This series has been called “From Cradle to Grave” since Part 1, and so far, we have mostly stayed away from the grave. We talked about being born (Part 1), growing up (Part 2), and getting happily married (Part 3 and Part 4). It is time we talked about the ending that nobody likes to plan for, but that statistically, most start-ups will eventually face: the grave.
I do not say this to be morbid, or to discourage you. I say this because, as with everything else in this series, knowing the legal mechanics in advance means you make better decisions when the time comes — and sometimes, knowing them in advance is what allows you to avoid this ending altogether.
How Start-Ups Actually Die
Very few start-ups die a dramatic, single-event death. Most simply run out of runway — the founders raise what they can, spend it building and testing the business, and eventually reach a point where there is no more money, and no one willing to put in more. Some die because the founders themselves fall apart — a disagreement over direction, over money, over who is pulling their weight, that cannot be resolved. Remember Part 3’s “business marriage” comparison? Well, sometimes the marriage is between the co-founders themselves, and sometimes it ends in divorce.
Founder and investor disputes, in fact, are one of the more common roads to the grave, and they deserve a mention here for that reason. When co-founders fall out irreconcilably, or when investors and founders reach a genuine impasse over the direction of the company, the temptation is to reach straight for litigation. My advice is usually — don’t, at least not first. Court proceedings in Singapore are a matter of public record, take a long time, and are expensive. For a start-up already in trouble, a long and public court fight is rarely going to save it.
Consider mediation instead, such as through the Singapore Mediation Centre (SMC), or arbitration if your shareholders’ agreement has an arbitration clause (and if it doesn’t, this is a good time to make a note to include one the next time you draft such an agreement — see Part 1). Mediation is private, faster, and considerably cheaper than going to court, and a settlement reached through mediation can be recorded as a binding agreement, or in some cases as a court order, so you are not sacrificing enforceability. Just as important, mediation gives the parties a chance to preserve whatever relationship, or whatever value in the company, is still worth preserving. Litigation rarely does.
Solvent or Insolvent — It Matters
Once it is clear that the company is not going to survive, the next question that matters, legally, is whether the company is solvent or insolvent. This is not just a technicality — it changes who is in charge of the process, and it changes your personal exposure as a director.
If the company is solvent — meaning it can pay all its debts in full within 12 months of winding up — the shareholders can put the company through a members’ voluntary winding up. The directors will need to make a declaration of solvency, and a liquidator is appointed to wind up the affairs of the company, pay off the debts, and distribute whatever is left to the shareholders.
If the company is insolvent — it cannot pay its debts as they fall due — the process becomes a creditors’ voluntary winding up, where creditors, not shareholders, effectively take control of the process, or a compulsory winding up ordered by the court, usually on the application of an unpaid creditor. In Singapore, this area of law is now largely governed by the Insolvency, Restructuring and Dissolution Act 2018 (IRDA), which consolidated what used to be scattered across the Companies Act and the old Bankruptcy Act.
A Word on Directors’ Duties
Here is something every founder-director needs to know, and it surprises many of them: once a company is insolvent, or even just heading towards insolvency, a director’s duties shift. Ordinarily, directors owe their duties to the company, and by extension, to the shareholders. Once insolvency looms, the interests of creditors move to the front of the queue.
Continuing to trade, take on new debts, or make payments the company cannot really afford, when you know or ought to know that the company cannot pay its way, can expose directors to personal liability for wrongful trading under the IRDA. This is not a technical footnote — it is one of the very few situations in Singapore company law where the “corporate veil” (remember Part 1 — the whole point of incorporating was to protect your personal assets) can be pierced, and a director can be made personally liable for the company’s debts. If your start-up is in genuine financial trouble, this is exactly the moment to get proper legal advice, not to put your head down and hope things turn around.
Just Striking It Off?
Not every start-up death requires the full ceremony of a winding up. If your company has stopped operating, has no assets and no liabilities (or none that anyone is chasing), you may be able to apply to ACRA to have the company struck off the register instead — a much simpler and cheaper process. But striking off is only appropriate where there really is nothing left to fight over. If there are creditors owed money, assets to be recovered, or disputes outstanding, striking off is not the right route, and ACRA can, and will, restore a struck-off company to the register if it later turns out that was not the case.
Who Gets Paid, and In What Order
If you take away only one thing from this section, let it be this: shareholders are always last in line. Whatever is left after a winding up is distributed in a strict order of priority — secured creditors first (those holding a charge over specific company assets), followed by certain preferential debts (which, notably, include a fair amount owed to employees for wages and CPF contributions), then unsecured creditors, and only after all of them have been paid in full, if anything at all is left, the shareholders.
This is worth remembering when you are negotiating that seed round, or that Series A, and an investor asks for preference shares with a liquidation preference. Even ahead of the shareholder queue described above, preference shareholders will typically be paid out ahead of ordinary shareholders (that’s usually you, the founder) — but everyone with shares, preference or otherwise, still stands behind the creditors.
Tying Up Loose Ends
Winding up is not just about money. It is worth remembering, in the rush and grief of closing a start-up, that there are other loose ends: intellectual property that may still have value and can be assigned or sold as part of the winding-up process; contracts that need to be properly terminated, not simply abandoned; and personal data that the company collected from customers or employees, which under the Personal Data Protection Act you cannot simply leave sitting on a server after the company ceases operations.
Not the End of the World
I will end this part the way I ended Part 1 — with some encouragement. A start-up’s failure is not, in most cases, a personal failure, and it is certainly not the end of your career as an entrepreneur. Many of Singapore’s, and the world’s, most successful founders buried at least one start-up before building the one that worked. What matters, legally and practically, is that you bury it properly: dealing honestly and promptly with creditors and employees, protecting yourself from personal liability by seeking advice early rather than late, and closing the chapter cleanly so you are free to start the next one.
We have basic templates and can advise on winding up matters, whether solvent or otherwise. Contact Us.
Not every start-up story ends at the grave, of course — some end very happily indeed, whether through a well-executed exit or a public listing. But we will end our story here.
We will be running a new series about Tech Start-Ups. We will be taking a much closer look at its formation and funding cycles.
