This article is part of our Singapore Court Cases series, examining key decisions and legal principles from Singapore’s courts that affect businesses, insolvency practitioners, and creditors.

When a company enters liquidation in Singapore, its creditors and the liquidator do not merely divide what is left in the pot. One of the most powerful tools in the liquidator’s arsenal is the ability to “claw back” assets that were transferred out of the company at an undervalue before the winding up. These are known as undervalue transactions, and they are governed by Section 98 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA).

This article examines the legal framework for challenging undervalue transactions in Singapore, the procedural steps for making court applications, the defences available to respondents, and the key judicial decisions that have shaped this area of insolvency law.

What Is an Undervalue Transaction?

An undervalue transaction occurs when a company, in the period before it enters liquidation, enters into a transaction with a person on terms that provide the company with:

  • No consideration at all (i.e., a gift), or
  • Consideration whose value, in money or money’s worth, is significantly less than the value of the consideration provided by the company.

The classic example is a company selling a commercial property worth S$5 million to a related party for S$1 million six months before winding up. The “undervalue” — the shortfall between market value and the transaction price — is S$4 million, and the liquidator may apply to court to set aside the transaction and recover that value for the benefit of creditors.

Other common examples include:

  • Gratuitous transfers of assets (e.g., transferring equipment to a director at no cost)
  • Forgiveness of debts owed to the company without equivalent benefit
  • Sale of assets at nominal prices to connected persons
  • Granting of security over assets for no or inadequate consideration

The Statutory Framework: Section 98 IRDA

Section 98 of the IRDA (which re-enacted the provisions formerly found in Section 98 of the Bankruptcy Act, as applied to companies via the Companies Act) empowers the court, on an application by the liquidator, to make an order restoring the position to what it would have been had the company not entered into the undervalue transaction.

The Look-Back Period

For the liquidator to succeed in challenging an undervalue transaction, the transaction must have been entered into within the relevant time:

  • Five years before the commencement of winding up, if the transaction was with a person who was an associate of the company at the time (e.g., a director, shadow director, or related company)
  • Two years before the commencement of winding up, in all other cases

The “commencement of winding up” is generally the date on which the winding-up application was filed with the court (for compulsory winding up) or the date of the special resolution (for voluntary winding up).

The Insolvency Requirement

For transactions entered into with non-associates, the liquidator must also prove that the company was unable to pay its debts at the time of the transaction, or that it became unable to pay its debts as a result of the transaction. This is often called the insolvency condition.

Where the transaction was with an associate, insolvency is presumed — it is for the respondent to rebut the presumption by proving that the company was solvent at the relevant time.

The Court’s Power to Make Orders

Under Section 100 IRDA, where the court is satisfied that an undervalue transaction occurred within the relevant time, it has broad powers to make orders, including:

  • Requiring any property transferred as part of the transaction to be vested back in the company
  • Requiring any person who received a benefit from the transaction to pay such sum to the liquidator as the court directs
  • Releasing or discharging any security given by the company
  • Restoring any surety to their original position
  • Providing for any property transferred to a third party (who may not be the direct counterparty) to be charged in favour of the company

The court’s objective is to restore the company’s position as if the undervalue transaction had never occurred. However, the orders made must be proportionate and must take into account the interests of innocent third parties who may have subsequently dealt with the transferred assets in good faith.

The Bona Fide Purchaser Defence

Section 102 IRDA protects a person who acquires property from the direct recipient of an undervalue transaction if that person:

  • Acquired the property in good faith
  • For value (i.e., they paid genuine consideration), and
  • Without notice of the relevant circumstances

This is the bona fide purchaser defence. It means that the liquidator’s claims are primarily directed at the direct counterparty to the undervalue transaction, not at subsequent innocent purchasers who had no knowledge of the insolvency or the undervalue.

The “No Detriment to Creditors” Defence

A respondent to an undervalue transaction application may argue that the court should not make an order because the company entered into the transaction in good faith and for the purpose of carrying on its business, and at the time of the transaction there were reasonable grounds for believing that the transaction would benefit the company.

This defence, found in Section 98(3) IRDA, essentially asks the court to consider whether the transaction, though on its face at undervalue, was entered into for legitimate commercial reasons that could reasonably have been expected to benefit the company. It is a narrower defence than it may appear: the company must have genuinely believed the transaction would be beneficial, and that belief must have been objectively reasonable.

Key Singapore Decisions

Living the Link Pte Ltd v Tan Lay Tin Tina [2016] SGHC 67

In this case, the High Court considered the undervalue transaction provisions as applied to a company in receivership. The court clarified that the “significantly less” threshold requires a comparison between the value given by the company and the value received, measured at the time of the transaction. A mere difference in value is not sufficient — the shortfall must be significant, which the court interpreted as material and not trivial.

Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) v BP Singapore Pte Ltd [2018] SGCA 75

The Court of Appeal in this significant case examined the interplay between undervalue transaction provisions and contractual rights. The court emphasised that liquidators must identify with precision the specific transaction being impugned, the consideration provided and received, and the period within which the transaction falls. A failure to particularise the claim may result in the application being dismissed.

Sun Electric Pte Ltd v Menrva Solutions Pte Ltd [2018] SGHCR 8

This case addressed the burden of proof in undervalue transaction applications. The court held that the liquidator bears the initial burden of establishing that a transaction occurred within the relevant time and at an undervalue. Once this is established, the burden shifts to the respondent to establish any applicable defence.

Procedural Steps for Making a Court Application

A liquidator seeking to challenge an undervalue transaction in Singapore must follow the procedural requirements under the Rules of Court 2021 and the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020.

Step 1: Investigation and Evidence Gathering

Before filing any application, the liquidator should:

  • Obtain and review all documents relating to the transaction (sale and purchase agreements, board resolutions, payment records, valuations)
  • Obtain an independent valuation of the assets transferred, as at the date of the transaction
  • Investigate the solvency of the company at the time of the transaction
  • Identify whether the counterparty was an associate of the company
  • Consider whether any of the transferred assets have been further disposed of to third parties

Step 2: Letter of Demand

As a matter of practice, many liquidators send a letter of demand to the respondent before commencing court proceedings. This gives the respondent an opportunity to return the assets or pay compensation voluntarily, avoiding costly litigation. Where the respondent is cooperative, a negotiated settlement is often preferable to a contested application.

Step 3: Originating Application

If the matter does not settle, the liquidator files an Originating Application (OA) in the General Division of the High Court (for winding up proceedings already before the High Court) or in the appropriate court. The OA is supported by an affidavit setting out:

  • The details of the transaction being impugned
  • The evidence establishing that it was at an undervalue
  • The evidence of insolvency (where required)
  • The orders sought

Step 4: Service and Response

The respondent is served with the OA and has 21 days (or such other period as the court directs) to file a response affidavit setting out their defence.

Step 5: Directions Hearing and Trial

The matter is typically set down for a directions hearing before the Registrar, who will give directions for the exchange of further affidavits, discovery, and the hearing date. Many undervalue transaction applications are determined on the affidavit evidence alone, without oral testimony, particularly where the primary facts are not in dispute. Where there are serious disputes of fact, the court may direct a trial with witnesses.

Quantifying the Liquidator’s Claim

The liquidator must prove the quantum of the undervalue — i.e., what the assets were worth at the time of the transaction compared to what the company received. This typically requires expert valuation evidence. Disputes over valuation methodology are common in contested applications, and the selection of the valuation approach (discounted cash flow, net asset value, comparable transactions) can significantly affect the outcome.

Interaction with Unfair Preference Claims

Undervalue transaction claims often arise alongside unfair preference claims (Section 99 IRDA), where a company preferentially repays one creditor over others before insolvency. The two types of claims are distinct but may be pleaded in the alternative in the same application. The liquidator should consider whether the same transaction may constitute both an undervalue and an unfair preference.

Implications for Directors and Advisers

Directors who authorise undervalue transactions in the lead-up to insolvency face significant personal risk. Where the liquidator’s application succeeds, the respondent is required to return the assets or pay compensation — and the director who authorised the transaction may face separate claims for breach of fiduciary duty and potential personal liability.

Legal advisers, valuers, and corporate secretaries who advise on transactions in the twilight period of a company’s financial life should ensure that proper valuations are obtained and documented, board minutes accurately record the commercial rationale for the transaction, and any significant asset transfers are on demonstrably arm’s length terms.

For businesses facing financial difficulties and seeking to understand their options, see our Corporate Secretary Services page or our guide on striking off a Singapore company.

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