The Singapore Ministry of Law has published for public consultation amendments to the Singapore Companies Act (Cap 50). The amendments, if enacted, have the potential to radically overhaul the existing insolvency and restructuring regime in Singapore. The clear aim of the amendments is to transform Singapore into a hub for cross-border and transnational insolvencies and restructurings.
This update briefly summarises the key amendments which have been proposed and the background to those reforms.
- Singapore government is proposing a radical overhaul of the existing insolvency and restructuring regimes, which will create a restructuring framework more suited to cross-border insolvencies and more debtor friendly overall.
- The proposed amendments to the Companies Act are currently in a public consultation phase. It is expected that the legislation will be enacted in early 2017.
- The specific amendments currently being considered include an automatic creditor moratorium upon a debtor applying for a Scheme of Arrangement; clarifying and expanding the circumstances in which foreign companies can seek Judicial Management or a Scheme of Arrangement in Singapore; the introduction of super-priority finance (already a feature of the US Chapter 11 Bankruptcy proceedings); and enacting the UNCITRAL Model Law on Cross-Border Insolvency.
Background to proposed insolvency and restructuring reforms in Singapore
On 8 May 2015, the Singapore government appointed the “Committee to Strengthen Singapore as an International Centre for Debt Restructuring” (the “Committee”), tasking it with recommending initiatives and legal reforms to enhance Singapore’s effectiveness as a centre for international debt restructuring. The Committee issued its final report on 20 April 2016. The Committee made some 17 recommendations, largely focused on bringing Singapore’s insolvency and restructuring regime more in line with the Chapter 11 Bankruptcy process in the US.
The Ministry of Law confirmed on 21 October 2016 that it broadly accepted all 17 recommendations. The Ministry of Law will be taking a phased approach to implementing the recommendations. As part of the first phase, the Ministry has published for public consultation a draft Companies (Amendment) Bill, which contains the proposed amendments to the restructuring and insolvency provisions of the Companies Act. The legislative amendments are currently open for public consultation until 2 December 2016. It is expected that the Bill will be enacted in early 2017.
Reform to the Singapore insolvency and restructuring legal framework
The proposed amendments to the Companies Act focus primarily on reforming how Schemes of Arrangement and Judicial Management work under Singapore law, which are the key mechanisms for effecting restructurings in Singapore.
The key proposals are:
- Clarity for foreign companies seeking restructuring in Singapore: Currently, a foreign company cannot seek Judicial Management under Singapore law. A foreign company can also only undergo a Scheme of Arrangement where it is liable to be wound up under the Companies Act, which in turn typically requires it to be established that the company has a “sufficient connection” or “nexus” to Singapore, which is a somewhat imprecise test. The proposed Bill would clarify the position with respect to foreign companies and improve their access to Judicial Management and Schemes of Arrangement in two ways.
- First, under the proposed Bill, foreign companies would now be permitted to apply for Judicial Management where such companies constitute a “corporation liable to be wound up under [the Companies Act]” (new section 227AA), which is the same as the current position for Schemes of Arrangement.
- Second, and further to the point above, the proposed Bill expressly provides that a foreign company will be considered “liable to be wound up” under the Companies Act for the purposes of Judicial Management and / or a Scheme of Arrangement where there is a “substantial connection” between the Company and Singapore. The Bill also provides a list of factors the Court should consider when determining whether there is such a connection, which should clarify and provide greater guidance as to when foreign companies come within the Court’s jurisdiction. These factors include: (a) Singapore is the centre of main interests of the foreign company; (b) the company is carrying on business in Singapore or has a place of business in Singapore; (c) the company is registered as a foreign company in Singapore; (d) the company has substantial assets in Singapore; (e) whether Singapore law has been chosen as the governing law for disputes; and (g) the company has submitted to the jurisdiction of the Court for the resolution of disputes relating to a loan or other transaction.
- Easier access to Judicial Management: In addition to making Judicial Management available to foreign companies, the proposed Bill also includes further amendments to make Judicial Management more accessible generally (amendment of section 227B). This includes lowering the threshold for a Judicial Management order to be made from being that the debtor company “is or will be” unable to pay its debts, to “is or is likely to become” unable to pay its debts; and removing the automatic veto which a floating charge holder has over any Judicial Management order being made.
- Enhanced moratoriums for Schemes of Arrangement: Currently, as part of the Judicial Management process, a debtor company is automatically granted a moratorium on creditors taking enforcement action or applying to wind up the company. There is, however, no similar automatic moratorium for Schemes of Arrangement. Instead, a debtor company must separately apply for a moratorium as part of the Scheme of Arrangement process. This is not ideal for companies in distress, as there is no guarantee a moratorium will be granted and, in any event, there is no protection during the time between when the application is made and the moratorium is (hopefully) granted by the Court. The proposed Bill provides for a new set of “enhanced moratoriums”, aimed at providing greater protection to a debtor. The amendments include:
- Express language confirming that the Court can grant a moratorium when a company has made an application to call a meeting of its creditors or intends to make such an application (new section 211B(1)).
- Introducing an automatic month-long moratorium that will start upon an application for a moratorium being made, ensuring a company will have some immediate breathing space while any application for a Scheme of Arrangement is being considered (new sections 211B(2), (3) and (8)).
- Expanding the scope of the moratorium order that may be granted by the Court to be similar to the moratorium available in Judicial Management (new section 211B(4)).
- Empowering the Singapore Courts to grant injunctive relief in Schemes of Arrangement against foreign proceedings if the creditors are subject to the jurisdiction of the Singapore Courts (e.g. by way of the Courts’ in personam jurisdiction) (new section 211B(5)(b)), and to extend any moratorium to a subsidiary of a debtor company (upon the application of that subsidiary) (new section 211C).
- Additional protections for creditors: The proposed Bill includes additional protections for creditors, including extensive disclosure obligations for companies seeking moratoriums, and new powers for the Court to restrain a debtor company from disposing of assets, exercising powers or transferring shares during the moratorium period other than in good faith and in the ordinary course of business (new sections 211B(3), 211B(6) and 211D).
- Enhanced cram-downs for Schemes of Arrangement: The proposed Bill includes provisions enabling the Court to approve a Scheme of Arrangement where there are multiple classes of creditors, notwithstanding that a class of creditors opposes the Scheme of Arrangement (new section 211H). This power is subject to certain conditions being met, including that the majority of scheme creditors present and voting approve the Scheme of Arrangement, representing at least 75% in value of the creditors to be bound by the Scheme of Arrangement. The Court can only make such an order if it is satisfied that the Scheme of Arrangement does not discriminate unfairly between two or more classes of creditors and is fair and equitable overall. There is detailed guidance on when a Scheme of Arrangement will be considered fair and equitable in the proposed section 211H(4). These cram-down provisions are based on similar cram-down mechanics in the US Bankruptcy Law.
- Pre-packaged restructurings: One of the common criticisms of Schemes of Arrangement is that the process takes too long. The proposed amendments look to address this in a number of ways, including the introduction of “pre-packed” restructurings. In short, this would allow the Singapore Courts to approve a Scheme of Arrangement without the need for any creditors meetings to be called, provided that (amongst other things) certain notice requirements have been met and the Court is satisfied that the proposed scheme would have been approved had a creditors meeting in fact been called (new section 211I).
The proposed Bill also includes provisions which would introduce “superpriority” for rescue financing. This would enable debtor companies to potentially access a wider range of finance in a distressed debt situation than might otherwise be possible. In short, in both a Scheme of Arrangement and Judicial Management scenario, it would be possible for lenders who provide rescue finance to obtain “super-priority” status with approval of the Court, subject to certain requirements and protections for other creditors. Super-priority status would in turn allow lenders providing rescue financing to be repaid ahead of other creditors in any subsequent winding-up. Such lenders can also be granted security over both unsecured and unsecured assets with respect to any rescue finance. The Court can also order that any security interest for the lender providing rescue finance may take priority over existing secured interests, in effect displacing existing secured lenders, but only where, amongst other things, there is adequate protection for existing secured lenders (new section 211E(1)(d)). The relevant provisions (new sections 211E, 227HA and 227HB), are modelled on debtor-in-possession financing under US Bankruptcy Law. The reforms are intended to promote rescue funding for struggling companies insofar as new creditors will be assured that their fresh injections into ailing companies will be repaid first if the exercise of restructuring fails. This will provide a strong incentive for lenders to provide “rescue financing” and consequently ensure that more ailing companies will possibly have a fresh lease of life.
UNCITRAL Model law on Cross-Border Insolvency, and changes to the ring fencing rule
To improve the recognition of foreign insolvencies in Singapore, and expand the recognition and enforcement of Singapore restructurings abroad, the UNCITRAL Model Law on Cross-Border Insolvency will be adopted into Singapore law (see new sections 354A, 354B, 354C and 14th Schedule). Indeed, this development has already been somewhat foreshadowed by the Singapore Courts, who in recent decisions are increasingly taking a more “universalist” approach with respect to recognising and rendering aid in foreign insolvencies proceedings. (See, e.g., Re Opti-Medix Ltd (in liquidation) and another matter  SGHC 108, where the Singapore High Court, applying Singapore common law, recognised a Japanese bankruptcy trustee with respect to a BVI company, on the basis that the company’s centre of main interest (rather than its place of registration) was Japan).
The proposed Bill also contains provisions which substantially water down the current “ring fencing” rule for foreign companies (amendment of section 377). This rule provides that, where a foreign company which is registered in Singapore is subject to foreign insolvency procedure, a Singapore liquidator can only remit funds to the foreign jurisdiction after all Singapore debts have been paid. It is now proposed that the rule only applies to regulated financial institutions and intermediaries.
Singapore is recognised as one of the leading international financial centres, ranking behind only London and New York according to the most recent Global Financial Centres Index. Singapore has also, in just a few short years, become one of the pre-eminent centres for cross-border and transnational disputes, with the creation and success of the Singapore International Arbitration Centre, Singapore International Mediation Centre and the Singapore International Commercial Court.
It is not surprising that Singapore is now looking to develop itself as a restructuring and insolvency hub. This will allow Singapore to both augment and leverage its existing strengths in the finance industry and in dispute resolution. Singapore’s plan also builds on its existing strong track record with insolvency and restructuring, with the steady growth in restructuring and insolvency work over the past few years which is only expected to continue given the current economic outlook. Indeed, a recent global survey, covering lawyers and other experts from 50 leading organisations across 12 jurisdictions, confirmed that Singapore is rated highly as an effective jurisdiction for cross-border insolvency by insolvency practitioners with direct experience with restructuring in Singapore.
The reforms proposed by the Committee, and the Singapore Government’s endorsement of those proposals, promise to build on Singapore’s existing successes, ensuring quick and cost-effective restructurings.
The relevant provisions of the proposed Bill can be found here.