As we previously reported, the amendments made to the Singapore Companies Act (Companies Act) are part of Singapore’s efforts to become a hub for the restructuring of troubled companies in Asia. This is the first in a series of articles that will explore in more detail some of the key changes that Singapore made to its restructuring regime, which now blends aspects of a UK scheme of arrangement with US chapter 11 concepts.
The amendments to the Companies Act considerably expand the jurisdiction of the Singapore High Court to preside over the restructuring of distressed companies. Before the amendments went into effect in May of this year, only companies incorporated in Singapore could avail themselves of the judicial management provisions of the Companies Act. The schemes of arrangement provisions only applied to foreign corporations under more limited circumstances, in that the Court had to be satisfied that there were sufficient assets in Singapore to enable an orderly liquidation, collection and distribution of such assets in favour of eligible creditors, or that the foreign corporation had a sufficient nexus or connection with Singapore.
The relevant amendments to the Companies Act
Section 351 of the Companies Act now provides that a foreign company may be wound up pursuant to the Companies Act, but “only if it has a substantial connection with Singapore.” Companies that can be wound up pursuant to the Companies Act can access either the schemes of arrangement or the judicial management provisions of the Companies Act.
The new subsection 351(2A) provides the following non-exhaustive list of factors, the presence of which will support a determination that a foreign company has a substantial connection with Singapore:
- Singapore is the centre of main interests of the company;
- the company is carrying on business in Singapore or has a place of business in Singapore;
- the company is a foreign company that is registered under Division 2 of Part XI of the Companies Act;
- the company has substantial assets in Singapore;
- the company has chosen Singapore law as the law governing a loan or other transaction, or the law governing the resolution of one or more disputes arising out of it in connection with a loan or other transaction; or
- the company has submitted to the jurisdiction of the Court for the resolution of one or more disputes relating to a loan or other transaction.
The term “carrying on business” is expressly provided (pursuant to subsection 351(4)) to have the same meaning as in section 366 of the Companies Act. Section 366 defines the term broadly and states that it “includes the administration, management or otherwise dealing with property situated in Singapore as an agent, a legal personal representative, or a trustee, whether by employees or agents or otherwise,” whether carried on for profit or otherwise. Section 366(2) and the reported Singapore cases interpreting the term “carrying on business,” however, have created a long list of exceptions to the term. Thus, activities such as the provision of Singapore-based assets as security, the presence of subsidiaries, and the purchase of goods in Singapore for subsequent sale outside Singapore have been found not to be sufficient to consider a person to be “carrying on business” in Singapore. These cases have generally required the foreign person to be registered in Singapore or to have an office or place of management control in Singapore.
The Companies Act does not provide any guidance as to what will constitute Singapore being the “centre of main interests” (COMI) of a debtor company. Presumably, the considerable European and American jurisprudence on this issue will be relevant. Moreover, the Companies Act does not provide any guidance on what will constitute “substantial assets.” Reported Singapore cases on the term “substantial assets” show that the assets must be of a fixed and permanent nature, against which orders of Court may be enforced, such as residential and commercial real estate and shares in corporations.
The Companies Act has also been amended, by the insertion of a new Part XA, to encourage foreign corporate entities to become registered as a company limited by shares under the Companies Act.
Comparison to the U.S. Bankruptcy Code requirements
Section 109 of the Bankruptcy Code sets forth the requirements for a company to become a debtor under chapter 7 or chapter 11 of the US Bankruptcy Code and only requires that the debtor reside or have a domicile, place of business, or assets in the United States.
Because the statute refers to “place of business” and not “principal place of business” and “assets” and not “substantial assets,” section 109 has been applied expansively to create an open door policy for companies seeking the protection of the US Bankruptcy Code. For example, having a full-time employee and substantial activities in the US constitutes having a place of business, and having a bank account or even a retainer in a US attorney’s trust account likely constitutes having property in the U.S. The US jurisdictional bar, therefore, appears to be set lower than the bar established in Singapore.
Notwithstanding the seemingly low bar in the US, it is worth noting that a US bankruptcy court has the power to dismiss a chapter 11 case by abstaining under section 305 of the Bankruptcy Code in favor of another proceeding or otherwise “for cause” under section 1112(b) of the Bankruptcy Code. Applying section 1112(b), for example, the US bankruptcy court dismissed the chapter 11 cases of Yukos Oil Company after concluding that Yukos could not likely effectuate a chapter 11 plan without the cooperation of the Russian government.
Accordingly, chapter 11 jurisdiction in the US may be available more quickly than going through the “COMI shifting” often seen in Europe (and which still may be required to access Singapore courts), but, regardless of which jurisdiction a debtor chooses, it must consider carefully its ability to enforce the ultimate outcome of the proceeding.