Singapore: One Year On – Key Developments and Unresolved Issues in Singapore’s Cross-border Insolvency Laws

Introduction

The restructuring and insolvency scene in Singapore underwent a major revamp with the recent amendments to the Companies Act (Chapter 50) (the Act). These amendments, which became operative on 23 May 2017, introduced new legislative tools to enhance the rescue regime for distressed companies and adopted the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law).

This article will examine the progress and development of Singapore's restructuring and insolvency laws since the new laws became operative. In particular:

• given the novelty of the new laws, this article will analyse how and to what extent the common law continues to play a role in the application of the Model Law as amended and adopted in Singapore (the Singapore Model Law) and the recognition of foreign insolvency proceedings generally;
• the Singapore court's interpretation of the 'public policy' exception in article 6 of the Singapore Model Law in the case of Re: Zetta Jet Pte Ltd and others [2018] SGHC 16 (Zetta Jet); and
• the conflicts between the admiralty jurisprudence and the insolvency jurisprudence in Singapore and the possible solutions to resolve these conflicts, in view of Singapore being a leading admiralty jurisdiction due to its port activities being one of the busiest in the world.

Common law and its continued role given the implementation of the Singapore Model Law

The Singapore Model Law provides, inter alia, a framework for the recognition of foreign insolvency proceedings and representatives in Singapore, along with a suite of reliefs and powers.

What, then, is the role of the common law in the future of recognition of cross-border insolvencies in Singapore?

Rather than being relegated, the common law will continue to operate in the space where the Singapore Model Law is not applicable. It also provides an alternative option for recognition and reliefs even where the Singapore Model Law applies. Finally, the common law will continue to lend aid to the interpretation of the Singapore Model Law.

Common law applicable where Singapore Model Law is not available

In the UK case of Re Stanford International Bank [2009] EWHC 1441 (Re Stanford), the argument that the Model Law constituted a complete code, which leaves no room for the application of the common law, was rejected.¹ The Honourable Mr Justice Lewison recognised that there will be a variety of insolvencies that would fall outside the application of the UK version of the Model Law (the UK Model Law) and in such circumstances 'the common law must remain in being'.²

In my judgment the [UK Model Law] supplement the common law; they do not extinguish it.³

In Cross-Border Insolvency: A Commentary on the UNCITRAL Model Law, fourth edition, volume one (Commentary on the Model Law), it was observed that article 7 under the UK Model Law:

thus confirms that the existing jurisprudence on cross-border insolvency continues to be available to a foreign representative. . . . Further, [w]hile judicial assistance has been given a statutory footing, the common law on international insolvencies continues to exist – something that a foreign representative should rely upon in an appropriate case.⁴

Article 7 of the Singapore Model Law mirrors article 7 of the UK Model Law and as such these observations are applicable or, at the very least, persuasive in Singapore. The Singapore Insolvency Law Review Committee appears to have adopted a similar position:⁵

The Model Law's benefits . . . will not be available in all cross-border cases. There will have to be continuing reliance on the common law . . . .

It is clear that the common law will remain as the default regime for recognition and assistance of cross-border insolvencies where the Model Law does not apply, such as:

• where the foreign insolvency proceeding was commenced prior to 23 May 2017;⁶ and
• where the foreign proceeding takes place in a jurisdiction where the debtor neither has its centre of main interests (COMI) nor an establishment and therefore cannot be recognised as a foreign main or non-main proceeding under the Singapore Model Law.⁷

The common law as an alternative option to the Singapore Model Law

Article 7 of the Singapore Model Law provides:

Nothing in this Law limits the power of a Court or a Singapore insolvency officer to provide additional assistance to a foreign representative under other laws of Singapore.

The Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency (the Enactment Guide) provides that enacting states should consider including article 7 when enacting the Model Law, to make clear that the Model Law is not meant to displace the existing provisions of the national laws, under which a foreign representative could obtain cross-border assistance, to the extent that they provide assistance that is additional to or different from the type of assistance dealt with in the Model Law.⁸

Further, this is in pari materia to article 7 of the UK Model Law. A UK court has held that even where the Model Law is available, 'there has been a deliberate decision in each country that the older system of cross-border assistance should be retained despite the enactment of Model Law legislation'.⁹ This suggests that it is open to the foreign insolvency representative to choose which insolvency regime best suits the recovery in the circumstances.¹⁰

In Commentary on the Model Law, the authors take the view that in Singapore:

the common law in relation to the provision of assistance to foreign insolvency proceedings should continue to operate in Singapore, alongside the Model Law, to plug any gaps which the Model Law may not be capable of covering.¹¹

Jurisprudence to aid interpretation of the Singapore Model Law

Even with the implementation of the Singapore Model Law, the common law will continue to play a role in interpreting various sections of the Singapore Model Law, whether by utilising existing case law or creating new jurisprudence. For example:

• the identification of the COMI and rebutting the presumption of COMI being in the place of incorporation (mentioned but not developed in Zetta Jet);
• how the Singapore court will exercise its discretion in granting relief under articles 19 and 21 of the Singapore Model Law;
• the considerations of the Singapore court in determining whether the interest of the creditors and other interested persons are adequately protected (as required under article 22). Case law will likely be relied upon and further jurisprudence will need to be developed to clarify the scope of interested persons and what would constitute adequate protection;¹² and
• how the Singapore court will utilise articles 25 to 30 to further judicial cooperation and coordination in cases of parallel foreign insolvency proceedings.

Article 6 of the UNCITRAL Model Law – the 'public policy' exception

Since its introduction, the Singapore Model Law remains relatively untested largely because it does not apply to, or in relation to, any collective judicial or administrative proceeding (including any interim proceeding) commenced before 23 May 2017 in the country in which the insolvency proceedings were commenced. There is only one reported case, namely Zetta Jet,¹³ which considered, among other issues, the 'public policy' exception contained in article 6 of the Singapore Model Law.

Zetta Jet is an application by a trustee (the Trustee), appointed under proceedings commenced in the United States under Chapter 7 of the US Bankruptcy Code (the US Proceedings), for recognition of the US Proceedings and of his appointment thereunder. The US Proceedings had been enjoined by a Singapore court and the Singapore court concluded that the public policy bar, as stated in article 6 of the Singapore Model Law, would operate to deny the Trustee's application for recognition. However, the Singapore court exceptionally granted limited recognition to the Trustee to take steps to set aside or appeal the injunction.¹⁴ The Singapore court took the view that justice and fairness required that an opportunity be given to the Trustee to question the granting of the injunction and that a balance needed to be struck between protecting the integrity of the administration of justice in Singapore and fairness to the Trustee. In the Singapore court's view, the granting of limited recognition only for the purposes of applying to set aside or appeal the injunction, or matters directly related to such applications, would achieve this balance.¹⁵

Further, the Singapore court took the view that the question of general recognition should be resurfaced if the Trustee succeeds in setting aside the injunction and that such a restoration would be consonant with the objective of the Singapore Model Law and statute.¹⁶ It would also have regard to the international basis of the Singapore Model Law and the promotion of uniformity, as required by article 8 of the Singapore Model Law.¹⁷ The Singapore court took the view that article 6 of the Singapore Model Law was broad enough to allow the Singapore court to exercise this discretion to grant the limited recognition and allow a restoration.¹⁸

Article 6 of the Singapore Model Law provides that:

Nothing in this Law prevents the Court from refusing to take an action governed by this Law, if the action would be contrary to the public policy of Singapore.

Article 6 of the Singapore Model Law was modified slightly from the original proposed wording in the Model Law which states:

Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State.

The Enactment Guide explains that the purpose of the expression 'manifestly' was to emphasise that public policy exceptions should be interpreted restrictively and that article 6 should only be invoked under exceptional circumstances concerning matters of fundamental importance to the enacting state.¹⁹

Despite the omission of the word 'manifestly', however, there has been academic commentary suggesting a narrow reading of the public policy exception in respect of the Singapore Model Law. In Commentary on the Model Law, the authors have suggested that the public policy exception should be read narrowly to remove pre-existing obstacles to the recognition of foreign insolvency proceedings, given that one of the objectives of the Singapore Model Law is to promote cooperation between the courts and other authorities among states in cross-border insolvency.²⁰ However, in Zetta Jet, the Singapore court was of the view that the omission of the word 'manifestly' from Singapore's article 6 was deliberate. The Singapore court held that:

[what] flows from the omission being deliberate is that the standard of exclusion on public policy grounds in Singapore is lower than that in jurisdictions where the Model Law has been enacted unmodified. That is, in Singapore, recognition may be denied on public policy grounds though such recognition may not be manifestly contrary to public policy. Whether this will lead to a significant divergence from other jurisdictions remains to be seen. [The Court had] noted that the commentaries to Article 6 of the Model Law suggest that Article 6, as originally worded, would be taken to exclude purely domestic public policy concerns . . . . If this were indeed so, then Singapore's version of Article 6 may not lead to the same conclusion.²¹

Although the Singapore court was not able to lay down what specifically would trigger the public policy bar in Singapore, it took the view that it must deny an application for recognition by foreign insolvency representatives appointed under proceedings enjoined by a Singapore court, as ignoring such an injunction would undermine the administration of justice.²² The same result would follow even if a higher threshold was applied and it would be rare for the Singapore court not to refuse recognition where there has been non-compliance with a Singapore court order.²³ In coming to this conclusion, the Singapore court relied on the US case, re Gold and Honey Ltd 410 BR 357 (2009), in which the US Bankruptcy Court of the Eastern District of New York denied recognition of an Israeli receiver appointed in the face of a Chapter 11 automatic stay in the United States.²⁴  

In the United States and the United Kingdom, the Model Law was adopted without modification to article 6. In these jurisdictions, it is therefore necessary to show that the recognition is 'manifestly contrary' to public policy. As observed by the Singapore court, it remains to be seen if Singapore will diverge significantly from these other jurisdictions. Nevertheless, given the lower threshold in Singapore, Singapore courts will consider cases from these jurisdictions, where it is held that an action is manifestly contrary to public policy, applicable and even persuasive.²⁵

Conflict between the admiralty and insolvency regimes and possible solutions

In the wake of the recent distress experienced by the oil and gas, and marine sectors, the restructuring of entities in these sectors have brought to the fore various conflicts arising out of the interplay of admiralty law and insolvency law. The following issues will be discussed:

• the competing priorities provided for under the admiralty and insolvency regimes;
• in rem actions and moratoria granted by Singapore courts in aid of a restructuring in Singapore; and
• the impact of section 211C of the Act on special purpose entities or vehicles typically used to own ships and vessels.

The competing priorities provided for under the admiralty and insolvency regimes

Generally, a secured creditor stands outside the liquidation and his right to realise his security is unaffected by a winding-up order or the priorities of preferential debts under section 328 of the Act.²⁶

In contrast, in a judicial sale of a vessel under the admiralty jurisdiction of the Singapore court, a mortgagee, prima facie, ranks below the sheriff's expenses, costs of the producer of the fund, maritime liens and possessory liens, with only the statutory lien ranking below the mortgage.²⁷

Maritime liens

A maritime lien²⁸ is a right of property given by way of security for a maritime claim,²⁹ with certain unique characteristics, namely that it:³⁰

• acts as an encumbrance or charge over a ship (or any other maritime property);
• accrues from the moment the underlying claim giving rise to it attaches;
• survives any change of ownership of the res (except one brought about by judicial sale); and
• is carried into effect by an action in rem.

A conflict arises here because the secured creditor and mortgagee enjoy the highest priority in a (land-based) insolvency, but rank below a maritime lien under admiralty priorities.31

Statutory liens

A plaintiff with an unsecured admiralty claim32 has a statutory right of action in rem, that can be enforced by way of a statutory lien. The plaintiff has the right to invoke the admiralty jurisdiction of the Singapore court and arrest the vessel in order to obtain security or an interest in the res.33

In The Capricorn,34 the Singapore Court of Appeal held that the advantage of an admiralty action in rem is that the statutory lienholder's claim is secured before judgment when a ship is arrested, and when judicially sold, the proceeds are used to pay off the statutory lienholder. If security is obtained before judgment, satisfaction of the statutory lienholder's claim will not be hampered by any intervening financial impecuniosity of the shipowner.35 Importantly, in the case of a statutory lien, it is the issuance of the in rem writ which places the claimant in the position of a secured creditor of the vessel.36

These conflicting priorities and, in the case of a statutory lien, the ability to create a security by the issuance of an admiralty action in rem, do not always sit comfortably in the event of a winding up or a restructuring of a debtor company.

In rem actions and moratoria granted by the Singapore court in aid of a restructuring in Singapore

Section 262(3) of the Act provides that upon the granting of a winding-up order, no action or proceeding shall be proceeded with or commenced against the company except with the leave of the Singapore court.

A secured creditor, as mentioned above, stands outside the liquidation and his right to realise his security is not affected by the winding up. Since a maritime lien and a statutory lien (upon issuance of the in rem writ) grant the claimant the status of a secured creditor, they too fall outside the insolvent estate and these creditors are able to pursue their security unaffected by the winding up of the debtor company.

Practically, upon the winding up of a company, the holders of the maritime lien or statutory lien (if the in rem action had been commenced prior to the winding up), will have to obtain leave of the Singapore court to continue with the said action and such leave will typically be granted.37

It is important to stress that a statutory lienholder who fails to issue the in rem writ prior to the insolvency of the defendant shipowner, will not be granted leave to proceed against the vessel38 and will instead have his claim dealt with as an unsecured creditor in the liquidation.39

Similarly, under section 211B of the Act, where a company intends to propose a scheme of arrangement, the Singapore court may on the application of the company make one or more of the following orders:

• an order restraining the commencement or continuation of any proceedings against the company except with the leave of the Singapore court;
• an order restraining the commencement, continuation or levying of any execution, distress or other legal process against any property of the company, except with the leave of the Singapore court; and
• an order restraining the taking of any step to enforce any security over any property of the company except with the leave of the Singapore court.

Section 211B(1)(c) of the Act is wider than section 262(3) of the Act in that it empowers the Singapore court to restrain secured creditors from enforcing their security. This would extend to the holder of a maritime lien or a statutory lien. The inclusion of maritime liens and statutory liens in a moratorium granted in support of the restructuring of ship-owning companies would be imperative in giving the companies breathing room to put forward the restructuring proposal.40

As with section 262(3) of the Act, the Singapore court has the power under section 211B of the Act to grant leave for the commencement or continuation of the proceedings or process, or enforcement of security contemplated in section 211B of the Act.⁴¹However, the principles and considerations applicable to the grant of leave to commence or continue a proceeding to enforce an in rem action under section 211B of the Act would be different to those under section 262(3) of the Act, given that the former contemplates a restructuring of the debts of a company while the latter deals with the winding up of a company.

Although there is no reported case dealing with how a Singapore court exercises its power under section 211B of the Act, it is expected that the applicant will have a higher standard to meet in showing prejudice before leave will be granted for him to commence or continue his proceedings or enforcement of his security. Subject to exceptional circumstances, a maritime lienholder or statutory lien (if the in rem action had been commenced prior to the winding up) ought not to be put in a better position than other secured creditors of the debtor company. Statutory lienholders who have not issued in rem proceedings prior to the granting of a moratorium under sections 211B or 211C, should also not be put in a better position than other unsecured creditors.

The impact of section 211C of the Act on vessels held by special purpose entities or vehicles

In the Admiralty Court, piercing of the corporate veil is rare, and permitted only in exceptional cases where justice requires the court to do so.⁴² In The Skaw Prince,⁴³ the Singapore court observed:

It is well known that businesses engaged in shipping set up and utilise one-ship companies within their corporate structure for the purpose of limiting liability. The device has been around and recognised by the courts as a legitimate one and the court's view has been that the court will not lift the corporate veil unless the circumstances are exceptional.

This then leads to a problem often faced in the restructuring of corporate groups in the ship or vessel owning business, ie, the vessels are not directly held by the debtor company that is subject to the insolvency or restructuring proceedings. The Singapore court has been reluctant to accept the single economic entity approach or to displace the principle of separate legal entity in a group of companies,⁴⁴ a point that was recently reaffirmed in the context of the Singapore Model Law in the decision of Zetta Jet.⁴⁵

One solution in the context of restructuring proceedings is the introduction of section 211C of the Act which provides:

(1) Where the Court has made an order under section 211B(1) in relation to a company (called in this section the subject company), the Court may, on the application of a company that is a subsidiary, a holding company or an ultimate holding company of the subject company (called in this section the related company), make one or more of the following orders, each of which is in force for such period (but not exceeding the period for which the order under section 211B(1) is in force) as the Court thinks fit . . . .

Section 211C of the Act therefore empowers Singapore courts to extend the moratorium granted in respect of a debtor company to its subsidiary or holding company, providing a statutory circumvention of the principle of separate legal entity in the context of a restructuring of a group of companies, and ensuring that moratoria protection also covers the special purpose entities or vehicles holding the assets. This would greatly aid the restructuring of ship or vessel owning businesses as their assets, typically owned by subsidiaries can avail themselves of protection afforded by section 211C of the Act during the restructuring of the group.

Conclusion

The new laws have certainly paved the way for Singapore to one day achieve its aspiration to be an international debt restructuring hub. There are, of course, many open issues that remain, some of which have not been mentioned here.

In respect of the continued application of the common law, a question worthy of discussion is the continued application under the Singapore Model Law, of the principle in Singularis Holdings Ltd v PricewaterhouseCoopers [2014] AC 1675 (PC), ie, that the common law power of assistance is available only if such a power exists in the jurisdiction of liquidation, and exists also in Singapore.

It will also be interesting to see the test adopted by the Singapore court for the worldwide in personam moratorium when deciding who is subject to the Singapore court's jurisdiction, should an order under section 211B of the Act be expressed to apply to any act of any person in Singapore or within the jurisdiction of the court, whether the act takes place in Singapore or elsewhere.⁴⁶ Will the Singapore court adopt with modifications, the test laid down under Order 11 Rule 1 of the Singapore Rules of Court, or will it formulate entirely new rules?

Stakeholders are also watching keenly on how the Singapore court will develop its jurisprudence on super priority for rescue financing, cramdown provisions and the interpretation of the various articles of the Singapore Model Law.

These (and other questions) are left to be decided by the Singapore courts in the appropriate case or resolved by further legislation.