A recent Singapore court case shows that company funds cannot be withdrawn freely when a business is in financial difficulty.
What Happened
A business owner withdrew about S$1.18 million through dividends and shareholder loan repayments after his company began facing a customer’s legal claim. The company later became insolvent and was wound up. The liquidators sued, and the court ordered him to repay the full amount.
When a company is insolvent or near insolvency, directors must consider the interests of creditors, not only shareholders.
Key Lessons
- Company money is not personal money, even for a 100% owner.
- Payments can be reversed: Under the IRDA, payments to insiders up to two years before winding up may be clawed back as unfair preferences or undervalue transactions.
- Timing matters: Withdrawals made during lawsuits, cash flow strain or unpaid debts will be closely scrutinised.
- Personal exposure: Limited liability does not protect directors who deplete company cash to the detriment of creditors.
Before Paying Dividends or Repaying Shareholder Loans
- Confirm the company will remain solvent after payment
- Consider pending claims, disputes and large unpaid debts
- Maintain adequate working capital
- Sign the required board resolutions and solvency statements before funds are paid out
Contact our corporate secretarial team before making any major distribution.