Insolvency and Restructuring in Singapore
Singapore is not only an attractive tourist and shopping destination. On 23 May 2017, the Ministry of Law (Singapore) officially amended the Companies Act of 1967 with certain provisions to simplify the restructuring companies’ debts. The South East Asian country became a potential indebtedness restructuring hub. To transform Singapore into the regional and international insolvency and restructuring forum of choice, the Singapore Companies Amendment Act of 2017 was enacted.
Restructuring refers a process wherein debtors and creditors agree on a proposed method for a debtor who is in financial trouble to repay a debt, without the debtor becoming insolvent. Restructuring entails making significant modifications to debts, and alternatively, the operations or structure of a company with its creditors’ consent. Debtors and creditors in such a situation must agree on negotiating agreements and repayment schedules. The purpose of restructuring is to facilitate debt repayments, which may divert the entity in financial trouble away from insolvency proceedings.
Insolvency law refers to the legal guidelines outlining the process through which businesses and individuals who have encountered financial difficulties and are struggling to pay their debts are to follow. Insolvency proceedings involve the instituting of legal action against an insolvent entity. Insolvency proceedings encompass a wide array of processes that are purposed to rescue or wind up a bankrupt company.
The insolvency process involves negotiating scheme arrangements. This is a legally binding agreement concluded between a struggling company and its creditors. Scheme arrangements are concluded if it is certain that a reduction in debt repayments can rescue the company. Apart from voluntary company agreements, insolvency proceedings also involve administration. Under administration, an administrator manages the company’s affairs. Administration protects companies from creditors who would enforce their debts. The administrator has the task of determining whether a company can be rescued or not. If the administrator is confident that the company can be saved, the administrator will create a recovery plan and implement it. A recovery plan aims to ensure that a company maximises profits. If the administrator is satisfied that the company’s financial affairs cannot be salvaged, then the company will be sold. Alternatively, the administrator may elect to liquidate the company. The liquidation procedure involves giving a liquidator control of the company’s assets. Once the liquidator has power over the assets, the company ceases to carry on business. The liquidator will then sell the company’s assets and distribute the proceeds amongst the creditors.
Insolvency proceedings also include a process name receivership. Receivership is a process through with a receiver is appointed by the court at the initiative of the company’s creditors. The receiver is tasked with recovering as much money as possible from the company to settle creditors’ claims. Receivership is advantageous to creditors but places the company in a precarious position where survival is unlikely.
Overview of Singapore’s Insolvency and Restructuring Legal Regime
The Singapore Ministry of Law convened the Insolvency Law Review Committee in 2010. The purpose of the Insolvency Law Review Committee was to review the Singapore legal regime surrounding bankruptcy and corporate insolvency regimes. The Insolvency Law Review then submitted a report in October 2013, which outlined suggestions to the corporate rescue mechanisms. The Insolvency law review also recommended that the UNCITRAL Model Law on Cross-Border Insolvency be enacted into Singapore law through a single consolidated Insolvency Act. The Ministry of Law then constituted a Committee to strengthen Singapore as an International Centre for Debt Restructuring (CSSICDR). The task of the Committee was to suggest a way to enhance Singapore's effectiveness as a centre for international debt restructuring. In April 2016 the ILRC Committee issued a report set out seventeen recommendations.
The two reports, by the Insolvency Law Review Committee and the Committee to Strengthen Singapore’s bankruptcy and corporate insolvency regime led the Ministry of Law to update and strengthen Singapore’s Insolvency and Restructuring law through a three-stage approach. The first stage was the Bankruptcy Amendment Act 2015 (Act 21 of 2015). The Act is an amendment to the Bankruptcy Act. The Amendment Act regulates personal insolvency based on the suggestions in the Insolvency Law Review Committee of 2013. The second stage was the Companies Amendment Act 2017 (Act 15 of 2017), which was enacted in May 2017. The Amendment Act updated the corporate restructuring and insolvency framework based on recommendations in the report by the CSSICDR report. The third and final stage was the Omnibus Bill or the Insolvency, Restructuring and Dissolution Bill, which aims to implement the remaining recommendations contained in both the ILRC and the CSSICDR reports.
Singapore Companies (Amendment) Act of 2017
The purpose of the changes to the Singapore Companies Act is to encourage transparency about the ownership and control of the company, reduce regulations, facilitate ease in business and simplify the restructuring of a company’s debt. The Amendment Act governs Schemes of Arrangement in terms of section 211, Judicial Management in terms of section 227, winding up of a foreign company according to section 351 and cross border insolvency according to section 354 A-C and Schedule 10.
As stated above, a scheme of arrangement or scheme of reconstruction is an agreement concluded between a company facing financial hardship and its creditors. The purpose of a scheme of arrangement is to assist a company in repaying its debts by restructuring the company's debts and altering creditor’s rights. Creditor's rights are changed by creditors agreeing to receive only a portion of the debt owed to them. Schemes of arrangement are attractive to companies because the company can pay a share of the debt and avoid default on the whole debt. Courts supervise and sanction schemes of arrangements which makes the scheme legally binding on all creditors if approved by the Court. Creditors are bound to the scheme even if some creditors do not accept the scheme in terms of s211 H of the Companies Amendment Act. If 50% of creditors, or creditors to which the company owes 75% of the total value of the debt agree on the scheme arrangement, then the scheme comes into effect. This provision benefits the company as the company avoids creating individual arrangements with all the creditors to achieve the restructuring of debts.
A scheme of arrangement is a viable solution for a company’s financial challenges if the company want to keep its affairs private. The scheme also does not require that a company’s directors give control of the company. Furthermore, the scheme is enforceable as the Court may grant an order to achieve those desired ends.
The old scheme of arrangement in section 210(10) of the Companies Act of 1967 stated that the court was only empowered to grant a stay of proceedings that had already started. Additionally, under the old regime, creditors had to be placed into a separate class if their rights were so different that they could not be expected to agree on a scheme of arrangement. However, this meant that creditors in belonging to class were a small amount was owed by the company could still block a scheme.
Relevant Provisions of the Companies Amendment Act
Section 211 B (1) states that if a company proposes or intends to submit a scheme arrangement between the company and its creditors or any class of creditors, then that company may apply. After such application, the court will make one of six orders. The first order that a court could make is an order restraining the passing of a resolution for the winding up of the company. Secondly, the court may also make an order restraining the appointment of a receiver or manager over the property or undertaking of the company. Thirdly, a court order could have the effect of any proceedings against the company and subject to such terms as the Court imposes. Fourthly, a court order can restrain the commencement, continuation or levying of any execution, distress or another legal process against the company's property except with leave from the court. Fifthly an order that encumbers a party from enforcing any security over any property of the company or a request to repossess any goods held by the company under any chattels leasing agreement, hire purchase agreement except with the leave of the Court. Lastly, an order restraining the enforcement of any right of re-entry or forfeiture under any lease in respect of any premise occupied by the financially distressed company except with the leave of the court.
There are several amendments regarding schemes of arrangements in the Companies Amendment Act. Section 211 B requires that debtors disclose the state of the company’s financial affairs. According to the case of Wah Yuen Electrical Engineering v Singapore cables Manufacturers ( 3 SLR(R) 629) the court stated that it is an established and independent principle of law that the creditors should be furnished with such information as is necessary to make an informed decision. In the Royal Bank of Scotland NV v TT International Ltd( 4 SLR 1182;  SGCA 53) case, the court said that accurate information is the creditor’s rightful entitlement. This is because it allows the creditors to examine whether the scheme arrangement is appropriate for the company, whether in the long or short term.
Section 211 B (8) of the Companies Amendment Act of 2017 provides an automatic 30-day moratorium which runs from the day the application is made. This section addresses the inadequate protection that was accorded companies under the old regime because it further allows the court discretion to order a variety of stays including stays against future proceedings, resolutions to wind up the company and steps to enforce security and where necessary, to give it a worldwide in personam effect. The concept of a worldwide stay of proceedings was coined in the Chapter 11 filing in the United States of America Bankruptcy Code. Section 211 C (5) (b) states that subsidiaries who play a necessary and integral role in the scheme of arrangement will also benefit from the moratorium. Section 211H of the Companies Amendment Act of 2017 removes the veto right that was available to each class of creditors.
Section 211D prevents debtors from dissolving assets during the moratorium period. A moratorium or stay is a temporary restriction on the performance of a specific activity. Section 211 D (1) states that the Court may, make two different kinds of orders regarding a moratorium which is in force for such part of the moratorium period as the Court thinks fit. The first order referred to is an order restraining the relevant company from disposing of the property of the concerned company other than in good faith and the ordinary course of the business of the relevant company. The second order referred to is an order preventing the company concerned from transferring shares, or altering the rights of any member of the company. An issue that may arise from this provision is the definition of the term “debtor”. The United States case of AH Robins Co v Piccinin (788 F.2d 994 (1986)) the court stated that in unusual circumstances, a moratorium might affect a non-debtor party. The unusual circumstances are described therein as where the identity between the debtor and the non-debtor is such that the non-debtor could be said to be the real defendant. In such an unusual circumstance, the judgment against the non-debtor who is the real defendant will also be a judgment against a debtor. Thus, a debtor may not be the actual person owing the debt. In the case of Queenie Ltd v Nygard International (321 F.3d 282) the court held that an automatic stay could apply to non-debtors if a claim against the non-debtor will have “an immediate adverse economic consequence for the debtor’s estate”. Therefore, a debtor who may experience an economic disadvantage because of the moratorium can be excluded from the effect of the moratorium while a non-debtor is affected by such moratorium.
Section 211 D (2) states that the ‘moratorium period’, in relation to a relevant company, means the automatic stay period referred to in section 211B (8) of 30 days. Section 211 D 2 (b) states that the moratorium period means the period when an order under section 211B (1) is in force. In terms of section 211 B (1), a financially distressed company may request the court to restrain the institution of legal proceedings against them. For instance, under section 211 B (1) CA, a court can grant an order to suppress the passing of a resolution ordering the winding up of the company. The moratorium also protects a company because it prevents creditors from taking legal action overseas.
The Oriental Insurance Co Ltd v Reliance National Asia Pte Ltd ( SGHC 236) case suggests that the Singapore Appeal Court prefers a more flexible jurisdiction to amend a scheme. This case is supported by the TT International case where the court set aside a scheme arrangement because failure to disclose specific information by scheme manager. However, it is of significance that the court exercises this flexible jurisdiction on rare occasions.
The purpose of a moratorium is to allow companies to negotiate the terms of the scheme, although the case Re IM Skaugen SE ( SGHC 259) says that this breathing space is not uninhibited; hence the 30-day moratorium. Thus, it is debtor misconduct for a financially distressed company to dissolve its assets during the moratorium period. Moreover, it is against the principles of good faith to do so.
An automatic filing does not protect the interests of creditors because there is no removal or displacement of the company’s director or management. This puts creditors in a vulnerable position as they must agree on a scheme arrangement without the assistance of an impartial third party.
Section 211 D has not been subjected to fair assessment yet; therefore it is unclear when as 211 D should be granted. Section 211D undoubtedly champions debtor protection. Even after the enactment of the Insolvency, Restructuring and Dissolution Bill passed on the 1st of October 2018, this section will continue to be of relevance. It is necessary then to determine what the appropriate test is to grant a section 211 D order.
The principles to be used in determining what the section 211D test are to be extracted from the JTrust Asia Pte Ltd v Group Lease Holdings Pte Ltd ( SGCA 27) case. The purpose of section 211D is to prevent abuse of the process by company management as well as provide protection for creditors. The section thus has a pre-emptive application. A balance must be struck between the debtor’s interests in benefitting from a moratorium and the creditor’s interests in preventing abuse of the moratorium at the creditor’s expense. The way to strike this balance is to ensure that section 211 D orders are granted infrequently. If section 211D orders were to be granted often, this would undermine the practicality, expedience and effectiveness of the scheme arrangement procedure.
In this case, the appellant JTrust Asia Pte Ltd had brought an action against Group Lease Holdings alleging that Group Lease Holdings had conspired to defraud the appellant through sham loans. The court ruled that the JTrust had suffered some economic harm which constituted actionable damage. JTrust alleged that there was a real risk that the respondents would dissipate their assets to frustrate the enforcement of the judgment. The court, in considering JTrust’s claim considered the test of whether there was a real risk that the defendant would dispose of their assets. The court considered whether there was, objectively, a real risk that the judgment would not be enforced because of the respondent’s dealings. According to the Guan Chong Cocoa Manufacturer Sdn Bhd v Pratiwi Shipping SA ( SGCA 45) case, the plaintiff must adduce substantial evidence to support their belief that the respondent will dissolve the assets. The court considered factors such as the nature of the assets, the ease at which they can be disposed of, the nature and financial standing of the respondents business, the length of time the respondent has been in business, the domicile of the respondent, whether the respondent is a foreign entity.
The reasoning of the Court in determining whether there was a real risk of company property being disposed of, can be used to formulate a section 211D order test. The legal community eagerly awaits the formulation of such an analysis as it will develop the Insolvency and Restructuring framework in Singapore.
The key achievements of the Companies Amendment Act are an ability to cram down on dissenting classes of creditors, an automatic stay of proceedings available upon the filing of a stay application. Furthermore, the court can order a worldwide in personam stays against a wide range of activities including future proceedings and enforcement of security against the company. Of particular interest, section 211 D prevents the dissipation of company property by debtors. However future judicial scrutiny of this section will determine when a section 211 D order will be granted. This will lead to further development of the Insolvency and Restructuring regime in Singapore.