Wrongful Trading Under Section 239 of the IRDA: When Continuing to Trade Becomes a Director’s Personal Liability

When a Singapore company starts running out of cash, the instinct of most directors is to keep going: take one more order, draw on one more line of credit, promise a supplier they will be paid next month. In many cases that instinct is perfectly reasonable, and the law does not punish directors simply for trying to save a struggling business. But there is a line, and once a company crosses it, continuing to incur debts can expose directors personally to the company’s liabilities under section 239 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA).

This is one of the most significant, and most misunderstood, personal liability risks facing directors of Singapore private companies. Unlike a breach of directors’ duties claim, which the company or its shareholders bring, a wrongful trading claim is typically brought after the company has already failed, by the very liquidator appointed to wind it up. This guide explains what wrongful trading actually means under Singapore law, how the court process works, what defences are available, and what directors of a financially stressed company should be doing right now to protect themselves.

The Legal Framework: Sections 238 and 239 of the IRDA

The IRDA, which consolidated and modernised Singapore’s insolvency law in 2018, sets out two related but distinct provisions dealing with trading by a company that is in financial difficulty.

Section 238 deals with fraudulent trading. It applies where a company’s business has been carried on with intent to defraud creditors, or for any other fraudulent purpose. A person knowingly party to this can be declared personally responsible, without limit, for the company’s debts, and fraudulent trading can also carry criminal liability. Because it requires proof of actual dishonest intent, section 238 claims are relatively rare and difficult to establish.

Section 239 deals with wrongful trading, and this is the provision that catches far more directors in practice, because it does not require dishonesty at all. A company is treated as having traded wrongfully if it incurred a debt or other liability without reasonable prospect of meeting it in full, at a time when the company was already insolvent, or became insolvent as a result of incurring that debt. If a court finds that a director knew the company was trading wrongfully, or ought reasonably to have known this in the circumstances, it can declare that director personally responsible for all or part of the company’s debts or liabilities, with no limit on the amount.

Why Section 239 Replaced the Old Companies Act Regime

Before the IRDA came into force, insolvent trading in Singapore was governed by sections 339 and 340 of the Companies Act. That regime required a director to first be criminally convicted under section 339(3) for contracting a debt with no reasonable expectation of repayment, before civil liability under section 340(2) could even be considered. In practice, the criminal conviction hurdle was so high that a government-appointed review committee found no record of these provisions ever having been successfully relied upon, making the old regime, in effect, a dead letter.

Section 239 of the IRDA removed that criminal conviction requirement entirely. A liquidator, judicial manager, or creditor can now apply directly to the High Court for a declaration of personal liability on the civil standard of proof, which is considerably easier to meet than the criminal standard “beyond reasonable doubt” that effectively neutralised the old law. This is a genuine and significant increase in exposure for directors of financially distressed Singapore companies compared to the position before 2018.

What Counts as “Trading Wrongfully”

The test under section 239 turns on two linked questions: was the company insolvent, or did it become insolvent as a result of the debt in question, and did the person incurring that debt on the company’s behalf know, or ought reasonably to have known, that there was no reasonable prospect of paying it in full? Courts will look at matters such as:

• Whether the company’s management accounts or cash flow forecasts, at the time the debt was incurred, showed a genuine prospect of repayment;
• Whether the director sought professional advice, such as from an insolvency practitioner or accountant, once financial difficulty became apparent;
• Whether the company continued to take deposits or supplies from creditors who were not told about its financial position; and
• Whether steps were taken to reduce the scale of the company’s ongoing obligations once the risk of insolvency became apparent, rather than allowing liabilities to keep growing.

Crucially, section 239 does not require the director to have acted dishonestly, only that they knew, or reasonably should have known, that the company could not meet a debt it was taking on. This is why directors of a company sliding toward insolvency need to treat every new commitment, from a new lease to a large customer order requiring upfront supplier payment, as a potential source of personal exposure, not merely a commercial decision for the company alone.

Who Can Bring a Claim, and When

A section 239 application can be brought during the judicial management or winding up of a company, or in separate proceedings against the company, by the liquidator, the judicial manager, or a creditor or contributory of the company. In practice, the great majority of these claims are brought by a court-appointed liquidator after the company has already collapsed, as part of the broader process of maximising recoveries for creditors. Directors should therefore understand that the greatest risk period is not while the business is struggling, but afterwards, once an independent liquidator has had the opportunity to review the company’s books with the benefit of hindsight.

The Court Process: Step by Step

A section 239 claim proceeds in the General Division of the Singapore High Court, typically as follows:

1. Investigation by the liquidator. Following the company’s winding up, the liquidator reviews the company’s financial records, board minutes, and correspondence to identify debts incurred during the suspected period of insolvency.
2. Demand or pre-action correspondence. The liquidator typically writes to the directors concerned, setting out the alleged wrongful trading and inviting a response or settlement before commencing formal proceedings.
3. Filing of the originating application. If no resolution is reached, the liquidator files an application in the High Court seeking a declaration of personal liability against the relevant director or directors.
4. Affidavit evidence. Both sides file affidavits addressing the company’s financial position at the relevant time, what the director knew or ought to have known, and any defence being raised.
5. Hearing. The court hears submissions and evidence, and may need to resolve factual disputes about the company’s solvency and the director’s state of knowledge at the relevant time.
6. Judgment. If the court finds wrongful trading is established and no relief is granted, it will make a declaration of personal liability, specifying the debts or proportion of debts for which the director is responsible.

Timelines vary considerably depending on the complexity of the company’s affairs and whether liability is contested, but directors should expect a contested section 239 application to take anywhere from several months to well over a year from filing to judgment, particularly where expert accounting evidence on the company’s solvency is required.

Indicative Costs

These figures are indicative only and vary widely based on the volume of documents in dispute, whether accounting experts are engaged, and how many directors are named in the application.

Defences Available to Directors

Section 239(2) allows the court to relieve a director from personal liability where the director acted honestly, and, having regard to all the circumstances of the case, ought fairly to be relieved from liability. In practice, directors who can show they sought timely professional advice once financial difficulty emerged, kept the board properly informed through documented meetings, and took active steps to reduce the company’s exposure rather than allowing debts to accumulate unchecked, stand a considerably stronger chance of relief than those who kept trading with no contemporaneous record of having grappled with the company’s position at all.

Practical Steps for Directors of a Financially Stressed Company

Our guide to directors’ duties and personal liability sets out the broader statutory duties directors owe under the Companies Act, which sit alongside, rather than replace, the wrongful trading exposure discussed here. Once a company’s cash position becomes genuinely uncertain, directors should hold and minute regular board discussions specifically addressing solvency, obtain professional advice from an accountant or licensed insolvency practitioner promptly rather than waiting for the position to deteriorate further, and carefully consider whether continuing to incur new debts, including ordinary trade credit, remains justifiable given the company’s realistic prospects.

Where the company may need to formally restructure, options such as Singapore’s Simplified Insolvency Programme for small companies, or a full judicial management application, can provide a court-supervised path that is treated very differently from directors simply continuing to trade unilaterally. Our explainer on the 21-day statutory demand rule is also useful background for directors trying to understand how quickly a single unpaid debt can escalate into a winding up application. Directors ultimately found personally liable, or facing a liquidator’s investigation, should also understand how this interacts with broader consequences; our guide on director disqualification proceedings covers the separate, but often related, risk of being barred from acting as a director in future.

Section 238 vs Section 239 at a Glance

Group Companies and Personal Guarantees

Directors of group structures should note that a section 239 declaration attaches to the individual, not the office. A director who sits on the boards of several related companies within a group can face separate wrongful trading exposure in each entity if debts were incurred wrongfully at the subsidiary level, even where the parent company’s own finances appeared healthy. This is a particular risk in groups where cash is regularly moved between related companies to support a struggling subsidiary, since the very act of continuing to fund a subsidiary’s trading can itself become evidence of wrongful trading if the subsidiary genuinely had no prospect of recovery. Directors of multi-entity structures should ensure the solvency of each company is assessed separately, rather than assuming the group’s overall position protects individual subsidiaries from scrutiny.

Personal guarantees add a further layer of exposure. A director who has personally guaranteed a company’s borrowing faces contractual liability to the lender regardless of any section 239 finding, meaning a single distressed company can expose a director to both a wrongful trading declaration and a separate personal guarantee claim arising from the same underlying facts.

Frequently Asked Questions

Can a section 239 claim be brought against a former director who has already resigned?

Yes. Liability attaches to the period during which the person was a director or officer and involved in the relevant decision, so resignation before a company’s eventual collapse does not retrospectively erase exposure for debts incurred while that person held office.

Does D&O insurance cover wrongful trading claims?

Many directors’ and officers’ liability insurance policies provide some cover for wrongful trading claims, but policies vary considerably, and some exclude claims arising from insolvency altogether or impose conditions that are easy to breach unintentionally. Directors of companies showing early signs of financial stress should review their D&O policy wording, ideally with a broker, well before any formal insolvency process begins.

Is there a time limit for bringing a section 239 claim?

The IRDA does not set out a fixed limitation period specific to section 239 in the way the six-year period applies to company restoration; ordinary limitation principles and the practical timeline of the liquidation process will generally determine when a claim is brought, which is usually within the years immediately following the company’s winding up while the liquidator is actively investigating its affairs.

Conclusion

Section 239 of the IRDA has made wrongful trading a genuinely enforceable risk in Singapore, in a way the old Companies Act regime never managed to be. Directors of a company facing financial difficulty should treat every new debt as a decision with personal consequences, document their reasoning contemporaneously, and take advice early rather than after a liquidator has already been appointed and is reviewing the company’s history with the benefit of hindsight.

If your company is facing financial difficulty and you need legal advice on director liability or the court application process, we can point you in the right direction. For the latest Singapore business news and regulatory updates, there are useful resources for directors navigating financially difficult periods.

The team at Raffles Corporate Services can help you understand your obligations and connect you with the right professional support if your company is approaching insolvency.

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