Overview of restructuring and insolvency activity
Following the coming into force of the omnibus Insolvency, Restructuring and Dissolution Act (IRDA) on 30 July 2020, the Singapore courts have continued to interpret, apply and provide guidance on the application of the provisions of the IRDA. Here we discuss these recent developments in the law.
General introduction to the restructuring and insolvency legal frameworki Restructuring and insolvency legal framework
Prior to July 2020, the corporate restructuring and insolvency framework in Singapore consisted primarily of provisions in the Companies Act, as well as certain provisions in the Bankruptcy Act that were imported into the Companies Act with necessary modifications. With the coming into effect of the IRDA on 30 July 2020, the primary source of legislation in Singapore governing corporate restructuring and insolvency is now the IRDA, supplemented by various subsidiary legislation2 and by the Companies Act. Under this statutory framework, there are three broad areas of court-supervised insolvency and restructuring procedures for companies: schemes of arrangement, judicial management and liquidation.Schemes of arrangement
Section 210 of the Companies Act and Part 5 of the IRDA set out the statutory framework for schemes of arrangement. A scheme of arrangement is a statutory mechanism for securing agreement between a company and its creditors, members, or shareholders in respect of a compromise or arrangement without the need for unanimous consent. Thus, under the scheme, creditors may, for example, agree to rearrange or extinguish debts owed by the company to them in part or in whole or to defer repayment of the same. The court plays a supervisory role at two key junctures: (1) in granting leave for a creditors' meeting to be convened to consider the scheme of arrangement3 and (2) in sanctioning the scheme of arrangement4 (which must have been approved by the majority of creditors in number representing three-quarters in value of the creditors or members or class of creditors or members).5
The statutory framework features a number of mechanisms and procedures that complement schemes of arrangement.
First, the statutory framework provides for a moratorium. There are two main avenues to obtain a statutory moratorium: a moratorium to restrain 'further proceedings in any action or proceeding against the company' provided for under Section 210(10) of the Companies Act,6 and a moratorium under Section 64 of the IRDA, which largely mirrors the 'enhanced' moratorium first introduced in 2017 (discussed in the 2017 edition of this publication). Matters restrained under this enhanced moratorium include the passing of a winding-up resolution, the appointment of a receiver or manager over the company's property or undertaking, the commencement or continuation of proceedings, execution, distress or other legal process, the taking of any step to enforce security of the company's property, and enforcing any right of re-entry or forfeiture under a lease of premises occupied by the company.7 Compared with the moratorium under Section 210(10) of the Companies Act, under the IRDA enhanced moratorium, an interim 30-day moratorium arises automatically on an application being made for a moratorium.8 Further, under the IRDA regime, it is possible to obtain an order that (1) the moratorium have in personam worldwide effect9 and (2) the moratorium be extended to related companies.10 The commencement and continuation of certain types of proceedings as prescribed by regulations are excluded from the effect of the moratorium (including the interim moratorium) under the IRDA regime.11 For now, admiralty proceedings and security interest arrangements are excluded.12
Second, the court may order cross-class cramdowns on minority dissenting creditors when the requisite majority is obtained in respect of all creditors as a whole, provided that the scheme does not discriminate unfairly between the classes of creditors and is fair and equitable.13 If the creditors in the dissenting class are unsecured creditors, the IRDA also now clarifies that the scheme will be considered to be unfair and unequitable when the scheme provides for a creditor with a claim or interest subordinate to the dissenting creditor class or member to receive or retain any property of the company on account of the subordinate claim or interest (and not just any property).14
Third, the court can also approve a pre-packaged scheme if it is satisfied that the requisite majority of creditors would have approved the scheme even though no meeting of creditors has been held,15 therefore saving time and costs.
Fourth, the court is empowered to confer various levels of 'super-priority' for rescue financing in certain circumstances (with various conditions to be satisfied, as provided for in the relevant subsections of the provision).16 Although the statutory language of Section 67(1)(a) of the IRDA does not expressly prescribe that the company must show that it would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing was given such priority (cf. Section 67(1)(b) to 67(1)(d) of the IRDA), the Singapore Court has held that the applicant must still show that it has expended reasonable efforts to secure other types of financing without super-priority.17 Evidence must be placed before the court of, for example, failed negotiations.18 Other considerations include whether:
- the proposed financing is in the exercise of sound and reasonable business judgement;
- alternative financing is available on any other basis;
- such proposed financing is in the best interests of the creditors;
- any better proposals are before the court;
- the proposed financing is necessary to preserve the assets of the estate and is necessary, essential and appropriate for the continued operation of the debtor's business;
- the terms of the proposed financing are fair, reasonable and adequate; and
- the financing agreement was negotiated in good faith and at arm's length.19
A debt roll-up is permissible under the Singapore super-priority regime (i.e., super-priority can be granted to rescue financing that is used to pay off existing pre-petition debt).20
Fifth, the IRDA provides for restrictions on the operation of ipso facto clauses applicable during the period in which scheme of arrangement proceedings have been commenced, until they are concluded. When a company has commenced proceedings for the approval of a scheme of arrangement or a statutory moratorium in aid of a scheme of arrangement, the company's counterparties may not terminate or amend the contract, claim accelerated payment or forfeiture under the contract, or terminate or amend any right or obligation under the contract by reason only that such proceedings have been commenced, or the company is insolvent, until the conclusion of such proceedings.21 The effect of the prohibition is suspensory for the pendency of the proceedings only and does not render the relevant clause or contract void. The prohibition does not apply to certain contracts, such as eligible financial contracts, contracts of national or economic interest, or commercial ship charters,22 or when winding-up proceedings have been commenced in respect of the company.Judicial management
Part 7 of the IRDA sets the statutory framework for judicial management. Judicial management may be utilised when a company is, or is likely to become, unable to pay its debts,23 when there is a reasonable probability of rehabilitating the company (i.e., as a tool for corporate rescue) or when the interests of the creditors will be better served than in a winding up (i.e., to carry out a more advantageous realisation of a company's assets than would be possible in a winding up).24 In judicial management, a judicial manager, who is appointed to replace the company's existing management, is empowered to do all such things as might be necessary for the management of the affairs, business and property of the company.25 After a judicial management order is made, the judicial manager will formulate a statement of proposals for the rehabilitation of the company or the realisation of its assets, which must be approved by the company's creditors.26
The statutory framework features a number of mechanisms and procedures that complement judicial management.
First, a statutory moratorium arises automatically on an application being made for judicial management,27 which is extended on the making of a judicial management order.28 The matters restrained include any orders for winding up or the passing of any winding-up resolution, the commencement or continuation of proceedings, execution, distress or other legal process, or the taking of any step to enforce security of the company's property.29 The commencement and continuation of certain types of proceedings as prescribed by regulations are excluded from the effect of both the automatic and the extended moratorium.30 For now, admiralty proceedings and security interest arrangements are excluded.31
Second, super-priority for rescue financing is also available in the judicial management regime.32
Third, a company can be placed into judicial management without a court order. The company first appoints an interim judicial manager by authorisation of the members of the company or a resolution of the board of directors (when authorised by the company's constitution).33 A meeting of creditors to consider a resolution to place the company into judicial management must be held no later than 30 days after the lodgement of the statutory declaration by the interim judicial manager under Section 94(3)(e) of the IRDA.34 At that meeting, the company can be placed into judicial management by way of a resolution of a majority in number and value of creditors present and voting at the meeting.35 Once the company is placed into judicial management, the judicial management process continues in the same manner as that in court-ordered judicial management.
Fourth, the judicial manager may assign proceeds of actions under Sections 224, 225, 228, 238, 239 or 240 of the IRDA (relating to transactions at undervalue, unfair preferences, extortionate credit transactions, fraudulent trading, wrongful trading and assessment of damages against delinquent officers, respectively) to a third party.36 It is also possible to obtain a prospective order granting priority for the distribution of assets or expenses successfully recovered when a creditor gives an indemnity for costs of litigation or the liquidators' expenses.37
Fifth, similar restrictions on the operation of ipso facto clauses discussed in the scheme of arrangement context are also applicable during the period in which the company has commenced proceedings for judicial management or has lodged a notice of appointment of an interim judicial manager, until they are concluded.38Liquidation
Part 8 of the IRDA sets the statutory framework for liquidation of corporations in Singapore. This includes foreign companies. In Re PT MNC Investama TBK  SGHC 149, the Singapore Court ruled that a foreign company with securities listed on the Singapore Exchange had a 'substantial connection' to Singapore and was therefore liable to be wound up in Singapore.39
A company may be wound up compulsorily by the court or voluntarily.40 In a compulsory liquidation, parties with standing under the IRDA, including creditors of a company41 and directors,42 may apply to the court for an order that a company be wound up. By default, an applicant must nominate a licensed insolvency practitioner to be the appointed liquidator and can nominate the 'official receiver' only if the applicant has taken reasonable steps but is unable to obtain the consent of a licensed insolvency practitioner to be appointed as liquidator.43
The IRDA provides a list of grounds on which the court may make an order to wind up a company,44 including that the company is unable to pay its debts.45 A statutory presumption that the company is unable to pay its debts arises (1) if a statutory demand for a sum exceeding S$15,000 has been duly issued to the company and the company for three weeks thereafter neglects to pay the sum or to secure or compound for it to the creditor's reasonable satisfaction46 or (2) if an execution or other process issued in a judgment of any court against the company is returned unsatisfied in whole or in part.47
The creditor can also prove that the company is unable to pay its debts (including contingent and prospective debts, if any).48 For this purpose, the test is whether the company's current assets exceed its current liabilities such that it is able to meet all debts as and when they fall due within a 12-month time frame (i.e., the cash flow test).49
The court may make an order to stay or restrain further proceedings against the company (including the enforcement of security) at any time after the making of a winding-up application.50 Further, upon the winding-up order being made or the appointment of a provisional liquidator, no action or proceeding may be commenced or proceeded with without the leave of the court.51 Whether a proceeding is a proceeding against the company that is restrained will depend on the nature of the original application. For example, the Singapore Court has held that an appeal against the decision in an application brought by the then judicial managers of the company for directions did not amount to a proceeding against the company.52
In a voluntary liquidation, the court need not get involved. There are two types of voluntary liquidation: a creditors' voluntary liquidation (CVL) and a members' voluntary liquidation (MVL). As a matter of procedure, both CVL and MVL are commenced by the company resolving by special resolution (i.e., by a majority of not less than three-quarters) that it be wound up voluntarily.53 If the company's directors are able to make a declaration that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of winding up, the liquidation begins as an MVL.54 If not, the liquidation begins as a CVL. A key difference between the two is that in a CVL the company must convene a meeting of creditors55 in which the creditors will be able to nominate a liquidator that will prevail over the company's nomination.56
In addition, the IRDA introduced the following provisions to complement the current winding-up regime.
First, it is possible to trigger the early dissolution of a company when realisable assets of the company are insufficient to cover the expenses of winding up and the affairs of the company do not require further investigation.57 As a safeguard, a 30-day notice of the early dissolution must be given to, among others, creditors of the company.58
Second, similar to judicial management, the IRDA expressly provides that a liquidator may assign proceeds of actions under Sections 224, 225, 228, 238, 239 or 240 of the IRDA (relating to transactions at undervalue, unfair preferences, extortionate credit transactions, fraudulent trading, wrongful trading and assessment of damages against delinquent officers, respectively) to a third party.59 A prospective order is also available for granting priority for the distribution of assets or expenses successfully recovered when a creditor gives an indemnity for costs of litigation or the liquidators' expenses.60
Third, the court is empowered under the IRDA to terminate a winding-up order and order the resumption of the management and control of the company by its officers.61
Companies with annual revenue of less than S$10 million can avail themselves of a simplified debt restructuring programme to rehabilitate a viable business or, if the company has ceased to be viable, a simplified winding-up programme to wind up the company. This programme was introduced on 29 January 2021 as part of covid-19 relief measures to give small companies access to a restructuring and insolvency framework in a quick, efficient and low-cost manner. At the time of writing, the programme has been extended to continue in effect until 28 July 2022.ii Statutory avoidance provisions and clawback
In addition, certain transactions entered into by the company prior to the commencement of liquidation may be void or voidable. An 'unfair preference', which is a transaction that has the effect of putting a creditor in a better position than the creditor would otherwise have been in in the event of the company's insolvency had the preference not been given, may be set aside if the transaction was entered into in the year preceding the commencement of winding up.64 When the person preferred is a 'person connected with the company' (including directors of the company), this period is two years.65 An unfair preference must have been made with the intention to prefer – an intention that is presumed if the transaction is entered into with a person connected with the company.
An 'undervalue transaction', including transactions that were entered into for no consideration or for a value that (in money or money's worth) is significantly less than the value (in money or money's worth) of the consideration provided,66 may be set aside if entered into within the three years preceding the commencement of winding up or judicial management and the company was unable to pay its debts or became unable to pay its debts because of the transaction.67 If a transaction is entered into with a person connected with the company, there is a presumption that the company was unable to pay its debts or became unable to pay its debts because of the transaction.68 However, the transaction will not be set aside if it is proven that the transaction was entered into in good faith for the purpose of carrying on the company's business and there were reasonable grounds for believing that the transaction would benefit the company.69
A floating charge created within the period of one year preceding the commencement of the winding up or judicial management,70 or within the period starting on the commencement of the judicial management and the date the company enters judicial management,71 is invalid to the extent of the value of the consideration (consisting of money paid, goods or services supplied, or discharge or reduction of debt of the company) for the charge.72 When the floating charge is created in favour of a person connected with the company, this period is two years.73iii The position of secured creditors
When entering into a loan transaction with a company that is insolvent or near insolvency, secured creditors should be mindful of the statutory avoidance provisions discussed in Section II.ii.
Further, any creditor intending to secure the debt with a floating charge should take care to ensure that the floating charge is registered within 30 days of its creation, failing which the floating charge is void as against a liquidator and any creditor of the company.74
The moratoria that apply to restrain the enforcement of security in schemes of arrangement, judicial management and liquidation are discussed in Section II.i.
As to the ranking of creditors in distribution, a creditor with a registered floating charge is subordinated to a creditor with a fixed charge and certain statutory preferential debts but ranks ahead of unsecured creditors.75
A secured creditor must realise its security within 12 months from the commencement of winding up or judicial management to be entitled to claim interest on secured debt (a similar provision also applies in judicial management).76iv Directors' duties in insolvency
A director is under a duty to act honestly and use reasonable diligence.77 If the company is insolvent or near insolvency, directors must additionally take into account the interests of the company's creditors to ensure that the company's assets are not dissipated.78 As long as there are reasons to be concerned that the creditors' interests are or will be at risk, directors ought to have due regard to their interests.79
Any person who was party to the company trading wrongfully may be declared personally liable for the company's debts or liabilities80 and guilty of a criminal offence of wrongful trading.81 A company trades wrongfully if it incurs debts or liabilities without reasonable prospect of meeting them in full when insolvent, or if it becomes insolvent by reason of incurring such debts or liabilities.
Any person who has been found to have been knowingly party to the company carrying on business with the intent to defraud creditors or for a fraudulent purpose may be held personally liable for all the company's debts and liabilities82 and guilty of a criminal offence of fraudulent trading.83
Further, although the statutory avoidance provisions discussed in Section II.ii are not per se expressed to impose duties on directors, a director would likely be liable for a breach of fiduciary duties if there is an adverse finding under the statutory avoidance provisions.84 Such liability can be founded even if the relevant statutory clawback period has expired.85 Claims for breaches of common law fiduciary duties may be brought, notwithstanding that the relevant time limit under statutory avoidance provisions has passed.86
General introduction to the new restructuring legal framework
General introduction to the insolvency legal framework
Recent legal developments
Here we highlight some key legal developments following the previous edition of this publication.
In Sun Electric Power Pte Ltd v. RCMA Asia Pte Ltd (formerly known as Tong Teik Pte Ltd)  SGCA 60, the Court of Appeal departed from previous decisions that applied both the cash flow and the balance sheet tests in determining the solvency of a company. For the purposes of determining whether the company was unable to pay its debts in a winding-up application, the Court held that the sole determining test is the cash flow test (i.e., whether the company's current assets (realisable within a 12-month period) exceed its current liabilities (falling due within a 12-month period), such that the company was able to meet all debts as and when they fall due).
In Re Brightoil Petroleum (S'pore) Pte Ltd  SGHC 35, the Singapore Court considered, for the first time, the effect of the payment of lock-up fees on the classification of creditors for the purposes of voting on a scheme of arrangement. In that case, creditors holding more than 57 per cent of the total debt value had entered into lock-up agreements with the company to vote in favour of the scheme in return for payment of certain sums. The Court held that the locked-in creditors could be classed together with the other unsecured lenders because the monies paid under the lock-up agreements were not so significant compared with the potential recovery under the scheme or liquidation as to sway the creditors. The Court set out the following non-exhaustive factors to be considered in determining whether creditors that enter a lock-up agreement should be classed separately.
The critical question in every case is whether the benefit conferred is so sizeable that it would have a significant influence on the decision of a reasonable creditor when voting for the proposed scheme.
The lock-up agreement must have been made available to all scheme creditors within the relevant class such that they were all given the equal right to enter into the agreement, and the agreements made with each creditor must be on substantially the same terms (as was the case there).
The use of the lock-up agreement must also be bona fide without misleading creditors.
In Rothstar Group Ltd v. Leow Quek Shiong  SGCA 25, the Singapore Court held that the grant of fresh security by an insolvent party for its own existing indebtedness did not amount to an undervalued transaction. However, if the grant of security is for the existing indebtedness of a third party, this may amount to an undervalue transaction. In considering the latter, the value comparison exercise is undertaken from the perspective of the insolvent grantor. The consideration need not be directly received by the grantor, but the value of that consideration is relevant insofar as it accrues to the grantor. The grantor's mere perception of value will not suffice, and the value of the consideration must be measured in monetary terms.
In United Securities Sdn Bhd (in receivership and liquidation) & Anor v. United Overseas Bank Ltd  SGCA 78, the Court declined to stay a secured creditor's claim, despite recognition of a Malaysian winding-up process as a foreign main proceeding. The automatic stay arising under Article 20(1) of the Singapore Model Law on the recognition of foreign main proceedings is limited to the scope and effect of a stay that would have come into effect if the company was wound up in Singapore, and would also be subject to any exclusions that would apply to a Singapore moratorium (see Article 20(2) and 20(3) of the Singapore Model Law). In this case, the applicant asserted that it was a secured creditor. To the extent that a secured creditor can enforce its security via self-help remedies, this would not be impeded by the automatic stay. In addition, to the extent that the secured creditor requires court proceedings to establish and enforce the security interests, the Singapore Court would readily allow secured creditors to continue with proceedings to enforce their security, as long as the secured creditor showed a bona fide prima facie case.
As for a discretionary stay of proceedings under Article 21(1)(a) of the Singapore Model Law, the Court declined to grant this as it held that a stay was not necessary to protect the property of the company or the interests of creditors.
The Court also gave guidance on whether and when a proceeding constitutes a 'foreign proceeding' within the meaning of the Singapore Model Law. It must be shown that the following four factors are present:
- the proceeding must involve creditors collectively;
- the proceeding must have its basis in a law relating to insolvency;
- the court must exercise control or supervision over the debtor's property and affairs in the proceeding; and
- the purpose of the proceeding must be the debtor's reorganisation or liquidation.
The Singapore Court in Yihua Lifestyle Technology Co., Ltd & Anor v. HTL Holdings Pte Ltd  SGHC 86 (affirmed on appeal in  SGCA 87) also considered the applicable principles in relation to when it is appropriate to intervene in a judicial manager's exercise of discretion. The test is as follows. First, it must be shown that the judicial manager's actions caused, or would cause, the complainant to suffer harm as a member or creditor. Second, the harm suffered must be unfair, stemming from conspicuously unfair or differential treatment to the disadvantage of the applicant that cannot be justified by reference to the objective of the judicial management or the interests of the members or creditors, or from a lack of legal or commercial justification that causes harm to the members or creditors as a whole. In the case of the latter, the Court will not interfere with the decision unless it was perverse.
Significant transactions, key developments and most active industries
Singapore's efforts to position itself as an international hub for cross-border restructuring continues to see cross-border insolvency matters involving distressed companies in the region. Following the Indonesian conglomerate MNC Investama Holdings' approval of a scheme of arrangement in January 2021,87 and Malaysian video on demand company Iflix's pre-packaged scheme approved in January 2021,88 2022 saw Indonesian garment manufacturer Pan Brothers89 and Indonesian real estate company Modernland Realty90 seek recourse to Singapore's insolvency and restructuring framework. Both companies sought protections under the moratoria in aid of a scheme of arrangement, and both subsequently sought and obtained approvals for pre-packaged schemes. The Indonesian Court has also recognised and acted in support of Singapore restructurings. For example, an application by a creditor of Pan Brothers under the Indonesian suspension of debt payment obligations regime was dismissed, inter alia, because of the existence of the worldwide moratorium granted by the Singapore Court.91
Recourse to the Singapore insolvency regime in aid of foreign restructuring proceedings also continues, for example, in the case of the industrial fishing conglomerate China Fishery, which successfully obtained recognition by the Singapore Court of its Chapter 11 restructuring plan and Chapter 11 proceedings as foreign main proceedings.92
International and future developments
Following Singapore's adoption of the Singapore Model Law, Singapore courts have been empowered to grant recognition for foreign main or non-main proceedings in accordance with the UNCITRAL Model Law on Cross-Border Insolvency. Foreign main proceedings qualify for more extensive relief than foreign non-main proceedings. For example, an automatic stay and suspension of actions or proceedings against the debtor's property arises on recognition of a foreign main proceeding.
The enhanced moratorium in a scheme of arrangement (see Section II.i), which may be expressed to have in personam worldwide effect, has also raised interesting questions on how foreign courts may view such a moratorium. An English court has recognised Singapore's extraterritorial moratorium.93 On the other hand, a Hong Kong court doubted that Hong Kong courts would be able to recognise the effect of such an extraterritorial moratorium in Hong Kong (which has not enacted the UNCITRAL Model Law).94
The Modalities of Court-to-Court Communication published by the Judicial Insolvency Network (JIN) were implemented in Singapore and supplements the Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters.95 These provide for the mechanics of communication between the Singapore and foreign courts (including joint hearings and appearances in court), allowing the Singapore courts to effectively manage cross-border insolvency proceedings. At the time of writing, 16 jurisdictions have adopted the JIN guidelines, including Delaware, the Southern Districts of New York, Florida and Texas, England and Wales, Australia, British Columbia, Bermuda and the Cayman Islands. As a further development in efforts towards cross-border judicial cooperation, on 5 October 2021, the Supreme Court of Singapore and the Federal Court of Malaysia announced the implementation of protocols on court-to-court communication and cooperation in admiralty, shipping and cross-border insolvency matters,96 which put in place a framework for cooperation and communication between the two courts to facilitate efficient and timely coordination and administration.
Two years following the coming into force of the IRDA, Singapore continues its efforts to promote itself as an international insolvency and restructuring hub. This includes the appointment of the Honourable Justice Christopher S Sontchi, a judge of the United States Bankruptcy Court, District of Delaware, as an International Judge of the Singapore International Commercial Court (SICC) in June 2022.97 This ties in with enhancements to the legislative framework clarifying the SICC's jurisdiction over international restructuring and insolvency cases in the Courts (Civil and Criminal Justice) Reform Act 2021 and the amendments proposed in the Legal Profession (Amendment) Bill to refine the scope of representation by foreign lawyers in SICC proceedings, including in relation to corporate debt restructuring and insolvency matters.98
In a speech delivered at the Singapore Insolvency Conference 2021, the Minister for Culture, Community and Youth and Second Minister for Law, Mr Edwin Tong SC, observed that there has been increasing certainty and maturity in the use of the IRDA, with a growing body of case law.99 International recognition of Singapore proceedings in foreign courts has also lent credence and assurance that restructuring efforts in Singapore will be recognised overseas, driving confidence in Singapore as a forum of choice.
Future developments will be watched closely by the relevant stakeholders, including lenders, borrowers and insolvency practitioners.