Adapting Singapore’s Insolvency Regime In Covid-19 Times
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This article examines the key changes to Singapore’s insolvency regime following the introduction of its omnibus legislation (IRDA), against the backdrop of the covid-19 pandemic. It highlights recent legislative developments, local cases of interest and the impact of Singapore’s covid-19 laws on insolvency and restructuring. It also considers the latest trends and preferences of corporate debtors, with a view to considering the market’s response to the IRDA, which was introduced in line with Singapore’s aim to become the forum of choice for debt restructuring.
- Legislative developments: introduction of the IRDA Amendment Act
- Additional measures to assist distressed companies in view of the pandemic
- Covid-19 laws and their impact on the insolvency regime
- Effectiveness of temporary measures and potential risks upon their expiry
- Lessons to be learnt from recent cases
- Latest trends: foreign debtors eyeing Singapore’s restructuring offering
Referenced in this article
- Insolvency, Restructuring and Dissolution Act No. 40 of 2018
- Insolvency, Restructuring and Dissolution (Amendment) Act No. 39 of 2020
- Insolvency, Restructuring and Dissolution (Amendment) Act 2020 (Commencement) Notification 2021
- COVID-19 (Temporary Measures) Act No. 14 of 2020
- Insolvency, Restructuring and Dissolution (Debt Repayment Scheme) Regulations 2020
- Companies Act
- Sun Electric
- Superpark Oy v Super Park
Insolvency laws are highly jurisdiction specific. Most territories have their own unique sets of rules, despite being driven by the universal aim to provide distressed companies with a conducive environment to settle their financial woes.
Singapore’s stance on insolvency is no different. With the Insolvency, Restructuring and Dissolution Act No. 40 of 2018 (IRDA) taking effect on 30 July 2020, Singapore has strived to provide a robust framework for debt restructuring and to establish itself as the forum of choice for foreign debtors.
Not even the outbreak of the covid-19 pandemic has slowed Singapore’s progress in implementing the new IRDA; with the swift introduction of schemes to assist affected companies, covid-19-related legislation and amendments to the IRDA, Singapore has been proactive in its attempts to soften the blow of the global pandemic with its forward-looking insolvency regime.
This article will examine the latest legislative developments in Singapore’s insolvency regime, local cases of interest and the impact of the pandemic on restructuring and insolvency, with a view to analysing the reception of the IRDA to date.
Simplified Insolvency Programme
The covid-19 pandemic seemingly came out of nowhere and brought with it a slew of lockdowns and other related restrictions. With the economy struggling to cope with the onslaught of the pandemic, smaller businesses have emerged as obvious victims.
In response to those extraordinary circumstances, Singapore was quick to amend the IRDA within months of its implementation through the Insolvency, Restructuring and Dissolution (Amendment) Act No. 39 of 2020 (the IRDA Amendment Act), the relevant provisions of which came into force on 29 January 2021. While the IRDA is geared towards companies with substantial assets, the IRDA Amendment Act facilitates the liquidation and restructuring of small and micro companies (MSCs) through the introduction of the Simplified Insolvency Programme (SIP).
The SIP is a simplified, quicker and low-cost route for MSCs to restructure their debt or be wound up. In particular, for viable MSCs with a hopeful future, the Simplified Debt Restructuring Programme (SDRP) serves as an improvised form of the existing pre-packaged scheme of arrangement (SOA) under Part 5 of the IRDA; while the latter is an option available to corporate debtors in general, the SDRP is exclusive to qualifying MSCs.
The key features of the SDRP are that:
- only one court application is required for the scheme to be sanctioned (as opposed to two court applications for the traditional SOA in the IRDA, one being for leave to convene a creditors’ meeting and another for the scheme’s sanction);
- the approval of two-thirds of creditors in value (with no requirement of a majority in number) is required under the SDRP compared to a majority in number representing 75 per cent in value needed for the approval of the traditional SOA under the IRDA (although under the SDRP, votes of related parties will be disregarded); and
- a temporary moratorium and restriction on ipso facto clauses will come into force until the date of the MSC’s discharge from the SDRP.
Once a company has been accepted to the SDRP, the official receiver will appoint a restructuring adviser (an experienced insolvency practitioner) to formulate a compromise, and a deposit of S$18,750 will be collected from all applicants to defray the costs. The company will be guided through the restructuring process with a view to completing the SDRP within three months.
The SIP also covers clearly unsustainable MSCs that are faced with the reality that there is no better alternative than to be liquidated. For those companies, the Simplified Winding-Up Programme (SWUP) provides a shorter, smoother runway to being wound up at minimal costs.
As a starting point, to avail themselves of the SWUP, applicants must be qualifying MSCs. The SWUP is modelled after the creditors’ voluntary winding-up regime under Part 8 of the IRDA; however, unlike the latter regime, which is open to corporate debtors in general, the SWUP, which is open only to qualifying MSCs, does not require a court application to commence the winding-up process.
Under the SWUP, companies may skip ahead of additional steps, such as distribution of dividends, provided that the liquidator is of the view that the company has insufficient assets to satisfy its liabilities and there is no need for further investigation into its affairs. To enter into the SWUP, an application must be made to the official receiver by the applicant company, accompanied by a special resolution authorising the company’s impending winding up and a statement of affairs showing the applicant company’s inability to satisfy its liabilities.
Once a company’s application has been accepted, the SWUP essentially streamlines the traditional winding-up process as there is no need for a creditors’ meeting to be convened, and the official receiver is automatically appointed as the liquidator. A small deposit of S$2,700 is also payable, along with an application fee of S$450.
To be eligible for the SIP, an MSC must have 30 or fewer employees, 50 or fewer creditors, a maximum liability of S$2 million and a maximum annual sales turnover of S$10 million. The SWUP further requires that the value of an MSC’s realisable unencumbered assets not exceed S$50,000. In addition to those basic requirements, the applicant MSC must be a company incorporated in Singapore and must have been a suitable candidate for SIP (without other live court applications or orders to wind up or restructure the company, provided that the restructuring or winding up was not expected to require significant resources or specialised expertise). The duration of the SIP was stated to be six months from the commencement of the IRDA Amendment Act, ending on 28 July 2021.
Sole Proprietors and Partnerships Scheme
Although Singapore has made great strides in its recovery from the covid-19 pandemic, it has had several mini-lockdowns and new restrictions in areas where clusters of covid-19 infections have emerged to prevent a full-blown outbreak. As Singapore moves forward with its controlled reopening, sole proprietors and smaller partnerships continue to face potential insolvency.
To help shoulder the burden for those businesses and to complement the SIP, the Association of Banks in Singapore and the Ministry of Law jointly launched the Sole Proprietors and Partnerships Scheme (SPP), which commenced on 2 November 2020. Under the SPP, qualifying businesses will be allowed to pay lower monthly instalment payments for unsecured debts, with an extension of the repayment period by up to eight years. Interest rates for the restructured loans, subject to the underlying loan’s contractual terms, may be subject to a maximum of 7 per cent interest per annum.
Sole proprietors and partnerships that are likely to bounce back – although they may currently be struggling to return to pre-pandemic productivity levels – if given time and concession for their loan repayments are the most suitable candidates for the SPP. Their total unsecured debts cannot exceed S$1 million, and they must owe unsecured debts to two or more lenders.
Businesses may also avail themselves of the Extended Support Scheme – Standardised of the Monetary Authority of Singapore, through which they may defer 80 per cent of the principal repayments on their secured loans, hire purchase agreements and loans granted under the loan schemes of Enterprise Singapore (ESG).
The Extended Support Scheme – Customised (ESS-C) goes one step further: it facilitates the restructuring of the credit facilities of small and medium-sized enterprises (SMEs) across multiple banks and companies where the SIP and the SPP are not applicable. Those SMEs could apply for the ESS-C with any of their lending banks or finance companies from 2 November 2020.
Given the unprecedented amount of government stimuli, most businesses have found a way to adapt to the ‘new norm’; however, Singapore’s calibrated resumption of economic and social activities, social distancing and travel restrictions continue to impact many sectors.
For businesses grappling to meet their contractual obligations, the Re-Align Framework, which commenced on 15 January 2021, provides much-needed respite. The Re-Align Framework allows for selected contracts to be renegotiated by way of mutual agreement with the counterparties. If they are unable to come to an agreement, the contract may then be terminated within certain parameters. Although liability for outstanding obligations will remain, parties can dodge payment of termination penalties.
Covid-19 impact on restructuring and insolvency
Apart from the IRDA and other developments geared specifically towards insolvency, another milestone enactment that cannot be ignored is Singapore’s legislative response to the covid-19 pandemic, the COVID-19 (Temporary Measures) Act No. 14 of 2020 (the COVID Act), which was passed by Parliament on 7 April 2020. The Act deals with a plethora of issues, including the institution of crucial measures to support businesses that were caught off guard by the pandemic.
It comes as no surprise that the insolvency regime was at the top of the legislative agenda in the formulation of the COVID Act. The government has clearly shifted its focus (albeit temporarily) to favour the debtor to stave off a situation where large numbers of businesses are forced into insolvency under the pandemic’s crushing financial toll. It is also interesting that the COVID Act refers to both the current IRDA regime as well as some relevant provisions under the pre-IRDA era (eg, the Bankruptcy Act and certain provisions of the Companies Act) that are likely to cover legacy issues and provide for a less turbulent transition.
The COVID Act increased the thresholds for personal and corporate insolvency. In terms of personal insolvency, the threshold to commence bankruptcy proceedings against a debtor was raised from S$15,000 to S$60,000 under the COVID Act. Pursuant to the Debt Repayment Scheme (DRS), debtors with unsecured debts not higher than S$150,000 may avoid bankruptcy if the official assignee deems the debtor a suitable candidate. The threshold to qualify for the DRS was also raised in the COVID Act from S$150,000 to S$250,000, and the time for an individual debtor to respond to a statutory demand was increased from 21 days to 6 months. Those measures appear to have had the intended effect as it was reported that the number of bankruptcy applications reached record low levels as at February 2021.
In respect of corporate insolvency, the threshold for when a company is deemed to be unable to pay its debt was increased from S$15,000 to S$100,000. Further, the period before a company is deemed to be unable to pay its debts (if no payment is made in respect of the debt demanded in the statutory demand by a creditor) increased from 3 weeks from the date of service of a statutory demand to six months.
Crucially, the COVID Act prescribed that directors are relieved from their obligation to prevent the company from trading while insolvent, as long as the debts are incurred in the company’s ordinary course of business; however, the COVID Act does not absolve directors of criminal liability if the debts are incurred fraudulently.
Finally, the COVID Act provides relief from legal and enforcement actions (including corporate and personal insolvency proceedings) for those who are unable to perform their contractual obligations in respect of specified types of contracts when the inability is materially caused by the pandemic.
The above measures only apply to individual and corporate insolvency applications made on or after the commencement of Part 3 of the COVID Act (which is aimed at temporary relief for financially distressed individuals, firms and other businesses) on 20 April 2020. There is also no requirement set out in the COVID Act for an individual or corporate debtor to demonstrate that he or she is unable to satisfy the debt as a result of the advent of the pandemic before the measures in respect of the higher thresholds under the insolvency regime apply. The measures introduced in the COVID Act in respect of introducing higher thresholds under the insolvency regime ended on 20 October 2020, without any extension.
While the government extended the relief period from legal and enforcement actions for inability to perform contractual obligations, it declined to do so for the measures discussed above in respect of the thresholds concerning the insolvency regime. Accordingly, it is expected that the number of insolvency cases will begin to rise this year.
Statistics released by the Insolvency Office of the Ministry of Law have shown that since the relief period for the insolvency regime ended in October 2020, the figures for the number of bankruptcy cases have been steadily increasing. Researchers have also cautioned that the gradual phasing out of the strong government measures originally put in place in 2020 could result in a delay of insolvencies from 2020 and drive Singapore’s insolvency numbers up in the near future. It remains to be seen if the pandemic may cause further relief measures that impact the insolvency regime to be enacted.
There remains the risk that, once the temporary protections under the COVID Act are lifted, a ‘legal epidemic’ may set in, where parties seek to enforce contractual obligations hitherto suspended. This is where the IRDA’s rule against ipso facto clauses under its section 440 plays a critical role in mitigating the dire effects of the legal epidemic.
Section 440 of the IRDA has been dubbed as the ‘single most controversial aspect of the reforms’; it serves to prevent parties to a contract with a company from asserting their rights merely because the company is insolvent. Prior to the IRDA, there was no such restriction, and it was commonplace to see those clauses being expressly embedded in contracts to serve as an added protection to contractual parties in the event of insolvency. The timely introduction of section 440 serves to remove this contractual time bomb, giving distressed companies some leeway to conduct their restructuring without any obstructions (eg, accelerated repayments).
Local cases of interest
Despite the ongoing pandemic, the development of Singapore’s jurisprudence in relation to insolvency continues apace, as illustrated by several landmark decisions made by the nation’s highest court. In this article, we examine two cases to shed some light on the application and interpretation of the insolvency laws going forward.
In Sun Electric Power Pte Limited v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd) (Sun Electric), the appellant, Sun Electric Power Pte Ltd (SEPPL), applied to place itself in judicial management and interim judicial management. The respondent, RCMA Asia Pte Ltd (RCMA), objected to both applications, and both applications were eventually dismissed by the court.
The court ordered a sum of S$11,500 in costs to be paid by SEPPL to RCMA. RCMA issued a statutory demand to SEPPL’s registered office to demand for payment of the costs plus interests (the statutory demand). On the 22nd day after service of the statutory demand, SEPPL paid S$3,000 into RCMA’s solicitors’ client account, thus reducing the outstanding balance to S$8,568.88. RCMA filed an application for SEPPL to be wound up.
A winding-up order was made against SEPPL at first instance on the basis that SEPPL was deemed unable to pay its debts and was insolvent under sections 254(2)(a) and (c) of the Companies Act. SEPPL appealed against the winding-up order under the direction of its sole director.
The key issues for determination before the Court of Appeal, and the Court’s ultimate answers, were, among other things:
- whether the sole director had the standing to bring the appeal, as SEPPL’s directors would be functus officio upon its winding up; and
- whether the court at first instance had erred in finding that SEPPL was deemed unable to pay its debts and was insolvent under the Companies Act.
In respect of (1), the Court of Appeal clarified that the sole director was able to bring the appeal. In particular, it found that a company has the right to appeal a winding-up order even without leave of court, and its directors or shareholders have the right to control the conduct of the appeal, subject to two general rules:
- the directors or shareholders controlling the conduct of the appeal should expect to pay any costs incurred by the company in prosecuting the appeal out of their own pockets, instead of using the funds of the company, and if the appeal succeeds, the directors or shareholders can reclaim from the company the funds that they had expended from their own pockets in prosecuting the appeal; and
- the directors or shareholders controlling the conduct of the appeal should expect to be personally responsible for the payment of any party and party costs awarded in favour of the respondent if the appeal fails.
In respect of (2), the Court of Appeal found that SEPPL was insolvent on the evidence. In this regard, the courts have traditionally applied both the cash flow test and the balance sheet test to assess the solvency of a company. In the present case, the Court of Appeal clarified that the cash flow test is the only test under section 254(2)(c) of the Companies Act to determine whether a company is unable to pay its debts.
The cash flow test assesses whether the company’s current assets exceed its current liabilities such that it can meet all debts as and when they fall due. ‘Current assets’ and ‘current liabilities’ refer to assets that will be realisable and debts that will fall due within a 12-month time frame, as this is the standard accounting definition for those terms. The Court of Appeal also provided a non-exhaustive list of factors to consider under the cash flow test (which may be found at paragraphs 50 to 69 of the judgment).
The Court also observed that where a company makes partial payment of the debt demanded in a statutory demand within the prescribed three-week period such that the remaining amount payable falls below S$10,000 (being the threshold amount for presumption of inability to pay), the company should not be deemed unable to pay its debts pursuant to section 254(2)(a) of the Companies Act.
The Court of Appeal’s decision in Sun Electric is a noteworthy departure from the traditional approach of the cash flow and balance sheet tests in determining insolvency under section 254(2)(c) of the Companies Act. The Court of Appeal’s confirmation of the cash flow test as the sole applicable test going forward makes Sun Electric an important and useful reference for practitioners and commercial entities alike. The safeguards laid down by the Court of Appeal are also a welcome judicial response against errant directors and shareholders who seek to deplete company funds through an unmeritorious appeal, when the funds ought to be better applied towards paying off the company’s creditors.
Superpark v Super Park
The appellant in Superpark Oy v Super Park Asia Group Pte Ltd and others (Superpark v Super Park), Superpark Oy (Superpark), was the 78.33 per cent majority shareholder of the first respondent, Super Park Asia Group Pte Ltd (SPAG). SPAG’s other owners are Treasure Step Global Limited (Treasure) and Vintex Oy (Vintex). Kumarasinhe is a director and shareholder of Treasure.
In light of a deteriorating relationship, Kumarasinhe tabled a board resolution over a Zoom meeting to put SPAG in provisional liquidation without notice. The resolution passed despite Superpark’s objections. Superpark commenced an action for, among other things, a declaration that the provisional liquidation and any voluntary winding up of SPAG be terminated at an extraordinary general meeting of SPAG. It also filed applications for:
- an injunction to restrain the provisional liquidators from taking any further steps in the provisional liquidation of SPAG; and
- the injunction against itself, which the provisional liquidators had obtained to restrain Superpark from taking any action inconsistent with SPAG’s provisional liquidation, to be lifted.
The judge at first instance, among other things, allowed the provisional liquidators to continue with their efforts to dispose of SPAG’s assets. Superpark was to, within a set amount of time, either put SPAG in judicial management or secure other means to restructure or rehabilitate SPAG, failing which the court would allow the liquidation process of SPAG to continue to its conclusion. Superpark appealed against this decision.
The Court of Appeal allowed the appeal and held that SPAG had never been put into liquidation and that the provisional liquidators should not have been allowed to dispose of the company’s assets. The key question for determination was whether the creditors of a company had the capacity to voluntarily wind up a company if no special resolutions to that effect were passed by the company’s members. The Court answered this in the negative, with the following reasoning:
- it is clear from the plain and unambiguous wording of section 290(1) of the Companies Act that a company may only be wound up voluntarily if the Constitution provides a certain time frame to do so or a special resolution is passed;
- allowing a company to be voluntarily wound up by its creditors in the absence of a member’s special resolution is at odds with the notion of voluntariness; and
- to allow creditors to voluntarily wind up the company would render section 290(1)(b) of the Companies Act otiose; there would be no need for the passing of a special resolution by the company’s members if creditors had the power to wind up the company voluntarily.
Although Superpark v Super Park considers provisions under the pre-IRDA insolvency regime, it stands as good authority in shedding light on the interpretation of the in pari materia provisions of the IRDA (ie, creditors have no means to voluntarily wind up a company without a special resolution from the company to that effect). The Court of Appeal’s clarification on the relevant winding-up provisions in Superpark v Super Park is much welcomed; without it, any meaningful distinction between a compulsory and voluntary winding-up would be rendered futile.
On the topic of notable insolvency precedents, Hyflux’s restructuring, being one of the most high-profile local insolvency cases, also cannot be overlooked. The case was adjourned an unprecedented 12 times as at October 2020.
Although the delays may affect Singapore’s reputation as a speedy forum for foreign debtors to conduct their restructuring, it does appear that the judicial process ‘left no stone unturned’ in the Hyflux case.
On a closing note, a discussion of the trends in insolvency in Singapore will be incomplete without considering the industry’s initial response to the IRDA, which has been in place for only one year as at July 2021. Companies have generally shown a preference for the SOA, which can be reasonably attributed to the availability of the enhanced moratorium, cross-class cramdown and formal proof of debt mechanisms. Market consensus shows that the SOA is a particularly appealing option for less contentious restructurings, where there are high levels of support from the creditors.
The SOA has also proven to be popular among foreign debtors, with Indonesian companies increasingly looking to Singapore to carry out their restructuring using IRDA’s SOA. Credit must be given to Singapore’s flexibility in applying its substantial connection test, which is a prerequisite that foreign companies must satisfy before embarking on insolvency in Singapore.
Although a list of factors has been provided that would support a determination of substantial connection, the Singapore courts have applied the ejusdem generis approach to statutory interpretation, confirming that the enumerated factors were not exhaustive. The courts rationalised that the presence of business activity, control or assets with some degree of permanence in Singapore would suffice.
Overall, it appears that the IRDA could not have come at a better time, leaving Singapore well equipped to meet the increase in demand for debt restructuring during the covid-19 pandemic.
 Insolvency, Restructuring and Dissolution (Amendment) Act 2020 (Commencement) Notification 2021.
 Sections 4 and 5 of the IRDA Amendment Act.
 Section 4 of the IRDA Amendment Act.
 Section 5 of the IRDA Amendment Act
 Ministry of Law press release, ‘Sole Proprietors and Partnerships (SPP) Scheme launched to help businesses in financial distress’ (1 November 2020).
 Ministry of Law, ‘Re-Align Framework to Renegotiate Contracts for Businesses Significantly Impacted by COVID-19’.
 Section 311(1)(a) of the IRDA.
 Section 21(1)(d) of the COVID Act.
 Section 289(2)(a) of the IRDA, read with Regulation 4(1) of the Insolvency, Restructuring and Dissolution (Debt Repayment Scheme) Regulations 2020.
 Section 21(1)(a) of the COVID Act.
 Section 312(a)(i) of the IRDA.
 Section 21(1)(e) of the COVID Act.
 Joyce Lim, ‘Bankruptcy cases in Singapore at 5-year low amid Covid-19 relief measures’, The Straits Times (1 February 2021).
 Section 125(2)(a) of the IRDA.
 Section 23(1)(a) of the COVID Act.
 Section 125(2)(a) of the IRDA.
 Section 23(1)(b) of the COVID Act.
 Section 23(2) of the COVID Act.
 Part 2 of the COVID Act.
 Ministry of Law, ‘Number of Bankruptcy Applications, Orders Made and Discharges as at 30 June 2021’. See also Ministry of Law, ‘Companies in Compulsory Liquidation’ for compulsory corporate winding up statistics
 Theo Smid and Iulian Ciobica, ‘2021: A turn of the tide in insolvencies’, Atradius (24 March 2021).
 VK Rajah and Goh Yihan, ‘The Covid-19 pandemic and the imminent legal epidemic’, The Straits Times (7 May 2020).
 Paul Apathy, Emmanuel Duncan Chua and Rowena White, ‘Singapore’s New “Omnibus” Insolvency, Restructuring and Dissolution Bill’, Law Gazette (January 2019).
 Meiyen Tan and Keith Han, ‘A Comparative Look at the Ipso Facto Regime’, SAL Practitioner 12 (16 April 2021).
 Sun Electric Power Pte Limited v RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd)  SGCA 60.
 Companies Act (Chapter 50) (now sections 125(2)(a) and (c) of the IRDA).
 The balance sheet test compares a company’s total assets with its total liabilities.
 Now section 125(2)(c) of the IRDA.
 Superpark Oy v Super Park Asia Group Pte Ltd and others  SGCA 8.
 Now section 160(1) of the IRDA.
 Sections 160 and 161(6)(a).
 Stefania Palma and Leo Lewis, ‘Court delays hit Singapore’s bid to be global restructuring hub’, Financial Times (16 October 2020).
 KC Vijayan, ‘Singapore well-placed to meet rise in debt restructuring demand amid Covid-19’, The Straits Times (9 November 2020).
 Meiyen Tan, Keith Han, Angela Phoon and Zephan Chua, ‘Recent Developments in Singapore’s Restructuring Regime’, Global Restructuring Review (16 November 2020).