In a decision that could widely affect accountants, auditors, and other finance professionals, the Singapore Court of Appeal recently ruled that a defunct company had abandoned its right related to a proof of debt due to the omission of such debt in its accounts. All companies, whether active or defunct, should aim to fully and accurately record every outstanding debt in their accounts.

Singapore’s Court of Appeal recently ruled in Lee Chen Seong Jeremy v Official Assignee [2018] SGCA 51 that a defunct company had abandoned its right in relation to a proof of debt filed against a bankrupt estate by virtue of the company’s conduct, including the omission of the proof of debt in the company’s accounts. While the case concerned a defunct company, it could similarly apply to an active company, which would be well advised to ensure that its accounts fully and accurately reflect its outstanding debts. This decision may have wide-reaching ramifications on parties involved in the preparation of accounts, including accountants, auditors, and other finance professionals.

Background

The company, Northstar, obtained a judgment against the appellant, who was adjudged bankrupt on the basis of the judgment debt (the Northstar Debt), and Northstar filed a proof of debt with the Official Assignee. Years later, Northstar applied to strike itself off the Companies Register as it had ceased business. In the application form submitted by Northstar, its directors checked two boxes stating that (1) the auditor had certified that at the time of the application, all the company’s assets and liabilities had been cleared, and (2) the company had no contingent assets and liabilities. The balance sheet of Northstar appended to the application form did not include the Northstar Debt, even though it had not been repaid at that point in time.

High Court: Northstar Did Not Waive or Abandon the Proof of Debt

The High Court held that the Northstar Debt, being an outstanding asset of Northstar, vested in the Official Receiver pursuant to Section 346 of the Companies Act. The Court held that even though a company had to declare that it no longer had any assets to be struck off, the provision would still apply to defunct companies because it envisaged that companies could potentially nevertheless be found to be in possession of outstanding assets.

The Court held that the declarations made by Northstar’s directors were not determinative of whether Northstar had waived or abandoned the proof of debt. The Northstar Debt could have been omitted from the financial statements simply as a matter of the view it took on financial reporting. The Court noted that the proof of debt had not been withdrawn or varied by any specific agreement between Northstar and the Official Assignee, whereas Northstar had expressly waived its rights through a letter in relation to a separate debt. Further, even if Northstar had given up its rights with respect to the Northstar Debt, it did not mean that the Northstar Debt would have been disposed of within the meaning of Section 346 of the Companies Act, as the rights would pass to the Official Receiver instead.

Court of Appeal: Northstar Intended to and Did Abandon the Proof of Debt

The Court of Appeal overturned the High Court’s decision and held that Northstar had abandoned its right of proof against the appellant’s bankruptcy estate. In analysing the relevant facts at the time of striking off, the court held that Northstar had overtly abandoned, with subjective intent, its right to participate in any payout of the appellant’s estate. Three factors were determinative in reaching this conclusion:

  1. First, the declarations made by the Northstar directors at the time of dissolution, which confirmed that the company no longer had contingent assets and that all its assets had been cleared, meant that Northstar had given up its right of proof and did not intend to pursue it.
  2. Second, the accounts of the company appended to the striking-off application did not contain the proof of debt. Notably, the Court held that in the case of an intangible property like the right of proof, the act of taking the property off the balance sheet would seem to be a clear indication of its abandonment. This act signalled Northstar’s intention to write off the debt and that Northstar no longer wished to pursue it.
  3. Third, Northstar’s conduct in writing off the remaining debt on its books similarly suggested that it would very well have given up on the possibility of a payout with respect to the Northstar Debt to secure its dissolution.

With respect to Section 346 of the Companies Act, the Court held that it is nothing more than a sweep-up or catchall provision. Where there is an asset that has not been dealt with prior to the dissolution of a company, it would vest in the Official Receiver for the Official Receiver to handle. The Court held that as there is no Northstar asset that has not been accounted for, Section 346 does not apply.

Takeaway

As a matter of law, the Court of Appeal held that abandonment occurs when there has been a unilateral relinquishment of a particular property, whether tangible or intangible. Two elements must be met: First, there must be an overt act of abandonment. Second, there must be a subjective intention to completely relinquish property. Northstar was found to have met both these elements given its conduct in relation to the Northstar Debt.

The Court of Appeal’s holding emphasizes the importance of fully and accurately recording every outstanding debt in a company’s accounts. While the Court’s decision was made in the context of the dissolution of a company, it may extend to active companies as well, in which case it could have wide-ranging implications.

In one possible scenario, say a company inadvertently fails to record an asset in its audited financial statements—the question then arises whether this would be sufficient to constitute an act of abandonment. On the one hand, it may be argued that the company’s accounts are a conclusive statement of its assets. On the other hand, it may be said that the company did not show any subjective intention to completely relinquish the asset. Companies and individuals who are involved in the preparation of company accounts, including accountants, auditors, and other financial professionals, should take note of this case and any developments that may arise in the future.