Singapore’s new restructuring laws take effect

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The Singapore Companies (Amendment) Act 2017, which came into force on 23 May 2017, introduced significant new legislative tools to rescue distressed companies and enhanced Singapore’s schemes of arrangement and judicial management processes.

The act also introduced into Singapore law the UNCITRAL Model Law on Cross-Border Insolvency, facilitating the recognition of cross-border insolvency processes in Singapore.

Creditors’ schemes of arrangement

The amendments introduced significant changes to the existing scheme of arrangement provisions. A scheme is a compromise between a company facing financial difficulties and its creditors, which gives the management of the company a respite through a court-sanctioned moratorium to restrain any debt enforcement actions.

The following new provisions adopt features of the US Bankruptcy Code, including chapter 11:

  • Automatic moratorium from the date an application is made, plus the capacity for a pre-application moratorium and a moratorium in relation to related entities of the debtor company, in each case with extra-territorial effect;
  • Super-priority rescue (DIP) financing;
  • Cram downs; and
  • Pre-packs.

The amendments will enhance the existing scheme moratorium in four
main ways:

  1. Pre-application moratorium – To give a distressed company breathing room to put forward a restructuring proposal to its creditors, a company may apply for a moratorium where it proposes, or intends to propose, a scheme. Such pre-application moratoriums were previously only available under the common law.
  2. Automatic moratorium – A 30-day moratorium will automatically arise upon the filing of an application for a moratorium order to the court, or until the application is decided by the court, whichever is earlier.
  3. Worldwide in personam moratorium – The court may now grant a moratorium extending to creditor actions outside of Singapore if the creditor is in Singapore or within the jurisdiction of the Singapore courts.
  4. Related entities – Where a moratorium is granted in relation to a company, related entities such as the subsidiaries or holding companies may, if necessary for the scheme, also apply for a moratorium.

The amendments, which mirror the debtor-in-possession (DIP) financing provisions application in US chapter 11, also include provisions allowing the court to grant “super priority” to rescue financing loans that are necessary for the survival of the company as a going concern, or to achieve a more advantageous realization of the assets of the company.

The rescue financing may have the same priority as liquidation expenses if the company is wound up, which means rescue financing indebtedness might rank above all other preferential debts.

Mirroring the provisions under chapter 11, the amendments also empower the court to “cram down” on dissenting classes of creditors and approve the scheme if certain conditions are met, including:

  • The requisite majority approval in value and number was obtained at scheme meeting(s) from the creditors to be bound by (and voting at) the scheme; and
  • The scheme does not discriminate unfairly between two or more classes of creditors, and is fair and equitable to each dissenting class.

“Cram down” provisions prevent errant creditors from holding out on a viable scheme in the hopes of receiving a larger payout.

The amendments also allow the court, subject to certain safeguards, to approve a pre-packaged scheme without a court-ordered scheme meeting having occurred (or any actual voting by creditors on the proposed scheme), where the court is satisfied that, had a meeting of the relevant creditors or class of creditors occurred, the requisite majorities would have been obtained.

This allows fast-tracking of pre-negotiated schemes, and seeks to replicate the limited time in which a pre-pack chapter 11 can be approved, being as little as 30-45 days, compared with the normal minimum scheme timeframe (generally about three to six months from application).

Judicial management

To encourage more troubled companies to proactively use the judicial management corporate rescue mechanism (which involves a judicial manager being appointed to the company, together with an automatic moratorium), the amendments liberalize the regime in the following ways:

  • Earlier application – The court need only be satisfied that the company “is likely to become”, as opposed to that the company “will be”, unable to pay its debts.
  • No automatic bar on creditor opposition – If a person who has appointed, or is entitled to appoint, a receiver and manager pursuant to a security interest objects to the appointment of a judicial manager, this objection will not be an automatic bar to that appointment. The person making the objection must show that the prejudice to that person is disproportionately greater than that caused to unsecured creditors if the application is dismissed.
  • Rescue financing – When a judicial management order is in force, a judicial manager is also empowered to apply to the court for priority for rescue financing, even where no scheme has been proposed.

Adoption of the Model Law

Foreign companies and liquidators now have a clearer picture of the basis on which Singapore courts will deal with cross-border restructuring or winding up with the following three new developments:

  • Adoption of the UNCITRAL Model Law. Singapore is one of few Asian countries to have adopted the Model Law, which was enacted in the US, UK and Australia more than 10 years ago, as well as by 43 other states. Adoption of the Model Law by the act will allow foreign representatives to apply to the High Court of Singapore for recognition of foreign proceedings. Notably, the Model Law as incorporated in the act has no requirement of reciprocity with the state in which the foreign proceeding is occurring. The Model Law as adopted is substantially in the same form as the Model Law, and also provides for international co-operation and communication between courts and representatives, and for concurrent insolvency proceedings.
  • Availability of Singapore restructuring tools to foreign companies. Schemes and judicial management are no longer available only to a company incorporated in Singapore. The amendments set out the factors that would make a foreign company have a “substantial connection with Singapore” and so become liable to be wound up pursuant to the Companies Act (and in that way become subject to the court’s jurisdiction for restructuring by scheme or judicial management). The factors are as follows:
    1. Singapore is the centre of its main interests;
    2. It is carrying on business or has a place of business in Singapore;
    3. It is a foreign company registered under division 2 of part XI of the Companies Act;
    4. It has substantial assets in Singapore;
    5. It has chosen Singapore law to govern a loan or other transaction; or
    6. It has submitted to the jurisdiction of the court.
  • Abolition of the ring-fencing rule. Other than in respect of banks, insurance companies and certain other licensed financial intermediaries, a Singapore liquidator of a foreign company will no longer give Singapore creditors priority over other creditors and must pay the amount realized from the foreign company’s assets to the foreign liquidator.

Subsidiary legislation

To implement amendments to the act, the following subsidiary legislation has also been passed and is in effect:

  • The Companies (Proof of Debts in Schemes of Arrangement) Regulations 2017 sets out the procedure by which proof of debts may be made, opposed and adjudicated upon. This procedure had previously been substantially governed by the common law.
  • The Companies (Prescribed Companies and Entities) Order 2017 sets out the categories of entities that cannot be subject to schemes, judicial
    management and the Model Law. These entities are generally of public importance, such as banks and other financial institutions.
  • The Companies (Prescribed Arrangements) Regulations 2017 sets out
    the types of security interests the exercise of which is not affected by a moratorium applicable in a scheme or judicial management.

The amendments effected by the act are part of an ongoing and concerted effort by the Singapore government and judiciary to liberalize the Singapore restructuring and insolvency framework.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing: Danian Zhang at [email protected], or for general enquiries contact Anand Ramaswamy at [email protected]