,Singapore

Cash flow test now sole determinant for company insolvency

This is based on a new ruling by the Court of Appeal.

The Singapore Court of Appeal addressed in its written ground of decision that the cash flow test is now the sole test in determining insolvency under the Companies Act. This is to determine whether a company is unable to pay its debts.

This is a decision on an appeal made on the case of Sun Electric Power Pte Ltd v RCMA Pte Ltd (formerly known as Tong Teik Pte Ltd), led by Justice Judith Prakash.

The cash flow test assesses if the company's current assets exceed its current liabilities. These will refer to assets which will be realisable and debts which will fall due within a 12-month timeframe.

The Court ruled that the cash flow test is the sole applicable test based on three reasons: plain words of the provision do not envisage two or more distinct tests being applied, this proposition is supported by case law in the UK, and the single test intended by s 254(2)(c) of the Companies Act is not the balance sheet test.

It was also ruled in the same case that directors will bear costs to appeal against winding up order.

Further, a company will no longer be deemed insolvent if it makes partial repayment within the prescribed three-week period such that outstanding debt falls below $10,000.

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