Singapore revamps restructuring and insolvency laws

Singapore hopes new amendments to its companies legislation will boost its standing as an international centre for debt restructuring and insolvency. 

The Ministry of Law expects the changes to be enacted soon, after a public consultation closed in December 2016. Businesses can expect to see changes to laws on cross border insolvency, and schemes of arrangement and judicial management. Lawyers told Asialaw they are excited about the amendments, if they do something about lessening the increasing complexity of cross-border restructuring and insolvency cases that span multiple jurisdictions.

Cross-border insolvency

Ashok Kumar

The archaic restrictions in existing restructuring and insolvency laws have been the main motivation behind the proposed amendments. “The current system hasn’t been effective for cross-border restructuring and insolvencies,” says Ashok Kumar, director at BlackOak. “With the amendments, companies can ask for help early and problems can be fixed early. The changes will encourage companies in the region to restructure in Singapore where they will be well-placed to raise money and can be taken out of distress.”

“The amendments will give more flexibility to courts. For example, BVI and Bermuda restructurings are not allowed currently,” says Shen Yi Thio, joint managing director at TSMP Law Corporation. “If a holding company in Singapore has operating subsidiaries in BVI, it can’t get the restructuring off the ground. The changes will allow Singapore to be used as a centre that binds all other entities if a company has a material interest to Singapore.”

“The provisions are timely because creditors no longer exist in only one jurisdiction,” adds Thio. “It becomes impossible to restructure if creditors aren’t ringfenced.”

Under the proposed amendments, a substantial connection test is needed to see whether a foreign company has sufficient connection to Singapore to file for schemes of arrangement and judicial management. A list of factors is included to determine whether there is such as connection, including whether:

  • The company is carrying on business in Singapore;
  • The company has substantial assets in Singapore;
  • The company is registered as a foreign company in Singapore;
  • Singapore is chosen as the governing law for disputes; and
  • Singapore is the centre of main interests.

The threshold for a company to seek judicial management will be lowered. “It’ll be easier to put a company into judicial management,” says Shen Yi Thio. “Right now the test is to prove that a company “is or will be” unable to pay debts. The test will change to it “is or is likely to become”. The standard of proof is lower so that a company can seek help from the courts and get more breathing space. While this is currently available only to local companies, it will be available to foreign companies, such as those listed in Singapore but incorporated in the BVI.”

Singapore will adopt the UNCITRAL (United Nations Commission on International Trade Law) model law on cross-border insolvency, making it easier for companies to access the Singapore courts’ assistance when undergoing cross border insolvency and restructuring procedures.

And the ring-fencing rule, where a foreign company facing an insolvency procedure has to pay debts in Singapore before funds can be remitted elsewhere, will be abolished.

Shen Yi Thio

“One of the challenges is the coordination with all the courts of other jurisdictions,” says Thio. “MOUs [memoranda of understanding] and bilateral entities with other courts will be necessary. In the next five years, we’ll be seeing more bilateral agreements and guidance notes to create more formal and express provisions in overseas courts.”

A dialogue is already occurring between the Singapore Supreme Court and the US Bankruptcy Court in Delaware. The adoption of court-to-court cooperation guidelines can maintain consistency between courts. While different courts may hold joint hearings, they can maintain their own independence and impartiality. “This will benefit stakeholders by decreasing legal costs and preserving the value of debt-ridden businesses by providing default guidelines that people can turn to immediately,” says Thio.

Schemes of arrangement

Under section 210 of Singapore’s Companies Act, a company can enter into a compromise with creditors through a scheme of arrangement for debt restructuring.

The proposed amendments to the schemes of arrangement will bring Singapore more in line with the US’ Chapter 11 bankruptcy process through tools such as super-priority financing, approval over dissent of certain creditors, enhanced cram-downs and a pre-pack mechanism that allows the court to approve a scheme without a formal creditor meeting.

Super-priority financing

Lenders who provide rescue finance to debtor companies will be able to obtain a super-priority status, with the approval of the court. With this status, lenders will be repaid before other creditors in any subsequent winding-up.

Approval over dissent of certain creditors

A scheme may be approved over the dissent of creditors, and without a formal creditor if a company meets certain requirements under the proposed Bill. Enhanced moratoria are being proposed so a debtor has greater protection. No automatic moratorium for schemes of arrangement exists at the moment, but this will change with the amendments. On the other hand, more protection for creditors will be in place, including giving the court powers to restrain a debtor company from asset disposals.

Enhanced cram-downs

In the case of multiple classes of creditors where a class of creditors may oppose a scheme of arrangement, if the majority of a scheme’s creditors are present and represent at least 75% in value of the creditors to be bound by the scheme of arrangement, the court can approve of the scheme, provided that it does not discriminate unfairly between two or more classes of creditors, and is fair and equitable.

Pre-packaged mechanism

The Ministry of Law is also proposing a pre-packed restructuring mechanism. The Singapore courts will be able to approve a scheme of arrangement without creditors’ meetings provided that notice requirements have been met and that if a creditors’ meeting had been called, the proposed scheme would have been approved. “The timing will be much more truncated and the expenses less with the pre-pack scheme,” says Kumar.

“Even if there are issues, creditors can still object at the court hearing,” says Thio.

“The creation of true cross-border processes will need time to mature and competing interests will need to be balanced through a series of tradeoffs,” says Thio. “For example with the pre-pack mechanism, some creditors like to persuade face to face through meetings before going to the courts instead of the automatic pre-pack. We will know when the rubber hits the road. These are unknown unknowns and the regulations will need to be tweaked to get the balance right.”

The Singapore government has set a clear target to turn the country into a model centre of restructuring and insolvency in Asia and beyond. There may be changes needed to the guidelines to ensure they balance different interests. Nevertheless, jurisdictions with schemes of arrangement procedures such as Hong Kong and Australia will be keeping a close eye on how Singapore’s progressive amendments play out.