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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.

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) [2021] 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 [2022] 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 [2022] 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 [2021] 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:

  1. the proceeding must involve creditors collectively;
  2. the proceeding must have its basis in a law relating to insolvency;
  3. the court must exercise control or supervision over the debtor's property and affairs in the proceeding; and
  4. 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 [2021] SGHC 86 (affirmed on appeal in [2021] 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