7A. Solvency statement and offence for making false statement Flashcards
7A. Solvency statement and offence for making false statement
General overview
[7A.01] This section adopts the accounting definition of solvency into the Act. The test of solvency of a company is very important for corporate transactions involving the redemption of preference shares by a company, the financial assistance given by a company to purchase its own shares, the reduction of capital, as well as in the liquidation of a corporation. Basically, the solvency of a company is premised on the “cash flow” and “balance sheet” test.
Solvency statement
[7A.02] Section 7A deals with a “solvency statement” which is issued by the directors in relation to a proposed redemption of preference shares by a company out of its capital under s 70, a proposed giving of financial assistance by a company under s 76(9A) or (9B), or a proposed reduction by a company of its share capital under ss 78B or 78C. For meaning of “insolvency”, see Tong Tien See Construction Pte Ltd (in liquidation) v Tong Tien See & Ors [2001] 3 SLR(R) 887; [2001] SGHC 381 where the High Court held that “a company was insolvent when it was unable to meet current demands, regardless of whether it possessed assets which, if realised, would enable it to fully discharge its liabilities. However, proof that a creditor’s debt had not been paid by itself did not establish an inability to pay debts within the meaning of s 254(2)(c) of the Act”: see generally s 254(2)(c). The test to ascertain commercial insolvency is whether the company is unable to meet its current debts as they fall due. Such a company would be categorised as “unable to pay its debts” even though: (i) it has substantial wealth which cannot be immediately realised; and (ii) on liquidation it would be able to meet all its liabilities: Gulf Business Construction (M) Sdn Bhd v Israq Holding Sdn Bhd [2010] 5 MLJ 34
[7A.03] However, there is no single test for insolvency and one test should not be preferred over the other. Ultimately, regard is given to all of the evidence that appears relevant to the question of insolvency: Re Great Eastern Hotel (Pte) Ltd [1988] 2 SLR(R) 276, HC ; referred to in Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo & Ors [2004] 1 SLR(R) 434; [2003] SGHC 307 ; Kon Yin Tong & Anor v Leow Boon Cher & Ors [2011] SGHC 228 ; cf the “quick assets” test which is not a test for insolvency, but “a measure of the capacity of a business to meet its current liabilities immediately or at short notice”. It is “an extreme test of the capacity of a business to meet a financial crisis”, or “an indicator of trend in financial stability”: Fitzgerald’s Analysis and Interpretation of Financial and Operating Statements (5th edn, 1977, Butterworths). The “quick assets” test was rejected in Re Great Eastern Hotel (Pte) Ltd [1989] 1 MLJ 161.
Uniform solvency statement
[7A.04] Section 7A is similar to but non-identical in form and content with s 76F(4) which applies to share buybacks. The CLRFC has recommended a uniform solvency test for all three kinds of transactions.
Who makes solvency statement
[7A.05] Essentially, a solvency statement is made by the directors of the company that they have formed the opinion as regards the company’s situation at the date of the statement, that there are no grounds on which the company could then be found to be unable to pay its debts. However, it was not adopted in Act No 36 of 2014.
Cash flow test
[7A.06] In deciding whether the company is able to pay its debts, s 7A(1)(b) provides two situations where the solvency of a company may be tested. Firstly, the cash flow solvency comprises the following two tests:
(a) Where it is intended to commence winding up within 12 months of the date of the statement, that the company will be able to pay its debts in full within the period of 12 months after the date of commencement of the winding up; or
(b) Where it is not intended to commence winding up, that the company will be able to pay its debts as they fall due during the period of 12 months after the date of the statement.
[7A.07] The cash flow test was applied in Living the Link Pte Ltd (in creditors’ voluntary liquidation) & Ors v Tan Lay Tin Tina & Ors [2016] 3 SLR 621; [2016] SGHC 67, HC. Where the company was unable to service its debts, “it is unnecessary to go into the balance sheet test”: Tam Chee Chong v DBS Bank Ltd [2011] 2 SLR 310. A temporary lack of liquidity does not tantamount to insolvency (see Tong Tien See Construction Pte Ltd (in liquidation) v Tong Tien See & Ors [2001] 3 SLR(R) 887 at [55] ), but a persistent inability to pay its debts as they fall due amounts to insolvency: Leun Wah Electric Co (Pte) Ltd v Sigma Cable Co (Pte) Ltd [2006] 3 SLR(R) 227.
Balance sheet test
[7A.08] This requires the directors to certify that the value of the company’s assets is not less than the value of its liabilities (including contingent liabilities) after the proposed redemption, giving of financial assistance or reduction of capital. In assessing the company’s balance sheet solvency, the directors have to consider the company’s most recent financial statements and all other circumstances that the directors know or ought to know that would affect the company’s assets and liabilities: Re Great Eastern Hotel (Pte) Ltd [1989] 1 MLJ 161 ; Re Capital Annuities Ltd [1979] 1 WLR 170 ; followed in Datuk Mohd Sari bin Datuk Hj Nuar v Idris Hydraulic (M) Bhd [1997] 5 MLJ 377 ; distinguishing Sri Hartamas Development Sdn Bhd v MBF Finance Bhd [1992] 1 MLJ 313 ; Malayan Plant (Pte) Ltd v Moscow Narodny Bank Ltd [1980] 2 MLJ 53 ; Re Sanpete Builders (S) Pte Ltd [1989] 1 MLJ 393. For purposes of ascertaining the insolvency of a company, contingent assets were not to be taken into account in determining whether the value of a company’s assets was less than the amount of its liabilities for the purposes of s 123(2) of the Insolvency Act 1986 (UK); that the amount of the unlawful dividend was a contingent asset since it had been contingent upon the unlawful nature of the dividend becoming known and someone on behalf of the company pursuing the claim for repayment of the dividend before the company went into liquidation: Re Rococo Developments Ltd (in liquidation), Evans & Anor v Jones & Anor [2016] EWCA Civ 660; [2017] Ch 1, CA.
[7A.09] In determining the contingent liabilities of the company, the directors may consider the likelihood of the contingency occurring. The net current liabilities of a financial institution were largely made up of deposits, which unless there was a run on the financial institution it was highly unlikely that depositors would be rushing to withdraw their funds all at the same time (see Datuk Mohd Sari bin Datuk Hj Nuar v Idris Hydraulic (M) Bhd (above)), and any claim that the company is entitled to make that may reduce or extinguish the contingent liability (for example, the contingent liability may be covered by an insurance policy).
[7A.10] In deriving at the balance sheet test, the directors shall have regard to the following information:
(a) the most recent financial statements of the company that comply with s 201(2) and (5), as the case may be;
(b) all other circumstances which the directors know or ought to know that will affect or may affect the value of the company’s assets and liabilities (including contingent liabilities); and
(c) valuations of assets or estimates of liabilities that are reasonable in the circumstances.
[7A.11] In assessing a contingent liability, the directors may take into account the likelihood of the contingency occurring and any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability, e.g. the amount that the company can claim under an insurance policy covering that liability. See BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc & Ors [2010] EWHC 2005, Ch; [2011] 1 WLR 1200, Ch D ; considered Re A Co (No 006794 of 1983) [1986] BCLC 261 ; Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232, CA ; and Re Cheyne Finance plc (No 2) [2008] Bus LR 1562 where the court held that for the purposes of s 123(2) of the Insolvency Act 1986 (UK) (equivalent to s 254(1)(e) of the Act) in assessing the “balance-sheet” test for “inability to pay debts”, the assets to be valued were the present assets of the company and there was no question of taking into account any contingent or prospective assets; that the requirement “[to take] into account its contingent and prospective liabilities” could not require such liabilities to be aggregated at their face value with debts presently due. The content of “taking account of” had to be recognised in the context of the overall question posed by the subsection, namely whether the company was to be deemed to be insolvent because the amount of its liabilities exceeded the value of its assets; that that involved consideration of the relevant facts of the case, including when the prospective liability fell due, whether it was payable in sterling or some other currency, what assets would be available to meet it and what, if any, provision was made for the allocation of losses in relation to those assets; that the deficit relied upon comprised of a number of elements which, whilst appropriate for drawing up the annual financial statements, went beyond what s 123(2) required.
Statutory declaration
[7A.12] Act No 36 of 2014 abolished the requirement of a statutory declaration of solvency by the directors. Instead, the directors are required to make a declaration in writing signed by every director. Where the company is exempt from audit requirements under s 205B or 205C, each director is required to sign the written declaration. Section 205B deals with dormant companies whilst the new s 205C deals with a new category of companies called “small companies”. Where the company is not exempt from audit requirements, each director shall sign the written declaration of solvency or the solvency statement shall be accompanied by an auditor’s report that he has inquired into the affairs of the company and is of the opinion that the statement is not unreasonable given all the circumstances.
