Liquidation may be either voluntary or compulsory.

In a voluntary liquidation, either the company’s members or its creditors, depending on whether the company is solvent, may elect to wind up the company. The company may choose its own liquidator, subject to the creditors’ preference.

In a compulsory liquidation, the company is liquidated by a court order. Various parties may apply for this order, including
● the company itself;
● a creditor of the company;
● a shareholder of the company;
● a liquidator;
● a judicial manager; or
● certain Ministers, in certain circumstances stated in law.

One of the main grounds for a compulsory liquidation is the inability of the company to pay its debts. Under the Companies Act, a company is considered unable to pay its debts if a creditor has a claim against the company for more than S$10,000 and has served a statutory demand for payment, but the debt has not been settled within 3 weeks. Alternatively, a company is also considered unable to pay its debts if the execution of a judgement obtained by a creditor against the company remains unsatisfied or if the Court is satisfied that the company is unable to pay its debts.

Case law suggests that the Court may temporarily stay the winding up of a company and may reject creditor’s opposition to a winding-up order.

Before liquidation can begin, a winding-up application must be presented to the High Court. After the Court has made a winding-up order, the officers of the company must file a Statement of Affairs and submit a summary of the company’s affairs to its creditors and contributories.

The liquidator will then seize and realise (sell or convert to cash) the company’s assets and notify the company’s creditors to file a Proof of Debt (Form 77) so that he or she can adjudicate the creditors’ claim and distribute the company’s assets accordingly.

The company’s assets are distributed according to a ‘pari passu’ principle. This means that all unsecured creditors are placed on an even footing and each receives a share in accordance with his or her rank. Exceptions to this principle are secured and preferential debts. Once the company’s debts and liabilities have been paid, any remaining capital is returned to the contributories of the company, if any.

Finally, the liquidator will release a notice to the creditors and contributories of his or her intention to apply for striking off of the company from the Register. The liquidator will also summary of receipts and payments, then apply to the Court for release as a liquidator and dissolution of the Company.

When a company’s financial position deteriorates, the interests of the company and those of its creditors often diverge. The company is often reluctant to commence liquidation proceedings and may wish to continue business in the hope of recovery.

In situations such as this, judicial management and schemes of arrangement are two alternatives to the final option of liquidating the company.

The aim of judicial management is to rehabilitate, rather than dissolve, a company that is in financial trouble. The rationale behind this option is that the interests of creditors would be better served if the company remained in operation under the Court’s supervision and had an opportunity to return to profitability. A judicial management order lasts for 180 days.

An application for judicial management may be made by the company, its directors, or its creditors. It must be proved that the company is unable to pay its debts and that the appointment of a judicial manager would be likely to achieve the survival of the company in part or in whole, a compromise arrangement between the company and its creditors, or more advantageous realisation of the company’s assets than would be effected on winding-up.

Once an application for judicial management is submitted, creditors and other parties are prevented from commencing legal proceedings against the company without the Court’s approval.

Additionally, no steps can be taken to wind up the company. If an order for judicial management is made, the board of directors is no longer in control of the company. Its powers and functions instead transfer to the Judicial Manager, an auditor approved by the Court.

The Judicial Manager must submit a statement of proposal to the company’s creditors within 60 days of his or her appointment.

A scheme of arrangement is an alternative to liquidation or judicial management, which allows the company to seek a compromise with its creditors to restructure, compromise or extinguish the company’s debts. This provides the company with ‘breathing room’ to come up with a more lasting plan to deal with its creditors.

A scheme of arrangement is subject to approval of a majority of 75% in value of the company’s creditors and the Court. The role of the Court in approving a scheme of arrangement is firstly to ensure that statutory procedures have been followed, and secondly, that the scheme is fair and reasonable.

Once approved, the scheme becomes binding on all creditors, including dissenting creditors or those abstained from voting.

Which option is best for your company depends on your circumstances and objectives. While both options allow a temporary stay from liquidation of the company, the two approaches differ in terms of who takes control of the struggling company.

Under judicial management, the Judicial Manager assumes control over the company and may run the company in a different manner than that desired by the directors. On the other hand, under a scheme of arrangement, the directors of the company are not necessarily displaced.

A scheme of arrangement may be more useful if a minority of creditors are unwilling to negotiate, as a court-approved scheme of arrangement is binding on all creditors equally.

On the other hand, a major advantage of judicial management is that creditors and other parties are automatically prevented from commencing legal action against the struggling company by law.

Schemes of arrangement do not confer this advantage automatically. Because a separate application must be made to the Court before a moratorium is issued, the company may not be protected from legal action such as lawsuits during the interim period.