When a Singapore company is wound up, the liquidator and creditors may investigate the conduct of the directors during the period leading up to insolvency. One of the most serious findings a Singapore court can make is that the company’s business was carried on with intent to defraud creditors — a conclusion that strips directors of the limited liability protection a company normally provides and makes them personally responsible for some or all of the company’s debts. This is known as fraudulent trading, and it is governed by Section 238 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA).

Fraudulent trading is distinct from wrongful trading (a civil, negligence-based concept) and from general director’s duties under the Companies Act (Cap. 50). It carries both criminal and civil consequences, making it one of the most potent weapons available to Singapore liquidators seeking to recover assets for creditors. If you are a director of a company in financial difficulty, understanding this provision is essential. If you need legal advice on your exposure as a director, specialist legal counsel should be engaged early.

The Statutory Provision: Section 238 IRDA

Section 238 of the IRDA re-enacted and updated the former Section 340 of the Companies Act (Cap. 50) when the IRDA came into force on 30 July 2020. The provision applies where a company is being wound up and it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose.

Section 238(1) provides that in such circumstances, the court may, on the application of the liquidator, a creditor or a contributory, declare that any person who was knowingly a party to the carrying on of the business in that manner is personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court directs.

The same conduct is also a criminal offence under Section 238(2): any person who was knowingly a party to carrying on a business with intent to defraud creditors or for any fraudulent purpose is guilty of an offence and liable on conviction to a fine not exceeding S$15,000 and to imprisonment for a term not exceeding seven years, or to both. Criminal proceedings may be brought independently of any civil application.

Section 239 IRDA provides for fraudulent trading in contexts beyond winding up — where a company is not in liquidation but proceedings are commenced. This extension is particularly relevant where a company is in judicial management or in a moratorium period.

Elements the Court Must Find

To succeed in a fraudulent trading application, the applicant (usually the liquidator) must establish the following:

1. The Company Was Being Wound Up

A civil claim under Section 238(1) can only be brought where the company is in the process of winding up. The liquidator is typically the applicant, though creditors and contributories also have standing. Applications are made to the General Division of the Singapore High Court.

2. The Business Was Carried On with Intent to Defraud Creditors

This is the central and most demanding element. “Intent to defraud” requires actual dishonesty — the applicant must show that the respondent knew the company was incurring debts it had no reasonable prospect of repaying, and continued to incur those debts with a dishonest purpose. The Singapore Court of Appeal has confirmed (consistent with English authority) that mere negligence or recklessness does not suffice — actual fraudulent intent must be proven.

Typical patterns that courts have found to constitute fraudulent intent include:

  • Continuing to accept deposits or advance payments from customers when the director knew the company could not deliver the goods or services.
  • Incurring substantial trade debts while systematically diverting company funds to related parties or the directors themselves.
  • Providing false information to lenders or suppliers to obtain credit that would not otherwise have been extended.
  • Operating a corporate shell as a front to incur debts, with no genuine intention of the company ever meeting those debts.

3. The Respondent Was Knowingly a Party to the Fraudulent Conduct

The respondent does not need to be a director. Any person who was knowingly a party to the fraudulent conduct may be liable — this has been applied to auditors, bankers, lawyers, and other professional advisers in appropriate cases where they knowingly assisted or participated in the fraud. However, professional advisers who were themselves deceived are not liable.

For directors, “knowingly a party” means the director participated in the management decisions that constituted the carrying on of the fraudulent business. A director who was entirely passive and wholly ignorant of the fraudulent purpose may escape liability, but this defence is difficult to sustain where the director continued to sign off on company accounts, authorise payments, or represent the company to creditors.

Key Singapore Cases

Liquidator of Dovechem Holdings Pte Ltd v Yong Yew Huat and others [2021] SGHC 193

In this case, the liquidator of Dovechem Holdings sought declarations of fraudulent trading against several former directors. The High Court examined whether the continued operation of the company’s business — whilst incurring substantial new debts from trade creditors — was carried on with intent to defraud. The court emphasised that the intention to defraud must be assessed subjectively at the time of the impugned acts, not retrospectively in light of the company’s ultimate failure. The case also clarified that it is not necessary to identify a specific individual defrauded — a general intent to defraud “creditors” as a class is sufficient.

Ang Thiam Swee v Low Hian Chor [2013] 2 SLR 340 (Court of Appeal)

Although decided under the former Section 340 Companies Act, the Court of Appeal’s analysis of fraudulent intent remains authoritative under the IRDA. The court confirmed that actual dishonesty is required — the respondent must be shown to have been subjectively dishonest, knowing that the business was being carried on to the prejudice of creditors’ rights. The court also noted that where a director had real authority and was actively involved in management, it is harder to claim ignorance of the company’s position.

Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] 4 SLR 1089

This case addressed the use of intercompany transactions to strip assets from an insolvent subsidiary in a manner that defrauded creditors. The court found that the systematic transfer of assets from the operating subsidiary to a parent or related entity, without adequate consideration, in circumstances where the subsidiary was insolvent, could constitute the carrying on of a fraudulent business.

Personal Liability: What Does It Mean in Practice?

A court declaration under Section 238(1) makes the named person personally responsible, without any limitation of liability, for such debts or liabilities of the company as the court directs. The key consequences are:

  • Personal payment obligation: The respondent must pay the specified amount from their personal assets. The company’s creditors can enforce this against the respondent’s bank accounts, real estate, investments and other personal property.
  • Scope of liability: The court has discretion to limit the declaration to specific debts incurred during the fraudulent period, rather than the entire company debt. Liquidators often seek the broadest possible declaration; respondents argue for a narrower scope tied to the specific acts of fraud.
  • Joint and several liability: Where multiple respondents are named (for example, two co-directors), the court may impose joint and several liability, meaning each respondent is liable for the full amount and the liquidator can recover from whichever respondent has the greatest assets.
  • No time limitation (in insolvency context): Claims under Section 238 are generally brought by liquidators appointed in the winding-up proceedings. The relevant limitation period runs from the date the cause of action accrued, typically the fraudulent acts themselves.

Defences Available to Directors

Directors facing a fraudulent trading application have several potential defences:

Lack of Dishonest Intent

The most common defence is that the director genuinely believed the company could trade through its difficulties and repay its creditors. Where a director sought professional advice, implemented a turnaround plan, and had objective evidence suggesting recovery was possible, courts have declined to find fraudulent intent even where the company ultimately failed. This defence requires contemporaneous documentation — board minutes, advisers’ reports, and financial projections prepared at the time are critical.

Ignorance of the Fraudulent Purpose

A passive director who genuinely did not know the company was being run fraudulently by co-directors may argue they were not “knowingly” a party to the fraud. However, this defence is weakened where the director continued to sign documents, receive remuneration from the company, or failed to inquire into obvious warning signs.

Lack of Participation

Where a director resigned before the fraudulent conduct commenced, they may argue they were not a party to the impugned business. The timing of the resignation and whether the director had any continuing involvement are key factual issues.

Criminal Consequences

The criminal offence under Section 238(2) is serious. A conviction may result in:

  • A fine of up to S$15,000.
  • Imprisonment of up to seven years.
  • Both a fine and imprisonment.

Criminal proceedings are brought by the Public Prosecutor and are independent of any civil application by a liquidator. In practice, where a liquidator uncovers evidence of fraud, they are required to report the matter to the Official Receiver and, where appropriate, to the Commercial Affairs Department (CAD) of the Singapore Police Force for criminal investigation.

Fraudulent Trading vs Wrongful Trading: A Key Distinction

Singapore law does not have a specific “wrongful trading” provision equivalent to Section 214 of the UK Insolvency Act 1986. However, Singapore directors face civil liability for insolvent trading through the general duties imposed by the Companies Act — in particular, the duty to act in the best interests of the company (which, when a company is insolvent, extends to the interests of creditors) and the duty not to cause the company to incur debts the director had no reasonable grounds to believe the company could repay (Section 157(3)(b) Companies Act read with Section 340 of the former Act, now Section 238 IRDA).

The critical difference between fraudulent trading and “wrongful trading” (as a concept) is:

  • Fraudulent trading (s.238 IRDA): Requires actual dishonest intent — the director knew the debts would not be repaid and continued to incur them anyway. A higher standard, but carrying both civil liability and criminal exposure.
  • Insolvent trading / director breach of duty: May be established on the lower standard of what a reasonable director ought to have known — no dishonesty required. Remedied through a breach of duty claim under the Companies Act, not Section 238.

Practical Implications for Directors of Companies in Financial Difficulty

For any director whose company is facing financial difficulties, the fraudulent trading provisions impose a clear obligation to act promptly and prudently:

  1. Obtain independent financial and legal advice immediately. Do not wait until the company is insolvent — engage advisers at the first sign of serious financial difficulty.
  2. Document your decision-making. Board minutes, financial projections, adviser reports and correspondence should all be contemporaneously maintained. These records are your primary defence if a liquidator later challenges your conduct.
  3. Avoid preferential payments to connected parties. Repaying loans to directors, shareholders or related companies while trade creditors go unpaid is a hallmark of conduct that liquidators will scrutinise.
  4. Consider insolvency options early. Judicial management, a scheme of arrangement, or a voluntary winding up may protect directors from fraudulent trading exposure by bringing an orderly process that treats all creditors fairly. See our guides on court winding up and creditors’ voluntary winding up.
  5. Do not ignore statutory demands. A creditor who serves a statutory demand and is not paid within 21 days may present a winding-up petition. Acting before a petition is presented preserves options and reduces the risk of fraudulent trading findings.

The Liquidator’s Investigation Process

When a company is wound up, the court-appointed liquidator is required to investigate the affairs of the company, including the conduct of directors and officers. Liquidators have extensive powers under the IRDA to:

  • Examine the company’s books and records.
  • Conduct private examinations of directors, officers, creditors and others who have knowledge of the company’s affairs (Section 285 IRDA).
  • Apply for public examinations of directors in open court.
  • Recover assets transferred at undervalue or as unfair preferences (see our guide on setting aside unfair preference transactions).

Where a liquidator has reasonable grounds to believe fraudulent trading has occurred, they will apply to the High Court for a declaration under Section 238(1). Such applications are often brought alongside claims for breach of director’s duties, recovery of unfair preferences, and reversal of undervalue transactions — giving liquidators multiple angles of attack on the same set of facts.

Court Procedure for Section 238 Applications

Applications under Section 238 IRDA are made in the General Division of the Singapore High Court, in the context of existing winding-up proceedings. The procedural steps are:

  1. The liquidator files a summons supported by an affidavit setting out the factual basis for the fraudulent trading allegation and the evidence gathered during the investigation.
  2. The respondent (typically the former director) is served and given the opportunity to file a responding affidavit.
  3. The court may order discovery and production of documents.
  4. The matter proceeds to a hearing, which in substantial cases may run for several days. Both parties may call witnesses and cross-examine.
  5. If the court finds fraudulent trading proven, it makes a declaration specifying the respondent’s personal liability and the quantum of debt for which they are responsible.
  6. Enforcement of the declaration proceeds by way of a judgment debt against the respondent personally.

The standard of proof is the civil standard — the balance of probabilities. However, given the serious nature of the allegation (involving dishonesty), courts apply heightened scrutiny and require cogent evidence before making such findings.

Conclusion

Fraudulent trading under Section 238 of the IRDA is one of the most serious provisions a director of a Singapore company can face. It removes the protection of limited liability and — where a criminal prosecution follows — can result in imprisonment. The key takeaway for directors is that honest, documented, and professionally advised decision-making during periods of financial difficulty is the best protection against a fraudulent trading finding.

If you are a director of a company in financial difficulty, or a creditor or shareholder concerned about the conduct of a company’s management, taking professional advice promptly is critical. If you need legal advice on director liability or insolvency proceedings, specialist legal counsel should be engaged at the earliest opportunity.

Raffles Corporate Services assists directors and companies with corporate secretarial compliance, governance documentation and referrals to specialist insolvency and corporate law firms. Our team can help ensure your company’s statutory registers, board minutes and compliance filings are in order — a foundation that matters significantly if your company ever faces financial difficulty.

For the latest Singapore business and legal news, business owners and directors can find useful updates on regulatory and court developments.

To speak with the team at Raffles Corporate Services, you can email [email protected] or call, SMS, or WhatsApp +65 8501 7133. We are happy to assist with any queries.

— The Editorial Team, Raffles Corporate Services