Transactions at Undervalue and Unfair Preferences: How Singapore Liquidators Claw Back Assets Under Sections 224 and 225 of the IRDA

When a Singapore company is wound up or placed under judicial management, one of the liquidator’s or judicial manager’s most consequential tasks is looking backwards, not forwards. Before distributing whatever assets remain to creditors, the officeholder must ask whether the company, in the months or years before insolvency, gave away value it should not have given away, or paid one creditor at the expense of the others. Sections 224 and 225 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) give the court the power to unwind exactly those kinds of transactions. For directors and business owners, understanding how these provisions actually work, and how far back a liquidator can reach, is essential well before insolvency ever becomes a live possibility.

This article explains how transactions at an undervalue and unfair preferences are defined under Singapore law, how far back in time a liquidator can look, what a director can expect if the company later challenges a past transaction, and what the court process actually involves.

The two distinct provisions

Transactions at an undervalue: section 224

Under section 224(1) of the IRDA, where a company is in judicial management or is being wound up and has, at the relevant time, entered into a transaction with any person at an undervalue, the judicial manager or liquidator may apply to the court for an order restoring the position to what it would have been had the company not entered into that transaction. Section 224(3) defines what counts as an undervalue transaction: either the company makes a gift or receives no consideration at all, or the company receives consideration whose value is significantly less than the value of what it gave.

The classic fact pattern is a director selling a company asset, such as property, equipment, or intellectual property, to a family member, a related company, or a friendly third party, for a price well below market value, often shortly before the company runs into financial difficulty. The undervalue does not need to be fraudulent or deliberately concealed to be caught by section 224; the provision is concerned with the objective effect on the company’s asset position, not the parties’ state of mind, although state of mind becomes relevant to the statutory defence discussed below.

Unfair preferences: section 225

Section 225 addresses a different problem: not an asset leaving the company for too little, but one creditor being treated better than the others in the run-up to insolvency. Under section 225(3), a company gives an unfair preference to a person if that person is a creditor, surety, or guarantor of the company, and the company does something, or allows something to be done, that puts that person in a better position than they would have been in on a winding up, had that thing not been done. Typical examples include repaying a director’s loan in full shortly before insolvency while other unsecured creditors go unpaid, or granting fresh security to one existing creditor over assets that would otherwise be available to all creditors generally.

Unlike section 224, section 225 requires proof of a particular state of mind: under section 225(4), the court will not make an order unless the company was influenced in deciding to give the preference by a desire to improve that person’s position in the event of winding up. This is a meaningfully different test from a transaction at undervalue, which does not require any particular intention.

The connected person presumption

Proving the company’s desire to prefer a particular creditor would ordinarily be a difficult evidential burden for a liquidator to discharge. Section 225(5) removes much of that difficulty where the preferred person was connected with the company at the time, otherwise than merely by being an employee. In that situation, the company is presumed to have been influenced by the relevant desire, unless the contrary is shown. A person connected with the company generally includes a director, an associate of a director, or an associate of the company itself. In practice, this presumption means that a payment to a director, or to a company associated with a director, in the period before insolvency carries a meaningfully higher litigation risk than the same payment made to an arm’s length trade creditor, because the burden shifts to the director to justify the payment rather than sitting with the liquidator to prove improper intent.

How far back a liquidator can reach: the relevant time

Section 226 sets out the look-back periods, described as the “relevant time,” within which a transaction or preference must fall before it becomes vulnerable to challenge.

Falling within the relevant time is necessary but not sufficient. Under section 226(2), the transaction or preference must also have occurred while the company was unable to pay its debts (within the meaning of section 125(2) of the IRDA), or the company must have become unable to pay its debts as a consequence of that transaction or preference. Section 226(3) then adds a further presumption: where the undervalue transaction was entered into with a connected person, this insolvency requirement is itself presumed to be satisfied unless the contrary is shown. In other words, a related-party transaction inside the three-year window carries two layered presumptions working against the recipient, first on insolvency, and separately, for a preference, on the requisite desire.

The statutory defence to a transaction at undervalue

Section 224(4) provides a defence that the court cannot ignore: the court must not make an order in respect of a transaction at undervalue if the company entered into the transaction in good faith and for the purpose of carrying on its business, and if, at the time, there were reasonable grounds for believing the transaction would benefit the company. This defence matters commercially. A company that sells an underperforming division at a discount to secure a strategic partnership, or restructures a debt on terms that look unfavourable in isolation but keep the business trading, may well be protected, provided the underlying commercial rationale can be demonstrated with contemporaneous evidence such as board minutes, valuations, or advice obtained at the time.

What the court can order

Section 227 gives the court broad remedial powers once it finds a transaction at undervalue or an unfair preference. These include ordering that property transferred as part of the transaction be vested back in the company, ordering a person to pay a sum to the company, judicial manager, or liquidator in respect of benefits received, releasing or discharging security given by the company, and reviving obligations of a surety or guarantor that were released as part of the impugned transaction. The remedy is restorative rather than punitive: the court’s task is to put the company back into the position it would have been in had the transaction or preference not occurred, which can mean unwinding a sale, requiring repayment of money, or a combination of orders tailored to the facts.

Illustrative case law

Singapore courts have shown they are prepared to grant interim relief to protect the value of a claim while these issues are being litigated. In Group Lease Holdings Pte Ltd (in liquidation) and another v Group Lease Public Company Ltd [2024] SGHC 302 (unreported in the Singapore Law Reports at the time of writing), the General Division of the High Court considered, among other things, whether the grant of security and an assignment of receivables to a parent company constituted unfair preferences under section 225 of the IRDA, alongside questions about the registrability of the underlying charge under section 131 of the Companies Act 1967. The case illustrates how section 225 issues frequently arise alongside related questions about the validity and registration of security interests, meaning a liquidator investigating a suspected preference is often simultaneously examining whether the underlying security was even validly created in the first place.

More broadly, the courts have made clear that the connected person presumptions in sections 225(5) and 226(3) are not merely technical hurdles. They are a deliberate policy choice to place the evidential burden on those closest to the company, on the view that a director or an associate of the company is best placed to explain a transaction that, on its face, looks like the company disadvantaging its general creditors for the benefit of an insider.

The court process, step by step

1. Investigation by the officeholder. A liquidator or judicial manager, often assisted by forensic accountants, reviews the company’s books and bank records for the relevant look-back period, identifying transactions with directors, associates, and other connected parties, as well as any payments or asset transfers that appear disproportionate to the consideration received.
2. Demand or negotiation. Many suspected preferences or undervalue transactions are resolved through correspondence and negotiated repayment before litigation is commenced, particularly where the recipient’s own records support a legitimate commercial explanation.
3. Originating application to the General Division of the High Court. Where negotiation fails, the liquidator or judicial manager applies to the court under section 224 or section 225, supported by affidavit evidence setting out the transaction, the relevant time period, and, where applicable, the connected person presumptions relied upon.
4. Response and any statutory defence. The respondent may resist the application on the basis that the transaction falls outside the relevant time, that the company was not insolvent at the relevant time, that there was no unfair preference desire, or, for section 224 claims, that the good faith and business benefit defence applies.
5. Hearing and order. The court determines the application, generally on affidavit evidence for most current insolvency litigation, and if satisfied, makes an order under section 227 tailored to restore the company’s position.

Indicative costs

These figures are indicative only and will vary significantly based on the number of transactions in issue, the complexity of tracing arguments, and whether the respondent mounts a genuine defence or settles early.

Practical tips for directors

Directors of companies in financial difficulty should treat any payment to, or transaction with, a director, a family member, or a related company as carrying elevated scrutiny risk if the company later becomes insolvent within the following one to three years. Keeping contemporaneous board minutes recording the commercial rationale for a transaction, obtaining independent valuations for any asset sale below apparent market value, and documenting the company’s solvency position at the time of any payment are all steps that materially improve a director’s position if a liquidator later investigates. Directors should also be aware that these provisions sit alongside, and are frequently investigated together with, questions of wrongful trading and director liability more generally, so a pattern of related-party transactions in the lead-up to insolvency rarely arises in isolation from other governance concerns a liquidator will examine.

Company secretaries and advisers assisting a company through financial difficulty should flag any proposed payment to a connected person for board-level scrutiny before it is made, precisely because the statutory presumptions mean such payments are the ones most likely to be unwound later. The underlying statutory text can be checked against the Insolvency, Restructuring and Dissolution Act 2018 on Singapore Statutes Online, and court judgments, including the case discussed above, are publicly available via the Singapore Judiciary’s electronic litigation portal.

How this connects to other insolvency provisions

Sections 224 and 225 rarely operate in isolation. A liquidator reviewing a company’s affairs for unfair preferences or undervalue transactions is often simultaneously assessing whether directors engaged in wrongful trading under section 239 of the IRDA, and whether any onerous contracts or leases should be disclaimed under section 230. Directors facing an insolvent or near-insolvent company should treat these provisions as a connected set of risks rather than isolated technical points, since the same set of pre-insolvency transactions is typically the evidential basis for all of them.

Practical next steps

If your company is approaching financial difficulty and has made payments to directors, family members, or related companies in the recent past, it is worth reviewing those transactions now, while records and rationale are still fresh, rather than waiting for a liquidator to ask the questions later. If you need legal advice on the court application process for challenging or defending a suspected unfair preference or undervalue transaction, we can point you in the right direction.

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