Avoiding Winding Up: Judicial Management, Part II

Avoiding Winding Up: Judicial Management, Part II

Man banging the judge hammer

In the previous article, we explained that you may fend off creditors from winding up your company by applying for a Judicial Management Order while your company rehabilitates financially. In this post, we will explain the effects of a Judicial Management Order, including its effects in light of the COVID-19 situation.

 

Effect of a Judicial Management Order on Company and Creditors

 

Effect on Creditors

If the Judicial Management Order is granted, a statutory moratorium will be imposed. This prevents the enforcement of creditors’ rights, but it does not destroy them. Creditors’ interests in your property or assets would continue to accrue, but they are unable to enforce their security over your company’s assets or to pursue any legal actions against your company without the leave of the Court or the Judicial Manager.

 

Effect on Company

If the Court grants the Judicial Management Order, as per s 227D Companies Act (Cap. 50) (the “Companies Act”), the said Order will also impose a statutory moratorium on certain actions. This has the effect of preventing:

  1. Any resolution or any order from being passed for your company’s winding up;
  2. Any receiver or manager being appointed over your company’s property or undertaking;
  3. Enforcement of creditors’ security over your company’s assets;
  4. The carrying out of proceedings or executions against your company’s assets without leave of the Court or the Judicial Manager; and
  5. Enforcement of any right of re-entry or forfeiture under the Conveyancing and Law of Property Act without leave of the Court or the Judicial Manager.

 

The Judicial Manager

The Judicial Manager will be given wide powers to manage the company. He will be able to act on your company’s behalf to deal with your property and assets etc, in accordance with his proposals on how to achieve the objectives of Judicial Management.

The Judicial Manager will be duty-bound to do all that is necessary for the management of the affairs, business and property of your company. As per s 227G(1) of the Companies Act, he must take into your company’s custody all property to which your company is entitled to.

 

Pros and Cons of Judicial Management

 

Pros:

  • Moratorium imposed would give your company time to strategise on how to rehabilitate your company
  • Your company is temporarily shielded from legal proceedings by third-parties

 

Cons:

  • Directors’ dissatisfaction towards being displaced and need for cooperation with Judicial Manager
  • Statutory moratorium does not apply to self-help remedies
  • Negative publicity (people may view Judicial Management as a precursor to your company’s winding up)

 

Effect of the COVID-19 (Temporary Measures) Act on Corporate Insolvency 

On 7 April 2020, Parliament passed the COVID-19 (Temporary Measures) Act (“TMA”), and one of its effects would be the imposition of temporary changes to corporate insolvency laws. This includes increased thresholds for bankruptcy and insolvency for financially distressed businesses. The TMA officially took effect on 20 April 2020.

 

The TMA will:

  1. Increase the monetary threshold for corporate insolvency from $10,000 to $100,000; and
  2. Increase the time period to satisfy a statutory demand from creditors from 21 days to six months.

 

Before the TMA, directors would be criminally liable if they incur debt that the company has no reasonable prospect of paying in full. Under the TMA, there will be a temporary relief from such liability in light of the commercially unstable COVID-19 situation. Many companies have been incurring debts with an uncertain prospect of repaying it in full. However, do note that directors will still remain liable if these debts were incurred fraudulently.

 

Conclusion

In conclusion, the decision to apply for Judicial Management would have different effects on your company and your creditors. Even though there would be restrictions imposed on your company, this option would nevertheless safeguard your company from legal action while you rehabilitate your company’s finances. In the next article, we will explain another option to prevent a winding up action, which is the Schemes of Arrangement between your company and its creditors.

 

[This article is for general information only and does not constitute legal advice. Please contact us if you require any form of assistance.]

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