Statistics from the Singapore Ministry of Law (MinLaw) show a slight increase in the number of companies liquidated in 2020 for the period January to July, as compared to the same period in 2019.
The downturn caused by the COVID-19 pandemic has detrimentally affected certain sectors more than others. Businesses related to tourism, aviation, events and connected businesses, and certain retailers and food and beverage sectors, have been badly affected.
There has also been a discernible increase in the number of insolvencies and restructurings in the oil and gas and marine-related industries.
Temporary Measures to Combat the Effects of COVID-19
The COVID-19 outbreak has adversely affected many businesses. In response, the Singapore government enacted the COVID-19 (Temporary Measures) Act, of which Part 3 provided for temporary changes to bankruptcy and insolvency laws (which expired on 19 October 2020) by increasing the debt thresholds for winding-up and bankruptcy, and providing a safety net to allow businesses to continue to trade while technically insolvent.
Additionally, MinLaw intends to introduce a Simplified Insolvency Programme (on a temporary basis) to support eligible micro and small companies that have to restructure debts or wind up, by providing simpler, faster, and lower-cost proceedings for this purpose.
The insolvency and restructuring market is expected to see more activity in the near future. The economic impact of the COVID-19 pandemic is likely to cause more corporate defaults and financial distress, particularly since the expiry of the relief period under the COVID-19 (Temporary Measures) Act.
Further, the new Insolvency, Restructuring and Dissolution Act 2018 (IRDA), which came into force on 30 July 2020, represents the culmination of a major reform process of the insolvency and restructuring regime in Singapore. The IRDA consolidates, updates and enhances the available restructuring and insolvency mechanisms. One of the objectives of this reform is to enhance Singapore's effectiveness and attractiveness as an insolvency and restructuring hub in the region.
The main legislation that governs corporate and individual insolvencies is the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) which came into force on 30 July 2020. The IRDA consolidates personal and corporate insolvency provisions previously found in the Singapore Bankruptcy Act and Singapore Companies Act (CA). The Singapore Bankruptcy Act has been repealed and the relevant provisions of the CA have been deleted and/or amended.
The corporate insolvency provisions in the IRDA apply to a company incorporated under the CA and an unregistered company that is liable to be wound up under the IRDA (or, in other words, that has substantial connection with Singapore). The bankruptcy provisions in the IRDA apply to individuals and unincorporated partnerships with statutorily specified connections to Singapore. In this guide, the focus is on corporate insolvency.
Winding up of other business entities, such as limited liability partnerships, limited partnerships, registered business trusts and variable capital companies, is governed by specific legislation regulating those entities.
Corporate insolvency and bankruptcy proceedings fall under the jurisdiction of the Singapore High Court (Court). Singapore has a list of specialist judges to hear corporate insolvency proceedings. Singapore follows the British common law tradition, including the doctrine of judicial precedents.
The main corporate insolvency proceedings and debt restructuring processes in Singapore are as follows:
Receivership is not generally intended as a debt restructuring tool. It is primarily a mode of enforcement by creditors. A receiver is appointed over certain property of the company, typically to enforce the security that has been created over the property. A receiver and manager may be appointed where it is necessary to realise the business of the company as a going concern.
Generally, there are no express provisions in the IRDA requiring insolvent companies to commence formal insolvency proceedings within a specified timeframe.
However, by continuing to trade despite a company's insolvency, the company's officers run the risk of offending certain provisions in the IRDA. The IRDA imposes penalties on officers of a company for certain acts conducted when the company is insolvent, including wrongful trading, fraudulent trading and breach of directors' duties affecting creditors. Such penalties may include a fine or a term of imprisonment, as well as personal liability for the relevant sums. As such, directors may choose to commence formal insolvency proceedings if the company is insolvent.
These obligations and penalties/liabilities are covered more fully in 10 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies.
Once proceedings are commenced, ie, by filing the relevant court documents, the timelines set out in the IRDA or as directed by the Court must be adhered to.
The restructuring and insolvency regime allows the creditors and other parties to commence involuntary proceedings.
The following persons may commence involuntary proceedings by applying to the Court for a winding-up order against the company:
An application to Court for a winding-up order must be made based on one or more of the grounds set out in Section 125 of the IRDA. These include:
The following may commence involuntary proceedings by applying to the Court for a judicial management order:
An application for a judicial management order may be made where:
For members’ voluntary liquidation, a company must be solvent. A solvent company can choose to commence voluntary liquidation through a resolution by its members. An insolvent company may be placed in a creditors’ voluntary liquidation.
For compulsory liquidation, Section 125 of the IRDA sets out the grounds on which a Court may liquidate a company. One of the commonly invoked grounds is that the company is "unable to repay its debts". Section 125(2) of the IRDA sets out the circumstances under which a company is deemed unable to repay its debts:
The courts generally use two tests for insolvency, namely, the inability to pay debts as they fall due, and an excess of overall liabilities over total assets, but will consider all the circumstances in deciding whether a company is insolvent.
For judicial management by way of an application to Court, the Court will only make a judicial management order if, among other things, it is satisfied that the company is, or is likely to become, unable to pay its debts.
For judicial management by way of a resolution of the company's creditors, Section 94(1) of the IRDA allows a company to obtain a resolution of its creditors for the company to be placed under judicial management. The company must consider, inter alia, that it is, or is likely to become, unable to pay its debts.
The corporate insolvency provisions in the IRDA apply to a company incorporated under the CA and an unregistered company that is liable to be wound up under the IRDA.
For other specific entities, provisions in other industry-specific legislation regulating these entities also apply to their corporate insolvency proceedings.
The Monetary Authority of Singapore (MAS), the central bank of Singapore, has powers to address issues relating to distressed financial institutions while maintaining continuity of their critical economic functions. For example, the Monetary Authority of Singapore Act (MAS Act) empowers the MAS to temporarily stay the termination rights of counterparties to contracts entered into with a pertinent financial institution in the event of a resolution of such financial institution. This includes a bank, a finance company, a merchant bank, an insurer, an operator or a settlement institution of a designated payment system, an approved exchange, or a licensed trust company, that is regulated in Singapore. In addition, a bank incorporated in Singapore and its holding company incorporated in Singapore are subject to a statutory bail-in regime set out in the MAS Act. The MAS bail-in powers include the power to cancel an instrument or liability issued by the bank or its holding company, to convert it from one form or class to another (eg, from debt to equity), to create a new instrument or liability in connection with modifying an existing instrument or liability, and to treat the instrument or liability as having effect as if a right of modification or conversion of its form had been exercised.
The Banking Act contains provisions relating to the insolvency of banks licensed under the Act, which include empowering the MAS to assume control of a bank that is, or is likely to become, insolvent. Similar powers are provided to the MAS in respect of other financial institutions that are, or are likely to become, insolvent. Such financial institutions include an insurer, a finance company, a payment service provider, an operator or a settlement institution of a designated payment system regulated under the Payment Services Act 2019 and an entity regulated or licensed under the Securities and Futures Act (SFA). Entities licensed under the SFA include an approved exchange or a recognised market operator, an approved clearing house or a recognised clearing house, a holder of a capital markets services licence that is licensed to carry on business in dealing in capital markets products, fund management, product financing, REIT management, advising on corporate finance, etc.
Entities providing essential services such as those running telecommunication systems and services, and providing services relating to the supply of electricity or gas, are also subject to a specific insolvency regime which may be imposed by the regulators governing these entities.
The winding up of a company is usually commenced when there is no longer any prospect of resuscitating the company. Where a company is still viable, it will typically elect for restructuring processes which aim to provide a company in financial difficulty with the opportunity to recover financially and carry on business as a going concern.
To facilitate the viability of restructuring strategies, the IRDA provides for the imposition of moratoriums on winding-up and other enforcement actions against the company when it has entered into restructuring proceedings, allowing some breathing room for the company to work out an arrangement with its creditors. See 6.2 Position of the Company.
There are no express provisions in the IRDA requiring consensual restructuring negotiations before the commencement of a formal statutory process, eg, to apply to the Court for an order for liquidation or, as the case may be, judicial management.
As far as possible and if there is no suspicion of improper conduct by the debtor, most industry participants, including the creditors, would be prepared to try to engage the debtor and negotiate a commercial solution acceptable to all stakeholders. It is fairly common for debtors to try to engage their creditors in a consensual restructuring process, before deciding whether to file a court application to initiate a scheme of arrangement or judicial management. See more about the consensual process in 3.2 Consensual Restructuring and Workout Processes.
Outside the formal statutory restructuring and insolvency processes, a company may seek to restructure its debts or implement a workout process by entering into a consensual or “out of court” arrangement with its creditors and other stakeholders. Parties may enter into a contractual arrangement to address the compromise of any debt, a repayment plan and issues regarding the intended operation of the company.
There is no specific legislation or rules governing out-of-court workouts. However, certain practices have developed. For instance, the Association of Banks in Singapore has promulgated a set of principles for facilitating out-of-court workouts through its Principles & Guidelines for Restructuring of Corporate Debt (ABS Guidelines). The ABS Guidelines are intended to provide a non-statutory framework for lenders to assist and facilitate the proposed restructuring of a company or group in financial distress. The ABS Guidelines aim to “promote a rescue culture and to avoid unnecessary corporate collapses so as to enhance the rate of recovery than otherwise would be achieved through formal insolvency procedures”. The ABS Guidelines encourage, among others:
In an “out of court” or consensual process, it is up to the debtor company and the participating creditors to negotiate and agree on the exact roles, powers and functions of any creditor committees which may be formed as part of the process, and the timelines and milestones for such process.
Successful negotiations in a consensual out-of-court process typically culminate in debt restructuring agreements between the debtor company and participating creditors. Such restructuring agreements would generally address issues relating to creditors’ contractual and security rights and priority, and inter-company priority (where applicable in a group restructuring).
One of the difficulties that may arise in consensual restructuring is obtaining the consent of all creditors and stakeholders that will be bound by the proposed restructuring plan. To overcome this, the company may consider formal court-managed restructuring processes such as schemes of arrangement or judicial management.
A scheme of arrangement, upon the approval of the requisite majority, would bind dissenting creditors. The support of key creditors is thus required for the effective implementation of a scheme. The company would have to ensure that all material information relating to the scheme of arrangement is disclosed to the creditors so as to allow them to exercise their voting rights meaningfully.
Where a company is in financial distress, it may seek the injection of new money by willing lenders or investors.
The specifics of the arrangement for the injection of new money would vary from case to case. Whether the new-money investor would be granted priority rights for their investment would depend on whether the company is able to negotiate such rights and obtain the agreement of its existing creditors.
To overcome any difficulty in obtaining other creditors' consent to granting priority rights to a new investor, a company could consider utilising the IRDA's rescue financing provisions. Subject to the fulfilment of the statutory requirements, the Court is empowered under these provisions to grant super priority to the lenders who provide rescue financing in the event of the company's winding up. See 6.10 Priority New Money.
There are no laws which expressly impose duties on creditors in this context or otherwise regulate permissible restructuring strategies. Generally, there is nothing in the law to prevent a creditor from acting in accordance with its own interests in a debt restructuring process.
However, there may be circumstances which give rise to possible causes of action under general law, for instance, where there are grounds on the facts to claim for a breach of duty of care in representations or statements, fraudulent misrepresentation, or other economic torts.
Consent Solicitation Exercise
Where an issuer of bond debt wishes to restructure such debt, it may try to do so through a consent solicitation exercise. Subject to the terms of the bond instrument, an issuer may seek the consent of holders of debt securities to amend and/or waive breaches of the terms of those debt securities. An issuer undergoing a bond restructuring may rely on the “super-majority” provisions in bond issues or related trust deeds. This means that once the requisite majority consents to such amendment or waiver, the decision is binding on all bondholders, including the dissenters.
More generally, the IRDA provides an out-of-court alternative for companies to enter judicial management. A company may, instead of applying to the court for a judicial management order, obtain a resolution approved by a majority in number and value of the creditors present and voting, for the company to be placed under the management of a judicial manager.
Apart from this, a consensual out-of-court restructuring arrangement generally cannot be enforced on dissenting creditors or shareholders.
In practice, it may be difficult to obtain the consent of all creditors to a restructuring arrangement. Companies thus typically turn to court-managed restructuring processes, such as a scheme of arrangement, which are binding on the dissenting minority creditors and shareholders (provided the necessary majority is obtained).
Scheme of Arrangement
A scheme of arrangement generally requires the approval of a majority in number holding three quarters in value of each class of creditors. As a general rule, if there is more than one class of creditors, the scheme of arrangement fails if the company fails to obtain the requisite approval of any single class of creditors.
In certain circumstances, the IRDA permits a "cram-down" across the different class or classes of creditors by approving the compromise or arrangement and ordering that the compromise or arrangement be binding on the company and all classes of creditors meant to be bound by the compromise or arrangement. This is possible if the Court is satisfied that, among other things, there is overall support from a majority in number holding three quarters in value of all creditors across classes in aggregate, and that the scheme is fair and equitable to, and does not unfairly discriminate against, the dissenting class.
The common types of security taken are:
General Rights and Remedies
Outside the insolvency context, secured creditors can generally look towards the asset or property subject to security in satisfaction of the debt.
Securities may be enforced according to the rights provided under the relevant security instrument. For example, in a mortgage, the mortgagee may exercise the right to possession, sale or foreclosure, or appoint receivers. If there are inter-creditor or security sharing arrangements, the exercise of rights would be subject to the terms of such arrangements.
In the context of restructuring and insolvency, there are certain restrictions on the rights of secured creditors. When a company is placed in judicial management or liquidation, creditors are not permitted to enforce their security rights except with the permission of the insolvency office holder or the Court. In a scheme of arrangement process, the company may apply for a moratorium to restrict the enforcement action by secured creditors (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation).
Blocking Insolvency and Restructuring Proceedings
Creditors of a company (both secured and unsecured) may oppose an application to the Court for the commencement of restructuring and insolvency proceedings. Such objection may be made at the following stages:
In statutory insolvency and restructuring proceedings, there are certain restrictions on the rights of secured creditors to enforce their security. Such secured creditors may, however, apply to the Court for permission to enforce their rights and the Court may make the appropriate orders depending on the circumstances.
A secured creditor has different rights and priorities from unsecured creditors. The assets or property which are the subject of security generally do not form part of the pool of assets available for distribution in the insolvency and restructuring process. Subject to any applicable restriction or moratorium, a secured creditor may enforce its rights against the secured property or asset. The rights of enforcement available to the secured creditor (eg, appointment of a receiver, possession, and sale) would depend on the nature of the security and the rights as stated in the security instrument.
An unsecured creditor would have to submit proof of debt and, if the proof is admitted, would ordinarily be entitled to the distribution of its share of the remaining assets of the company on a pari passu basis.
There are no laws which specifically address the extent of recovery of unsecured trade creditors in the restructuring process. The terms of repayment for unsecured trade creditors, like other unsecured creditors, would depend on the terms of the proposed restructuring.
In the judicial management and scheme of arrangement processes, creditors' meetings must be held to present the proposal or proposed scheme for the company respectively. Unsecured creditors generally have the right to vote on the proposal; approval is generally required from a prescribed majority of creditors (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation).
In the context of an application to the Court for judicial management, schemes of arrangement or winding-up, unsecured creditors may seek to oppose the application in court (see 4.2 Rights and Remedies). It is up to the Court to consider the weight to be given to the position of such creditors.
Part III of the Debtors Act provides for attachment of property before judgment. Section 17 provides that the Court may, subject to the satisfaction of the prescribed requirements, order the seizure of the property of the defendant as a pledge or surety to answer the just demand of the plaintiff, until the trial of the action and satisfaction of any judgment that may be made against the defendant.
It should be noted that such an order does not make the plaintiff a secured creditor in the event of the defendant's bankruptcy.
Freezing orders and Mareva injunctions may be granted by the courts under Singapore law.
In the distribution of assets, a liquidator must ensure that the following items are paid in priority to all other unsecured debts in the following order of priority:
The payments above do not have priority over secured creditor claims.
To facilitate rescue financing, the IRDA empowers the Court to grant super priority to the lenders who provide rescue financing in the context of judicial management or a scheme of arrangement. The Court may specify the order of priority of the payment to such lenders in accordance with the requirements of the IRDA.
A company may enter judicial management by:
Upon entry into judicial management, the appointed judicial manager will, within 90 days, provide the company's creditors with a proposal to achieve one or more of the statutory purposes.
The judicial manager will hold a creditors' meeting, at which the creditors will vote on whether to approve the proposal. Approval must be obtained from a majority in number and value of the creditors (present and voting either in person or by proxy), whose claims have been accepted by the judicial manager.
The judicial manager will report to the Court on the result of the creditors' meeting, and if the proposal has been approved, will manage the affairs, business and property of the company in accordance with the approved proposal.
The judicial manager's appointment expires 180 days after the date of the making of the order, unless extended.
To allow breathing room for a company to formulate a judicial management plan, an automatic moratorium arises:
The moratorium restricts, amongst others, the winding-up of the company, and the commencement of proceedings or enforcement of security against the company.
During the period when a company is in judicial management, a similar moratorium is in place.
Scheme of Arrangement
The procedure for entering into a scheme of arrangement generally begins with an application to Court for leave to convene a creditors' meeting to put forward a proposed scheme of arrangement for the creditors’ consideration.
If leave is granted, the company will conduct a creditors' meeting in accordance with the prescribed requirements, at which the creditors will vote on the proposed scheme. The scheme must be approved by a majority in number representing at least three quarters in value of creditors present and voting (in person or by proxy).
If the scheme is approved, an application is made to the Court for sanction of the approved scheme. Once the Court sanctions the scheme, the scheme becomes effective upon lodgement with the Registrar of Companies. The scheme manager may then proceed to implement the scheme. The scheme is binding on all creditors of the company, even those who voted against it.
To provide breathing room for a company intending to propose a scheme of arrangement, a company may apply to the Court for an interim moratorium before the company seeks leave of the Court to convene a creditors' meeting. Once such an application is made, there is an automatic moratorium of 30 days, which may be further extended by the Court.
The moratorium restricts, amongst others, the winding-up of the company, and the commencement of proceedings or enforcement of security against the company.
The IRDA also provides for an expedited "pre-packaged" scheme of arrangement. Under Section 71 of the IRDA, the Court is empowered to approve a compromise or arrangement proposed by a company without a meeting of the creditors being held by the company, subject to fulfilment of prescribed conditions.
These conditions include providing the creditors with the prescribed information on the scheme, as well as the Court being satisfied that the approval of the requisite majority of creditors would have been obtained had a meeting been held.
When a company is placed under judicial management, control of the company is ceded to the judicial manager.
The judicial manager takes into custody all the property to which the company is, or appears to be, entitled. The judicial manager may perform all the duties imposed on the directors of the company by the CA or the IRDA, or by the constitution of the company.
Scheme of Arrangement
The company's directors remain in control over the company and the company may continue carrying on business, subject to the terms of the scheme of agreement made with the creditors.
As for borrowing money during this process, the IRDA does provide for rescue financing, see 6.10 Priority New Money.
With regard to a moratorium, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Section 440 of the IRDA also restricts the operation of ipso facto clauses in contracts with the company which are triggered by reason only of the insolvency of a contracting party or the commencement of corporate rescue proceedings. Parties are restricted from relying on such clauses to, among other things, terminate or amend the contract or claim an accelerated payment.
In a judicial management, the judicial manager may call a creditors' meeting to vote on a proposal. The creditors will be provided with a statement of the proposal, a statement showing the names of all the creditors and the amounts of their claims, and a full statement of the company's affairs showing – in respect of the company’s assets or property – the method and manner by which the valuation was arrived at.
At the creditor's meeting, the creditors may establish a committee to oversee the judicial manager's actions. The committee may require the judicial manager to furnish information relating to the conduct of the judicial manager’s functions.
Scheme of Arrangement
When the company intends to hold a creditors' meeting to propose a scheme of arrangement, the creditors must be provided with sufficient notice and a statement explaining the effect of the compromise or arrangement and, in particular, stating any material interests of the directors, and their effect on the scheme.
A creditor who has filed a proof of debt is also entitled to inspect a proof of debt filed by any other creditor, subject to secrecy and other disclosure restrictions.
Separate meetings may need to be held for different classes of creditors. Creditors may be required to separate into different classes where their rights are dissimilar such that they may not be able to consult together with a view to their common interests.
In a scheme of arrangement, the Court is empowered under Section 70 of the IRDA to cram down a dissenting class of creditors provided certain conditions are met, including approval from a majority of creditors holding three quarters in value of all the creditors meant to be bound by the scheme, and that the scheme is fair and equitable and does not unfairly discriminate against the dissenting class.
There are no laws which expressly deal with the trading of claims against a company in the context of restructuring and insolvency proceedings. Subject to the terms of the contract governing the claim, a creditor may be able to assign or sell its claim to another party. However, in the context of a scheme of arrangement, it is open to the Court to examine assignments of debts in considering the overall scheme process.
A scheme of arrangement may be used for the amalgamation, restructuring or reorganisation of a corporate group, whether in a solvent or insolvent context.
Upon the issuing of a judicial management order, the judicial manager takes over control of the company’s assets. While there is no specific restriction on the use of the company's assets by the judicial manager, the judicial manager must perform its functions in line with one or more of the statutory purposes of judicial management. Further, the powers of the judicial manager generally do not extend to making any payment towards discharging any existing debt of the company, except in limited circumstances and subject to the satisfaction of certain requirements.
Before the determination of a judicial management application, a creditor may also apply to the Court to restrain the disposal of the company's property other than in good faith and in the ordinary course of business.
Scheme of Arrangement
In a scheme process, the company’s assets remain under the control of its management. A creditor may apply to the Court during a moratorium period for an order restraining the company from disposing of the property of the company other than in good faith and in the ordinary course of business.
See 6.7 Restrictions on a Company’s Use of Its Assets.
Under Section 100 of the IRDA, a judicial manager of a company may dispose of any property of the company, which is subject to a floating charge, as if it were not subject to a charge. The holder of the charge has the same priority as they would have had in respect of the property subject to the charge.
The judicial manager may also apply to the Court for an order authorising the disposal of property subject to any other security, as if the property were not subject to the security. The Court must be satisfied that such disposal would be likely to promote the purposes of judicial management. Further, the proceeds of the disposal must be applied towards discharging the sums secured by the security.
Scheme of Arrangement
If the scheme of arrangement is intended to address the rights of secured creditors, then the rights of such secured creditors and whether and how such rights are affected, would be subject to the terms of the scheme.
The IRDA empowers the Court to grant super priority to the lenders who provide rescue financing in the context of a judicial management or scheme of arrangement. "Rescue financing" refers to financing that is necessary:
Upon an application by a company, the Court may order the debt arising from rescue financing to be treated as follows:
The IRDA provides a framework for the determination of the value of claims of creditors. Creditors would generally file their proof of debt with the liquidator or judicial manager. These claims are then examined by the liquidator, or as the case may be, the judicial manager, who will determine whether to admit or reject the proof, and estimate the value of any contingent debt.
The creditor must be informed of the determination and the ground for any rejection. If dissatisfied, the creditor may apply to the Court to reverse or vary the decision.
The proposal of a judicial manager requires the approval of the company’s creditors. Whilst such proposal is not subject to any overall requirement of fairness under the IRDA, where a company is in judicial management, the company's creditors may apply to the Court for relief if the company’s affairs, business and property have been managed by the judicial manager in a manner that is unfairly prejudicial to the interests of the creditors.
Scheme of Arrangement
A proposed scheme, after it has been approved by the requisite majority of the creditors, must be submitted for sanction by the Court before it can be implemented. In deciding whether to grant sanction to the scheme, the Court considers, among other things, whether:
It is possible for a scheme of arrangement to release non-debtor third parties, such as guarantors, from liabilities. The Court may consider the following in determining whether to allow the release of third-party liabilities in a scheme:
Generally, the exercise of contractual rights of set-off, offset or netting are not affected by the moratorium in a scheme of arrangement process.
In a liquidation and judicial management, mandatory insolvency set-off rules (which only permit set-off of mutual debts and dealings between parties holding such claims in their own right) set out in the IRDA apply to the exclusion of contractual terms.
Scheme of Arrangement
Where the company or the scheme manager has committed an act or made a decision in breach of any term of the scheme, the Court may reverse or modify the act or decision or order its rectification.
The judicial manager of a company must apply to the Court for the company to be discharged from judicial management if it appears that none of the purposes of judicial management can be achieved.
The IRDA does not provide any restrictions on whether existing equity owners may receive or retain ownership or other property on account of their ownership interests. The rights of existing equity owners would generally be subject to the terms of the restructuring.
Types of Liquidation
The different types of winding-up are discussed in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
The main differences between compulsory and voluntary liquidation are:
In general, voluntary winding up is more informal and economical, and is appropriate for cases where there is little dispute between the interested parties and no suspicion of prior misconduct on the part of the company's officers.
Creditors' Voluntary Liquidation Process
Compulsory Liquidation Process
The IRDA provides a summary procedure for the dissolution of a company, which applies where:
Creditors or contributories may apply to the Court to defer the date of summary dissolution or enable the regular winding-up procedure.
Effects of Winding Up
The appointment of a provisional liquidator or a liquidator would cause all the powers of the directors to cease. The responsibility of administering the assets of the company would fall on the provisional or appointed liquidator.
Once winding up is commenced, the company must cease to carry on its business, except insofar as is required for the beneficial winding-up of the company.
After applying for a winding-up and before a winding-up order has been issued, the company or any creditor or contributory may apply to the Court to stay or restrain further proceedings in any pending action against the company.
When a winding-up order has been issued or a provisional liquidator has been appointed, no action or proceeding against the company may proceed without leave of the Court and in accordance with the terms imposed.
Distribution of Assets
After realising the assets of the company, the liquidator will then require the creditors of the company to submit their proof of debt, and it will assess whether to admit or reject such proof.
Where there are mutual credits, debts or dealings between the company and a creditor, these may be set off against each other. However, there cannot be a claim for set-off if, at the time of extending credit, the creditor knew that a winding-up application was pending against the company. The rules on insolvency set-off operate automatically and are mandatory, and parties cannot contract out of them.
The liquidator will ordinarily apply the remaining assets of the company to the prescribed categories of priority payments (see 5.5 Priority Claims in Restructuring and Insolvency Proceedings). The balance of the assets will then be distributed to the unsecured creditors on a pari passu basis.
Once the liquidator has realised all the property of the company and has distributed a final dividend, the liquidator may call a creditors' meeting to present an account of the liquidation and subsequently apply to the Court for the company to be dissolved.
When a company enters liquidation, the liquidator or provisional liquidator must take all the property of the company into their custody.
The liquidator is empowered to perform certain transactions on behalf of the company. For example, the liquidator may sell the company's property by public auction, public tender or private contract. If authorised by the Court or the committee of inspection, the liquidator may also:
A party buying assets from a liquidator does not obtain good title or title free of claims by sole fact that they are purchased from a liquidator. The assets may be sold by a liquidator on an “as is, where is” basis without representation or warranty on the title over the assets or claims against the assets.
There are no special laws governing credit bids or stalking horse bids. A liquidator generally exercises their discretion in the conduct of the sale of assets, and if there is any issue or dispute, they may seek direction from the Court.
The liquidator may, and must if requested by any creditor or contributory, summon separate meetings of the creditors and contributories for the purpose of determining whether they require the appointment of a committee of inspection and, if they so require, determining the members of the committee.
The committee of inspection will act with the liquidator in managing the affairs of the company in liquidation and may authorise the liquidator to perform certain acts or transactions.
In a judicial management, a meeting of creditors which approved the judicial manager’s proposal may establish a committee of creditors. Such committee may require the judicial manager to provide information relating to the carrying out of his or her functions.
Cross-border insolvency is covered in Part 11 of the IRDA, which gives force of law to the UNCITRAL Model Law on Cross-Border Insolvency (Model Law), with certain modifications to adapt it for application in Singapore.
The Model Law establishes a framework for the management of cross-border insolvency proceedings. Its key features are:
Section 250 of the IRDA also allows the Court to appoint a liquidator of a foreign company for Singapore on the application of the foreign liquidator in the company’s place of incorporation.
The Singapore Supreme Court has implemented the Guidelines for Communication and Co-operation between Courts in Cross-Border Insolvency Matters (Guidelines). The Guidelines set out key features to be reflected in a protocol or order of the Court for communication and co-operation amongst courts, insolvency representatives and other parties involved in cross-border insolvency proceedings, with the aim of preserving enterprise value and reducing legal costs.
In 2020, the Singapore Supreme Court further implemented the Modalities of Court-to-Court Communication (Modalities), which supplement the Guidelines and prescribe the mechanics for initiating, receiving and engaging in such communication.
The Model Law states that, where it conflicts with an obligation of Singapore arising out of any treaty or other form of agreement to which Singapore is a party with other states, the requirements of the treaty or agreement prevail.
The Model Law does not prevent the Court from refusing to take action or grant the requested relief if it would be contrary to the public policy of Singapore. The Model Law also provides that the Court, in deciding on the relief, may consider whether the interests of creditors in Singapore are adequately protected.
As a general rule, foreign creditors are not treated differently from creditors in Singapore solely because of a difference in nationality. See 8.1 Recognition or Relief in Connection with Overseas Proceedings and 8.3 Rules, Standards and Guidelines.
A liquidator (or provisional liquidator) is appointed by the Court upon application by the company or its creditors. The liquidator may be either the Official Receiver or a private liquidator.
Judicial Management: Judicial Manager
A judicial manager (or interim judicial manager) is appointed by the Court upon application by the company or its creditors (see 2.4 Commencing Involuntary Proceedings).
Scheme of Arrangement: Scheme Manager
A scheme manager may be appointed to implement the proposed scheme pursuant to the terms of the scheme of arrangement.
The role of the liquidator is essentially to:
Private liquidators will be monitored by the Official Receiver to ensure the performance of their duties and compliance with the requirements of the law.
In the administration of the company's assets, Court-ordered liquidators must have regard to any directions given by resolution of the creditors or contributories or by the committee of inspection.
A liquidator is an officer of the Court and is expected to act fairly and impartially. A liquidator owes a responsibility to retain a measure of detachment in the course of discharging their functions.
A judicial manager is also an officer of the Court and is expected to act fairly and impartially. The judicial manager must perform all the duties imposed on the directors of the company in the interests of the creditors as a whole, and as quickly and efficiently as is reasonably practicable.
A scheme manager, whilst not appointed by the Court, is also expected to act with independence, transparency and fairness.
Eligibility and Appointment
Liquidators, judicial managers, receivers and other insolvency practitioners must be licensed under the IRDA according to the new regulatory regime administered by the Licensing & Regulation of Insolvency Practitioners Division established under MinLaw. This regime:
For judicial managers, there is the additional requirement that they cannot be an auditor of the company. The nominated judicial manager must file a statutory declaration that he or she is not in a position of conflict of interest in accepting the appointment of judicial manager.
Removal and Replacement
The judicial manager of a company may, at any time, be removed by order of the Court.
Liquidators may also be removed by order of the Court and replaced with another liquidator. The Court would generally consider whether due cause has been shown, and whether it is against the interest of the liquidation that a particular person be made liquidator.
When a company is insolvent, apart from a director's usual common law and statutory duties to the company, a director has to act in the interests of the creditors of the company.
When a company is insolvent (or nearly insolvent), directors must take care not to enter into or engage in certain transactions, including the following:
This refers to any business of the company in the course of judicial management or winding up that has been carried on with the intent to defraud creditors of the company or for any other fraudulent purpose.
Where the company is found to have engaged in fraudulent trading, every person who was a knowing party with such intent may incur a fine not exceeding SGD15,000 and/or imprisonment for a term not exceeding seven years.
A company trades wrongfully if it incurs debt or liabilities without reasonable prospect of meeting them in full when the company is insolvent or if it becomes insolvent as a result.
Where a company has traded wrongfully, every person who was a knowing party, or any officer of the company who ought to have known of the wrongful trading, may incur a fine not exceeding SGD10,000 and/or imprisonment for a term not exceeding three years, and may be made personally liable for the company’s debts.
The fiduciary duties explained in 10.1 Duties of Directors are owed by the directors to the company and to the body of creditors collectively. Individual creditors cannot, without the assistance of liquidators, directly claim against the directors for such breach of duties.
The IRDA provides that certain transactions that preceded an insolvency process may be avoided. These include:
Certain floating charges on the company's property may be invalid, including those created within one year before the commencement of judicial management or winding-up (or within two years for charges in favour of persons connected with the company) for no fresh consideration.
Where an undervalue transaction has been entered into by a company for no consideration or consideration of significantly less value than that provided by the company, the Court may make an order restoring the position to what it would have been if the company had not entered into that transaction if:
Unfair Preference Transactions
Where an unfair preference transaction has been given by a company to the company's creditor, surety or guarantor, and where the transaction has the effect of putting that person in a better position than they would be in, in the event of the company's winding-up, the Court may make an order restoring the position to what it would have been if the company had not given the unfair preference. Such transaction must have occurred when the company was insolvent or if it became insolvent as a consequence of the transaction, and within one year of the commencement of judicial management or winding up (or within two years if given to a person connected with the company).
Extortionate Credit Transactions
Where an extortionate credit transaction has been entered into within three years before the commencement of the judicial management or winding-up, the Court may order the setting aside or varying of the transaction, or for the sums to be repaid to the company, among others. Transactions involving the provision of credit are presumed to be extortionate if:
Onerous property may be disclaimed by the liquidator, subject to the satisfaction of certain requirements. Onerous property may include onerous or burdensome financial obligations which might otherwise continue to the detriment of those interested in the liquidation, such as land with onerous covenants, shares with encumbrances, or unprofitable contracts.
The relevant look-back period depends on the specific voidable transaction and takes reference from the date of commencement of liquidation (or judicial management, as the case may be). See 11.1 Historical Transactions.
The liquidator or, as the case may be, judicial manager may apply to the Court to set aside the transactions. See 11.1 Historical Transactions.
Trends and Developments in Singapore Restructuring and Insolvency Laws
The restructuring and insolvency regimes in Singapore have traditionally borrowed heavily from English and Australian legislation.
However, in recent years, significant strides have been taken to customise and update Singapore’s restructuring and insolvency laws. This is the culmination of years of extensive public and private consultations, including a Final Report on insolvency reform issued by a multi-disciplinary Law Reform Committee in 2013.
Schemes of arrangement and judicial management
The first major amendments took place in 2017, with the introduction of US Chapter 11 features into the existing frameworks for court-supervised restructuring, namely, schemes of arrangement and judicial management.
In the case of debtor-in-possession restructuring, companies were given new protections in the form of an automatic 30-day interim moratorium if they intended to propose schemes of arrangement. Relief was also extended to group companies, to facilitate a group restructuring. The Singapore court was also granted new statutory powers to restrain creditor action anywhere in the world, for creditors who were in Singapore or within the court’s jurisdiction.
To encourage the growth of a regional restructuring hub in Singapore, judicial management was made available to foreign companies seeking to restructure their debts. Foreign companies will need to show that they have a substantial connection to Singapore, in order to avail themselves of the framework.
The improved regime for schemes of arrangement now affords more flexibility for debtors-in-possession, but with close court supervision on timelines and milestones as a check and balance. These innovations have resulted in a marked increase in debtor companies opting for schemes to compromise their debts. However, judicial management, which involves an independent, third-party officer driving the restructuring, is still widely resorted to in cases where management no longer commands the support of creditors. Both regimes also come with the option of rescue financing and cross-class cram-down possibilities.
UNCITRAL Model Law on Cross Border Insolvency
There has also been a growing judicial trend for the Singapore courts to give assistance to foreign-seated restructurings and insolvencies, using common law principles of recognition. This movement towards a universalist approach for cross-border restructurings was formalised in 2017, by the introduction of the UNCITRAL Model Law on Cross Border Insolvency into Singapore law. The UNCITRAL Model Law now empowers the Singapore courts to grant mandatory moratoria for foreign main proceedings (being a restructuring in the applicant company’s centre of main interest), as well as discretionary relief for foreign non-main proceedings. Although the UNCITRAL Model Law only applies to companies, the Singapore courts have nevertheless borrowed principles from the Model Law to assist foreign-seated personal bankruptcies.
Judicial Insolvency Network
More broadly, the Singapore courts have been at the forefront of developing the Judicial Insolvency Network (JIN). The JIN seeks to bring together a network of insolvency judges from key commercial jurisdictions, with the aim of opening clearer lines of communication and co-operation between courts of different jurisdictions in a cross-border restructuring. The JIN has grown and now includes judges from Singapore, the United States, England and Wales, Canada, Australia, Brazil, Argentina, Bermuda, the British Virgin Islands and the Cayman Islands, with observers from Japan, South Korea and Hong Kong. To this end, the Singapore courts adopted the JIN’s Modalities of Court-to-Court Communication on 19 June 2020 under court practice directions, to improve the mechanics for cross-border judicial co-operation.
The new Insolvency, Restructuring and Dissolution Act (IRDA)
On 30 July 2020, the new Insolvency, Restructuring and Dissolution Act (IRDA) came into force. The IRDA consolidates all restructuring and insolvency legislation, including for corporate and personal insolvencies, under one omnibus legislation and repeals all prior legislation. The IRDA has also made further evolutionary, rather than revolutionary, changes to support debt restructuring.
One major innovation is the introduction of new prohibitions on ipso facto clauses in Section 440 of the IRDA. An ipso facto clause is a contractual clause that allows an innocent party to terminate a contract or accelerate obligations, by reason only that debt restructuring proceedings had commenced. The IRDA now provides that such clauses are invalid, unless the innocent party can show that it would suffer significant financial hardship.
Section 440 of the IRDA is significant as it signals that personal, contractual rights will, in appropriate circumstances, yield to collective outcomes in a restructuring. Section 440 of the IRDA also underscores the importance of ensuring that a debtor company is not deprived of critical services, supplies or valuable contracts, by the sole fact it is undergoing a restructuring, if it is otherwise able to perform its contractual obligations. A comparative review of several jurisdictions was done, including legislation from Canada and the UK, in formulating exclusions to these new principles.
There is also growing recognition of the value of specialist mediation to resolve issues and disputes in a restructuring context. This follows from the successful results of mediating complex disputes during the Lehman Brothers collapse, more than a decade ago. The Singapore courts have recently observed that there is tremendous utility in deploying a neutral specialist mediator, who can build consensus between debtors and creditors in developing a restructuring plan and in building trust, outside of the adversarial context of a courtroom.
Mediation in the restructuring context will be boosted by the introduction of the United Nations Convention on International Settlement Agreements Resulting from Mediation (ie, the Singapore Convention) in February 2020, which provides a uniform framework for the international enforcement of settlement agreements. This will be especially beneficial for negotiated settlements for complex cross-border matters.
The unforeseen COVID-19 pandemic has now wreaked havoc worldwide, and recovery is not within sight. The imposition of mandatory social-distancing rules in Singapore in April 2020 has severely impacted businesses and livelihoods. To mitigate the impact of restrictions, the Singapore government quickly introduced temporary emergency measures aimed at saving jobs and businesses.
Besides major injections of liquidity and social support measures, a broad range of moratoria reliefs was introduced under the COVID-19 (Temporary Measures) Act for sectors that were most impacted by the pandemic. These include relief for parties who were unable to perform contracts relating to events, travel, hospitality, construction and commercial leases. In conjunction, the time periods for deeming a company or person insolvent for the purposes of winding-up or bankruptcy were extended from three weeks to six months, and the relevant monetary thresholds increased.
While these measures have prevented what might otherwise have been a tidal wave of insolvencies and bankruptcies, the measures are not permanent. Unless affected businesses are able to pivot swiftly or to successfully restructure their debts, it is likely that defaults and insolvencies will be on the horizon.
Plans for a new, simplified insolvency programme
However, the reality is that distressed micro and small businesses with depleted resources will not be able to capitalise adequately on existing restructuring frameworks. This prompted the Singapore government to announce plans in October 2020 for a new, simplified insolvency programme under the IRDA to assist micro and small companies. The simplified programme is expected to provide for simpler, faster and less costly proceedings for eligible companies to restructure their debt, or to wind up their businesses. The plans, which will be introduced soon as an amendment Bill, will include pre-pack arrangements and lower voting thresholds for compromises to be approved.
In summary, the main thread running through recent developments and trends in Singapore is the emphasis on enhancing efficiency in the restructuring and insolvency regimes, and the promotion of a universalist, collective mode of dealing with cross-border restructurings. Amidst the sweeping changes brought by multiple rounds of legislative reform, care has also been taken to ensure sufficient checks and balances to address the concerns of stakeholders, with the objective of enhancing returns to all stakeholders to the fullest extent possible.