Singapore

A year in review: Insolvency, Restructuring and Dissolution Bill, and key cases

In 2017, the Companies Act was amended to enhance Singapore’s corporate insolvency and debt restructuring process. The reforms introduced features adapted from Chapter 11 of the United States Bankruptcy Code, and the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law).

Singapore continues to take steps to progress further as a corporate insolvency and debt restructuring hub. In this article, we set out an overview of the Insolvency, Restructuring and Dissolution Act 2018 (the Omnibus Act), note the judicial cooperation in cross-border insolvency matters between the courts of Singapore and the US, and highlight key cases in the areas of enhanced moratorium and recognition of foreign insolvency proceedings over the past year.

The Omnibus Act (passed but not yet in force)

The Omnibus Act was passed by parliament on 1 October 2018 and is expected to come into force sometime in 2019. The Omnibus Act consolidates Singapore’s existing corporate and personal insolvency and restructuring laws into a single piece of legislation, and seeks to enhance Singapore’s insolvency and restructuring schemes. When the Omnibus Act comes into force, the Bankruptcy Act will be repealed and provisions in the Companies Act relating to corporate insolvency and restructuring will be deleted.^[1]

Some of the key changes the Omnibus Act will bring to Singapore corporate insolvency and restructuring law are considered below.

Clarification on cross-class cram down for scheme of arrangement

Section 211H of the Companies Act provides for a cross-class cram down mechanism for schemes of arrangement, despite there being dissenting classes of creditors, provided that the scheme is fair and equitable to the dissenting class. Where the scheme is approved by the requisite majorities of at least one class of creditor, section 211H of the Companies Act provides that another non-consenting class of creditors can be compulsorily bound to the scheme in certain circumstances.

To cram down a class of unsecured creditors, implementation of the cram down mechanism pursuant to section 211H of the Companies Act requires that the shares of existing shareholders be divested. However, there is currently no procedure to compulsorily divest shareholders of their shares as part of a scheme of arrangement. As such, the cram down mechanism is dependent on the voluntary divestment of shares by shareholders in order to cram down unsecured creditors; this may be difficult to achieve in practice.

Section 70(4)(b)(ii)(B) of the Omnibus Act re-enacts section 211H of the Companies Act but eliminates the requirement that shareholders be divested of their shares in the company if unsecured creditors are to be crammed down. The new provision does this by expressly stating that no member shall ‘retain any property of the company on account of . . . the member’s interest’, replacing the current restriction (per section 211H4(b((ii)(B) of the Companies Act) against a member retaining ‘any property on account of . . . the member’s interest’, which would include the members’ shares. This confirmed the position outlined in parliament in 2017 that the cram down provisions were not concerned with adjustments to shareholder interests,^[2] and addresses the procedural issue preventing the operation of the cross-class cram down.

Appointment of judicial managers by resolution of creditors

Under existing Singapore legislation, a company may only be placed under judicial management by an order of court.^[3] The Omnibus Act provides an alternative option for a company to be placed under judicial management by a resolution of the company’s creditors for the company to be placed under judicial management (section 94).

A resolution to place the company under judicial management pursuant to section 94 must, among other things, be approved by a majority in number and value of the creditors of the company present and voting on the appointment of a person as a judicial manager.

Assignment of proceeds of action

The Omnibus Act provides judicial managers and liquidators with the power to assign proceeds of actions involving undervalue transactions, unfair preferences, extortionate credit transactions, fraudulent or wrongful trading, or delinquent company officers, to third parties (section 144 and paragraph (f) of the First Schedule).

It is envisaged that this power of assignment will allow judicial managers and liquid­ators to assign the proceeds of the action to third parties in exchange for funding of the court actions. This new method of funding may improve the chances of such action being pursued, with the potential benefit of providing higher recovery to all stakeholders in the event the action is successful.

Voidable transactions in corporate insolvency

Voidable transactions in the context of corporate insolvency are now separately dealt with in sections 224 to 229 of the Omnibus Act. In contrast, and under existing Singapore legislation, the provisions relating to voidable transactions are largely found in the Bankruptcy Act. The Companies Act provides that those provisions also apply, with the necessary modifications, in the case of corporate insolvency.

Wrongful trading

Under existing Singapore legislation, civil liability for insolvent trading only arises where there has been a criminal conviction.^[4] The Omnibus Act introduces a new ‘wrongful trading’ provision (section 239), which provides that a company ‘trades wrongfully’ if it incurs debts or other liabilities when insolvent (or becomes insolvent as a result of incurring debts or other liabilities), without reasonable prospect of meeting such debts or other liabilities in full.^[5]

In particular, section 239(1) further provides that a judicial manager, liquidator or creditor or contributory of the company may apply to the court for an order declaring that any person who was a party to the company trading wrongfully is personally liable for any or all of the debts or other liabilities of the company if that person:

• knew the company was trading wrongfully; or
• as an officer of the company ought, in all the circumstances, to have known that the company was trading wrongfully.

It is no longer necessary to establish criminal liability for this provision to apply.

Section 239(1) may potentially be used against directors, employees or counterparties of the company if they were a party to the company trading wrongfully, and the quantum of liability may be very significant. The Omnibus Act provides some safeguard against the potential risks to such parties under this provision. In this regard, any person party to or interested in becoming party to the carrying on of the business of the company may apply to the court for a declaration as to whether a particular course of conduct, transaction or series of transactions of the company at the time of and after such application would constitute wrongful trading.^[6] Such a declaration may include provisions to ensure the confidentiality or publication of the declaration.^[7]

Restriction to ipso facto clauses

The Omnibus Act will restrict the enforceability and operation of ipso facto clauses (section 440), which is a new development in Singapore law. Under existing Singapore legislation, there are no restrictions on the use of ipso facto clauses on the formal insolvency of a company.

In the insolvency and restructuring context, ipso facto clauses are clauses that permit a contracting party to terminate, amend or accelerate payment under an agreement solely upon the other contracting party’s insolvency or occurrence of insolvency-related proceedings (ie, applications for moratorium, judicial management and schemes of arrangement). For example, this means that lenders cannot terminate, amend or accelerate facility agreements simply because of the borrower’s insolvency or the occurrence of insolvency-related proceedings involving the borrower.

However, parties who may wish to enforce ipso facto clauses can do so with the leave of court, if the court is satisfied that the operation of section 440 would cause ‘significant ­financial hardship’ to the applicant (section 440(4)). It remains to be seen what circumstances the Singapore courts will construe as ‘significant financial hardship’, although guidance may be sought from Canadian legislation as a similar phrase is used in the Canadian Bankruptcy and Insolvency Act^[8] and Canadian Companies’ Creditors Arrangement Act.^[9]

Counterparties will not be precluded from exercising contractual rights on other sub­stantive grounds, such as non-payment or non-performance by the insolvent company. Lenders are still permitted to exercise their termination rights based on other events of default, such as default in payment or breach of financial convenants.

Certain types of contracts are exempted from this section.^[10] These include any eligible financial contracts that may be prescribed, ship charters and contracts that are likely to affect the national or economic interest of Singapore (eg, government contracts).

Memoranda of understanding with two US bankruptcy courts

The Supreme Court of Singapore signed memoranda of understanding with the United States Bankruptcy Court for the Southern District of New York and with the United States Bankruptcy Court for the District of Delaware on 24 September 2018.^[11] The memoranda aim to improve the efficiency and effectiveness of transnational insolvency proceedings by encouraging cooperation between the Supreme Court of Singapore and the two US bankruptcy courts.

This ‘whole of government’ approach (ie, the Omnibus Act and the memoranda of understanding) enhances Singapore’s standing as an attractive forum for corporate insolvency and debt restructuring.

Key Cases

Enhanced moratorium

The High Court of Singapore, in the case of Re IM Skaugen SE and other matters [2018] SGHC 259 (Skaugen), had the opportunity to consider the provisions of an enhanced moratorium under a proposed scheme of arrangement as well as an intention to propose a scheme of arrangement.

In Skaguen, there were three applicants: a Norwegian parent company, IM Skaugen SE, and its two Singapore subsidiaries, SMIPL Pte Ltd and IMSPL Pte Ltd. The applicants belonged to a group of companies comprising other foreign and local companies. The overall group was facing financial difficulties and this led to the applications by the three applicants.

The applicants sought an enhanced moratorium under section 211B(1) of the Companies Act for the purposes of allowing the two subsidiaries to propose a scheme of arrangement to their respective creditors, as well as for the parent companies to allow their own creditors (ie, creditors of the parent) to consider the intended scheme.

Most of the creditors of the applicants either supported the intention to propose a scheme or kept a neutral stand. On the other hand, MAN Diesel & Turbo SE, which was a significant and majority creditor of IMSPL Pte Ltd, objected to the application on the basis that since they would not agree to any scheme that is eventually proposed, the application for a moratorium would be ‘doomed to fail’. Notwithstanding the objections, the court allowed a moratorium for a period of three months.

Although the applicants were separate legal personalities, they were nonetheless part of a group, and the court was persuaded by the position of the other creditors from the standpoint of the group rather than from the standpoint of the individual companies.

The court clarified that when considering section 211B(4) in the context of support from the creditors, it did not matter whether a scheme was already proposed or about to be proposed. In either case, there must be evidence of support from the creditors in an appli­cation seeking a moratorium. However, the support that has to be considered is different, and this is because, in the case of a scheme that is about to be proposed, there is no scheme to be supported. In such instances, the support to be considered is the support for a moratorium for the intention of eventually proposing a scheme.

The court also clarified that the extraterritorial effect of a moratorium applies to parties that are within the in personam jurisdiction of the Singapore court, similar to how anti-suit injunctions are made and enforced, and that it is in relation to a specific act or acts of a specific party based in Singapore or within the jurisdiction of the court.

The court also said that the legislation allows it to make conditions attached to the moratorium and that these include requiring the appointment, at the debtor’s or creditor’s costs, of a monitoring accountant or a chief restructuring officer who would be answerable to the court and directed to report to the creditors, enlisting the help of an experienced insolvency mediator to develop the restructuring plan, whether it be an individual or group restructuring plan.

Recognition of foreign insolvency

The High Court of Singapore, in Re Zetta Jet Pte Ltd and others (Asia Aviation Holdings Pte Ltd, Intervener) [2019] SGHC 53 (Zetta), had the opportunity to consider the recognition of foreign insolvency.

In Zetta, certain shareholders of the company obtained an injunction in Singapore prohibiting the company and its remaining shareholders from commencing any bankruptcy proceedings in the US. In breach of the injunction, the company proceeded with a US Chapter 11 action that was then converted into US Chapter 7 action. The company then applied to the High Court of Singapore seeking a recognition of the US Chapter 7 proceedings under the Model Law.

The High Court initially rejected the application on the grounds that it would be contrary to public policy to make such a recognition since there were breaches of the injunction made by the Singapore court. However, the High Court allowed a very limited recognition of the US Chapter 7 proceedings solely to allow the applicants to set aside the injunction and its related applications.

Subsequently, there was a consensual discharge of the injunction, which led to a further application by the company for a recognition of the US Chapter 7 proceedings. This time, the court allowed the application.

In making its decision, the court dealt with some of the articles under the Model Law, some of which are summarised below.

Under article 17, the court must recognise the foreign proceeding if the requirements under article 17 are met. For the purposes of article 17, the foreign proceeding has to be the foreign main proceeding, and to establish that, one has to look at where the debtor has its centre of main interests (COMI). In Zetta, the High Court held that the COMI of Zetta Jet Singapore was in the US, and accordingly, the US Chapter 7 proceeding was the foreign main proceeding. In this regard, the Court also held that the relevant date for the purposes of considering the COMI was the date of the application for recognition, as opposed to the date of the foreign proceeding.

Also, when considering the COMI, the court is to look at the place where ‘the primary commercial decisions are made for the debtor’. While this would generally be the place of registration of the debtor, this is only a presumption under article 16(3) of the Model Law and this presumption is a mere starting point that can be displaced by other factors before the court. It is not a presumption that has to be rebutted by evidence on a balance of probabilities. The court would therefore start with the presumption that the registered office is the COMI and then look at factors that point the COMI away from the place of registration to some other location. The factors that are to be considered are those that are ‘objectively ascertainable by third parties’, with a focus on creditors and potential creditors.

The relevant date for the purposes of considering the COMI is the date of the filing of the application for recognition of the foreign proceeding. The court thus followed the US position over the European position (date of commencement of foreign insolvency proceeding) and Australian position (date of hearing of the application for recognition of foreign proceeding).

The court also dealt with the factors to be taken into account when considering the COMI of a company, and these include the location from which control and direction was administered, the location of clients, creditors, employees and operations, dealings with third parties and the governing law.

Notes