Singapore’s New Restructuring Tools – Implementation and Unresolved Questions Following the Companies (Amendment) Act 2017
It has been just over a year since Singapore passed significant amendments to the Companies Act1 (the Act) in May 2017 to revamp its corporate insolvency regime. The changes were intended to expand the toolbox available to insolvent and distressed companies, and promote Singapore as an international debt restructuring hub.2 In this article, we set out an overview of the changes to the regime, highlight key cases from the past year and consider their practical implications.
Before discussing the changes, we briefly summarise the three primary features of the prior regime that have been retained and continue to be available for distressed companies in Singapore:
- Schemes of arrangement:3
- a scheme of arrangement is a compromise between the debtor company and its creditors to restructure the company's debts in an attempt to keep it afloat;
- it is an alternative to the finality of liquidation and generally allows management to retain control of the company throughout the process;
- an application for a scheme may be made by the company, its members or creditors and is subject to the approval by a majority in number, representing at least 75 per cent in value of the relevant stakeholders;
- once approved by the requisite number of stakeholders, the scheme will come into effect once sanctioned by the courts and is binding on the company and all creditors (regardless of whether or how they voted); and
- a company may also apply for a moratorium to facilitate the passing of a proposed scheme without threat of action in Singapore by its creditors.
- Judicial management:4
- similar to schemes of arrangement, judicial management is primarily intended to be a rehabilitative alternative to liquidation. However, unlike schemes where the existing management retains control, the applicant company is managed by a court-appointed judicial manager; and
- an added advantage of judicial management is that once ordered, an automatic moratorium takes effect to stay claims in Singapore against the company.
As discussed in last year's edition, prior to the amendments to the Act, a limitation of Singapore's insolvency regime was that there was no unified legislative framework setting out the role of the Singapore courts and the availability of Singapore's debt restructuring tools in matters of cross-border insolvency.5
Features of the new regime
The new features that were introduced in the amendments to the Act have liberalised and added to the available solutions set out above. A brief summary of such features follows.
- Companies may apply for a moratorium, not only alongside a scheme application, but even prior to proposing an intended scheme.6
- Enhanced moratoria can have extraterritorial reach, applying to any person who is subject to the in personam jurisdiction of the Singapore courts.7
- An automatic moratorium comes into effect for 30 days from the date the moratorium application is submitted, or until the court has decided on such application, whichever is earlier.8
- Related entities of a company which has been granted a moratorium may also apply for protection from the Singapore courts under an extended moratorium, which may apply extraterritorially.9
Distressed companies in need of working capital to survive as a going concern may benefit from new rescue financing provisions.10
Companies may now take advantage of cross-class cramdown provisions to push through a scheme even where there are small dissenting classes of creditors.11Under the old regime, one dissenting class, regardless of relative size, could block a scheme that otherwise had substantial majority approval among all creditors.
A pre-pack scheme that has the requisite majority support of the creditors can now be passed and approved by the courts in an expedited process without the company convening a scheme meeting. Assuming certain formalities have been complied with, a court can approve a pre-pack if it is satisfied that the requisite voting thresholds would have been satisfied had a meeting taken place.12
Adoption of the UNCITRAL Model Law on Cross-Border Insolvency
The UNCITRAL Model Law on Cross-Border Insolvency (Model Law) provides a framework for the Singapore courts to recognise foreign insolvency proceedings commenced in other jurisdictions.13 This gives clarity to the treatment of foreign proceedings, which prior to the amendment of the Act, was developed incrementally through case law.
The ring-fencing rule has been abolished save in respect of certain financial institutions.14 This means that Singapore debts are no longer preferred in the liquidation of foreign companies.
Since the introduction of the new features of the insolvency regime, the cases that have followed have leveraged on the benefits provided by such features to assist debtor companies. The pioneer cases have also given the courts an opportunity to clarify the application of the new provisions.
The enhanced moratorium provisions have given distressed companies the breathing room to negotiate restructuring plans with their creditors. These protections have been extended not only to the companies themselves but to their group companies as well, allowing the group to stave off actions that might impede agreement on a holistic restructuring plan.
In November 2017, Hoe Leong Corporation Ltd applied for a worldwide stay in respect of actions against itself and certain subsidiaries until 31 July 2018. The automatic moratorium in respect of Hoe Leong took effect and the court subsequently granted the worldwide moratorium for the group. During the moratorium period, Hoe Leong was able to obtain creditor approval for a pre-pack which the court approved in January 2018.15
Hyflux Ltd and a number of its subsidiaries have also successfully obtained worldwide moratoria in June 2018 for a duration of six months. According to a news report, though one of the largest creditors of Hyflux sought a shorter moratorium period, the Singapore courts granted the six-month reprieve as it deemed that it would be 'beneficial' to the parties involved. Hyflux's lawyers also reportedly indicated that during the moratorium, Hyflux would attempt to obtain rescue financing from a group of potential investors.16
Subsidiaries of Pacific Radiance Ltd have also applied for and recently obtained moratoria against creditor actions in Singapore. In its published announcement, Pacific Radiance mentioned that the automatic moratoria would provide it with the opportunity, and adequate time, to continue to finalise its group restructuring.17
The first pre-pack was sanctioned in January 2018 in respect of Hoe Leong. Taking advantage of the expedited pre-pack regime, Hoe Leong was able to dispense with convening a scheme meeting by using a balloting process to determine whether the required voting thresholds would likely be achieved. According to Hoe Leong's Singapore Exchange (SGX) announcements, ballot forms were despatched to scheme creditors along with the scheme document, the statutory explanatory statement and a proof of debt form. The speed of the pre-pack is notable. Hoe Leong's scheme was sanctioned in approximately just two months from the date on which the scheme documents were despatched.
However, the two-month period did not include the time negotiating and finalising the scheme documents, which would be significant. While we are not aware of what was set out in the explanatory statement sent by Hoe Leong, the Act requires that the statement contain such information as is necessary to enable a creditor to make an informed decision in respect of approving the scheme.18 It does not, however, set out what information would be necessary or sufficient. As there has been no reported decision on pre-packs at the time of writing, the specific information required is yet to be clarified in the Singapore courts.
Re Attilan Group Ltd19
In Attilan, the High Court issued its first published decision dealing with the new rescue financing measures. The application for rescue financing in Attilan failed on the grounds that the applicant had not shown reasonable efforts to obtain alternative financing on a non-priority basis. In its written judgment, the High Court outlined key issues that debtors should take into account when seeking such financing.
Relevance of US cases
As a preliminary matter, the High Court explained the role of US case law in the interpretation of the rescue financing provisions of the Act. While the High Court noted the differences between the US and Singapore regimes, it also acknowledged that the Singapore provisions were 'at least inspired' by their US counterparts. As such, despite the statutory differences, the High Court stated that US authorities could be helpful in providing guidance for the proper construction of the newly enacted rescue financing provisions.20
Elements of rescue financing
The High Court set out the following elements that must be satisfied for a rescue financing order:
- the proposed financing must be:
- necessary for the survival of the company or of the whole or any part of its undertaking as a going concern; or
- necessary to achieve a more advantageous realisation of the company's assets than on winding up;21
- the applicant must meet the relevant conditions of the rescue financing that is being obtained (secured or unsecured); and22
- the court exercises its discretion to grant the requested priority.23
Definition of rescue financing
The applicant asserted that it was in dire need of funds and that the proposed financing was necessary for its survival. This went towards showing that such financing satisfied the definition of 'rescue financing' under section 211E(9) of the Act. The applicant relied on the fact that it was separately being sued by a creditor under a guarantee, and that since the commencement of such action, the applicant had incurred numerous other liabilities, which it could not meet. It also pointed to the general weakness and volatility in the stock market, insufficient cash flow, currency fluctuation, soft consumer demand and competitive environment to demonstrate its financial difficulties.24
The High Court made the following statements in relation to what constitutes rescue financing:
- an offer of rescue financing need not be unconditional because the decision to extend financing and on what terms is a matter for commercial consideration;24 and
- rescue financing need not be entirely new as long as it is not solely an existing obligation to fund. It can be additional financing from an existing creditor. It can also be premised on a prior obligation that the creditor has become entitled to terminate due to the applicant's default. Any further extension of funds post-termination would be additional funding that could constitute rescue financing.26
Types of rescue financing
In making an application for rescue financing, the applicant should clearly state which limb of section 211E(1) is invoked. A lack of clarity may delay proceedings as the opposing creditor would not be able to properly prepare its arguments.27
The applicant must prove that on a balance of probabilities, the requirements under the relevant limb of section 211E(1) will be satisfied.28
The application in Attilan was for the requested funding to:
- be treated as part of winding up costs; or
- have priority over all preferential and unsecured debts, on the basis that the applicant could not have obtained such rescue financing unless such priority was given (under sections 211E(1)(a) and 211E(1)(b) of the Act, respectively).
Reasonable efforts test
An important takeaway from Attilan is that it is imperative (at least in respect of the first two limbs of section 211E(1)) that an applicant must be able to show that it has made reasonable efforts to obtain financing on a non-priority basis before making an application for rescue financing in the courts.29 This is notwithstanding that this is an express condition only of a section 211E(1)(b) application but not a section 211E(1)(a) application.
Nonetheless, the High Court emphasised that while this is not a statutory requirement of section 211E(1)(a), the reasonable efforts test serves as a useful yardstick to guide the court's discretion.30 This aligns with US case law. Granting rescue financing disrupts the expected order of priority of the various creditors and should be a measure of last resort. If the applicant could otherwise obtain financing on a normal basis, it would generally be unfair to give one creditor priority to the company's assets in winding up.
For both sections 211E(1)(a) and 211E(1)(b), the courts will assess as a question of fact on a case-by-case basis whether the applicant has expended reasonable efforts. In order to show such efforts, an applicant may adduce evidence of failed negotiations or attempts to obtain non-priority financing from other lenders. The High Court observed that US judges have rejected a rescue financing application where the applicant only approached one lender without attempting to obtain financing from its existing creditors.31
Given that the reasonable efforts test is a factor and not a pre-condition of section 211E(1)(a), a court may consider if the applicant was objectively in such abysmal financial health that no financial aid could have been reasonably received without any offer of priority. In such case, it would not be necessary to show that reasonable efforts were expended to obtain normal financing, as such efforts would inevitably be futile.32
In Attilan, the High Court found that the evidence tendered did not show reasonable efforts.33 The applicant was not able to show that its financial position was so dire that any attempts at normal financing would have been fruitless. Its application was therefore denied.
The practical implication is that potential applicants should ensure that they adequately document their efforts to obtain non-priority financing from multiple other sources before making an application for rescue financing under the first two limbs of section 211E(1).
Given that the third and fourth limbs of section 211E(1) (ie, rescue financing with subordinate, equal or super priority security in respect of existing security interests) are also conditional on such financing being unavailable without the requested priority of security, it would be prudent to assume that the reasonable efforts test would also be a factor in applications for such financing.
Re Zetta Jet 34
The High Court laid down its first decision on the recognition of foreign insolvency proceedings under the Model Law in Zetta Jet. In that case, certain shareholders of the subject company had obtained an injunction in Singapore prohibiting the company and its remaining shareholders from commencing any bankruptcy proceedings in the US. In breach of such injunction, the company nonetheless proceeded with US Chapter 7 proceedings. When the company applied for such foreign proceedings to be recognised in Singapore, the High Court rejected the application on the grounds that it would be contrary to public policy to do so.35
Public policy exception
The High Court discussed the difference between the wording of the public policy exceptions in Singapore's enacted version of the Model Law and the original Model Law. Under the original wording, the recognition of a foreign proceeding can only be denied if it is 'manifestly contrary' to the public policy of the jurisdiction in which it is to be recognised. However, Singapore's adaptation omits the word 'manifestly'.36 This means that the standard of denying recognition in Singapore on public policy grounds would be lower than in jurisdictions that enacted the original exception. The High Court noted that future cases will determine whether such lower standard would result in a significant divergence in application.37
In any event, the High Court was clear that Singapore's public policy would not allow the recognition of foreign proceedings that have been filed in breach of an order of the Singapore courts. It was irrelevant in Zetta Jet that the injunction was made only after the US proceedings were already filed and a worldwide moratorium ordered by the US courts was already in effect.38 However, in order to strike a balance and do justice, the High Court allowed the trustee in the Chapter 7 proceedings limited recognition in Singapore solely for the purpose of applying to set aside or appeal the injunction on behalf of the company. Otherwise, the company would have no recourse to deal with the injunction in Singapore.39
Centre of main interests
Another issue in Zetta Jet was whether the company's centre of main interests was in Singapore or the United States. This was relevant to determine whether the US bankruptcy proceedings should be treated as foreign main or non-main proceedings.40 The company had argued that even though it was incorporated in Singapore, its centre of main interests was the United States because the operations, sales, substantial assets and employees of its US-based subsidiary were primarily in the United States. This was premised on the company and its subsidiary being treated as a single business entity. The High Court raised concerns as to the propriety of ignoring the separate legal personalities of the Singapore and US entities by treating them as one unit.41 However, given that the recognition application was barred due to the public policy issue, the High Court did not need to consider this issue.
On the whole, the additions to Singapore's debt restructuring regime appear to have given debtors more options to stave off liquidation and zealous creditors, and to work with the latter to come to a workable solution for all parties. However, these are still early days in the application of such measures and the following issues, among others, remain unanswered:
- What information is sufficient to include in the statutory pre-pack statement?
- How practical will a cross-class cramdown be for shareholders where the dissenting creditors are unsecured?42
- The High Court in Attilan cited a number of factors that US courts have taken into account in exercising their discretion to grant rescue financing, including whether financing was negotiated in good faith.43 How will such factors weigh in local decisions?
- Further to Zetta Jet, in determining where the centre of main interests of a company lies, to what extent will the activities of its international affiliates be taken into account (ie, will the activities of the group be treated as that of a single unit)?
It will be worth watching to see how future courts develop the jurisprudence in this area to reach an optimal balance between the interests of creditors and debtors.
1 Companies Act (Cap 50, 2006 Rev. Ed.) (the Act).
2 See generally, Indranee Rajah, SC, then Senior Minister of State for Law and Finance, 'Enhancing Singapore as an international debt restructuring centre for Asia and beyond', Ministry of Law (20 June 2017) www.mlaw.gov.sg/content/dam/minlaw/corp/News/Note%20on%20Debt%20Restructuring.pdf.
3 Section 210 of the Act.
4 See Part VIIIA of the Act.
5 See Low Poh Ling and Wilson Zhu, 'Singapore', The Asia-Pacific Restructuring Review 2018 (21 September 2017) for an in-depth review of the trends in Singapore's cross-border insolvency regime prior to the introduction of the amendments to the Act.
6 See section 211B(1) of the Act. In order to take advantage of the enhanced moratorium orders, the company must provide the court with the information set out in sections 211B(4) and (6) of the Act.
7 Section 211B(5) of the Act.
8 Section 211B(8) of the Act.div id="footnote-009">
9 Sections 211C(1), 211C(2) and 211C(4)(b) of the Act.
10 Section 211E of the Act.
11 See sections 211H(1) and (2) of the Act. To obtain a cramdown order, the company must show that the scheme has been approved by a majority of the creditors representing at least 75 per cent in value of all the creditors (counting all classes) present and voting at the scheme meeting. Such scheme must be fair and equitable to each dissenting class and not discriminate among classes of creditors, in accordance with section 211H(3) of the Act.
12 See section 211I(3) of the Act.
13 Section 354B of the Act. To apply for recognition under the new regime, a representative authorised in the foreign proceedings must provide to the Singapore courts proof of the commencement of the foreign proceedings and the representative's appointment, and a statement identifying all insolvency proceedings whether in Singapore or otherwise in respect of the company. See article 15 of the Model Law.
14 Section 377(3) of the Act. The ring-fencing rule required that assets recovered in Singapore in relation to the liquidation of a foreign company be used to pay down the debts of that company that were incurred in Singapore, prior to sending any remaining funds to the jurisdiction of the liquidation.
15 See Hoe Leong Corporation Ltd, 'Proposed scheme of arrangement – court approval of proposed scheme of arrangement', SGX announcement (22 January 2018).
16 Mayuko Tani, 'Singapore court grants Hyflux 6-month debt reprieve', Nikkei Asian Review (19 June 2018) https://asia.nikkei.com/Asia300/Singapore-court-grants-Hyflux-6-month-debt-reprieve.
17 See Pacific Radiance Ltd, 'Application for moratorium by CSI Offshore Pte Ltd', SGX announcement (18 May 2018).
18 Section 211I(3)(a) of the Act.
19  3 SLR 898 (Attilan)
20 Attilan at –.
21 Section 211E(9) of the Act.
22 Section 211E(1) of the Act.
23 Attilan at .
24 Attilan at .
25 Attilan at .
26 Attilan at –.
27 Attilan at .
28 Attilan at .
29 Attilan at .
30 Attilan at –.
31 Attilan at –.
32 In comparison, the same argument would not apply for an application under section 211E(1)(b), where reasonable efforts are a condition. See Attilan at  and .
33 The applicant's affidavit asserted that it had approached several lenders, but it was unclear whether the loans sought were on a non-priority basis. It failed to adduce evidence of correspondence of relevant negotiations with, and any rejections from, the lenders. See Attilan at .
34  SGHC 16 (Zetta Jet)
35 While the process to apply for recognition in Singapore is generally an administrative one, the courts retain a discretion to refuse recognition where it would be against public policy. See article 6 of the Model Law.
36 Article 6 of the Model Law.
37 Zetta Jet at .
38 Zetta Jet at .
39 Zetta Jet at .
40 The rights of recognition granted to foreign proceedings differ depending on whether such proceedings are 'main' or 'non-main' foreign proceedings. Foreign main proceedings take place where the company has its centre of main interests. Foreign non-main proceedings take place where the company has an establishment, in the sense that it is a place where the company has property or is a place of operations where the company carries out 'a non-transitory economic activity with human means and property or services'. Once foreign main proceedings are recognised in Singapore, certain automatic reliefs are triggered. These include an automatic stay of actions and enforcement against the company and a suspension of the right to transfer, encumber, or otherwise dispose of the company's property. Such reliefs are not automatically available for foreign non-main proceedings and must be applied for separately and granted only where necessary to protect the property of the company or the interests of the creditors. See articles 2(d), 2(f), 2(g), 20(1), and 21 of the Model Law.
41 Zetta Jet at –.
42 For a scheme to be eligible for cramdown, unsecured creditors must receive property of equal value to their respective claims. Otherwise, the shareholders cannot receive or retain any property on account of their interests (ie, their shares). See section 211H(4)(b)(ii) of the Act.
43 See Attilan at –. Such factors include: (i) the proposed financing has to be in the exercise of sound and reasonable business judgment; (ii) no alternative financing is available on any other basis; (iii) such financing is in the best interest of the creditors; (iv) no better offers, bids or timely proposals are before the court; (v) the proposed credit transaction is necessary to preserve the assets of the estate, and is necessary, essential and appropriate for the continued operation of the debtors' businesses; (vi) the terms of the financing agreement are fair, reasonable and adequate in light of the circumstances of the debtor and the proposed lender; and (vii) the financing agreement was negotiated in good faith and at arm's length between the debtor, on the one hand, and the agents and the proposed lender, on the other.