A lender with a registered floating charge over “all assets” may assume it will be paid first if the borrower fails. In a Singapore liquidation that is often not true. Liquidation costs and employee claims can be paid out of the floating charge assets before the lender sees anything, and a floating charge taken shortly before the company failed may be invalid for most of the debt it was meant to secure.
This article works through, with numbers, what a floating charge holder actually recovers in a liquidation. It is written for banks and finance companies, and especially for directors and shareholders who lend to their own companies and take a debenture in return. It is part of our series on company charges, which starts with fixed and floating charges.
Three rules that reduce a floating charge
| Rule | Source | Effect on the floating charge holder |
|---|---|---|
| Preferential debts are paid first out of floating charge assets if free assets are insufficient | IRDA s 203(6) | Liquidation costs, the winding up applicant’s costs, wages, retrenchment benefits, CPF contributions and vacation pay within the prescribed limits come out before the lender |
| A receiver appointed under a floating charge must pay employee preferential debts first | IRDA s 86 | The same reduction applies outside liquidation when the lender enforces through a receiver |
| Late floating charges are invalid except for new value | IRDA s 229 | A floating charge created within one year before the commencement of the winding up or judicial management (two years for a connected lender) secures only new money, goods or services provided at or after its creation |
None of these rules applies to a valid fixed charge. That is why lenders try to take fixed security over as much as possible and why the court’s characterisation of a charge matters so much.
Preferential debts under section 203
Section 203(1) of the Insolvency, Restructuring and Dissolution Act 2018 lists the debts paid in priority to other unsecured debts in a winding up, in this order:
- the costs and expenses of the winding up incurred by the Official Receiver as liquidator;
- other costs and expenses of the winding up, including the liquidator’s remuneration;
- the costs of the creditor who applied for the winding up order;
- wages and salary, within a prescribed limit;
- retrenchment benefits and ex gratia payments, within a prescribed limit;
- work injury compensation;
- CPF and similar contributions for a 12-month period around the winding up;
- vacation leave pay, within a prescribed limit; and
- taxes assessed and GST due.
Section 203(6) then provides that, so far as the company’s assets available for general creditors are insufficient, the debts in paragraphs (a), (b), (c), (d), (e), (g) and (h), plus amounts advanced to pay wages under s 203(5), have priority over the holder of a floating charge and are paid out of the floating charge assets. Two categories are left out: work injury compensation and tax. IRAS and work injury claimants are preferential creditors against free assets, but they do not rank ahead of a floating charge holder.
The rule applies to a charge which “as created” was a floating charge. A lender cannot avoid it by crystallising the charge before the liquidation starts, which our article on crystallisation explains.
Worked example 1: a bank with an all-assets debenture
A trading company owes its bank $400,000 under an overdraft and term loan, secured by a debenture registered with ACRA five years ago. The company is wound up. Its only assets are receivables, which realise $280,000, and stock, which realises $70,000. There are no other assets. The liquidation costs, including the applicant’s costs, are $50,000. Employees are owed $40,000 in wages and $10,000 in CPF contributions, all within the prescribed limits. IRAS is owed $30,000 in tax, and trade creditors are owed $300,000.
| Step | Scenario A: charge over receivables is floating | Scenario B: charge over receivables is a valid fixed charge |
|---|---|---|
| Receivables ($280,000) | Part of the floating charge pool | Paid to the bank under its fixed charge: $280,000 |
| Floating charge pool | $350,000 | $70,000 (stock only) |
| Preferential debts paid out of the pool under s 203(6) | $100,000 in full (costs $50,000, wages $40,000, CPF $10,000) | $70,000, paid in the s 203(1) order: costs $50,000 in full, wages $20,000 of $40,000. CPF is unpaid |
| Balance to the bank from the floating charge | $250,000 | Nil |
| Bank’s total recovery | $250,000 of $400,000 | $280,000 of $400,000 |
| IRAS and trade creditors | Nothing: there are no free assets | Nothing: there are no free assets |
The bank’s recovery depends on whether the “fixed” charge over receivables survives scrutiny. As explained in our article on fixed and floating charges, that usually turns on whether the company was free to collect and spend the receivables. If it was, Scenario A is the likely outcome. The tax authority and trade creditors receive nothing in either scenario, which is common where an all-assets debenture covers everything.
The section 229 avoidance rule
IRDA s 229 targets a familiar pattern: a struggling company grants a floating charge to an existing creditor to secure money it already owes, shortly before it collapses. The section makes a floating charge created at a “relevant time” invalid except to the extent of the total of:
- money paid, or goods or services supplied, to the company at the same time as or after the creation of the charge (goods and services are valued at what they would reasonably have cost in the ordinary course of business);
- the discharge or reduction, at or after the creation of the charge, of any debt of the company, for example where the lender pays one of the company’s suppliers directly; and
- interest payable on those amounts under the relevant agreement.
The relevant time depends on who the charge holder is:
| Charge holder | Look-back period, ending on the commencement of the winding up or judicial management | Must the company have been insolvent? |
|---|---|---|
| A person connected with the company, such as a director, shareholder or related company | 2 years | No. The charge is caught whatever the company’s financial position |
| Any other person, such as a bank | 1 year | Yes. Only if the company was unable to pay its debts at the time, or became unable to as a result of the transaction |
| Anyone | The gap between the commencement of judicial management (generally when the application is made) and the date the company actually enters judicial management | No |
Under s 229(5) and (6), the look-back is extended by any time the company spent under certain moratoriums, such as an automatic or court-ordered moratorium in a scheme of arrangement, so that a moratorium does not shorten it.
Worked example 2: a director who takes a debenture late
A director has lent $200,000 to the company over three years without security. In January, with the business struggling, the company grants the director a floating charge over all its assets, which is registered with ACRA within 30 days. In March the director lends a further $50,000, which the company uses to pay wages. In October, the company goes into liquidation. The floating charge assets realise $180,000.
- The charge was created within two years before the liquidation in favour of a connected person, so it was created at a relevant time. The company’s solvency in January is irrelevant.
- The charge is valid only to the extent of the $50,000 of new money lent after its creation, plus any agreed interest on that amount.
- For the original $200,000, the director is an unsecured creditor and shares with everyone else.
- The charge was also floating, so preferential debts payable under s 203(6) come out of the $180,000 before the director’s valid $50,000 is paid.
- Because the $50,000 was advanced to pay wages, s 203(5) may also give the director the same priority the employees would have had for that amount, within the prescribed limits. Keep records showing exactly which wages the advance paid.
On top of s 229, granting security for an existing debt to a connected person in the two years before liquidation can be challenged as an unfair preference under IRDA s 225, where the company is presumed to have been influenced by a desire to prefer. Our article on shareholder and director loans in liquidation explains how liquidators approach these claims, and our guide to challenging the validity of a charge covers the procedure.
Receivership: the same priority outside liquidation
A floating charge holder often enforces by appointing a receiver rather than waiting for a liquidation. IRDA s 86 provides that, if the company is not being wound up when a receiver is appointed or possession is taken under a charge that was floating as created, debts that would be preferential in a winding up for wages, salary, retrenchment benefits, ex gratia payments, vacation leave and CPF contributions must be paid out of the floating charge assets in priority to the lender’s principal and interest. The receiver can later recoup those payments from assets available to general creditors. Our guides to receivership and priority disputes between a receiver and preferential creditors cover this in detail.
How lenders and owner-lenders can protect their position
- Register within 30 days. An unregistered charge is void against the liquidator and creditors, so none of the rules above even matter. See our article on unregistered charges in a liquidation.
- Take security when you lend, not when trouble starts. A charge taken at the outset for new money is not affected by s 229. A charge taken later for old debt is the transaction the section targets.
- Take fixed security where the business can live with it. Fixed charges over property, equipment and shares are not reduced by preferential debts. A fixed charge over receivables only works with genuine control over the proceeds.
- Document new value carefully. If you advance fresh money after taking a floating charge, keep clear records of each advance, the date and its use. Those amounts are what s 229 preserves.
- Price the preferential debts in. A lender to a business with a large workforce should assume that unpaid wages, retrenchment benefits and CPF contributions will come out of its floating charge recovery.
Frequently asked questions
Does IRAS rank ahead of a floating charge holder in Singapore?
No. Tax and GST are preferential debts under IRDA s 203(1)(i), but s 203(6) does not include them among the debts paid out of floating charge assets. They are paid only from free assets.
Are preferential debts paid out of fixed charge assets?
No. Section 203(6) applies only to property subject to a charge which, as created, was floating. A valid fixed charge holder is paid from its asset ahead of preferential creditors.
Is a floating charge given to a bank one month before liquidation always invalid?
Not always. For a lender not connected with the company, the charge is only caught if the company was unable to pay its debts when the charge was created or became unable to as a result. Even then, it remains valid for new money advanced at or after its creation.
Does section 229 make the debt itself unenforceable?
No. Only the security is invalid to the extent described. The lender keeps its claim as an unsecured creditor for the balance.
How much of an employee’s wages ranks ahead of the floating charge?
Wages, retrenchment benefits and vacation pay rank as preferential debts only up to amounts prescribed by the Minister under IRDA s 203(2). Amounts above the limits are ordinary unsecured debts.
Official sources: IRDA 2018, s 203, IRDA 2018, s 229, IRDA 2018, ss 225 and 226, IRDA 2018, s 86, Companies Act 1967, s 131.
Need help with a floating charge in an insolvency?
If your company, or you as a director, shareholder or lender, holds or has granted a floating charge and the company is in financial difficulty or in liquidation, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will help you understand the documents and deadlines. Where your matter needs a lawyer, we will refer you to a firm on our panel of Singapore law firms that regularly handles insolvency, restructuring and security enforcement. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not legal advice.
Willie Tan, Raffles Corporate Services