Singapore Court Of Appeal Holds That Companies Are Now To Be Adjudged Insolvent Using Only The Cash Flow Test

• Published date: 24 August 2021
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Oon & Bazul
• Author: Ms Meiyen Tan, Keith Han, Angela Phoon, Cheryl Eio and Richard Xu

In Sun Electric Power Pte Ltd v RCMA Pte Ltd (formerly known as Tong Teik Pte Ltd) [2021] SGCA 60 ("Sun Electric"), the Singapore Court of Appeal (per Justice Judith Prakash) addressed in its written ground of decision ("GD") the questions of: (i) what is the applicable test for the purpose of determining insolvency under s 254(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) ("Companies Act"); and (ii) who should be the appropriate party to control the conduct of the appeal, as well as to bear the responsibility of any costs incurred during and after the appeal, following a company's right to appeal a winding up order regardless of whether a stay order is granted.

Brief Facts

In Sun Electric, the Appellant was a company incorporated in Singapore that was in the business of transmitting, distributing and selling electricity. In late 2015, the Appellant entered into an agreement with the Respondent for the Respondent to assume certain market-making obligations owed by the Appellant, in exchange for 70% of all incentive payments that the appellant would receive for carrying out these market-making obligations. The Appellant initially paid the Respondent its 70% share, but after January 2018 stopped all payments. In 2019, following the inability of the Appellant to pay the Respondent funds owed pursuant to a statutory demand, the Respondent filed for the Appellant to be wound up.

The Cash Flow test is the sole test in determining insolvency

The Court held that the cash flow test is the sole applicable test under s 254(2)(c) of the Companies Act to determine whether a company is unable to pay its debts.

The cash flow test assesses whether the company's current assets exceed its current liabilities such that it can meet all debts as and when they fall due. "Current assets" and "current liabilities" refer to assets which will be realisable and debts which will fall due within a 12-month timeframe, as this is the standard accounting definition for those terms.

In considering the cash flow test, the Court will take into account whether the company's assets "were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable", and whether the liquidity problem "can be cured in the reasonably near future". The Court will also consider debts which may not have been demanded, and which may not even be due.

The Court further set out a non-exhaustive list of factors which should be considered under the cash flow test. These...