Encus International Pte Ltd (In Compulsory Liquidation) v Tenacious Investment Pte Ltd and Ors  SGHC 50
Avoidance of Antecedent Transactions
Whilst the case addressed several issues (including the effect and application of an “entire agreement” clause – which was actually central to the outcome of the case on the facts), the main feature of this case worthy of note arose in the course of the Court’s observations on whether the granting of a security interest over property can amount to a transaction at an undervalue.
By way of background, under Singapore’s statutory insolvency regime, certain transactions or payments entered into or made by the company prior to the commencement of the winding up (i.e. the date the winding up application is filed in the case of a court-ordered liquidation) may subsequently be set aside (or unwound) upon the application of the liquidator. Provided the relevant criteria are met, such transactions or payments may be set as:-
(1) an unfair preference;
(2) a transaction at an undervalue; or
Whilst there are several differences between unfair preferences, on the one hand, and transactions at an undervalue, on the other, for present purposes the main distinction between the two is the applicable “look back” period, i.e. the period of time prior to the commencement of liquidation during which transactions or payments made by the company are susceptible to being set aside, whether as unfair preferences or as transactions at an undervalue.
In the case of an unfair preference, the “look back” period is 6 months prior to the commencement of the liquidation. This period is extended to a period of 2 years where the unfair preference is made to an “associate” of the debtor company. Comparatively, in the case of transactions at an undervalue, the relevant “look back” period is 5 years.
Given the fact that there is a longer “look back” period applicable to transactions at an undervalue, the issue as to whether the granting of a security interest by a debtor company over its property may amount to a transaction at an undervalue may be relevant where the security interest was given more than 2 years prior to the commencement of the liquidation since this would be outside the “look back” period applicable to unfair preferences.
Singapore Position To Be Determined
The law in Singapore on this issue is not settled and, notwithstanding the observations in Encus, remain unsettled.
In the UK, there have been differing views on this issue, with the English High Court in Re MC Bacon Ltd  BCC 78 holding that the grant of a security interest in its property by a debtor company cannot conceptually constitute a transaction at an undervalue. In that case, Mr Justice Millett (as he then was) noted:-
“ The mere creation of a security over a company’s assets does not deplete them and does not come within the paragraph [relating to undervalued transactions]. By charging its assets the company appropriates them to meet the liabilities due to the secured creditor and adversely affects the rights of other creditors in the event of insolvency. But it does not deplete its assets or diminish their value.”
Jady Justice Arden, sitting in the English Court of Appeal in Hill v Spread Trustee Co Ltd and Anor  WLR 2404 subsequently appeared to disagree with Millet J’s observations, and set aside, on the facts of the case, the giving of security (without consideration) as a transaction at an undervalue.
A subsequent decision by the English Court of Appeal in Feakins v Department for Enviornment Food and Rural Affairs  BCC 54 chose to apply MC Bacon, without reference to the decision in Hill v Spread Trustee.
In Encus, Justice Judith Prakash expressed her preference for the approach in Hill v Spread Trustee, although she did not decide the issue as part of her judgment since, on the facts before her, no security had been created. The issue therefore remains open and undecided under Singapore law, although the suggestion in Encus is that the position in Hill v Spread Trustee is to be preferred.
Whilst the issue is a narrow one, it may be of importance where the security interest sought to be impugned is given by the debtor more than 2 years prior to the commencement of liquidation / bankruptcy. As mentioned above, in such a case it could not be set aside as a unfair preference since this would be outside the applicable “look back” period.
From a strictly legal perspective, it may be difficult to argue with Millet J’s observations in ReMC Bacon since the giving of security over an asset does not legally remove that asset from the debtor’s estate but, instead, may just give a particular creditor rights in specie against the asset in question.
However, the overall effect of the giving of security would be, in a liqidation scenario, to remove that asset (or so much of it as remains subject to the security) from the pool of assets available for distribution amongst the debtor’s creditors. On this analysis, the outcome in Hill v Spread Trustee would be correct.
Given that the test at law as to what constitutes a debtor’s assets available for distribution in insolvency is whether the debtor is beneficially entitled to those assets (hence the principle that assets held on trust do not form part of the debtor’s estate available for distribution), it should follow as a matter of principle (if not as a matter of law) that a transaction which causes a depletion or dimuniton of the Company’s beneficial rights in property, and which has the other characteristics of a transaction at an undervalue, ought to be capable of being set aside as a transaction at an undervalue.
If and when the issue falls to be determined, it will be interesting to see how the Singapore Courts will rule.
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