Singapore Court of Appeal Settles Controversy on When a Grant of Security to Cover Existing Indebtedness May Amount to a Transaction at an Undervalue

Upon the insolvency of an individual or company, the Court has the power to set aside transactions at an undervalue entered into by the insolvent party when or as a consequence of which it becomes insolvent. In Rothstar Group Ltd v Leow Quek Shiong [2022] SGCA 25, the Singapore Court of Appeal conclusively ruled on two longstanding questions relating to the law of undervalued transactions. The first is whether the grant of fresh security by an insolvent party for its existing indebtedness can ever amount to an undervalued transaction. The Court held that it cannot. The second is whether there is a difference if the grant of fresh security by an insolvent party is for the existing indebtedness of a third party. The Court held that there is – in this situation, the grant of security could amount to an undervalued transaction.

The case involved applications to set aside a legal mortgage entered into by a company and its shareholder as security for moneys owed by an associated company. The Court of Appeal allowed the applications and discharged the legal mortgage with prospective effect. The applicants were represented by Lee Eng Beng SC, Sim Kwan Kiat, Chua Beng Chye, Raelene Pereira, Torsten Cheong, Wong Ye Yang, Yeoh Su Yi, and Foung Han Peow of Rajah & Tann Singapore LLP.