Insolvency Series 2016: Counterparty Insolvency

Overview

The IMF, in a January 2016 update to its World Economic Outlook, revised its global growth projections for 2016 and 2017 down by 0.2%, citing a decline in emerging markets' growth and lower prices for energy and other commodities.1

With the trough in the global economy set to continue, there is unlikely to be any respite for the marine and trade industries, where counterparty insolvency will become more prevalent.

In this Insolvency Series consisting of 5 articles, we will be covering topics relating to current concerns in the area of counterparty insolvency.

The first article in this Series covers the early stages of insolvency - identifying the warning signs, and the legal tests for when a company is deemed to be insolvent. Early identification of insolvency is crucial in order to take protective steps before a counterparty enters the "twilight zone" of insolvency. We will also highlight the mechanism of insolvency set off, which is one of the more important "self-help" remedies available to reduce the impact of counterparty insolvency.

In the next 4 articles in this Series, we will deal with the following topics:

Insolvent trading and antecedent transactions; Rescue, rehabilitation and restructuring procedures; Liquidation; and Cross-border insolvency. Legal tests for insolvency

Under the Singapore Companies Act, a company is considered insolvent if it is unable to pay its debts.

A company would be deemed unable to pay its debts where:2

It is unable to satisfy a statutory demand for a debt exceeding S$10,000 within 3 weeks from the date of service of that demand, or It is unable to satisfy a judgment, decree, or order of court whether in whole or in part, or It is proved to the satisfaction of the Court that the company is unable to pay its debts. Where a company's inability to pay its debts falls to the determination of the Singapore Courts, the Courts will apply the following legal tests:

The "cash-flow" test i.e. whether the company is able to pay its debts which are presently due as well as those falling due in the near future; and The "balance-sheet" test i.e. is the value of the company's assets less than the amount of its liabilities, taking into account its contingent and prospective liabilities. The above tests require looking at the company's financial position as a whole to determine whether it can continue in business and still pay its way. The Singapore High Court has expressly noted that the Court adopts a...