An extract from The Restructuring Review, 13th Edition

General introduction to the restructuring and insolvency legal framework

i Restructuring and insolvency legal framework

In last year's edition, we discussed substantive changes to the existing legal framework to be effected with the passing of the omnibus Insolvency, Restructuring and Dissolution Act in October 2018 (the Insolvency Act), which was originally slated to come into force on a date to be announced in or around the second half of 2019. The new Insolvency Act promised significant deviations from the existing restructuring and insolvency legal framework, particularly in the area of ipso facto clauses in contracts. At the time of writing, the Insolvency Act has yet to come into force, and while no confirmed date has been announced, it is now expected to come into force in the second half of 2020. During the interim, the Ministry of Law has been actively taking steps to lay the groundwork for the Insolvency Act coming into force, including conducting a public consultation for certain draft subsidiary legislation to be promulgated under the Insolvency Act in March 2020.

The main source of legislation in Singapore governing corporate restructuring and insolvency therefore remains the Companies Act, with certain provisions in the Bankruptcy Act imported into the Companies Act with necessary modifications. Both Acts are supplemented by various subsidiary legislation. Under the 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

Part VII of the Companies Act sets 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: first, in granting leave for a creditors' meeting to be convened to consider the scheme of arrangement, and second, in sanctioning the scheme of arrangement (which has been approved by the creditors).

A crucial tool is the availability of the statutory moratorium. There are two separate moratorium regimes under the Companies Act: the original moratorium to restrain further proceedings in any action or proceeding against the company; and the newer 'enhanced' moratorium introduced in 2017, under which an interim 30-day moratorium arises automatically upon an application being made for a moratorium. The enhanced moratorium also restrains secured creditors from enforcing their security, can have in personam worldwide effect, and can be extended to related companies. Recent applications for moratoriums have predominantly been under the enhanced moratorium regime.

Other provisions include the availability of cross-class cramdowns on minority dissenting creditors where 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. The court can also approve a pre-packaged scheme where it is satisfied that the requisite majority of creditors would have approved the scheme, therefore saving time and costs.

Finally, the court is empowered to confer various levels of 'super-priority' for rescue financing in certain circumstances. To obtain an order under Section 211E(1)(a) of the Companies Act, the applicant must show that it has expended reasonable efforts to secure other types of financing without super-priority. For an order under Section 211E(1)(b) of the Companies Act, the debtor must demonstrate that reasonable efforts have been undertaken to explore other types of financing without priority status. Evidence must be placed before the court of, for example, failed negotiations. Other considerations include whether: (1) the proposed financing is in the exercise of sound and reasonable business judgment; (2) alternative financing is available on any other basis; (3) such proposed financing is in the best interests of the creditors; (4) any better proposals are before the court; (5) the proposed financing is necessary to preserve the assets of the estate and is necessary, essential and appropriate for the continued operation of the debtors' business; (6) the terms of the proposed financing are fair, reasonable and adequate; and (7) the financing agreement was negotiated in good faith and at arm's length. There is a relative paucity of reported decisions on the principles governing a Singapore court's grant of super-priority financing. At the time of writing, there has only been one reported decision, and there have only ever been two successful applications for super-priority financing (discussed further in Section III).

Judicial management

Part VIIIA of the Companies Act sets the statutory framework for judicial management. Judicial management may be utilised where a company is, or is likely to become, unable to pay its debts, either as a tool for corporate rescue or to carry out a more advantageous realisation of a company's assets than would be possible in a winding up. In judicial management, a judicial manager, who is appointed to replace the company's existing management, is empowered to do all such things as may be necessary for the management of the affairs, business and property of the company. 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.

A statutory moratorium arises automatically upon an application being made for judicial management, which is extended upon the making of a judicial management order. As in the scheme of arrangement enhanced moratorium, the judicial management moratorium restrains secured creditors from enforcing their security. Super-priority in rescue financing is also available in the judicial management regime.


Under the Companies Act, a company may be wound up compulsorily by the court or voluntarily. In a compulsory liquidation, parties with standing under the Companies Act, including creditors of a company, may apply to the court for an order that a company be wound up.

The Companies Act provides a list of grounds upon which the court may make an order to wind up a company, including that the company is 'unable to pay its debts'. A statutory presumption that the company is unable to pay its debts arises if (1) a statutory demand for a sum exceeding S$10,000 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 satisfaction, the company is deemed to be unable to pay its debts; or (2) if an execution or other process issued on a judgment of any court against the company is returned unsatisfied in whole or in part, the company is also deemed to be unable to pay its debts.

The creditor can also prove that the company is unable to pay its debts (including contingent and prospective debts, if any). In general, courts typically deploy two tests – the 'cash-flow' test (i.e., the company is unable to pay its debts as they fall due) and the 'balance-sheet' test (i.e., the company's liabilities, including contingent and prospective liabilities, exceed its assets). All evidence that may appear relevant to the question of insolvency will be considered.

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. Further, upon the winding-up order being made, no action or proceeding shall be commenced without the leave of the court.

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. 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. 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 creditors, where the creditors will be able to nominate a liquidator that will prevail over the company's nomination.

ii Statutory avoidance provisions and clawback

Any disposal of the company's property made after the commencement of winding up is void, though the court can prospectively or retrospectively validate such disposal.

Additionally, 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 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 six months preceding the commencement of winding up. Where the person preferred is a 'person connected with the company' (including directors of the company), this period is two years. 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 of which (in money or money's worth) is significantly less than the value (in money or money's worth) of the consideration provided, may be set aside if entered into within the five years preceding the commencement of winding up. 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.

A floating charge entered into within six months of the commencement of the winding up is valid to the extent of any cash paid to the company in consideration for the charge, unless it is proven that the company was solvent immediately after the creation of the charge.

The above applies similarly in judicial management, with the necessary modifications.

iii 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. This requirement was considered by the Singapore court recently, where the Court found, on the application of a liquidator of a Singapore company, that a floating charge was void for lack of registration. It is not sufficient for lenders to merely obtain the agreement of the borrower to grant security – the onus lies on the secured lender to take the necessary steps for the creation, validity and perfection of their security interests (including, where applicable, registration of a floating charge).

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.

In BP Singapore Pte Ltd v. Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others and another appeal [2020] SGCA 9, a question arose as to whether, when a company in receivership is wound up, its trading partners can set off debts they incurred to the company against unsecured debts that the company incurred to them before the company entered into receivership. There, the company's secured lenders had a floating charge over, inter alia, the company's undertaking and assets, including all present and future book debts. The secured lenders enforced their security by appointing receivers and managers over the company's assets, thus crystallising the floating charge. The receivers and managers then continued the company's business under interim tolling agreements. Under these tolling agreements, the company's trading partners were entitled to use the company's plant to process feedstock (supplied by the trading partners) into aromatics and petroleum products which they could sell. In exchange, the company was paid a monthly tolling fee by the trading partners for use of the plant. The company was later wound up, and the trading partners attempted to set off their post-receivership indebtedness to the company arising from the tolling agreements, against debts that the company had incurred to them pre-receivership. The Singapore Court of Appeal held that, in the absence of clear evidence, there was no decrystallisation of the lenders' security, as the lenders had not relinquished control over the receivables that arose during the receivership, and as soon as they arose, the receivables became subject to the crystallised floating charge. Hence, insolvency set-off was not applicable. The Court left open the possibility that such control may be relinquished without the express consent of the secured lender (e.g., where the company trades with an unsecured creditor who has no knowledge that the company is in receivership). The Court also found that equitable set-off did not arise because it had not been shown that there was close connection between the debts sought to be set-off, or that it would be manifestly unjust not to allow such set-off.

iv Directors' duties in insolvency

A director is under a duty to act honestly and use reasonable diligence. Where the company is insolvent or near insolvency, directors must additionally take into account the interests of the company's creditors to ensure the company's assets are not dissipated. 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.

A director who is knowingly a party to the company contracting a debt of which there was no reasonable or probable ground or expectation that the company would be able to pay off such debt could be convicted of a criminal offence. Any person who has been convicted for insolvent trading may also be held personally liable for the repayment of that debt.

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 liabilities, and guilty of a criminal offence of fraudulent trading.

Further, while 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 where there has been an adverse finding under the statutory avoidance. Claims for breaches of common law fiduciary duties may be brought, notwithstanding that the relevant time limit under statutory avoidance provisions has passed.