HR software company faces winding up over executive's unpaid salary

Singapore's High Court determines employer's fate under 'cash flow test'

HR software company faces winding up over executive's unpaid salary

Singapore's High Court recently dealt with a case involving an employer, a firm offering human resource software and information technology solutions, and a worker who had a dispute over unpaid wages.

The worker, who was employed as the head of corporate development, claimed that the employer owed him $145,161.30 in unpaid salary and served a statutory demand for this amount.

When the employer failed to satisfy the demand, the worker filed an application to wind up the company.

The case revolved around the worker's employment status and whether any salary remained outstanding for the period between February and September 2021.

The court's decision shed light on the complexities of employment disputes and the factors considered when determining whether a company should be wound up due to its inability to pay debts.

Background of the case

The worker started working for the company in January 2020 at a monthly salary of $12,000. However, he alleged that after slightly more than a year, he stopped receiving his salary from February 2021 onwards.

Despite the employer's financial difficulties, the worker continued working in hopes that the company would recover and pay his remuneration. The court noted that the situation is not uncommon, as employees may sometimes continue working without pay when their employer faces financial challenges, hoping that the company will eventually overcome the difficulties and compensate them for their work.

On 3 January 2022, the employer terminated the worker's employment without providing the contractually specified four weeks' notice.

The worker claimed that at the time of termination, the employer owed him unpaid salary amounting to $145,161.30, including salary in lieu of notice.

The termination of employment without proper notice and the accumulation of unpaid salary led to the worker serving a statutory demand on the employer, as allowed under Singapore's Insolvency, Restructuring and Dissolution Act 2018.

Disputes over termination and outstanding salary

The employer disagreed with the worker's claim, contending that the termination took place earlier on 2 September 2021. The employer also argued that the worker's salary for September 2021 would count towards salary in lieu of notice.

The dispute over the termination date was crucial, as it would determine the period for which the worker was entitled to salary and whether the employer had failed to provide the required notice.

Regarding the outstanding salary for the period between February and September 2021, the employer raised several defences:

  • The salary for May 2021 was withheld for withholding tax purposes.
  • The salary for the disputed months (February, March, half of June, and half of August) had already been paid to the worker.

The court analysed the evidence presented by both parties to determine whether there was a substantial and bona fide dispute regarding the debt.

The employer's defences, if proven, would impact the amount of outstanding salary owed to the worker and the validity of the statutory demand.

The court’s analysis

In examining the evidence, the court found that the employer had raised a legitimate dispute as to whether the worker's employment was terminated in September 2021.

This impacted the worker's ability to bring a winding-up application for salary claims beyond September 2021. The court's finding highlighted the importance of clear communication and documentation regarding employment termination to avoid disputes.

However, the court concluded that the employer failed to establish a substantial and bona fide dispute regarding the salary claim for the disputed months.

The court noted that the employer's internal documents were unconvincing and showed flaws in its financial records. This emphasised the need for employers to maintain accurate and reliable records of salary payments and other financial transactions.

The court noted the importance of extraneous records, such as bank statements, in proving salary payments:

"Given the dishevelled state of the [employer’s] internal documentation, there was clearly a need for extraneous records evidencing payment of the [worker’s] salary for the disputed months (eg, in the form of bank statements). Yet, the [employer] failed to adduce any, and instead asserts that it is the [worker] who should adduce evidence of [the] credit card statements, to prove that the salary for the disputed months was not paid."

Consequently, the court found that the worker had established his status as a creditor for the disputed months' salary claim.

This finding underscored the burden of proof on the employer to demonstrate that salary payments had been made when challenged by an employee.

The court’s conclusion

In the end, the court dismissed the winding-up application, taking into account several factors. The court noted that the employer had made efforts to address the undisputed portion of the statutory demand by making payments and providing security.

These actions demonstrated the employer's willingness to resolve the outstanding salary dispute and its ability to pay the undisputed amount.

The court also considered the provision of security as a demonstration of the employer's ability to pay the debt:

"Contrary to the [worker]'s submission that putting the funds into an escrow amount merely creates the 'illusion of solvency', the fact that the company possesses cash on hand matching the size of the amount demanded, as well as the financial wherewithal to ringfence that cash while going about its daily business, tends to show that the company is in a position to pay that amount."

The cash flow test

The court discussed the cash flow test to determine if the employer should proceed to winding up proceedings for failure to pay its outstanding debt to the worker.

“For clarity, the cash flow test assesses whether the company’s current assets exceed its current liabilities such that it is able to meet all debts as and when they fall due. ‘Current assets’ and ‘current liabilities’ refer to assets which will be realisable and debts which will fall due within a 12-month timeframe, as this is the standard accounting definition for those terms,” the court said.

“The cash flow test assesses whether the company’s current assets exceed its current liabilities, such that it is able to meet all debts as and when they fall due. In this regard, “current assets” and “current liabilities” refer respectively to assets which will be realisable and debts which will fall due, within a 12-month timeframe. The Court of Appeal also set out a non-exhaustive list of factors which should be considered under the cash flow test:

(a) the quantum of all debts which are due or will be due in the reasonably near future;

(b) whether payment is being demanded or is likely to be demanded for those debts;

(c) whether the company has failed to pay any of its debts, the quantum of such debt, and for how long the company has failed to pay it;

(d) the length of time which has passed since the commencement of the winding-up proceedings;

(e) the value of the company’s current assets and assets which will be realisable in the reasonably near future;

(f) the state of the company’s business, in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales;

(g) any other income or payment which the company may receive in the reasonably near future; and

(h) arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts,” the court said.

The court found that the worker had failed to establish the employer's inability to pay its debts under the cash flow test:

"The [worker] has not even crossed that first milestone of showing that the [employer’s] current liabilities exceed its current assets."

The court's decision highlighted the importance of proper documentation and evidence in employment disputes, particularly when it comes to proving salary payments, saying “it was incumbent on the company to show that there were deferred payment plans to postpone the due date of the company's current liabilities."

This case serves as a reminder for both employers and employees to maintain accurate records of salary payments and to address disputes promptly to avoid escalation into winding-up proceedings.

Moreover, the case demonstrates the court's approach in balancing the interests of both parties in an employment dispute, considering factors such as the employer's efforts to satisfy the statutory demand, the provision of security, and the company's financial health under the cash flow test.

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