Corporate Law Case Study: Undue Preference and Novation Agreements

This case study delves into two significant corporate law cases. The first case, Living the Link Pte Ltd v Tan Lay Tin Tina, examines directors' personal liability for making payments while a company is in liquidation, potentially giving undue preference to certain creditors. The analysis covers Section 99(2) of the Bankruptcy Act, the running account principle, and directors' fiduciary duties. The second case, Buildspeed Construction Pte Ltd v Theme Corp Pte Ltd, concerns a novation agreement made during insolvency. The analysis focuses on Section 329 of the Companies Act, Section 98 of the Bankruptcy Act (regarding undervalue transactions), and relevant case law. The conclusion in the first case found the directors liable, while the second case granted the plaintiff the declaration under the bankruptcy act. The document includes a bibliography of relevant legislation and case law.

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Case 1 Living the Link Pte Ltd (in creditors’ voluntary liquidation) and others v Tan Lay Tin
Tina and others [2016] SGHC 67
Facts
The directors of a company has prepared payment while the company was in liquidation for
another company preparing it over the other creditors of the company.
Issue
The issue in this case was to determine whether the directors of such company could be held
personally liable for their actions
Rule
Section 99(2) of the Bankruptcy Act1 provides the court abroad discretion in appropriate cases to
make an order for partial reversal of transaction adjust to be undue preference if it is required by
justice. An order could be justified under this section in cases where the parties make an
uncontroversial claim.
According to the running account principle defence a transaction which is under preference
prima faice can be valid based on the fact that it had been concluded under mutually beneficial
running account.
The claim is said to be uncontroversial where there is a clear agreement between the liquidators
and the creditors in relation to the amount to be set aside for claims of the unsecured parties.
1 Bankruptcy Act 1996 at Section 99

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In the West Mercia Safetywear Ltd, Liquidator of v Dodd2 directors of the company were held
personally liable for ensuring and undue preference based on breach of fiduciary.
Application
The impugned payment had been made in relation to a running account is not sufficient
by itself to provide for a preferable intention as it was not made with the motive of gaining a new
value for the purpose of keeping the business running. The principle is not an independent
defence strictly but is only applicable when there was no preference by the company in relation
to a particular creditor.
Directors had fiduciary duties to consider the interest of the company’s creditors at the
time the company is nearing insolvency or becoming insolvent. In such cases it is clear from the
application of fiduciary duties that a liability to pay such creditors would also exist when no
losses are suffered by the company all no personal benefits was obtained by the directors from
under preferences.
Conclusion
Director who initiated payments from a company in liquidation to an associated company
preferring it over creditors was help personally liable to restore the company to such position it
would have been otherwise for the undue preference transactions.
2 (1988) 4 BCC 30

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Case 2: Buildspeed Construction Pte Ltd (in liquidation) v Theme Corp Pte Ltd and another
[2000] SGHC 26
Facts: The plaintiff hand entered into a novation agreement at the time of insolvency and wanted
a declaration.
Issue
Could the plaintiff in this case climate declaration along with other Riya lives in relation to the
novation agreement.
Rule
Section 329 of the Companies Act3 Purports to ensure uniformity with respect to transaction
treatment where the transactions were imposed, whether or not the insolvent entity was a
company for a natural person.
The courts under the section have the power to make a decision to restore the position of the
company or the natural person which it would have been if the insolvent transaction would not
have taken place.
Section 98 of the Bankruptcy Act 19964 states that an order under this section can be passed
when an individual who had been adjust bankrupt had entered into a transaction at an under
value at a relevant time.
The transaction is said to be under value if at the time and the transaction was concluded the
consideration for it was significantly less than the worth of the transaction.
3 Companies Act (Cap 50, 1994 Ed)
4 Bankruptcy Act 1996 at Section 98

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In Relibra Industries Pvt Limited5 the organisation which was in mandatory liquidation was able
to make a claim of declaration that specific agreement for lease got into by the company in form
of a tenant initiated at transaction which was at an undervalue and provided for a number of
other reliefs. The court found the contract to be voidable as it was made at an undervalue.
In the Re M C Bacon Limited [1991] Ch 127 which was decided with respect to Section 238 -
239 of the English insolvency act 1986, both the section provided for an application to enable the
Restoration of the position to what the company would have been if the transaction was not made
or the preference was not given.
Application
At the time when the Asian agreement was made the plaintiff was insolvent as they were not able
to pay the dues to the creditors. The agreement was made within relevant time defined under
section 100 of the bankruptcy act.
The value provided for search novation agreement with the plaintiff was significantly less than
the value of the consideration which was given by the plaintiff. This accounted for the provisions
under section 98 of the bankruptcy act which deal with under value transactions.
There is no preclusion provided in paragraph 6 of the company regulations 1995 with reference
to making an order under section 98 of the bankruptcy act as evidently the agreement was not
carried out for the purpose of the plaintiffs business.
Conclusion
The plaintiff was granted the declaration under the bankruptcy act.
5 2000 1 SLR 84

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Bibliography
Bankruptcy Act (Cap 20, 1996 Rev Ed)
Companies Act (Cap 50, 1994 Rev Ed)
MC Bacon Ltd, In re [1991] Ch 127
West Mercia Safetywear Ltd, Liquidator of v Dodd (1988) 4 BCC 30