A recent situation involving a judicial manager and the fate of the employees of a company under judicial management has come to light (a judicial manager is the equivalent of an administrator in the United Kingdom).

The issue was whether to adopt the existing contracts of employment or to terminate them and execute fresh contracts. By continuing the employment, the judicial manager would arguably adopt the contracts of employment within the meaning of Section 227I(1)(b) of the Singapore Companies Act. Accordingly, liabilities owed to the employees in the period the judicial managers were in office (eg, payments in lieu of notice and holiday pay payable on dismissal) would be payable in priority to all other debts. It was therefore a potentially hazardous situation for the judicial managers to retain those employees necessary to keep the company running. If the company had instead been wound up, the employees would be creditors and would enjoy no more than a limited priority. If the employees were retained for more than 28 days, the contracts would have been adopted automatically and the employees would immediately become entitled to the same priority enjoyed by the judicial managers.

In Singapore, the purpose of placing companies under judicial management is to allow the business of the company to continue, with a view to either (i) the rehabilitation of the company, or (ii) procuring a more advantageous realization of its assets. Therefore, the continued employment of at least part of the workforce is usually essential. Section 227I(1)(b) of the Singapore Companies Act provides that the judicial manager is personally liable for any contract entered into or adopted by him/her (unless he/she disclaims liability). Adoption of an employment contract connotes conduct by the judicial manager which may amount to an election to treat the continued contract of employment with the company as giving rise to separate liability.

More importantly, by adopting these contracts of employment, Section 227I(1)(b) arguably provides employees with the right to be paid in full and in priority, not only for services rendered during the judicial management but also for payments not referable to services to which the employees were entitled under their employment contracts (eg, holiday pay and contractual notice pay).

In the United Kingdom this issue has been substantially resolved with the Insolvency Act 1986, amended by the Insolvency Act 1994. The 1994 Act makes it clear that administrators are not liable in respect of services rendered before the adoption of the employee contract. However, the Singapore Companies Act does not have a similar provision. Thus, for local judicial managers, the issue remains unresolved. A leading local textbook, Company Law (2nd Edition), suggests that by following the rationale in the case of Powdrill & Watson [1995] 1BCLC 386 (House of Lords), the liability of judicial managers for contracts adopted by them should only be in respect of liabilities incurred under the contract while they are managers. Although this involves reading meaning into Section 227I(1)(b) of the Singapore Companies Act, the alternative leads to absurd results.

The basic tenet of judicial management within Singapore is to provide companies with a second chance at survival. Bearing this in mind, any provision which unduly burdens the judicial manager with further liabilities renders the survival of the company hazardous. It seems that Parliament should take steps to make the necessary amendments to the Companies Act in order to correct this situation.

For further information on this topic please contact Sham Sabnani at Drew & Napier by telephone (+65 531 2450) or by fax (+65 532 7149) or by e-mail ([email protected]). The Drew & Napier web site can be accessed at www.drewnapier.com.

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