Directors of Singapore companies bear a particular responsibility when the business slides towards insolvency: continuing to trade while the company cannot pay its debts can expose them to personal liability for the company’s debts, not just corporate liability. This is known as insolvent trading, and it is one of the most consequential director-liability regimes in Singapore company law.
This 2026 guide explains what insolvent trading is under Section 239 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA), the tests the court applies, the defences available to directors, and the practical steps directors should take when insolvency looms.
Insolvent trading is a real, litigated liability — not a theoretical risk. Every Singapore company director should understand the framework and act on the warning signs when they appear.
What Is Insolvent Trading?
Insolvent trading is the situation where a company incurs a debt at a time when it is unable to pay its debts as they fall due (cash-flow insolvency), or where its liabilities exceed its assets (balance-sheet insolvency). Directors who allow this to continue can be held personally liable to contribute to the company’s assets when the company subsequently winds up.
The Singapore statutory framework has two overlapping mechanisms:
- Section 239 IRDA (Fraudulent trading) — where the business is carried on with intent to defraud creditors or for any fraudulent purpose.
- Section 238 IRDA (Wrongful trading) — where directors incur debts on behalf of an insolvent company or a company that becomes insolvent as a result.
Wrongful trading under Section 238 is the more commonly used ground because it does not require proof of dishonest intent — only a failure to act when the company was insolvent or on the brink.
Legal Basis: Section 238 and 239 of the IRDA 2018
The two provisions live in Part 8 (Winding Up) of the Insolvency, Restructuring and Dissolution Act 2018.
Section 238: Wrongful Trading
Under Section 238, an officer of a company who was knowingly a party to the incurring of a debt or other liability by the company at a time when there was no reasonable prospect of the company being able to pay off the debt or liability may be personally liable to contribute to the company’s assets.
Section 238 applies where two conditions are met:
- The company has been wound up.
- The court is satisfied that the officer was knowingly party to the incurring of the debt at a time when there was no reasonable prospect of repayment.
Section 239: Fraudulent Trading
Section 239 addresses the more serious situation: where the business has been carried on with intent to defraud creditors or for any fraudulent purpose. Fraudulent trading is both a civil liability (contribution to the company’s assets) and a criminal offence (up to 7 years’ imprisonment or fine of up to S$15,000, or both).
Who Can Apply?
An application under Section 238 or Section 239 is made to the High Court by:
- The liquidator of the company (in a winding-up context).
- A judicial manager (in a judicial management context).
- A creditor of the company.
- A contributory (shareholder) of the company.
The application is typically made after winding up has commenced, since Section 238 explicitly requires that the company has been wound up. It is triggered when the liquidator, on investigating the company’s pre-winding-up conduct, identifies a period during which the company was trading while insolvent.
Step-by-Step: How a Section 238 or 239 Application Works
Step 1: The company is wound up
Whether by court order or voluntary winding up, the company is placed into liquidation and a liquidator is appointed. The liquidator’s primary duty is to realise the company’s assets for the benefit of creditors.
Step 2: The liquidator investigates director conduct
Under Section 246 IRDA, the liquidator has broad investigation powers, including compelling directors to produce books and records and examining directors under oath. The liquidator reviews the company’s financial position over the 12 to 24 months before winding up.
Step 3: Identifying the “insolvent trading period”
The liquidator identifies the point at which the company became insolvent — the earliest date at which the company had no reasonable prospect of paying its debts. Common evidence includes:
- Cash flow forecasts prepared at the time.
- Board minutes discussing solvency.
- Statutory demand letters received.
- Bank overdraft breach notices.
- Auditors’ going-concern qualifications.
Step 4: Filing the application in High Court
The liquidator files an originating summons in the Singapore High Court seeking:
- A declaration that the director engaged in wrongful (or fraudulent) trading.
- An order that the director contribute a specified sum to the company’s assets.
- Ancillary orders including disqualification and costs.
Step 5: The hearing
The court examines the evidence on both sides. Directors are entitled to call expert evidence (accounting, industry-specific) to show that at the time debts were incurred, there was a reasonable prospect of repayment. The court applies an objective standard: what would a reasonably diligent director in the same position have known and done?
Step 6: The order
If the court is satisfied, it may order the director to contribute to the company’s assets a sum the court considers proper. This is typically calculated by reference to the additional loss suffered by creditors during the insolvent-trading period.
Documents Required
| Document | Source |
|---|---|
| Winding-up order or resolution | High Court / Members |
| Liquidator’s investigation report | Liquidator |
| Company financial statements (last 3 years) | Company records |
| Bank statements and creditor correspondence | Bank / Creditors |
| Board minutes and director resolutions | Company records |
| Statutory demand letters | Creditors |
| Cash flow forecasts prepared by directors | Company records |
| Expert accounting evidence | Independent expert |
Timeline and Costs
| Stage | Timing | Indicative Cost |
|---|---|---|
| Liquidator investigation | 3 – 12 months | Funded from company assets |
| Preparation of application | 1 – 3 months | S$20,000 – S$50,000 |
| Filing in High Court | Day 0 | Court filing fees ~S$500 – S$1,000 |
| Response and evidence | 3 – 6 months | Legal fees per side |
| Hearing and judgment | 12 – 18 months from filing | S$50,000 – S$300,000+ |
| Total elapsed time | 18 – 30 months | Highly variable |
Costs vary widely by complexity, number of directors involved, and the sum in dispute. Personal liability quanta in reported cases range from tens of thousands to several million Singapore dollars.
What Happens After the Order
If the court makes an order under Section 238 or 239:
- The director must pay the ordered sum to the company’s liquidator.
- The sum is used to increase the pool of assets available to creditors.
- The director may also be disqualified from acting as a director for a period of up to 5 years under Section 149 of the Companies Act.
- For fraudulent trading under Section 239, criminal proceedings may follow.
Bankruptcy is a real risk for directors held liable in significant sums. Personal insolvency proceedings can follow if the director cannot satisfy the contribution order.
Defences Available to Directors
Directors are not automatically liable simply because the company failed. The court applies an objective test, and directors can defend on the following grounds:
- Reasonable prospect of repayment. If, at the time each debt was incurred, the director genuinely believed and had reasonable grounds to believe that the company could repay it, the Section 238 test is not satisfied.
- Every step to minimise loss. Where directors took every step a reasonable person would take to minimise creditors’ potential losses, the court can decline to make an order.
- Reliance on professional advice. Reliance on accountants, restructuring advisers, or corporate secretaries can be a defence if the reliance was reasonable.
- No knowledge (for wrongful trading). Section 238 requires the director to be “knowingly” party to the debt. Non-executive directors who genuinely did not know the company was insolvent may escape liability.
- Section 391 relief. Even where liability is established, Section 391 of the Companies Act gives the court discretion to relieve directors from liability if they acted honestly and reasonably.
How Directors Should Act When Insolvency Looms
The best defence is early action. When a director becomes aware that the company may be insolvent, the correct steps are:
- Convene an urgent board meeting. Document the solvency concern in the minutes.
- Take professional advice. Engage an insolvency practitioner and, if necessary, a Singapore law firm specialising in corporate restructuring.
- Prepare a formal cash flow forecast. Assess whether there is a genuine prospect of repayment. Document assumptions.
- Cease incurring new debts if the position is hopeless. Every new debt during an insolvent period increases director exposure.
- Consider judicial management or scheme of arrangement. The IRDA offers restructuring pathways that can preserve value if the underlying business is viable.
- If no rescue is possible, initiate members’ voluntary or creditors’ voluntary winding up promptly. An orderly winding up is far better than continued insolvent trading.
Frequently Asked Questions
Are non-executive directors also liable?
Yes, in principle. Section 238 applies to any officer of the company who was “knowingly” party. Non-executive directors who attend meetings and receive management reports cannot claim ignorance if the reports showed insolvency indicators.
What is the standard of proof?
Civil standard: balance of probabilities. This is lower than the criminal standard applicable to Section 239 fraudulent trading (beyond reasonable doubt).
Does an insured director have coverage?
Directors’ and Officers’ (D&O) insurance policies typically exclude fraudulent conduct but may cover wrongful trading claims subject to policy terms. Review your D&O policy carefully.
How does insolvent trading interact with the duties in breach of fiduciary duty?
They can overlap. A director who continues trading while insolvent may simultaneously breach the fiduciary duty to act in the company’s best interests (which, once insolvency looms, shifts to the interests of creditors). Multiple claims can be brought concurrently.
Can a director voluntarily initiate winding up to limit liability?
Yes. Placing the company into voluntary winding up as soon as insolvency is apparent is one of the most effective ways to limit personal exposure. See our directors’ duty not to fetter discretion guide for related director-conduct issues.
Does Section 238 apply if the company is not wound up?
No. Section 238 explicitly requires the company to have been wound up. Prior to winding up, the applicable framework is directors’ fiduciary duties and the general duty of care.
Related Provisions to Be Aware Of
- Section 240 IRDA (Fraudulent preference). Payments to a preferred creditor within 6 months of winding up can be clawed back.
- Section 241 IRDA (Undervalue transactions). Transactions at less than market value within 3 years of winding up can be set aside.
- Section 155 Companies Act (Disqualification). Directors of insolvent companies can be disqualified.
- Section 391 Companies Act (Relief). Discretionary relief from liability for honest and reasonable conduct.
For more on the winding-up framework itself, see the IRDA on Singapore Statutes Online.
Need Help With This Matter?
If your company is facing this situation, Raffles Corporate Services can assist with the groundwork — ACRA filings, compliance documentation, and coordinating with experienced Singapore law firms. For matters requiring court proceedings, we work with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice.
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This article is for general information only and does not constitute legal advice. For advice specific to your situation, please consult a qualified Singapore Advocate and Solicitor.
— The Editorial Team, Raffles Corporate Services