Corporate Bankruptcy or Insolvency in Singapore — What Does It Mean for Employees?

These days, it seems like businesses around the world are dropping like flies. Just recently, retailer Forever 21’s and travel agency Thomas Cook’s bankruptcies have been making headlines around the world. 

Back home, the financial Grim Reaper has come for troubled organisations big and small, from Hyflux to Ofo to Honestbee.

And guess what? When companies go bust, their employees are often collateral damage.

Now, if you can take some time off between searching for your employer on the Ministry of Law’s corporate insolvency search engine and frantically applying for jobs on JobsDB, read this article to find out more about what business bankruptcy or insolvency means for you.

 

What is bankruptcy in the corporate context?

Bankruptcy generally refers to when you owe more money than you can pay, and it can apply to both individuals and companies.

For individuals, it’s pretty straightforward. You may file for bankruptcy if you cannot repay debts of more than $15,000. This effectively “resets” your debts, but it does come with a lot of severe consequences.

But for companies, it’s complicated. There is no one-size-fits-all guideline that applies to all companies.

According to Singapore Legal Advice, a company can be considered insolvent if a creditor (lender, e.g. a bank) demands a payment of above $10,000, and the company is not able to pay within 21 days.

Or, a creditor has gone to court to try to recover the money that the company owes them, and the company is still not able to pay even partially. 

These are the corporate insolvency guidelines set out in the Companies Act. However, insolvency is different from bankruptcy. Generally, bankruptcy protection is granted to insolvent companies who seek temporary relief from their debts. But there’s a whole different procedure for that.

 

What happens after a company is found insolvent?

Singapore is famous for being pro-business, and our insolvency laws are, according to Singapore Law Watch, quite “conducive to corporate rescue.” (In other words, we like to give chance.)

If there are no court proceedings, but the company is nonetheless under significant pressure from its debtors, the company may file for bankruptcy. 

The court may then issue a debt moratorium — which legally allows the company to delay debt repayments — for a specific period of time. During this period, debtors are the company is expected to restructure its business and/or look for a “rescuer” to lift it out of insolvency.

Legally, the court can be a lot harsher. It can issue a winding-up order to the debt-ridden company to shut it down. Thereafter, the company’s assets will be liquidated to repay its creditors.

But in many cases, debt moratoriums are granted (and sometimes even extended, as in the case of Hyflux right now) to let the company to make a final attempt to do right by its employees, customers and regular shareholders.

That’s because these small players are usually the ones who get next to nothing if a company liquidates, since it’s unlikely there’s anything left over of the liquidated assets after they are repossessed by the creditors.

 

What happens to the insolvent company’s employees?

As mentioned, the big players in high-profile corporate insolvency cases are almost always the major (secured) creditors, such as banks. The bulk of the liquidated assets go to them.

The remainder, if any, will be distributed in the following order according to the Companies Act, emphasis mine:

1. The costs and expenses of the winding up, and the remuneration of the liquidator;
2. The wages and salaries of employees of up to 5 months, including any amount payable by way of allowance or reimbursement under any contract of employment, award or agreement relating to the conditions of employment of any employee;
3. Retrenchment benefits due to employees (subject to a maximum of S$12,500 per person);
4. Employees’ work injury compensation, if any;
5. CPF contributions due to employees (up to 12 months’ worth per person);
6. Pay in lieu of an employee’s unconsumed vacation leave, or in the case of his death, to any other person in his right; and
7. The company’s total assessed taxes (including GST).
8. Secured creditors (with floating charges)

In reality, however, there may not be enough left of the liquidated assets to repay employees’ wages and CPF contributions. 

“Depending on the assets available for distribution, they may receive a few cents for each dollar owed, or nothing at all if the assets were secured assets,” wrote Patrick Tay of NTUC in 2017.

Furthermore, he pointed out that if the company is in legal limbo (statutory moratorium), workers cannot try to recover their wages, even with help from MOM, without getting permission from the court.

 

What if you suspect your company is doing badly?

If your company has been quietly missing your CPF contributions, delaying salary payments, or doing anything else that makes you suspect its finances are on the rocks, then you should immediately take steps to leave, especially if you have your own financial commitments to meet.

Even if the court gives your company a chance to turn things around, faithful employees who stick around during troubled times may get the short end of the stick.

Take ill-fated bike-sharing company Ofo for example. In Jan 2019, Ofo Singapore laid off their operations team without compensation. While the workers were obviously unhappy about not getting the contractual compensation, they didn’t dare to demand anything for fear that Ofo would withhold their final month’s pay.

Another troubled startup, Honestbee, owes 215 workers $1million in unpaid salaries. What’s troubling is that Honestbee appears to have held town halls in which staff were reassured that the company was doing fine.

Note that private companies, including startups, are much more loosely governed than publicly listed companies, and may not have good financial disclosure practices in place.

 

In conclusion: Protect yourself, because no one else will

If your company is losing money and owes a lot of debts, that’s worrying but not really scandalous in itself. 

It’s just a fact of life that businesses rise and fall, and they are affected by all kinds of changes — from changes in CPF contribution rates to a depressed economy.

However, you should not be blindly loyal to your employer either. It’s not smart to stay on just because the charismatic CEO made a moving speech comparing himself to Winston Churchill.

If you do not proactively take steps to look for other work opportunities, you could end up in an unpleasant situation where your financial commitments outweigh your income.

Is “Winston Churchill” going to help with your home loan repayments or show up at your house with milk powder for your kid!? Thought not.

Unless you have absolutely no career prospects, I would say it’s extremely unwise to hang in there till the end in the hopes of a payout after the company is liquidated.

As I’ve shown above, the chances of recovering any owed salary, claims or CPF payments are very slim, since the lion’s share of the assets will go to the creditors. At that point, no one — not your MP, not the law, not MOM — can help you out.

What should be done to protect bankrupt companies’ employees? Share some suggestions with us.