Liquidation is frequently misinterpreted as the final, sombre chapter of a company’s existence – a dead end where creditors expect to recover little. In practice, however, liquidation can be a starting point for asset recovery. When a company enters liquidation with empty coffers, viable claims against directors or counterparties may remain dormant because the estate cannot afford the legal fees or the risk of adverse costs. Creditor funding bridges that gap, and the Singapore courts have, in recent years, developed a settled framework for approving such arrangements.
Options for funding recovery
The Insolvency, Restructuring and Dissolution Act 2018 (the “IRDA”) codifies developments which were emerging in the Singapore courts concerning funding recovery efforts in insolvency. In Re Vanguard Energy Pte Ltd [2015] 4 SLR 597, the High Court confirmed that the liquidator’s statutory power of sale extended to the proceeds of a cause of action. Re Fan Kow Hin [2019] 3 SLR 861 extended that reasoning to the assignment of proceeds of clawback claims by a trustee in bankruptcy. The IRDA now expressly provides for the following routes for creditor funding in corporate insolvency:
• Section 144(1)(g): With court approval or the consent of the committee of inspection (“COI”), the liquidator may assign the proceeds of certain statutory claims (transactions at undervalue, unfair preferences, extortionate credit transactions, fraudulent and wrongful trading, and claims against delinquent officers). The IRD (Assignment of Proceeds of an Action) Regulations 2020 require notice to all creditors, a right of first refusal to fund, and the funder’s non-influence over the conduct of the claim. Where the funding creditor is on the COI, regulations 37 and 39 of the IRD (Court-Ordered Winding Up) Regulations 2020 additionally require court approval, and prevent COI members from otherwise purchasing the company’s assets or profiting from transactions arising out of winding up.
• Section 144(2)(b): The liquidator may sell or assign the fruits of the company’s pre-insolvency causes of action. Court authorisation is not required, though directions under section 145(3) may be sought.
• Section 204(3): On the application of a funding creditor, the court may make a prospective order giving the funder priority over other creditors in respect of assets recovered, protected or preserved as a result of the funding or indemnity provided. As Re Mingda Holding Pte Ltd [2025] 4 SLR 234 (“Mingda”) confirmed, approval must be sought prospectively – retrospective validation of a funding agreement after costs have been incurred is not available.
The seminal decision on the section 144 routes is Lavrentiadis, Lavrentios v Dextra Partners Pte Ltd (in liquidation) and another matter [2023] 5 SLR 1288, where the liquidators of Dextra Partners and the trustee in bankruptcy of its sole director sought authorisation for a joint funding agreement with a judgment creditor. The court considered the following factors relevant to the sought authorisation: whether the liquidator is acting in good faith, whether the assignment is in the interest of the company and its creditors as a whole, whether it conflicts with any public policy, and whether its terms conflict with any written law.
Priority via funding
Section 204(3) priority is a different mechanism from a section 144 assignment. Under section 144, the funder (which can be a commercial third-party funder or a creditor) takes the proceeds of an identified cause of action it has paid to advance. Under section 204(3), a creditor takes a priority distribution from assets recovered, protected or preserved through the funded action, and that distribution may extend beyond the fruits of the specific litigation to other assets in the estate.
In deciding applications for section 204(3) priority, the court applies a set of non-exhaustive factors first articulated in Song Jianbo v Sunmax Global Capital Fund 1 Pte Ltd (in compulsory liquidation) [2023] 4 SLR 1575 and refined in Majestica Enterprises Ltd v Kams Singapore Pte Ltd (in compulsory liquidation) [2024] 3 SLR 1220: the complexity and necessity of the proceedings to be funded; the extent of funding and the level of risk borne by the funder; whether the other creditors were given the opportunity to fund and declined to do so; the public interest in encouraging creditors to provide funding; and the presence or absence of objections from other creditors, the liquidator or the Official Assignee.
A potent practical guiding question is whether the funding the only realistic means by which value can be unlocked for the estate? Where the alternative is no recovery at all, the court will look favourably on terms that, in another context, might appear generous to the funder. As the court explained in Mingda, the funder’s reward must be commensurate with the risks it has assumed, but must not be “extravagant or objectionable”. Objections from the targets of the underlying claims (typically former directors or related parties) are generally given limited weight, as their self-interest in defeating the funded action is plain.
For a funding arrangement to survive judicial scrutiny, some of the other key requirements are:
• Adequate indemnity: The funding must cover the liquidator’s costs, legal fees and, and must provide a full indemnity against any adverse costs order made in the funded proceedings.
• Liquidator control: The liquidator must retain control of the strategy and conduct of the proceedings. A funder may legitimately be consulted, and may negotiate consent rights over the selection of solicitors, settlement, and discontinuance, but it may not direct the litigation.
• Commercial proportionality: The funder’s return must be proportionate to the risk taken, taking into account the benefit produced for the estate. Returns that are commercially defensible (including, on appropriate facts, a 100% priority) will be approved; arrangements that appear extravagant will not.
Designing the waterfall
The most consequential commercial term of any funding agreement is the distribution waterfall, and recent cases recognise two models. In Mingda, the funder was a creditor of the company that agreed to fund the liquidator’s claw-back actions against a former director and a related party for unfair preferences and void dispositions. The funding agreement provided for the funder to recover, in priority over all other creditors and liquidation expenses, (i) its funding costs, (ii) its legal costs, and (iii) 100% of its admitted debt. Other unsecured creditors objected. The court approved the priority on the basis that funding was the only realistic means of recovery; no other creditor had been willing to share the risk; and the funder was effectively assuming the costs of an action, the benefit otherwise, would have been zero for everyone.
Majestica by contrast represents a more balanced model. After repayment of the funding amount, further recoveries were split between the funding creditor (75%) and the wider unsecured creditor body (25%), with the liquidator retaining limited flexibility to adjust the timing of distributions. Both structures are available, and the choice between them turns on the bargaining position of the funder.
Conclusion
For liquidators, the practical question on any potential recovery action is no longer whether funding is available in principle but how to structure it. The choice between a section 144 assignment and a section 204(3) priority, the design of the waterfall, the staging of the indemnity, and the preservation of the liquidator’s control are the levers on which the commercial outcome turns. For creditors, the same exercise looks the other way: what priority is being granted, what risks are being assumed, and does the structure create value that would not otherwise exist?
