By Aurelio Gurrea-Martínez (Singapore Management University)
On 1 October 2018, the Singapore Parliament passed the Insolvency, Restructuring and Dissolution Act 2018 (‘IRDA’). After given Presidential Assent on 31 October 2018, the IRDA was published in the Government Gazette on 7 November 2018. However, while many of the innovative provisions dealing with corporate restructuring included in the IRDA were already in operation –since they were implemented in the Companies Act– the IRDA did not come into yet due to the need to complement the IRDA with a comprehensive package of subsidiary legislation. Today, the Government has announced that the Insolvency, Restructuring and Dissolution Act, together with its 48 related pieces of subsidiary legislation, will commence on 30 July 2020. Therefore, it is a big day for the Singapore insolvency community, since it represents the end of a long period of consultations and reforms, and the beginning of a new era for the insolvency and restructuring industry in the country.
Motivation and goals of the reform
The IRDA is the result of a long-awaited reform that seeks to modernise the insolvency and restructuring framework in Singapore while consolidating all the existing laws relating to individual and corporate insolvency in a single statute. Therefore, the new legislation not only seeks to facilitate the understanding and practice of insolvency law in Singapore but it also serves as a valuable tool to support the real economy by facilitating the reorganisation of viable companies in financial distress, the liquidation of non-viable businesses in a fair and efficient manner, and the maximisation of returns to creditors. Furthermore, by implementing a sophisticated restructuring framework, this package of reforms which culminates in the enactment of the IRDA seeks to enhance Singapore’s leadership as an international hub for debt restructuring.
Features of the new legislation
1. Consolidation of existing insolvency and restructuring laws. – The IRDA is an omnibus legislation that consolidates Singapore’s personal and corporate insolvency and debt restructuring laws into a single piece of legislation and updates relevant laws to be aligned with international best practices.
2. Insolvency practitioners. – The new legislation provides a more comprehensive regulation of insolvency practitioners that, among other aspects, includes a new licensing regime for lawyers and accountants interested in acting as insolvency practitioners.
3. Summary dissolution procedure.– Many companies facing financial trouble do not even have assets to pay for their liquidation costs. To address this problem, the new IRDA includes a summary procedure to dissolve companies that have insufficient assets to pay for the administration of the winding up.
4. Avoidance actions. – The new legislation amends the system of avoidance actions existing in insolvency proceedings. Among other aspects, the new regime reduces the ‘twilight period’ for transactions at an undervalue from 5 to 3 years, and it increases from 6 months to 1 years the avoidance period of unfair preferences given to non-related parties.
5. Litigation funding. – The new legislation enhances the existing framework for litigation funding in Singapore. Namely, while respecting the traditional common law rules for the assignment of actions and proceeds belonging to the company, the new system formally grants judicial managers and liquidators the power to assign the proceeds from statutory causes of actions belonging to them (e.g., avoidance actions or actions seeking to make the directors liable for wrongful trading). Therefore, by enlarging and clarifying the range of causes of action which may be funded by third parties, the regime will allow the initiation of certain actions that, while beneficial for the creditors, would not be otherwise pursued due to the lack of funds.
6. Model Law on Cross-Border Insolvency. – The new legislation includes the provisions dealing with cross-border issues already existing in Singapore when it adopted the Model Law on Cross-Border Insolvency in 2017.
7. Jurisdiction over foreign debtors. – The new legislation includes the provisions, adopted in the 2017, allowing Singapore courts to manage the insolvency or restructuring procedure of foreign debtors. Namely, a foreign debtor will be able to use Singapore’s new restructuring framework if it shows a ‘substantial connection’ with Singapore. This substantial connection can be established by showing that the debtor’s assets or centre of main interest is located in Singapore, its contracts are governed by Singapore law, the debtor's business is primarily conducted in Singapore, or the debtor has submitted to the jurisdiction of the Singapore courts for the resolution of one or more disputes relating to a loan or other transactions.
8. Restructuring tools. – The new legislation includes all the changes implemented to the Singapore restructuring framework in the the past few years. These changes include a variety of restructuring tools. Most of them apply to both the Scheme of Arrangement and judicial management.
8.1. Enhanced moratorium. – The new restructuring framework allows debtors to enjoy an enhanced moratorium which will protect them from any legal actions taken by creditors. Even though, unlike the UK Scheme of Arrangement, the Singapore Scheme already allowed for a moratorium before the recent package of reforms, the new legislation has made the moratorium more powerful in several ways. First, it now protects the debtor against secured creditors. Second, the new moratorium has worldwide effect and it may be extended to related companies. Finally, the debtor will enjoy an automatic moratorium which has the possibility of being extended. Therefore, this moratorium seems to be a significant step to strengthen Singapore as an international hub for restructuring hub. At the same time, the implementation of this enhanced moratorium has been conducted in conjunction with protections to the creditors. Among other aspects, this protection will be provided by a close scrutiny of the court to decide about the need and desirability of granting and, if so, extending a moratorium. Therefore, given the sophistication of the judiciary in Singapore, it is expected that this enhanced moratorium will be beneficial for debtors without harming creditors.
8.2. Cross-class cramdown. – Inspired by the US Chapter 11 reorganisation procedure, the new restructuring framework in Singapore allows debtors to impose a reorganisation plan on dissenting classes of creditors. At the same time, the new legislation has provided creditors with several safeguards against the opportunistic use of this provision by the debtor. Therefore, the system is expected to facilitate a debt restructuring without undermining the interests of creditors.
8.3. Rescue financing. – Debtors in financial distress usually have trouble having access to new financing. The new restructuring framework addresses this problem by implementing a system of rescue financing similar to the regime of DIP financing existing in the United States. Under the new system of rescue financing in Singapore, creditors providing new financing to debtors subject to a restructuring procedure may enjoy a super priority status provided that certain requirements are met and this priority is authorised by the court.
8.4. Restriction of ipso facto clauses. – Many suppliers may include in their contracts certain provisions allowing them to terminate their contracts if a debtor initiates an insolvency or restructuring procedure. Subject to some limitations, the new restructuring framework restricts the ability of certain parties to terminate their contracts on the sole basis that the debtor has initiated a restructuring procedure.
8.5. Debtor in possession. – Unlike what happens in formal insolvency proceedings such as a winding up and judicial management, debtors using the Singapore Scheme of Arrangement are not required to appoint an insolvency practitioner. Therefore, the directors are allowed to keep running the company during the procedure. As a result, the new restructuring framework provides debtors with most of the tools existing in formal reorganisation procedures while allowing the debtor to remain in possession - something uncommon in reorganisation procedures outside the United States. Therefore, the new Singapore Scheme of Arrangement will allow debtors to enjoy the advantages associated with both the traditional Scheme of Arrangement (e.g., flexibility, debtor-in-possession, lower costs and stigma) and a modern reorganisation procedure (e.g., moratorium, rescue financing provisions, cramdown).
8.6. Pre-packaged Scheme. – Although the concept of ‘pre-packs’ differs across jurisdictions, the insolvency and restructuring framework adopted in Singapore uses the term ‘pre-packaged Scheme’ for a Scheme of Arrangement approved without a creditors’ meeting. Since these pre-packaged Schemes can affect creditors’ rights, several forms of creditor protection have been put in place. Among others, the new regime requires the debtor to provide information to each creditor bound by the agreement, and the pre-packaged Scheme can only be approved if the court is satisfied that the agreement would have been approved by creditors representing a majority in number and 75% in value. While a pre-packaged Scheme can be risky in countries without reliable courts, the sophistication of the judiciary in Singapore will probably make this tool a desirable option to reduce negotiation costs and to facilitate a quick resolution of the debtor’s financial trouble for the benefit of not only the company but also of the creditors as a whole.
The commencement of the IRDA and the enactment of the subsidiary legislation accompanying the IRDA represents the end of a long period of consultations and reforms and the beginning of a new era of insolvency and restructuring industry in Singapore. In addition to enhancing the attractiveness of Singapore as a debt restructuring hub, it does so by achieving a good equilibrium between the protection of debtors and the protection of creditors. If an insolvency regime is not attractive to debtors, it can harm entrepreneurship, innovation, and the quick reorganisation of viable businesses. If an insolvency regime is not attractive to creditors, it can harm firms’ access to debt finance. Therefore, an insolvency framework should ideally be pro-both. While implementing an insolvency reform in that direction can be challenging, Singapore has shown that it is possible. Whether the reforms will create the expected economic benefits for the real economy, and whether the new insolvency framework will strengthen Singapore as an international hub for debt restructuring, is something that only time will judge. So far, it seems that the country is taking the necessary steps to successfully achieve these goals.