By Debby Lim, Director, BlackOak LLC
Singapore’s long-anticipated Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) was passed by the Singapore Parliament on 1 October 2018 and came into effect on 30 July 2020. The purpose of the IRDA is threefold. First, it synthesises the written laws on personal and corporate insolvency and debt restructuring into a wholistic piece of legislation. This consolidation leads to a more coherent approach since the principles underpinning the personal and corporate insolvency regimes are closely related. Second, the IRDA enhances existing insolvency and restructuring laws to further strengthen Singapore’s debt restructuring regime. Third, the IRDA also establishes a regulatory regime for insolvency practitioners. This sets a common and consistent standard of professional regulation and introduces a system of accountability.
The IRDA, together with 48 supporting pieces of subsidiary legislation, builds on the foundation laid by the ground breaking 2017 reforms to Singapore’s restructuring and insolvency regime. Adopting best practices from around the world, some of IRDA’s noteworthy features include restrictions on ipso facto clauses, out-of-court judicial management and a new wrongful trading provision.
This article recapitulates the game-changing 2017 amendments, examines some of the key changes encapsulated in the IRDA as well as introduces the upcoming simplified insolvency programme. By communicating the reforms adopted by Singapore to the wider international restructuring community, this article also seeks to encourage a cross-pollination of ideas across jurisdictions.
The early archetype of insolvency law in Singapore followed the traditional common law pro-creditor bias. With the 2017 Amendments, there has been a gradual trajectory towards creating a climate more conducive to corporate rescue.
To recapitulate, the 2017 Amendments to the Companies Act, which came into force on 23 May 2017, introduced significant new rescue tools and enhanced the existing corporate restructuring mechanisms of judicial management and schemes of arrangement. The 2017 Amendments incorporated several features of Chapter 11 of the U.S. Bankruptcy Code, including super-priority rescue financing, cram-down powers, and fast-tracked pre-negotiated restructuring plans. Essentially, these Chapter 11 elements were grafted onto the existing English-inspired scheme of arrangement provisions.
One standout feature is that the debtor may also apply to have the moratorium extended to its related entities including those that are foreign incorporated. It may do so if it can demonstrate that:
- the related entity plays a necessary and integral role in the compromise or arrangement;
- the compromise or arrangement will be frustrated if the moratorium is notextended to the related entity; and
- the creditors of the related entity will not be unfairly prejudiced by the extension of the moratorium to the related entity.
This concept of a “group moratorium” is a bold innovation that goes beyond Chapter 11 as a Chapter 11 stay only protects the debtor and does not extend injunctive coverage to non-debtor third parties. The “group moratorium” is useful where the related entities are guarantors of the company’s debt that is being restructured.
The 2017 Amendments also increased the access that foreign companies have to Singapore’s insolvency procedures. A foreign incorporated entity may apply to the Singapore Court for a scheme of arrangement, judicial management or winding up if it is able to establish nexus to Singapore. Prior to the 2017 amendments, only Singapore incorporated companies could apply for judicial management.
Importantly, the UNCITRAL Model Law on Cross Border Insolvency was adopted, thereby improving the Singapore Court’s ability to participate in and facilitate cross border insolvency processes. This allows foreign representatives to apply to the Singapore Court for recognition of foreign insolvency proceedings and to seek assistance and cooperation with the foreign insolvency proceedings. For inbound recognition, there is no requirement for the foreign jurisdiction to have adopted the Model Law.
Pursuant to Section 94 of the IRDA, a company may place itself into judicial management without a court order as long as the creditors agree to it. Basically, the company must first obtain a creditors’ resolution for the company to be placed under judicial management.
This minimises the formality, delay and expense in applying to court for a judicial management order. The expedited procedure will allow the distressed company to channel its resources to its rehabilitative efforts. Importantly, the out-of-court judicial management mechanism reduces stigma associated with judicial management as there is no need to resort to a formal judicial process via the Court.
However, once the company is placed into judicial management, the judicial management process will then continue in the same manner and under the supervision of the Court, even if it was initiated via the out-of-court method. This ensures that the rights of the creditors are safeguarded.
A holder of a floating charge over the whole (or substantially the whole) of the debtor’s assets may block an out-of-court judicial management application as its consent is required for the appointment of the interim judicial manager. Whereas in an application to Court for judicial management, the floating charge holder’s ability to veto the judicial management application is not absolute and the Court will take into consideration the interests of the unsecured creditors.
Section 64 of the IRDA re-enacted Section 211B of the Companies Act, save that it provides that neither an order of Court to restrain proceedings against a company in a scheme of arrangement or the automatic moratorium will affect the commencement or continuation of any proceedings that may be prescribed by regulations.
In recognition of Singapore’s importance as a major global maritime hub, it is prescribed that the filing of an in rem writ against a vessel is not itself impeded by the moratoria. This is in order to preserve the claims against the vessels, because time stops running once the claim has been filed. However, a party will still need to obtain leave of Court to be able to continue with such proceedings.
The 2017 Amendments introduced cross-class cram downs whereby the Court had the power to sanction a proposed Scheme of Arrangement, even if there were dissenting classes of creditors, where the Scheme did not discriminate unfairly between two or more classes of creditors and was fair and equitable to the dissenting classes and subject to the absolute priority rule. The cross-class cram down provision has not been utilised to-date.
The absolute priority rule requires that to cram down unsecured creditors existing shareholders may not retain any of their shares in the company unless all unsecured creditors are paid in full. There are practical difficulties with the absolute priority rule as Singapore lacked a statutory mechanism to compulsorily divest shareholders of their shares in the company. It is unlikely for shareholders to voluntarily divest of their shares.
Therefore, in the new Section 70 of the IRDA, the relevant section has been clarified to state that shareholders do not need to divest their shares before a cram down can be made.
Ipso facto clauses in contracts permit the termination or modification of the contract upon the occurrence of a specified trigger event, such as the insolvency or the restructuring of the company. If such clauses exist in key contracts entered into by the distressed company, it would be difficult to restructure the company as the contracts which the company relies on for business could be unilaterally terminated by the counterparties. This potentially renders the company’s restructuring efforts nugatory.
The language in Section 440 takes reference from Section 34 of the Canadian Companies’ Creditors Arrangement Act. Section 440 of the IRDA restricts a party from:
- terminating, amending, or claiming an accelerated payment or forfeiture of a term under any agreement; or
- terminating or modifying any right or obligation under any agreement (including a security agreement),
with a company by reason only that the company has commenced proceedings for judicial management or a scheme of arrangement or that the company is insolvent. The restriction applies to contracts entered into on or after 30 July 2020.
It should also be noted that these ipso facto restrictions do not apply to certain contracts, such as the commercial charter of a ship, and certain prescribed eligible financial contracts.
As a result of the restriction on ipso facto clauses, distressed companies are afforded some protection. This facilitates restructuring where a distressed company’s business relies on critical contracts that contain ipso facto clauses and will likely lead to more successful restructuring efforts.
Further, it appears that a foreign debtor can avail itself of these restrictions so long as the foreign debtor can establish a substantial connection to Singapore enabling it to apply for a scheme of arrangement or for judicial management. It should also be noted that the restriction is not expressly confined to contracts governed by Singapore law.
It should be noted that the Section 440 restriction does not prevent ipso facto clauses which are exercised by reason of other grounds such as for non-payment of monies due. This incentivises the debtor to apply for insolvency protection via a scheme of arrangement or judicial management earlier so as to avail itself of the safety net of Section 440, prior to defaults occurring under its contracts.
In terms of addressing cross-defaults, it may also be important for the company’s related entities to apply for a related-party moratorium to also avail themselves of protection under Section 440. This is crucial when the related entities are guarantors of the company’s debts.
Previously, under Section 279 of the Companies Act, the Court only has the power to stay winding up proceedings. As such, the Court could grant a permanent stay (effectively terminating the winding up) or a stay for a limited period of time. However, the Court did not have the power to unwind a winding up order.
Under Section 186 of the IRDA, the Court is expressly empowered to stay or terminate the winding up of a company as well as to direct, upon such termination, the resumption of management and control of the company by its officers. This allows for the smoother resumption of management and business after the termination of winding up.
Companies now have the option of applying for a termination of winding up, rather than just a stay where such companies subsequently are able continue as a going concern and winding up is no longer appropriate. This promotes corporate rescue of potentially viable companies which have temporarily become insolvent or where a white knight may wish to acquire the shares of the distressed company and revive the same.
Section 209 and 210 of the IRDA provide for a summary procedure for the dissolution of a company. This applies where there is reasonable cause to believe that the company’s assets are insufficient to cover the winding-up expenses, and that the affairs of the company do not require further investigation.
Previously, criminal liability is a prerequisite to civil liability for insolvent trading (ie. criminal conviction must first be obtained). Section 239 of the IRDA introduces a new concept of wrongful trading (adopted from English law).
Wrongful trading is defined as “the incurrence of debt or liabilities without reasonable prospect of meeting them in full when the company is insolvent or becomes insolvent as a result of such debt”. With this new wrongful provision introduced by way of the IRDA, criminal liability no longer a prerequisite before civil liability can be imposed.
Even though section is called wrongful trading, liability is based not on trading per se, but on the company incurring a debt when it is insolvent or the incurring of the debt causes the debtor company to be insolvent, without reasonable prospect of meeting them in full.
The test of wrongful trading does not depend on state of mind of the person(s) making the decision to incur the debt.
The implications are that the IRDA makes it easier for liability to be established as the civil standard of proof is lower than that for criminal liabilities. As such, directors of distressed companies intending to enter into contracts will have to exercise greater caution. That said, the courts may relieve the person from personal liability if the courts are satisfied that the person acted honestly, having regard to all the circumstances of the case, and ought fairly to be relieved from personal liability.
Also, section 239(10) of the IRDA provides that a company or any person party to, or interested in becoming a party to, the carrying on of business with a company, may apply to the courts for a declaration that a particular course of conduct, transaction or series of transactions would not constitute wrongful trading.
Distressed companies often do not usually have sufficient funds to pursue claims. Third-party funding will enable a distressed company to pursue such claims and provide a potential avenue of recovery for its creditors. Prior to the IRDA, courts had permitted litigation funding in Singapore in the context of insolvency under the appropriate circumstances. However, a liquidator was only able to assign the proceeds of the company’s claims to third parties but not the right to pursue actions that are personal to the judicial manager or liquidator.
Under the IRDA, both judicial managers and liquidators are statutorily empowered to seek third-party funding for certain of causes of action, including those which are personal to them. However, authorisation by the Court or the committee of inspection is required. These are in respect of claims in relation to transactions at undervalue, unfair preference transactions, extortionate credit transactions, fraudulent trading, wrongful trading, and assessment of damages against delinquent officers of the company.
In light of the pandemic, many countries around the world are currently implementing, or are planning to implement, special insolvency rules for micro and small businesses. Singapore is not an exception. A bill will be introduced by the Singapore Parliament in October to establish a Simplified Insolvency Programme (“SIP”) to help micro and small companies restructure their debts or wind up their business in a faster, simpler and cost efficient manner.
This comes in the aftermath of the pandemic which has hit many industries hard, leaving behind the detritus of a severe economic fallout. The solutions offered by the IRDA may not be suitable for distressed micro and small businesses, particularly those that have depleted their resources due to the pandemic.
The proposed SIP cuts through the complexity by enabling eligible micro and small companies to restructure their debts or wind up operations through two temporary and new processes adapted and modified from the existing framework in IRDA. The SIP will enable eligible businesses to quickly restructure. Where rehabilitation is not possible, eligible businesses will be able to wind up faster and more efficiently.
The eligibility criteria for companies to qualify for the SIP will include limits on the aggregate total liabilities of the company, the number of creditors and employees, and the amount and value of realisable assets in winding up.
The SIP will be available for a period of 6 months from the commencement of the proposed legislation. This application period may be extended for a period determined by the Minister. The programme will be administered by the Official Receiver, who may assign private insolvency practitioners to administer the cases accordingly.
The commencement of the IRDA is opportune in this economic crisis, as it will help troubled business pick up the financial pieces. The enhancements to the restructuring regime in Singapore have made Singapore an attractive Asian option to London and New York. As Singapore continues its trajectory of becoming an international debt restructuring centre, the IRDA also potentially create new opportunities for insolvency professionals, distressed debt funds and financial institutions.
The reforms encapsulated in the IRDA and SIP will enable Singapore to emerge from the pandemic with a stronger, more resilient and more competitive economy. Coupled with the Singapore government’s fiscal measures, these reforms will kick-start confidence and business activity as the Singapore economy transitions to the recovery phase.
It is also expected that the IRDA will improve Singapore’s ranking for Resolving Insolvency, based on the findings of Word Bank’s annual “Doing Business” report. This study measures the efficiency of insolvency frameworks around the world. The indicators include the recovery rate and whether each economy has adopted internationally recognised good practices in the area of insolvency.
Debby Lim is gaining a strong reputation for appellate advocacy. She has recently appeared before the Singapore Court of Appeal (with a full bench of five Judges) in SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal  SGCA 51, Diablo Fortune Inc v Duncan, Cameron Lindsay and another  SGCA 26 and AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company)  SGCA 33, a trifecta of jurisprudentially significant insolvency-related appeals to confront the Singapore courts. Debby also has significant experience in restructuring and non-contentious insolvency work. Many of these matters involve acting for public-listed companies, including the first “pre-packaged” scheme of arrangement and the first judicial management involving a foreign-incorporated entity. These are precedent- setting matters which impact the way the industry handles similar matters moving forward. She is one of the first three Singapore-qualified practitioners to be bestowed the prestigious fellowship from INSOL International. Debby is currently the Co-Chairperson of the Singapore Network of the International Women’s Insolvency & Restructuring Confederation. She is also a founding member of the Law Society of Singapore’s Women in Practice Task Force.
The essay is available for download here.