Insolvency 2021

Last Updated November 23, 2021

Singapore

Law and Practice

Authors



Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

The restructuring market in Singapore has been very active in the past few years, especially following the incorporation of the US Chapter 11 ‒ like provisions into the Companies Act, and the subsequent coming into force of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA). These provisions include those that permit super-priority rescue funding (or debtor-in-possession funding), cross-class cram-downs in schemes of arrangement, and pre-packaged restructuring plans.

While there are no publicly available statistics as to the number of restructuring matters before the Courts at any one time, the Ministry of Law periodically releases statistics on companies in compulsory liquidations. There was a large spike in 2019 in both applications filed as well as winding-up orders made before these fell back to pre-2019 levels in 2020 and 2021. Notwithstanding this, there have been articles and judgments on several high-profile debt restructuring proceedings before the Singapore courts. Some of these matters include:

  • the attempted restructuring and subsequent liquidation of Hyflux Ltd, which faced claims amounting to around SGD2.8 billion;
  • the debt restructuring efforts of South-east Asia's largest carrier Pacific International Lines involving a USD1.1 billion scheme of arrangement and an out-of-court restructuring of the company’s remaining debts; and
  • PT MNC Investama’s restructuring of its USD231 million senior secured notes due in 2021 listed on the Singapore Exchange through a pre-packaged scheme of arrangement.

There are also the schemes of arrangements brought by various entities in the Design Studio group of companies, which culminated in an application for approval of a pre-packaged scheme of arrangement that was rejected by the Singapore courts in September 2021. Two entities in the Rhodium group of companies, a global commodities trading firm, are also seeking to restructure their debts by way of a scheme of arrangement in Singapore.

In addition to the new and improved laws, there can be no doubt that the global COVID-19 pandemic has played a significant part in the increase in restructuring and insolvency cases in Singapore. While temporary measures were put in place in April 2020 to (among other things) protect companies against unnecessary insolvencies as a result of the COVID-19 pandemic, these measures were allowed to expire in October 2020 and many companies have not been able to recover from the ill-effects of the ongoing pandemic.

Given the post-pandemic landscape, many companies have remained hopeful and attempted to restructure their debts and liabilities instead of simply allowing the company to be placed in liquidation. Creditors may also consider a restructuring that postpones repayment and/or provides at least some returns to be a better alternative to liquidation.

In 2018, Singapore’s personal and corporate insolvency and debt restructuring laws were combined into a single piece of omnibus legislation, the IRDA. These laws were previously found in the Bankruptcy Act and the Companies Act.

The IRDA came into force on 30 July 2020, and the Bankruptcy Act and the relevant provisions in the Companies Act were accordingly repealed. The scheme of arrangement provision is however found in the Companies Act (Section 210), although related provisions are found in the IRDA.

Both voluntary and involuntary restructurings and insolvency regimes are available in Singapore. These include:

  • schemes of arrangement;
  • judicial management;
  • court ordered liquidation; and
  • voluntary liquidation.

Receivership proceedings are also available.

While there is no statutory obligation for companies to commence formal insolvency proceedings in Singapore, directors and officers of companies that continue to trade while insolvent may be exposed to personal liability for the debts of the company should the company subsequently be placed under judicial management or go into liquidation. Examples include liability for fraudulent trading (ie, where the company’s business has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose) and wrongful trading (ie, where the company incurs debts or other liabilities without reasonable prospect of meeting them in full when it is insolvent or that results in it becoming insolvent).

A company may be placed in involuntary liquidation on an application to court by:

  • a director of the company;
  • a creditor of the company, including contingent or prospective creditors;
  • a contributory (including personal representatives of deceased contributories or the Official Assignee of the estate of a bankrupt contributory);
  • the liquidator in a voluntary liquidation;
  • the judicial manager (to place the company in liquidation); and
  • government ministers (in limited, specific circumstances).

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(1) of the IRDA. The most common ground is where the company is unable to pay its debts (see Section 125(1)(e) of the IRDA).

An application to court for a company to be placed under judicial management may be made by:

  • a company or its directors (pursuant to a resolution of its members or the board of directors);
  • a creditor of the company, including contingent or prospective creditors.

This application may be made where the company or any of its creditors considers that the company is, or is likely to become, unable to pay its debts; and that there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern, or that the interests of creditors would be better served otherwise than by resorting to a winding up.

A company is deemed insolvent if it is unable to pay its debts. The IRDA provides that a company is deemed to be unable to pay its debts in three scenarios:

  • where the company fails to satisfy a statutory demand from a creditor for a sum exceeding SGD15,000 for three weeks after service of the demand on it;
  • where the company fails to satisfy (in whole or in part) any execution or other processes issued by a creditor on an order of court; and
  • where it is proved to the satisfaction of the court that the company is unable to pay its debts.

While the test for insolvency in liquidation proceedings in relation to the third scenario was previously widely understood to entail satisfaction of either the cash flow test (ie, whether the company is able to pay its debts as they fall due) or the balance sheet test (ie, whether the company’s liabilities exceed its assets), the Court of Appeal clarified in June 2021 (see the judgment in Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd [2021] SGCA 60) that under the IRDA, there is only one test: the cash flow test.

While a company has to be insolvent or likely to become insolvent in order to be placed under judicial management, a company may be, but is not required to be, insolvent to propose a scheme of arrangement or be wound up. In the case of schemes of arrangements and court-ordered liquidations, a company may propose a scheme of arrangement or be wound up for a variety of reasons, including its insolvency.

There are also two types of voluntary liquidations – members’ voluntary liquidation and creditors’ voluntary liquidation. The former relates to the liquidation of a solvent company, where a majority of the company’s directors are required to sign a declaration of solvency stating that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the liquidation. The latter relates to a voluntary liquidation where the company is likely to be insolvent and its directors do not sign a declaration of solvency. In such cases, the company must convene a meeting of the creditors of the company to be summoned for the day, or the day next following the day, on which there is to be held the meeting of the company at which the resolution for voluntary winding up is to be proposed.

The restructuring and insolvency regimes, save for judicial management, apply to all companies liable to be wound up in Singapore. The judicial management regime, as well as specific features of the scheme of arrangement provisions in IRDA (including the extraterritorial moratorium, super priority rescue financing, cram down and pre-packed scheme) do not apply to certain entities such as banking corporations and insurance brokers. A list of the prescribed entities is set out in the Insolvency, Restructuring and Dissolution (Prescribed Companies and Entities) Order 2020.

The Monetary Authority of Singapore (MAS) has powers under the MAS Act and Banking Act to react in instances where a regulated financial institution or bank is, or is likely to become, insolvent. These powers include requiring the financial institution or bank:

  • to take or not take any action;
  • to appoint one or more statutory advisors; or
  • to assume control of and manage business of the bank or financial institution.

The MAS Act also sets out specific provisions in relation to schemes of arrangement in relation to financial institutions governed by the MAS Act.

There are also provisions across different pieces of legislation (in addition to the general restructuring and insolvency regimes) dealing with entities engaged in providing public services (eg, the Public Utilities Act and Bus Services Industry Act 2015 where there are certain restrictions/conditions on the insolvency processes that may be commenced against such entities).

While companies generally attempt to enter into a consensual restructuring and workout process in the form of agreeing a postponement of their obligations with specific creditors as and when payments fall due and/or they receive demands for payment, this is oftentimes not a sustainable method of restructuring especially for companies that have many different creditors as payments to any specific creditor above others may be vulnerable to claw back actions in the event of a liquidation or judicial management. Ultimately for such consensual restructuring to be workable, the consent of all creditors will be needed. There are specialist insolvency mediators whose assistance may be recruited to obtain creditors’ assent, but this is frequently difficult to achieve.

As such, and given that there are no mandatory consensual restructuring negotiations before the commencement of a formal “statutory process”, companies and their officers are typically advised to consider formal restructuring mechanisms early in the day so as to avoid exposing directors and officers to potential personal liability for wrongful or fraudulent trading and to reduce the risk of claw back actions, and the associated fiduciary claims that may be made against directors. Early action also encourages creditors to reconsider their expectations of recovery of debts from the distressed company and reduces the creditor “fatigue” that sets in after negotiating with the company for an extended period before the company decides to begin a formal restructuring process.

Consensual restructuring and workout processes are typically used by companies with few creditors as it requires unanimous approval from each of the company’s creditors to take effect. As such, the process (assuming it is feasible) would often be relatively quick as the creditors are generally friendly and willing to agree to a restructuring proposal put forward by the company. 

During the negotiation phase, the creditors would have agreed to a standstill, ie, that they would not take legal action against the company, although many would still seek to preserve their rights by issuing demand letters and/or statutory demand letters to ensure that in the event the negotiations fall through they would be able to take action immediately.

Where creditors are noteholders, they are often represented by ad hoc committees in a consensual restructuring, and financial and trade creditors also often organise themselves into committees to facilitate discussions with the insolvent company. The directors and officers of the company are normally welcoming of such committees since they facilitate communication. Generally speaking, where a restructuring is proposed by way of a scheme of arrangement, noteholders will vote individually in respect of their proportionate note indebtedness and not collectively via the note trustee. 

While there is no legislation governing such consensual processes, there have been attempts to develop industry practices, such as the Association of Banks in Singapore’s “Principles & Guidelines for Restructuring of Corporate Debt”.

In consensual restructurings, new money is typically injected by either existing shareholders or white knights who are interested to rehabilitate the company, and who agree to fund the repayment (in full or in part) of the company’s outstanding debts, or to otherwise address the company’s debt burden. In either situation, the creditors will be required to relinquish all claims against the company upon receipt of payment or other consideration. There is no formal process and any agreement reached in this regard will consist of interrelated agreements entered into between the company and each of the white knight and its creditors.

Given the new statutory provisions that allow the grant of super-priority to a provider of new funds in the context of a scheme of arrangement or judicial management, it may be that rescuers would require the company to “formalise” its restructuring efforts, especially where the company is unable to obtain support from all of its creditors for its proposed restructuring of debts.

An out-of-court restructuring is the most flexible restructuring tool as it is subject only to agreement by the relevant parties. There are accordingly no duties on either creditor, the company or such third party (as the case may be) as to the terms of the agreed restructuring plan, beyond those that are expressly agreed by the parties.

However, depending on the facts of the matter, the agreements between the parties may be set aside in the event that negligent and/or fraudulent misrepresentations had been made and/or there was duress, undue influence or unconscionability present during the negotiations.

As indicated, a consensual, agreed out-of-court financial restructuring or workout may be accomplished and effectuated only with unanimous agreement of the creditors. This requires the creditors to enter into a new contract with the companies to vary their entitlements. There is no “cram-down” mechanism to bind dissenting creditors of the company who are free to take action against the company.

As such, unless the company is confident that its all of its creditors will agree to its restructuring plan, it would have to utilise the scheme of arrangement mechanism that requires approval of only a majority in number of creditors representing three-fourths in value of each class of creditors to be bound by the scheme, and who were present and voting at the relevant scheme meeting, in order for a restructuring plan to become binding on all of the creditors, including the dissenting minority.

Secured creditors are creditors with the benefit of a security interest in the form of (among others) mortgages (real estate), pledges (goods), fixed and floating charges (equity shares, intellectual property, accounts receivables) and liens (goods).

Secured creditors sometimes have the contractual right to appoint receivers and managers over the assets secured to them to enforce their security/liens and recover their outstanding debts.

In an insolvency scenario, secured creditors stand outside the liquidation and are entitled to realise their security and proof in the liquidation for any shortfall as unsecured creditors. 

Secured creditors play a significant role in restructuring scenarios, as they typically form a class of their own and will be entitled to vote down any scheme of arrangement proposed that they do not agree with.

While a secured creditor with the ability to appoint a receiver and manager previously had the power to block a judicial management order, this power has been toned down in the IRDA, which now requires the court to dismiss an application for a judicial management order if the order is opposed by a secured creditor who is entitled to appoint a receiver and manager only if the court is satisfied that the order will cause prejudice to that secured creditor proportionately  greater than the prejudice it would cause to unsecured creditors in the judicial management application. Notwithstanding this change, it is clear that the courts will consider the wishes of secured creditors in a judicial management scenario.

While the statutory moratorium in a liquidation does not affect a secured creditor’s right to enforce its security, the moratorium under a scheme of arrangement and judicial management proceedings may extend to secured creditors as well.

As indicated in 4.2 Rights and Remedies, secured creditors are protected in liquidation proceedings as they are not prevented from enforcing their security, and participating as unsecured creditors for any shortfall.

In the context of a restructuring, while secured creditors may be restrained from enforcing their security under the statutory moratorium, secured creditors typically vote in a separate class from unsecured creditors and may block the approval of a scheme of arrangement as such. The judicial management regime also affords secured creditors with the right to appoint a receiver and manager protection in the form of a veto right if the secured creditor is also able to show that it would suffer greater prejudice than the unsecured creditors would if the judicial management application were dismissed.

In a restructuring scenario, the rights and priorities among the various classes of creditors may be decided by the company or judicial manager as the case may be, subject of course to the requisite creditors’ approval.

In a liquidation, however, a secured creditor stands outside the insolvency proceedings and may choose to participate in the liquidation as an unsecured creditor for the entire debt if it chooses to give up its security, or for the undersecured portion of its debt, if any.

Amongst the company’s unsecured creditors, the IRDA provides for a statutory priority of debts, with the costs and expenses of the liquidation including the liquidators’ costs, expenses and remuneration having first priority.

Unsecured trade creditors may be kept whole in a restructuring if the restructuring involves the ongoing conduct of business and the trade creditors are essential to that objective. Short of this, however, unsecured trade creditors are not made whole in a restructuring, primarily because, in a liquidation scenario, being non preferential and unsecured, trade creditors typically achieve the least recovery. 

As the unsecured creditors will more often than not vote in a separate class from the secured creditors given the dissimilarities in their rights from those of the secured creditors, the unsecured creditors may disrupt a restructuring by voting against the proposed scheme should they not be satisfied with the recovery under the same.

Given that the unsecured creditors have the most to lose in an insolvency situation, the court would give considerable weight to the views of this class of creditors as the returns by way of dividends would be for their benefit, and not for the benefit of the secured creditors.

The Singapore courts have the power to grant pre-judgment attachments to preserve the assets as an ancillary to a main substantive cause of action. Trustees and liquidators have been seen to apply for pre-judgment attachments vis-à-vis third parties including related parties who may have clawback-related or other liabilities for losses to the insolvent estate they are administering. 

A significant addition to Singapore’s restructuring regime was the adaptation of the Chapter 11 super priority rescue financing in 2017. Under the IRDA, this allows new money to be given varying degrees of priority, with the highest being security over property that has already been secured to another creditor of the Company. 

Depending on the level of priority to be accorded to the rescue financing debt, the company may be required to demonstrate that the company had undertaken reasonable efforts to explore other types of financing that did not entail super-priority, and that it would not have been able to obtain the rescue financing from any person without the grant of super priority.

The statutory process for a financial restructuring in Singapore is the scheme of arrangement, which may be applied for by a company, its creditors (including contingent creditors) or members, a liquidator of the company or a judicial manager in the context of a company in liquidation or under judicial management respectively to reorganise the company’s liabilities or obligations to its creditors or members or any class of them.

The process allows an arrangement to become binding on the company and all of its creditors or members to whom the company has proposed a scheme of arrangement, so long as a majority in number representing three-fourths in value of the relevant creditors or class of creditors to be bound by the scheme, and who were present and voting at the relevant scheme meeting, approve the scheme and the court sanctions the same. Unanimous agreement, which is oftentimes not possible to achieve, is not required and the dissenting minority becomes bound by the scheme. The scheme will also bind creditors and members who choose not to exercise their vote at the scheme meeting.

A hallmark feature of the scheme of arrangement is the moratorium that companies may, and often do, apply for to give themselves time and breathing space to put forward a scheme of arrangement and/or to allow the creditors to consider the same pending a vote being taken. As a result, the Singapore courts have adopted a very proactive case management system, with the company being required to provide periodic updates to the court and creditors (or members as the case may be) to ensure that the company is actively working on its restructuring and not delaying the process unnecessarily.

Arrangement or Compromise

Section 210 of the Companies Act, which sets out the scheme of arrangement procedure, is worded very broadly and gives power to a company to propose a “compromise or an arrangement” with its creditors. Whether a proposed scheme constitutes a “compromise” or “arrangement” does not appear to have been considered or decided by the Singapore courts. However, the position taken by the English courts is persuasive. While English courts have found that “arrangement” may be construed more widely than “compromise”, they have required that the scheme involve some element of give and take and not simply amount to a surrender or confiscation. 

Three Stages

The scheme of arrangement regime may be broken down into three distinct stages:

  • “leave stage” – where the company applies to court for leave to convene a scheme meeting;
  • “meeting stage” – where the creditors vote on the proposed scheme at the scheme meetings convened pursuant to the “leave stage”, and require approval of a majority in number representing three-fourths in value of the creditors or class of creditors; and
  • “sanction stage” – where the company applies to court for sanction of the duly approved scheme at the “meeting stage”.

Cram Down

Where the creditors or members have interests that are so dissimilar that they cannot sensibly consult together with a view to their common interest, they will have to be split into different classes and each class will have to approve the scheme (ie, a majority in number representing three-fourths in value of each class of creditors or members to be bound by the scheme, and who were present and voting at the relevant scheme meeting).

Singapore has adopted the “cram down” feature from the US Chapter 11, which gives power to the Singapore courts to order that a dissenting class of creditors be bound by the scheme. This means that if there are two or more classes of creditors or members to be bound by the scheme, and approval is not obtained from one or more of the classes (referred to as the dissenting class), the Court may nonetheless sanction the scheme such that it becomes binding on the dissenting class(es) as well. This may be done if a majority in number representing three-fourths in value of all the creditors intended to be bound by the scheme have approved the scheme, and the Court is satisfied that the arrangement does not discriminate unfairly between two or more classes of creditors, and is fair and equitable to each dissenting class.

Creditors and Proof of Debt Process

The court will appoint a chairperson of the scheme meeting who will be required to adjudicate upon the proofs of debt filed by persons claiming to be a creditor of the company, and to report the results of the scheme meeting to the court.

In order for a creditor intended to be bound by the scheme to participate and vote at the scheme meeting, they will be required to file a proof of debt with the chairperson within the time stipulated in the notice of meeting. Where the chairperson rejects a proof of debt submitted and the creditor whose proof was rejected disagrees, they may require an independent assessor to be appointed to adjudicate the matter.

A creditor intended to be bound by the scheme who fails to file a proof of debt will not be entitled to participate at the scheme meeting. The scheme of arrangement may also provide that such a creditor’s debt will be extinguished upon the scheme being approved by creditors and sanctioned by the court.

As mentioned in 3.2 Consensual Restructuring and Workout Processes, where a restructuring is proposed by way of a scheme of arrangement, noteholders will generally vote individually in respect of their proportionate note indebtedness and not collectively via the note trustee.

A scheme of arrangement is essentially a debtor-in-possession restructuring. This means that the company’s incumbent management remain in control of the company’s business during the restructuring. The company’s management is the party that puts forward the scheme to its creditors. Once the company’s proposed scheme of arrangement has been approved by the requisite majority of creditors and sanctioned by the court, a scheme manager is appointed who has oversight of and ensures that the scheme of arrangement is duly performed by the company. During this time however, the company’s incumbent management remains in control of the company’s affairs.

During this time, unless otherwise restricted by the terms of the scheme of arrangement, the company is entitled to carry on its business including to borrow money and incur debt and liabilities. Typically, these debt and liabilities are incurred for the purpose of improving recovery to the scheme creditors, ie, in the form of litigation funding and/or injection of equity by existing or new shareholders, and are excluded from the scheme of arrangement.

An automatic moratorium applies for up to 30 days from the date of application for a moratorium under Section 64(1) of the IRDA, save where another Section 64(1) application had been brought in the preceding 12 months by the company. The moratorium may (and typically) extends to prevent secured creditors from enforcing their security.

Creditors play a vital and central role in a scheme of arrangement. Given that a scheme of arrangement proceeding which typically involves a moratorium granted over a significant period of time essentially impinges upon the rights of creditors to seek recovery from and/or take action against the company, the courts have been careful to ensure that the views of creditors are heard at every stage of the proceedings and accorded due weight.

As mentioned in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, a scheme of arrangement requires the approval of a majority representing at least three-fourths in value of the creditors or class of creditors intended to be bound by the scheme, and who were present and voting at the relevant scheme meeting.

Where the interests of creditors are so dissimilar such that they are unable to sensibly consult together as to their common interest, they will have to be placed in separate classes. A typical example is secured versus unsecured creditors, as the secured creditors are usually expected to receive significantly better recoveries than the unsecured creditors by reason of their security. Given the importance of creditor support throughout the proceedings, creditor committees are often organised and funded by the company.

Where a company obtains a moratorium in aid of its proposed scheme of arrangement, the court will require the company to provide sufficient information to the court and its creditors relating to the company’s financial affairs to enable its creditors to assess the feasibility of the intended or proposed scheme of arrangement. Such information includes a valuation of the company’s significant assets, the company’s disposal or acquisition of property or grant of security over any property, periodic financial reports of the company and its subsidiaries and forecasts of the profitability and cash flow of the company and its subsidiaries.

At the “leave stage”, the company bears a duty to make disclosures as would enable the court to determine the issues that it must properly consider at this stage, such as the classification of creditors, the proposal’s realistic prospects of success, and any allegation of abuse of process.

At the “sanction stage”, the company must demonstrate that it has disclosed, by the time of the creditors’ meeting, sufficient information to ensure that the creditors are able to exercise their voting rights meaningfully.

The scheme of arrangement once approved by the requisite number of creditors and sanctioned by the court becomes binding on the company and all scheme creditors intended to be bound, including the dissenting creditors.

Where the requisite majority approval is not obtained in respect of a class of creditors, the company may apply to court for a “cram down” order, ie, an order for the scheme to be binding on such class of creditors.

However, the court may not make a cram down order unless:

  • a majority in number of the creditors meant to be bound by the proposed scheme, and who were present and voting (either in person or by proxy) at the relevant meeting, have agreed to the proposed scheme;
  • the majority in number of creditors mentioned represents three-fourths in value of the creditors meant to be bound by the proposed scheme, and who were present and voting (either in person or by proxy) at the relevant meeting; and
  • the court is satisfied that the scheme does not discriminate unfairly between two or more classes of creditors, and is fair and equitable to each dissenting class.

There is generally no restriction against creditors trading their claims against the company in restructuring, save that the company will stipulate a time at which such trades will have to be informed to the company and the person to whom a debt is owed will be treated as the creditor entitled to participate in any vote (the “recognised creditor”) and to whom payment will be made unless otherwise informed by the recognised creditor.

The method of transfer of any claims against the company will be left to be decided by the creditors themselves.

To facilitate group-wide restructurings, the IRDA also provides for the moratorium granted over a company to extend to its holding company, ultimate holding company and subsidiaries, whether such actions are taken against these parties in or outside Singapore.

Prior to the approval of a scheme of arrangement, there are generally no restrictions or conditions applied to the company’s use of its assets. The court may, however, require the company to disclose on a periodic basis any disposals or acquisition of its assets as well as the grant of security or charges over its assets, if any.

Should the restructuring fail, any disposal of assets during this time may be subject to claw back by the liquidator or judicial manager appointed over the company (as the case may be).

Terms may be incorporated into the scheme of arrangement to control the company’s use of its assets during the term of the scheme.

As indicated, unless specifically provided for in a scheme of arrangement, there are generally no restrictions against the disposal of assets, including for the purpose of generating income for the company’s operating expenses and to realise assets to be distributed to creditors under the scheme, during the restructuring process.

As the company’s directors and officers remain in control of the company during the term of the scheme, the directors will execute the sale of assets on behalf of the company.

A purchaser will generally acquire good title in a sale executed pursuant to such a restructuring proceeding, unless the scheme fails and the company is subsequently placed into liquidation or judicial management. In such a situation, depending on the terms and circumstances of the transaction, the liquidator or judicial manager (as the case may be) could seek to void the transaction.

Creditors may also bid for company assets and are not prevented from acting as a stalking horse in the sale process. To ensure transparency of the process, all creditors should be informed of the sale and given an equal chance to participate.

A company may also proceed to effectuate a pre-negotiated sale prior to the restructuring process insofar as the company considers that this would be in the interest of the company and its creditors. It should be noted that, in entering into transactions on behalf of the company during the restructuring process, the directors and officers of the company continue to owe fiduciary duties and may be held liable for any breach if the company is later placed in liquidation or under judicial management.

Secured creditor liens and security arrangements may be released as part of the scheme to the extent that such release is part of a give and take and does not simply amount to a surrender or confiscation with no benefit conferred upon the secured creditor. 

Priority new money can be made available by third parties. The IRDA contains provisions allowing new money investments to be secured over assets (both encumbered and unencumbered) and/or prioritised over other debts and obligations of the company in the event of a liquidation in certain instances.

The determination of value of claims and creditors process takes place through the creditors being required to file a proof of debt in respect of their claims against the company. The adjudication is carried out by the scheme manager.

The scheme of arrangement approved by the requisite majority of creditors or class of creditors is subject to an overall “fairness test”.  The court’s approval is required at the “sanction stage”, where the court must be satisfied that:

  • the statutory provisions have been complied with;
  • those who attended the meeting were fairly representative of the class of creditors and that the statutory majority did not coerce the minority in order to promote interests adverse to those of the class; and
  • the scheme is one which a person of business or an intelligent and honest person, being a member of the class concerned and acting in respect of their interest, would reasonably approve (see The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213 at [70]).

The scheme of arrangement would also provide that the creditors’ claims under their respective contracts are extinguished following the court’s sanction of the same, such that the creditors are no longer entitled to commence proceedings for their underlying claims that that been compromised under the scheme.

A non-debtor third party may be released from liabilities under the scheme where there is a sufficient nexus or connection between the release of the third-party liability and the relationship between the company and the scheme creditors.

A creditor may exercise its rights of set off if there are mutual debits and credits between the creditor and the debtor company. However, the Singapore courts have applied the anti-deprivation rule, under which contractual clauses that unfairly seek to remove assets from a company upon it becoming insolvent, are void for being against public policy.

As a duly approved and sanctioned scheme of arrangement is binding on the company and all of its creditors, a failure by any party to observe its commercial terms could result in an action being brought by the innocent party to require the party in default to comply with the terms of the scheme. However the Court retains a residual discretion to amend or set aside a scheme, particularly as to, for example, such matters as the extension of time for filing proofs of debt (See The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd [2008] SGCA 18).

A company’s failure to perform the terms of the scheme may also risk the entire scheme unravelling and exposing the company to proceedings by its creditors.

The very intention behind a company proposing a scheme of arrangement is to allow the company to be rehabilitated. The terms of a scheme of arrangement thus ordinarily allow the existing owners to receive or retain ownership on account of their ownership interests.

The different types of statutory voluntary and involuntary insolvency and liquidation proceedings include:

  • judicial management;
  • creditors’ voluntary liquidation; and
  • court-ordered liquidation.

Judicial Management

The judicial management regime allows a company to be placed in the hands of a third party to achieve one or more of the following three purposes:

  • the survival of the company, or the whole or part of its undertaking, as a going concern;
  • the approval under Section 210 of the Companies Act or Section 71 of the IRDA of a compromise or an arrangement between the company and any such persons as are mentioned in the applicable sections; or
  • a more advantageous realisation of the company’s assets or property than on a winding up.

It is applied for where there is value to be extracted from the company continuing as a going concern instead of being placed in liquidation immediately, but where the directors/officers of the company are no longer comfortable running the business themselves or creditors do not trust management remaining in possession of the company.

Unlike a liquidation, the judicial management regime allows the company to be rehabilitated and to continue as a going concern after the termination of the judicial management order, which could see better returns to creditors than in a liquidation. However, some companies and officers do not take kindly to a third-party judicial manager being appointed by creditors, and may not be willing to work with or co-operate with the judicial manager who takes over control of the business once appointed.

Judicial management is an expensive process as the judicial manager’s fees are typically significant given that the judicial manager will be required to take over control of the company and run its business in a short time and to provide periodic updates to the court during the period of the judicial management, although the Singapore courts have been playing an active role in ensuring that the judicial manager’s fees are kept under control through the requirement for costs schedules to be filed. 

Applying for judicial management

A judicial management application may be filed in court by a company or any of its creditors. The applicant must show that the company is, or is likely to become, unable to pay its debts, and that there is a reasonable probability of the company achieving one of the three statutory purposes of a judicial management set out above.

An automatic moratorium arises upon the filing of the judicial management application and ends when the moratorium application is disposed of. A statutory moratorium takes effect if the judicial management order is granted for the period of the judicial management. While the moratorium extends to secured creditors, they do not prevent a creditor from exercising its legal right of set‑off or netting where applicable.

A judicial manager must within 90 days (or such longer period as may be approved by the court or creditors) put forward a proposal for achieving one or more of the three statutory purposes of a judicial management to the creditors at a creditors’ meeting.

In order to participate in the judicial management of a company, creditors (including contingent creditors) are required to file proofs of debt with the judicial managers. The proofs will be adjudicated upon by the judicial managers and a creditor who is dissatisfied with the judicial manager’s decision may apply to court for the decision to be reversed or varied.

The judicial manager has wide-ranging powers, including but not limited to disclaiming onerous property, leaseholds, bringing or defending an action in the company’s name, disposing of property of the company in a public auction or private treaty etc.

As briefly mentioned above, the judicial manager is also required to provide periodic updates to the court and creditors as to the progress of the judicial management.

Unless the judicial manager proposes for the company to be placed in liquidation, which proposal is accepted by the creditors, a judicial management terminates when the term of the judicial management specified in the judicial management order ends with the company being returned to its directors and officers. Where no period is specified in the order, the judicial management expires 180 days after the order is made.

Creditors’ Voluntary Liquidation

A creditors’ voluntary liquidation is an out of court insolvency arrangement where the company’s creditors essentially decide on most if not all matters involving the winding down of the company’s affairs. The process is cheaper and quicker than a court-ordered liquidation, as there are fewer requirements on the liquidator. The liquidator may nonetheless apply to court for directions if necessary and to exercise the same powers as a liquidator appointed in a court-ordered liquidation.

The regime commences with the company resolving to be placed in liquidation and nominating a liquidator. On the same day and no later than the next, a creditors’ meeting is to be convened to primarily consider the appointment of the liquidator and to appoint a Committee of Inspection if the creditors so wish. The liquidator takes over the affairs and assets of the company upon their appointment.

Upon the commencement of the liquidation (ie, when the company resolves to do so), no action or proceeding may be proceeded with or commenced against the company except by the leave of the court and subject to such terms as the Court may impose. Unlike the moratorium that applies in a judicial management, secured creditors are not restrained from enforcing their security. As with judicial management, where there are mutual credits, debts or other mutual dealings between the company and its creditor, the debts and liabilities to which each party is or may become subject as a result of such mutual credits, debts or dealings must be set off against each other and only the balance is a debt provable in the liquidation.

Just as in a judicial management, creditors (including contingent creditors) are required to file proofs of debt with the liquidator to participate in the liquidation and receive dividends, if any. The liquidator will be required to examine and adjudicate the proofs filed with him. In the event that he/she rejects a proof of debt, the liquidator must inform the creditor affected and state in writing the grounds of rejection. The creditor may apply to court to reverse or vary the rejection.

The liquidator distributes assets, if available, to creditors through the declaration of dividends. The liquidator is obliged to pay the debts of the company in accordance with the priority set out at Section 203 of the IRDA. Unless there are sufficient funds to conduct the liquidation, a liquidator may not be required to take any step that may incur costs that the company does not have assets to bear, including the adjudication of proofs of debt. In such a scenario, the liquidator may invite funding from creditors and the court may upon application by such creditors give an advantage to these creditors over others in consideration of the risks run by them in funding the liquidation.

Where the company’s affairs have been fully wound up, a creditors’ voluntary liquidation may be brought to an end by the dissolution of the company and discharge of the liquidators by the calling of a creditors’ meeting to consider the liquidator’s account showing how the winding up has been conducted and the property of the company has been disposed of. In the alternative, the IRDA now gives the court the power to terminate a liquidation and revert the control of the company to its directors and officers.

Court-Ordered Liquidation

A court-ordered liquidation is commenced by the filing of an application in Court for the company to be placed in liquidation. A list of the parties who may bring the application is set out at 2.4 Commencing Involuntary Proceedings.

Once the liquidator has been appointed, the procedure is largely similar to that in creditors’ voluntary liquidations, in that the court appointed liquidator owes the same duties and has the same powers as a liquidator in a creditors’ voluntary liquidation.

Where the liquidator is of the view that they have realised all the property of the company, or so much of the property of the company as can in their opinion be realised, without needlessly protracting the liquidation, and has distributed a final dividend, if any, to the creditors and adjusted the rights of the contributories among themselves and made a final return, if any, to the contributories, they may seek an order from Court for the dissolution of the company and for their release so as to bring the liquidation to a close.

In a liquidation, the liquidator’s role is to take over control of the company and to sell its assets so that they may be distributed to its creditors. While the liquidator may carry on the company’s business for a period of time so far as is necessary for the beneficial winding up of the company, the liquidator typically winds down the company’s business and sells off its assets by public auction, public tender or private contract.

In the case of a judicial management, the judicial manager may in certain scenarios sell assets to raise funds to keep the company’s operations going, and may similarly do so by public auction or private contract. 

Depending on the assets to be sold, the liquidator or judicial manager (as the case may be) may appoint advisors and/or third-party valuers to assist in the sale process. The liquidator or judicial manager will negotiate, execute and authorise the sale of assets and business during such proceedings. While they may seek the views of the directors depending on their special knowledge of industry norms and players, the directors and management of the companies do not have the ability to execute or authorise the sale of the company’s assets. 

Whether a purchaser of assets acquires good title in a sale of assets in such a procedure will depend on the representations and warranties given by the liquidator or judicial manager as part of the sale contract. Oftentimes, the liquidator or judicial manager will not be willing to warrant good title as they may consider that they do not have the requisite knowledge to be able to give such warranties.

Creditors may bid for company assets and act as a stalking horse in the sale process. Insofar as the liquidator or judicial manager is able to show that they took reasonable steps to invite bids from non-creditors and non-related parties to the company, and that the bids accepted by the creditors were in the interest of the company and its creditors (whether in terms of value, timing of payment, etc), the liquidator or judicial manager has the discretion to accept such bids.

Further, a liquidator or judicial manager may still proceed to effectuate pre-negotiated sale transactions following the commencement of statutory insolvency proceedings where such transactions would benefit the company and its creditors, although they may equally disclaim any onerous property regardless of whether they had taken possession, endeavoured to sell or otherwise exercised rights of ownership in relation to the said property.

Creditor committees may be organised by the company or by the creditors themselves. Given the relevance of creditor support and, in certain circumstances, a statutory requirement to show such support for the applications filed in court, a company considering making a formal restructuring application in particular may choose to organise a creditor committee to express support for the company’s applications. Where this is done, the company may also bear the creditor committee’s costs and expenses, including legal costs.

Creditor committees can play an important role in a company’s restructuring as their views and support (or opposition) will shape the company’s proposal and guide the court’s decisions.

Creditor committees typically consist of creditors sharing the same legal interests in the company’s proposed restructuring, and are usually creditors that would fall to vote within the same class (eg, bondholders, secured creditors, creditors with the benefit of insurance).

In the case of liquidations, there are also provisions that provide for the formation of a Committee of Inspection consisting of creditors and/or members of the company. Such committees hold the power to (among other things) fix a liquidator’s remuneration and grant powers to the liquidators to compromise any debts of the company with creditors and to bring or defend an action brought by or against the company.

Singapore adopted the UNCITRAL Model Law on Cross-Border Insolvency Law in 2017 (the “Model Law”) which allows a foreign representative to apply to the Singapore court for recognition of the foreign proceeding in which the foreign representative has been appointed.

Even prior to the adoption of the Model Law, the Singapore courts recognised foreign proceedings at common law on the basis of the desirability and practicality of a universal collection and distribution of assets and that a creditor should not be able to gain an unfair priority by an attachment or execution on assets located in Singapore subsequent to a foreign insolvency proceeding commenced elsewhere.

Singapore hosted the inaugural Judicial Insolvency Network (JIN) conference in 2016 which concluded with the issuance of a set of guidelines for court-to-court communication and cooperation titled “Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters”, also known as the JIN Guidelines. This was supplemented by the JIN in 2020 with the “Modalities of Court-to-Court Communication”, which prescribe the mechanics for initiating, receiving and engaging in such communication. The JIN Guidelines were adopted in 2017, and Modalities in 2020.

These address key aspects of and the modalities for communication and cooperation amongst courts, insolvency representatives and other parties involved in cross-border insolvency proceedings, including the conduct of joint hearings.

Where the Centre of Main Interests (COMI) has been identified, the court will simply recognise the foreign insolvency proceedings and the foreign insolvency administrator will be recognised and able to exercise his duties in Singapore as such. The Gibbs principle does not apply in Singapore, and as such contracts that apply foreign law may fall within, and be discharged by, a Singapore scheme. However, in deciding in the scope of an obligation under a contract, the court will apply the law that applies to the contract.

Foreign creditors of companies undergoing formal restructuring or insolvency proceedings are treated in the same way as local creditors. They may submit proofs of debt and vote in the proceedings just as a local creditor would be entitled to do.

A foreign judgment may be recognised in Singapore under the Reciprocal Enforcement of Commonwealth Judgments Act (RECJA), the Reciprocal Enforcement of Foreign Judgments Act (REFJA) and the Choice of Courts Agreements Act 2016 (CCAA).

Where the RECJA, REFJA and CCAA do not apply, a foreign judgment may also be recognised at common law through the commencement of an action for the judgment debt and summary judgment on the basis that there is no reasonable defence.

The Singapore court may set aside the order registering the foreign judgment in certain instances, including but not limited to where the original court acted without jurisdiction, the foreign judgment was obtained by fraud, an appeal against the foreign judgment is pending and the foreign judgment was in respect of a cause of action which for reasons of public policy could not have been entertained by the Singapore court.

A foreign judgment recognised by the Singapore court may be enforced by:

  • a writ of seizure and sale;
  • a writ of possession;
  • a garnishee order; and/or
  • an application for examination of judgment debtor.

Statutory officers include:

  • a liquidator of a company placed in liquidation;
  • a judicial manager of a company placed under judicial management; and
  • a receiver and manager of property of a company.

The role of a liquidator is to take over control of the company’s affairs and to realise its assets and distribute them to the company’s creditors in accordance with the statutory priorities set out in the IRDA. A liquidator owes duties to the company’s creditors as well as to the members where there are sufficient assets to be distributed to the members after all the company’s debts and liabilities have been duly repaid to fulfil his/her role as liquidator. The liquidator reports to the creditors, Official Assignee and the court that appointed him.

The function of a judicial manager is to achieve one or more of the three purposes of a judicial management (see 7.1 Types of Voluntary/Involuntary Proceedings):

  • the survival of the company, or the whole or part of its undertaking, as a going concern;
  • the approval under Section 210 of the Companies Act or Section 71 of a compromise or an arrangement between the company and any such persons as are mentioned in the applicable section; and
  • a more advantageous realisation of the company’s assets or property than on a winding up.

A judicial manager owes duties to the creditors of the company, and reports to the creditors and the court that appointed them.

A receiver and manager is appointed by a secured creditor to manage and realise the assets secured to that creditor and apply the proceeds of sale towards the discharge of the debts owed to them. The receiver and manager owes a duty to the secured creditor that appointed them and reports to that creditor. While the receiver and manager does not owe a general duty of care to the company whose assets they have been appointed to manage, they must take reasonable steps to obtain a proper price for the security and act for the purpose of realising the security and discharging the secured debt and not for any other purpose.

A liquidator, judicial manager and receiver or manager may be appointed by the party that applies for the company to be placed in liquidation or in restructuring proceedings.

In the context of a creditors’ voluntary liquidation, where a company nominates its proposed liquidator and a creditor nominates a different person as liquidator, the creditor’s nominated liquidator will be appointed (see Section 167(1) of the IRDA).

In the context of involuntary liquidations, judicial management applications and the appointment of receivers or managers, the court will consider the basis for any objection to the applicant’s proposed liquidator, judicial manager or receiver or manager in deciding whether the grant the appointment of that individual as officer in the proceedings.

Liquidators may be removed or replaced by the members in a members’ voluntary liquidation and by creditors in a creditors’ voluntary liquidation, whereas receivers and managers appointed may be removed by the secured creditor that appointed them. In all other scenarios, the officers may be removed or replaced by the court.

Only persons holding an insolvency practitioner’s licence are qualified to be appointed as liquidators, judicial managers and receivers or managers, save that a liquidator appointed in a members’ voluntary liquidation does not require an insolvency practitioner’s licence. This means that a director or officer of the company may serve as the liquidator in a members’ voluntary liquidation.

A person may apply for an insolvency practitioner’s licence if they are a solicitor, a public accountant, a chartered accountant within the meaning given by Section 2(1) of the Singapore Accountancy Commission Act (Cap. 294B) or possesses such other qualifications as the Minister may prescribe by order in the Gazette.

A director or such other officer of a company is required to consider and act in the interest of the company’s creditors in continuing the affairs of the company. In deciding if a company is facing financial troubles, the director or officer ought to consider if the company is able to meet its debts and liabilities in full as and when they fall due.

In the event that a director or officer fails to act in the interest of the creditors when the company is insolvent or close to insolvency, they may become personally liable for the debts of the company. 

Action may be commenced by the liquidator or judicial manager to claw back transactions entered into by the company at an undervalue and transactions giving an unfair preference to a party, and a concurrent action is typically brought against the directors or officers responsible for causing the company to enter into these transactions for beach of their fiduciary duties. In such a situation, the directors or officers may be found to be liable for damages arising from these transactions.

Separately, in an action brought by a liquidator, judicial manager, creditor or contributory against a director or officer for fraudulent trading or wrongful trading, the court may order the director or officer involved to be personally responsible for all or any of the debts or liabilities of the company. While fraudulent trading applies only to directors and officers of a company, wrongful trading applies to any person who was a party to the wrongful trading if that person knew that the company was trading wrongfully.

In addition to civil liability, fraudulent trading is an offence rendering the persons responsible liable on conviction to a fine not exceeding SGD15,000 or to imprisonment for a term not exceeding seven years or to both. Wrongful trading also attracts both civil and criminal liability. A person responsible for wrongful trading may on conviction be liable to pay a fine not exceeding SGD10,000 or to imprisonment for a term not exceeding three years or to both.

While the Singapore courts have recognised that a director owes a fiduciary duty towards creditors when the company is insolvent, this fiduciary duty is owed to the company and not directly to the creditors. As such, individual creditors cannot assert claims against directors for fiduciary breaches of duty. 

Creditors may however consider seeking recourse against the directors of the company if they are able to show that the directors were knowingly party to the company’s fraudulent trading and/or wrongful trading, or ought to have known of the company’s wrongful trading. Should the claims succeed, the court may declare the relevant directors personally responsible for all or any of the debts or other liabilities of the company.

In the context of judicial management and liquidation, the judicial manager or liquidator (as the case may be) has the ability to claw back payments given as an undue preference or to void transactions entered into by the company at an undervalue when the company was unable to pay its debts or became unable to pay its debts as a result of the transaction.

Extortionate credit transactions may also be set aside if it can be shown that, having regard to the risk accepted by the person providing the credit, the terms required grossly exorbitant payments to be made or they were harsh and unconscionable or substantially unfair.

Floating charges created may also be deemed invalid except to the extent of the aggregate of value of cash consideration or goods or services supplied to the company or the discharge or reduction of the company’s debt at the same time as or after the creation of the charge.

The judicial manager or liquidator also has the power to disclaim onerous property including unprofitable contracts and such other property that is unsaleable, not readily saleable or may give rise to a liability of the company to pay money or perform any other onerous act.

The look-back period for transactions entered into at an undervalue and extortionate credit transactions is the period starting three years before the commencement of the judicial management or liquidation and ending on the date of the commencement of the judicial management or liquidation. 

The look-back period for transactions involving the giving of unfair preferences (that are not transactions at an undervalue) and the grant of floating charges depends on the identity of the party to whom unfair preference was given.

In the event that the unfair preference or floating charge was given to a person who is connected with the company, the period that applies is the period starting two years before the commencement of the judicial management or liquidation and ending on the date of the commencement of the judicial management or liquidation. Where the unfair preference or floating charge was given to a person who is not connected with the company, the look-back period is the period starting one year before the commencement of the judicial management or liquidation and ending on the date of the commencement of the judicial management or liquidation.

Where the company obtained a moratorium under the Companies Act or the IRDA during the look-back period before the commencement of the judicial management or liquidation mentioned above, the look-back period is extended by adding a period equivalent to such period of the moratorium immediately before the look-back period mentioned above.

Claims to set aside or annul transactions may be brought by the liquidator or judicial manager in a liquidation or judicial management scenario (as the case may be).

Creditors may however personally fund a liquidator or judicial manager to investigate the matter and commence proceedings as the liquidator or judicial manager may deem appropriate. 

Mayer Brown

6 Battery Road, #10-01
Singapore 049909
Singapore

+65 6922 2233

singapore.office@mayerbrown.com www.mayerbrown.com
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Law and Practice

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Mayer Brown has more than 40 lawyers in its global restructuring practice, operating in jurisdictions across the Americas, Asia and Europe, enabling the firm to provide comprehensive assistance to clients around the world. It represents corporate debtors, company directors, lenders (throughout the capital structure), bondholders, liquidators, receivers, administrators, trustees, debtor-in-possession (DIP) loan providers, insurers, pension fund trustees, special servicers and landlords on all aspects of restructuring, bankruptcy and insolvency. The firm's experience in a broad array of industries enables it to quickly identify the proper context for the business and legal issues that can arise during the course of an out-of-court restructuring or an in-court insolvency proceeding. The team has extensive experience in cross-border and formal insolvencies, working closely with colleagues in other regional offices on multi-jurisdictional matters. It is able to provide clients with comprehensive and innovative solutions that serve their business needs.

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