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Singapore – the new jurisdiction of choice for cross-border restructuring?
Global | Publication | July 2017
Introduction
Recent changes to Singapore’s restructuring and insolvency law framework mean that the international insolvency landscape has shifted dramatically, opening up further options and possibilities for Singapore-incorporated and foreign debtors seeking to restructure their indebtedness. in particular, the changes to the Singapore Companies Act (Cap. 50) (the Companies Act) (which, in part, incorporate into Singapore law certain features of Chapter 11 of the United States Bankruptcy Code), which came into force on 23 May 2017, have enhanced Singapore’s restructuring and insolvency law framework and improve significantly its potential to become a restructuring hub. The ultimate aims of these changes are to improve the Singapore Court’s ability to deal with cross-border insolvencies and restructurings and to transform Singapore into a regional and international forum of choice for international debt restructurings.
The amendments to the Companies Act are positive and provide a framework unique to Singapore for implementing debt restructurings, rather than adopting wholesale restructuring tools from other jurisdictions. It is hoped that by providing a debtor with the legal protection necessary to give it the opportunity to reorganize, more value will be preserved for all creditors than would be achievable in a liquidation.
The most important change is Singapore opening up its doors to foreign companies – clarifying the circumstances in which foreign companies can be wound up in Singapore and allowing them to avail themselves of the restructuring regime under the Companies Act. As previously, a foreign company can be wound up in Singapore or promulgate a scheme of arrangement in Singapore if it has a substantial connection with Singapore. However, the amendments to the Companies Act have clarified the meaning of “substantial connection”, which now expressly includes carrying on business in Singapore, having substantial assets in Singapore or having Singapore law-governed finance documents. This increases the options available to foreign companies wishing to restructure their indebtedness and, in light of the relative ease with which foreign companies and their financial creditors will be able to establish a substantial connection with Singapore (for example, by changing the governing law of the relevant financing documents).
As part of the amendments to the Companies Act, the UNCITRAL Model Law on Cross-Border Insolvency Law has been adopted in Singapore. This is a positive development from the perspective of foreign debtors and insolvency office-holders seeking assistance from the Singapore Court and insolvency office-holders in Singapore, and mirrors the approach taken in certain other key jurisdictions in recent years, including the United States, the United Kingdom, the Republic of Korea and Japan. The new Companies Act provisions adhere closely to the text of the Model Law itself (and, for example, do not seek to impose any additional conditions to the recognition of foreign insolvency proceedings in Singapore); a commendable approach which promotes certain and predictability in cross-border insolvency matters and helps to create a level playing-field for foreign insolvency office-holders seeking recognition of insolvency proceedings in multiple jurisdictions which have enacted the Model Law.
Scheme of arrangement
Here is a summary of the main reforms to the scheme of arrangement provisions:
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Previous position |
Amendments |
Advantage |
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1 |
No automatic moratorium No automatic moratorium; no worldwide effect; no extension to subsidiaries or related companies unless they do business or have a place of business in Singapore. |
Automatic moratorium Automatic moratorium for up to 30 days upon the filing of the application of a company which is proposing, or intends to propose, a scheme of arrangement for the protection of a moratorium. Such an application can be made at the same time as or prior to the making of the application to court to convene the relevant meetings of creditors. The moratorium precludes the passing of a resolution to wind up the company, the appointment of a receiver, the commencement or continuation of proceedings or other legal process against the company and the enforcement of any right of re-entry or forfeiture under a lease. In determining any such application, the court has the power to order the granting of a moratorium with in personam worldwide effect of similar scope to the automatic moratorium. If the court declines to make such an order, the automatic moratorium lapses. A subsidiary or holding company can also apply to court to obtain a moratorium of similar scope. |
Obtaining a moratorium affords the company an opportunity to restructure without the risk of unilateral creditor actions disrupting the process. The automatic moratorium is of considerable value in allowing immediate protection from the time of the making of the application.
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2 |
Rescue financing No priority for rescue financiers. |
“Super priority” for rescue financing This allows the rescue financier to be given (by the Court) priority over statutorily preferred creditors, a security interest over assets which are not subject to any existing security interests, a subordinate security interest in property which is subject to an existing security interest or, in certain circumstances, equal or higher priority to existing security interests. In the latter case, the court must be satisfied that the interests of the existing security-holder are “adequately protected” (a concept imported from the United States Bankruptcy Code) and there are detailed provisions setting out the relevant considerations in this respect. (It is also expected that the Singapore Court will draw on the US jurisprudence in interpreting such provisions.)
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This allows companies in financial difficulties to be given new finance to aid survival. It is expected, however, that it will be difficult in most cases to demonstrate adequate protection of existing security-holders which would allow the granting of a prior-ranking security interest without their consent (as is the case in the United States). |
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3 |
Requirement for approval Previously, each and every class of creditors amounting to 75% by value and 50% in number were required to approve the scheme of arrangement.
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“Cram down” provisions introduced This allows the Singapore Court to approve the scheme where there are multiple classes of creditors and the requisite majorities of at least one class of creditors have voted in favour of the scheme, in circumstances in which one or more classes have not done so, provided that 75% by value and 50% in number of all creditors in aggregate (i.e. combining all classes for these purposes) have voted in favour of the scheme and the Court is satisfied that the scheme does not unfairly discriminate between classes and is fair and equitable to each dissenting class. In order to be “fair and equitable”, the dissenting creditors must not receive less than they would in a liquidation and, in the case of dissenting unsecured creditors, must not allow for subordinated creditors or shareholder to make greater recoveries than them, or, in the case of secured creditors, must not prejudice their security rights. |
These provisions prevent a minority dissenting class of creditors from unreasonably frustrating a restructuring that benefits creditors as a whole. In light of the protections available to secured creditors, it is anticipated that instances of successful cram down of classes of secured claims will be rare. |
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4 |
Requirement for creditors’ meetings Previously, it was necessary in all cases to hold meetings of the relevant classes of creditors, and for the requisite majorities to vote in favour of the scheme, in order for the court to approve the scheme. |
Power of court to approve scheme without creditors’ meetings It is now possible for schemes to be approved without the need to convene meetings of creditors. The Singapore Court has the power to approve schemes without a meeting of creditors being called where a scheme has been agreed and the Singapore Court is satisfied that, amongst other things, had a meeting of the creditors or class of creditors been summoned, not less than 50% in number and 75% in value of each class of creditors would have approved the scheme. |
It is expected that the court’s approval without the holding of creditors’ meetings will shorten considerably the time it takes for a scheme to come into effect. Nevertheless, the company will need to demonstrate to the satisfaction of the Court why creditor approval has not been sought in the circumstances of any particular case. For this reason, it is anticipated that debtors will seek to dispense with creditor meetings only in urgent or exceptional circumstances. |
Judicial management
Here is a summary of the main reforms to the judicial management provisions:
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Previous position |
Amendments |
Advantage |
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1 |
Timing of application Previously, the Singapore Court could only make a judicial management order when a company “is or will be unable to pay its debts”. |
Earlier timing of application The Singapore Court can now make a judicial management order when a company “is likely to become unable to pay its debts”. |
This allows the judicial management process to commence earlier, when the prospects of saving a company are likely to be higher. This is likely in most cases to give the company a better chance of rehabilitation.
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2 |
Secured creditor opposition Previously, the Singapore Court could not grant a judicial management order if secured creditors opposed the application. |
Additional condition on secured creditor opposition A secured creditor who objects to the making of a judicial management order will need to show that the prejudice that would be caused to him by the making of the order will be disproportionately greater to him than the prejudice caused to the unsecured creditors if the order were not made. In addition, a judicial manager may promulgate a scheme under the new regime and similar provisions to those described above in relation to cram down and approval of a scheme without holding creditors’ meetings apply.
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This makes it more difficult for secured creditors to adopt an obstructive stance or to seek to extract hold-out value in circumstances in which the interests of all creditors favour the making of a judicial management order. |
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3 |
Rescue financing Previously, each and every class of creditors amounting to 75% by value and 50% in number were required to approve the scheme of arrangement.
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“Super priority” for rescue financing “Super priority” given for rescue financing. The relevant provisions are similar to those which apply to schemes, as described above. |
The considerations described above in the context of schemes apply equally here. |
The amendments to the Companies Act are a positive development which have thrust Singapore to the forefront of the international restructuring and insolvency stage, making it a viable and appealing alternative to other popular forum-shopping destinations. The presence in Singapore of a highly skilled and experienced judiciary and leading practitioners mean that Singapore is ideally-placed to emerge as a regional and international forum of choice in the next wave of transnational restructurings and insolvencies.
It is to be hoped that local and foreign debtors seeking to restructure their indebtedness will avail themselves of the tools and techniques available under the new regime at the earliest possible stages of distress, in order to increase their chances of achieving a successful turnaround. The first cases under the new regime will be critical – particularly in terms of the recognition of the effectiveness of Singapore-based restructurings in other key jurisdictions – to the future use and development of the provisions and the jurisprudence thereunder.
The enactment of the UNCITRAL Model Law on Cross-Border Insolvency is equally to be welcomed and it will be interesting to see how its use in practice in Singapore accords with the experience in other key jurisdictions.
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