Avoiding Winding Up: Judicial Management, Part I

Avoiding Winding Up: Judicial Management, Part I

Door sign that says "Closed"

What is Winding Up?

The winding up of a company is a process where the company ceases to exist and its assets are seized and realised. Any remaining monies will be used to pay off the creditors of the company, the expenses and costs of the winding up, and any balance thereafter will be dispensed among the shareholders of the company.

 

Therefore, if you are a debtor company, you can consider a few options to fend off a winding up:

  1. Judicial Management: To protect your company from creditors so as to rehabilitate your company
  2. Schemes of Arrangement: To negotiate compromises and settlements with your creditors

 

Judicial Management

There are instances where your company may face severe financial difficulties, but it may nonetheless be revived because of its strong business fundamentals. In such circumstances, your company may consider applying for a Judicial Management order. The objective of Judicial Management is mainly to protect your company from creditors in order to give you time to rehabilitate your company.

 

Conditions to apply for Judicial Management

Where your company is deemed to be unable to pay its debts, and your company or your creditors believe that there is a reasonable probability of:

 

  1. Rehabilitating the company;
  2. Preserving part of or all of the company’s business as a going concern; or
  3. That the interests of creditors would be better served by methods other than winding up,

 

Your company may make an application to Court for a Judicial Management Order.

 

An application for Judicial Management may be made by:

  1. The company (either by ordinary resolution in general meeting, or majority in a board meeting); or
  2. By creditors (group or individual).

 

Interim Moratorium

An application for Judicial Management imposes an interim moratorium on creditor action. This creates a temporary shield from creditors who may try to take further actions to enforce their rights against your company.

Specifically, as per Section 227C of the Companies Act (Cap. 50) (“Companies Act”), a moratorium prevents any resolution or any order from being passed for your company’s winding up. Creditors’ security over your company’s assets cannot be enforced, and no proceedings or execution against your company’s assets will be able to be carried out without leave of the Court.

 

Conditions for the Court to grant a Judicial Management order

After your company makes an application for Judicial Management, the court may make a Judicial Management order if:

  1. The Court is satisfied that your company is already/is likely to become unable to pay its debts; and
  2. The Judicial Management must also be likely to fulfill at least one of the following purposes:
    1. The survival of the company, or all/part of its undertaking as a going concern
    2. The approval of a scheme under Section 210 of the Companies Act; or
    3. A more advantageous realisation of the company’s assets than via winding up.

 

Conclusion

In summary, you may be able to stop the winding up of your company by applying for a Judicial Management Order to protect your company from creditors while your company financially rehabilitates. There are effects of a Judicial Management Order, which will be discussed in Part II of this series, including how the COVID-19 situation has affected corporate insolvency.

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