Corporate Insolvency Legal Update: Personal Liability of Directors for procuring undue preference

In a recent case, the High Court in Living the Link Pte Ltd (in creditors’ voluntary liquidation) and others v Tan Lay Tin Tina & ors [2016] SGHC 67  held that a director who had procured payment by the Company in liquidation to an associated company in preference over other creditors would be personally liable  for restoring the company to the position it would otherwise have been but for the undue preference transactions.

The Court’s rationale was that a director has a fiduciary duty to take into account the interests of the company’s creditors when a company is insolvent, or near insolvency, and purpose of the duty mirrors that of the statutory avoidance provisions i.e to protect general creditors from the diminution of the assets available for distribution to the creditors under the collective insolvency regime. The Court also highlighted that this liability to repay the company would exist even if (i)  the company has not suffered any loss; or (ii) the director has not personally benefitted from the undue preferences.

In this case, the defendant director had breach her fiduciary duties by granting preference to associate companies of which she is the sole shareholder. In particular, the Court found that the undue preferences was motivated by the director’s desire to better her own position as  guarantor of the associated companies ‘credit facilities with their banks. In this regard, the Court held that the errant director was jointly liable and severally  with the associate companies to pay back the sum representing the total value of the undue preferences.

If there are any queries arising from this article or if you would like to discuss this article with us, please contact Ms Valerie Ang at valerieang@straitslaw.com.sg or the director who is in charge of your matters.