The Insolvency, Restructuring and Dissolution Act 2018 (the "IRDA") came into force on 30 July 2020. The consolidation of all personal and corporate insolvency and debt restructuring legislation into a single statute, along with other legislative changes, seeks to further strengthen Singapore's position as an international debt restructuring hub. This note highlights certain key changes effected by the IRDA that are relevant to loan market participants.
Restrictions on ipso facto clauses
Ipso facto1 clauses allow a party to terminate or modify the operation of a contract (including accelerating payment) upon the occurrence of certain events such as a counterparty's insolvency or being subject to restructuring proceedings. Under the IRDA, these clauses are unenforceable,2 with some exclusions such as for "eligible financial contracts". 3 In addition, a counterparty may obtain a court declaration that the new restriction does not apply to it if it satisfies the court that restricting the application of ipso facto clauses would "likely cause the applicant significant financial hardship". 4
For a detailed discussion on the new ipso facto provisions, please refer to our dedicated article on the provisions.5
Scheme of arrangement – cross-class cram downs
Under the previous cross-class cram down regime contained in the Companies Act6, to cram down a class of unsecured creditors, existing members were required to divest their shares. However, there was no set procedure for shareholders to be compulsorily divested of their shares as part of the scheme of arrangement, and the cram down was therefore dependent on the members voluntarily divesting their shares. Under the IRDA, unsecured creditors can be crammed down without requiring that the members are divested of their shares.7
Judicial management without a court order
Section 94 of the IRDA introduces judicial management without a court order, where companies can now be placed under judicial management through a creditors' resolution. Under the IRDA, a company can propose to its creditors that it enter judicial management and, with the approval of a majority in number and value of the creditors present and voting, be placed under judicial management. Judicial management can only commence if the requisite majority of creditors resolves to place the company under judicial management. If such requisite majority is not obtained, the process ends. Note that once the company is placed into judicial management, the judicial management process will then continue under the supervision of the court in the same manner as a court commenced process.
A notable difference in the new creditors' resolution process is that it requires the consent of a holder of a floating charge over the whole (or substantially the whole) of the company's asset for the appointment of the interim judicial manager to proceed. This is different from the court ordered process where the floating charge holder's opposition can only block the judicial management if the court is of the view that the prejudice that would be caused to it if the order were made is disproportionately greater than the prejudice that would be caused to unsecured creditors if the application were dismissed.8
Judicial management by creditors' resolution should minimise expense, formality and delay in comparison to a court ordered process, thereby providing distressed companies another viable option to commence a restructuring.
The IRDA introduces a new concept of "wrongful trading", where a company is deemed to "trade wrongfully" if it incurs debts or other liabilities, when insolvent (or becomes insolvent as a result of incurring such debts or other liabilities), without reasonable prospect of meeting them in full.9 Any director, company secretary or any executive officer of the company (an "Officer") does not need actual knowledge to be found liable for wrongful trading. An Officer may be found liable for wrongful trading if he or she ought to have known that the company was trading wrongfully. In addition, any person (this is wider than just an Officer) party to such wrongful trade, who knew that the company was trading wrongfully, may be liable for such wrongful trading.
The courts are empowered to declare that any person who was a knowing party to a company's wrongful trading be personally liable for its debts or liabilities if found guilty without the need to establish criminal liability. The previous regime was viewed as unsatisfactory as criminal liability had to be found as a prerequisite before the making of an application to impose civil liability against the officer of the company. The current regime under the IRDA makes it easier for liability to be established as the standard of proof for civil liabilities is lower than for criminal liabilities. As such, directors of distressed companies considering entering into contracts will have to exercise greater care. However, the courts may relieve the person from personal liability if the courts are satisfied that the person acted honestly, having regard to all the circumstances of the case, and ought fairly to be relieved from personal liability.
Section 239(10) of the IRDA provides that a company or any person party to, or interested in becoming a party to, the carrying on of business with a company, may apply to the courts for a declaration that a particular course of conduct, transaction or series of transactions would not constitute wrongful trading.
Availability of third-party funding to judicial managers and liquidators
Distressed companies do not usually have sufficient funds to pursue claims. Third-party funding agreements are a useful tool to enable a distressed company to pursue such claims and realise a greater recovery for its creditors. Prior to the commencement of the IRDA, courts had permitted litigation funding in Singapore in the context of insolvency under the appropriate circumstances.10 However, a liquidator was only able to assign the proceeds of the company's claims to third parties but not the right to pursue an action under the various avoidance provisions and insolvency offences, such as wrongful trading, as such actions are personal to the judicial manager or liquidator.11 With the commencement of the IRDA, both judicial managers and liquidators are now statutorily empowered to enter into agreements with third parties in relation to obtaining funds and, in connection thereto, assigning the proceeds in respect of the following12:
(a) transactions at an undervalue13;
(b) unfair preferences14;
(c) extortionate credit transactions15;
(d) fraudulent trading16;
(e) wrongful trading17; and
(f) damages against delinquent officers18.
However, this power must be exercised in accordance with the Insolvency, Restructuring and Dissolution (Assignment of Proceeds of an Action) Regulations 2020. The regulations provide important safeguards for the exercise of this power, such as requiring judicial managers and liquidators to obtain approval from specified persons before entering into an assignment, and prohibiting judicial managers and liquidators from receiving any commission or share of the proceeds. This new power will allow judicial managers and liquidators to fund court actions and increase the chances of such actions being taken (when they may not have been taken previously due to a lack of funding). If such actions are successful, this should improve the overall recoveries for the creditors. The changes are not intended to affect other funding arrangements that are allowed under common law, such as funding for causes of action that belong to the company as its property and funding for the investigation of potential causes of action for financially distressed companies.