2017 Insolvency and Corporate Reorganisation Report: Singapore

Author: | Published: 25 Apr 2017
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www.blackoak-llc.com

SECTION 1: Market overview

1.1 What have been the recent bankruptcy and reorganisation trends or developments in your jurisdiction?

The impact of the downturn in the oil and gas sector in the last few years has been keenly felt across the world. With an increasing number of energy-related businesses (in Singapore and elsewhere) facing insolvency and considering reorganisation processes, Singapore has accelerated its push to become an international centre for debt restructuring. This is evinced by the recent universalist attitude of the courts as well as the recently passed amendments to the Companies Act (Cap.50) (CA) – which will come into force soon after March 2017, which has bolstered the rehabilitation options and assistance for cross-border insolvencies.

1.2 Please review some recent important cases and their impacts in terms of precedents or shaping current thinking.

Pacific Andes Resources Development [2016] SGHC 210 demonstrated the courts' universalist approach. Here, the High Court used statutory provisions relating to schemes of arrangement to impose a moratorium over proceedings in Singapore being brought against a Bermudan company which was listed on the Singapore stock exchange. In making its decision, the Court recognised that the application was part of an ongoing global restructuring, including efforts in Peru and the US, and was not minded to unduly stymie these efforts.

Re Opti-Medix (in liquidation) [2016] SGHC 108 was another case emblematic of the universalist trend. This was an application to recognise the Japanese bankruptcy-trustee of two companies incorporated in the British Virgin Islands. Instead of narrowly focussing on the companies’ place of incorporation, the High Court allowed the application on the basis that the bankruptcy-trustee was duly appointed in the companies’ Centre of Main Interest (Comi), which was Japan. Re Opti-Medix is thus the first Singapore decision to expressly endorse the Comi test.

Re Gulf Pacific Ltd (in creditors' voluntary liquidation) [2016] SGHC 287 was the first decision to recognise foreign liquidators appointed in a foreign company's creditors' voluntary liquidation. Whereas previous recognition orders had only been granted in the context of compulsory liquidation, the High Court was not minded to distinguish between the precise modes of liquidation and expressly emphasised the primacy of universalist over territorial concerns in its decision.

SECTION 2: Processes and procedures

2.1 What reorganisation and insolvency processes are typically available for financially troubled debtors in your jurisdiction?

Distressed debtors have four options.

First, they may apply for liquidation. This is a voluntarily or compulsorily initiated process within which the assets of the company are realised so that the proceeds may be applied to meet its debts, and typically concludes with the dissolution of the company. As a result, the company's business usually ceases to carry on upon liquidation.

Second, an insolvent company, its directors or any creditor may apply for judicial management if there is a reasonable probability of rehabilitation or preservation of the company as a going concern, or if the interests of creditors are better served than in liquidation. The court may then appoint judicial managers to oversee the affairs of the company if it is likely to achieve: the survival of the company, in whole or part, as a going concern, or the approval of a rehabilitation plan, or a more advantageous realisation of assets than on liquidation.

Third, a distressed debtor may utilise a scheme of arrangement (scheme) under section 210 CA, to seek a compromise or reorganisation arrangement between a class of creditors and the company.

Lastly, a receiver may be appointed as an alternative to liquidation, by a debenture holder. Under a receivership, a company may continue to exist even while the receiver collects and realises assets subject to the debenture to meet the debts owed. However, it may be possible for a receiver to be concurrently appointed as a manager of the business of the company, with a view towards the eventual disposing of the business of the company as a going concern.

2.2 Is a stay on creditor enforcement action available?

Moratoriums on legal proceedings against the company are available for each of the liquidation, judicial management or scheme processes. However, they differ slightly in terms of operation. For liquidation, the stay must be applied for vis-à-vis a specific proceeding prior to the winding-up order but automatically kicks in after, subject to leave of court. Whereas, once judicial management is applied for, a stay is automatically imposed until the hearing and is renewed after judicial management is ordered, save for leave of the judicial manager or court.

Moratoriums in support of schemes are available for companies both before and after a scheme proposal has been made. With the former option, all that is required is to be shown is the applicant's intention to make such a proposal and once this is applied for, an interim stay lasting 30 days operates automatically. Subsidiaries which are necessary and integral to schemes, may also apply to be covered under existing stays for parent companies and all stay orders apply to anyone within the in personam jurisdiction of Singapore courts.

2.3 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?

While one of the tasks of a judicial manager is to formulate a compromise plan, in practice, the process is often long-drawn as judicial managers need time to get up to speed. The heavy, daily involvement of managing the business also incurs high costs. Thus, unless the steering of external professionals is needed, the ideal reorganisation process is a scheme outside judicial management.

Under section 210 CA, the scheme proposal must be voted on by a meeting of creditors, classed according to their interests. The voting threshold required is a majority in number, representing three quarters in value, of creditors present and voting and the Court holds final approval over the scheme. Some debtors may also be interested in the accelerated process under the section new 211I CA, which would allow the Court to sanction schemes agreed without a meeting.

2.4 How can a creditor or a class of creditors be crammed down?

Generally, a creditor may be crammed down if he is within a class of creditors which has voted in favour of the scheme by a majority in number and three quarters in value. Further, under the amended CA, the Court may order a cram-down when creditor approval is given to a scheme by at least one class of creditors, in accordance with the statutory requirements, but the scheme is dissented to by another. In this situation, the Court would be able to order that the scheme is binding on the dissenting class, subject to the scheme being "fair and equitable", and also that an overall majority in number of creditors and three-fourths in value of the creditors present (whether personally or by proxy) and voting at the meetings have agreed to the compromise or arrangement. This would not be the case if, for instance, the returns to the dissenting class of creditors is lower than what they would be likely to receive in liquidation.

2.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?

Liquidation and receivership are the typical choices.

2.6 What are the duties of directors of a company in financial difficulty?

Under ordinary circumstances, directors of a company owe general duties to the company including to act bona fide in its best interest. In an insolvency situation, these same duties are not just owed to the company but also to present and future creditors. Accordingly, there are statutory rules regulating the conduct of directors of insolvent companies, the breaches of which constitute criminal offences. For instance, under section 339(3) CA, directors may not contract a debt knowing that there is no reasonable prospect of the company's repayment. Under section 340(1) CA, directors who carry on the business of the company with the intention of defrauding creditors may be held personally liable, without limitation.

2.7 How can any of a debtor's transactions be challenged on insolvency?

Where an insolvent company undergoes liquidation or judicial management, it is open to the eventual liquidator or judicial manager to investigate all recent transactions leading to insolvency and avoid (or even claw-back value from) any transaction which affects the pro rata distribution of the assets of the insolvent estate to creditors thereby violating the pari passu principle. Transactions vulnerable to claw-back include: those entered into for no consideration or significantly less value in money terms; unfair preferences which intentionally place a creditor or guarantor in a better position upon the company's insolvency than before; credit transactions on extortionate or grossly unfair terms; creating floating charges for past value (ie within six months of liquidation); creating charges which are statutorily required to be registered but are not; onerous property; transfer of property to trustees for the benefit of all creditors; conveyance of property with intent to defraud creditors; contracting debts without reasonable expectation of payment; and fraudulent trading.

2.8 What priority claims are there and is protection available for post-petition credit?

Under section 328(1) CA, several claims take priority over the rest of other unsecured debt in the event of a winding-up. For instance, the first in this order of priority are the costs and expenses of the winding-up. This order of priority is utilised to lend protection for rescue financing. Under section 211E (1), an order could be sought to treat debt arising from rescue financing as part of the costs and expenses of liquidation. Alternatively, the Court could allow these debts to have super-priority over all other claims comprised under section 328(1).

Section 211E (1) also allows orders to be sought to secure the debt arising from rescue financing over company property, whether such property is currently unencumbered or otherwise. In fact, the Court need not order the debt to rank subordinate to the pre-existing security interest on the property, and may well allow such debt to have equal or higher priority over the existing security interest, if the credit is unable to be otherwise obtained and there is adequate protection for the existing security holder. These super-priority liens would even take priority over the claims of holders of debentures under floating charges and would be paid out of the assets comprised in that same floating charge if the assets to be realized to meet the super-priority liens, upon liquidation, are otherwise insufficient.

2.9 Is there a different regime for credit institutions and investment firms?

Licensed banks, finance companies or insurance companies do not generally have recourse to the same rehabilitation options. They are expressly barred from the judicial management regime and may only undergo schemes involving the transfer of their undertaking, with the consent of the Finance Minister and approval of the Court. The Uncitral Model Law, incorporated into Singapore law under the amendments to the CA, does not apply to Singapore financial institutions and relief under the Model Law is not to be granted, in any case, if incompatible with the Banking Act or the Payment and Settlement Systems (Finality and Netting) Act.

SECTION 3: International/cross-border issues

3.1 Can reorganisation or insolvency proceedings be opened in respect of a foreign debtor?

Foreign incorporated debtors may re-domicile themselves as Singapore companies in order to avail themselves of all restructuring processes under the Act. Alternatively, a company "liable to be wound up under [the] Act" and/or with a "substantial connection with Singapore" may avail itself of the judicial management, scheme and/or liquidation proceedings. Factors used in assessing this include whether Singapore is the Comi, whether the company has business or physical presence or substantial assets in Singapore and whether it has chosen Singapore law to govern transactions or otherwise submitted to its courts' jurisdiction.

3.2 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?

In addition to the courts' recent universalist approach, the incorporation of the Model Law ensures a common framework for recognition of foreign insolvency and reorganization proceedings with many jurisdictions including the USA, UK and Japan.

SECTION 4: Other material considerations

4.1 What other major stakeholders could have a material impact on the outcome of the reorganisation?

While the revised CA has bolstered the infrastructure for an organic reorganisation to take place between creditors and debtors, the Ministry for Trade and Industry may continue to be a key player behind the scenes if low oil prices and the downturn in the sector persist. Recognising the importance of the sector to Singapore's economy, the Ministry committed in November 2016, to provide short-term working capital to offshore marine companies by way of a bridging loan. More assistance may be forthcoming if the downturn persists and creditors and potential lenders alike shy away from providing the necessary tools for resuscitating distressed businesses.

SECTION 5: Outlook 2017

5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?

The recent legislative amendments have only just taken effect and they will clearly shape the development of the insolvency space in the year ahead. As a result of the bolstered reorganisation processes and reliefs, Singapore will become conducive and attractive to regional and global restructurings for both debtor-companies and creditors alike, many of whom will be availed of the processes and reliefs for the first time. Legal practitioners (both in Singapore and in other jurisdictions) will have to prepare themselves to handle test cases relating to the impact of the new provisions.

About the author
 

Ashok Kumar

Director, BlackOak

Singapore
T: +65 6521 6741
F: +65 6622 5920
E: ashok.kumar@blackoak-llc.com
W: www.blackoak-llc.com

Ashok Kumar has more than 20 years of experience in legal practice. His core practice area is corporate restructuring and insolvency and he leads this practice at BlackOak, handling both contentious and non-contentious aspects. He acts for companies, creditors, financial institutions, banks and insolvency professionals, providing advice on solutions when companies are in a distress or near-distress situation and has acted for parties in many high-profile deals, such as Jurong Aromatics Corporation, Bilcare Singapore, Bumi Resources, Vanguard Energy and Suntech Power.

Kumar successfully argued the first reported decision in Singapore approving a funded litigation in Vanguard Energy. He also chaired the Sub-committee of the Singapore Academy of Law on Litigation Funding in Insolvency Cases. Kumar has been noted as a leading lawyer in numerous publications including Chambers Global, Chambers Asia, IFLR1000, Asia Pacific Legal 500, Who's Who Legal, PLC Which Lawyer Yearbook and Best Lawyers International, in this practice area. He sits on various committees and has released various publications related to his core practice area.


About the author
 

Darius Tay

Director, BlackOak

Singapore
T: +65 6521 6747
F: +65 6622 5920
E: darius.tay@blackoak-llc.com
W: www.blackoak-llc.com

A rising star in the Singapore corporate restructuring and insolvency scene, Darius Tay handles both contentious and non-contentious aspects of the corporate restructuring and insolvency practice and is experienced with both domestic and international matters. Tay holds a BCL from Oxford University, where he completed a well-received dissertation on cross-border restructuring and was the champion in the Oxford University inaugural JustCite Procedural Justice Moot.

Outside private practice, Tay is an adjunct lecturer at the Singapore Management University on various topics. To date, Tay has taught corporate law, company law, and the law of equity and trusts. Tay has also represented the Insolvency Practitioners Association of Singapore in a collaboration effort with the Singapore Management University and the Ministry of Law in designing an insolvency practitioners' course for the Singapore Management University School of Accounting. Tay was appointed to the Singapore Supreme Court's Young Amicus Curiae Scheme in 2014. He acted as amicus curiae in the only reported Singapore judgment on the issue of testamentary capacity regarding the disposal of one's Central Provident Fund (Singapore's national retirement savings plan) monies and was also part of the Insolvency Practitioners Association of Singapore's working committee on their amicus brief in Kao Chai Chau Linda vs Fong Wai Lyn Carolyn and Others [2016] 1 SLR 21, a landmark Singapore decision on insolvency practitioners' remuneration.


 


 

 

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