Key amendments to the debt restructuring regime in Singapore

In recent years, concerted efforts have been made to promote Singapore as the choice jurisdiction for insolvencies and restructurings in the region. Those efforts are long overdue and welcome.

Singapore’s status as a leading global financial hub has meant that it has seen a wave of cross-border restructurings in recent years given the slowdown in economic growth. Indeed, the Singapore High Court has noted in a recent judgment that cross-border restructurings are increasingly becoming common given the proliferation of cross-border investments and trade.

An important prong of the efforts to promote Singapore as an international debt restructuring hub has been the reform of the debt restructuring provisions in the Singapore Companies Act. These reforms are expected to come into effect shortly, and will change the debt restructuring landscape in Singapore.

We provide a brief overview of the more significant amendments.

Schemes of Arrangement

The Scheme of Arrangement regime will adapt parts of Chapter Eleven United States Bankruptcy Code:

(a) Broader moratorium: the Court may order an automatic moratorium for up to 30 days when the company files (or undertakes to file as soon as practicable) an application to convene a meeting of creditors under Section 210(1) or an application under the new Section 211I(1) of the Companies Act for the Court’s approval of a compromise or an arrangement without calling a meeting of the creditors. Such moratorium may also extend to related entities of the company.

(b) Enhanced cram down provisions: the Court may order that a compromise under a scheme of arrangement bind all creditors even if there are dissenting classes.

(c) Rescue financing: rescue financing provisions will be introduced, where the Court could confer super-priority on fresh financing which is necessary for the survival of a company, or to achieve a more advantageous realization of the assets of a company that obtains the financing.

(d) Pre-pack restructurings: the Court may approve pre-negotiated restructurings between the debtor company and its key creditors, dispensing with the requirement for creditor meetings.

Subsidiary legislation will be passed to provide for carve outs from the moratorium - for instance, in respect of set-off and netting arrangements.

Judicial Management

Enhancements will be made, with a view to making the Judicial Management process a more attractive regime for debt restructuring:

(a) Near insolvent companies: a judicial management order may be made even when a company is “likely to become unable to pay its debts”, as opposed to the current requirement which requires proof that the company “is or will be unable to pay its debts”.

(b) Consideration of unsecured creditors’ interests: presently, the Court must dismiss an application for a judicial management order if it is satisfied that the making of the judicial management order is opposed by a person who has appointed or may be entitled to appoint a receiver and manager of the whole (or substantially the whole) of a company’s property under the terms of any debentures of the company secured by a floating charge, or by a floating charge and one or more fixed charges (Qualifying Debenture Holder). When the amended judicial management provisions come into effect, a more measured approach will be taken. The Court must dismiss an application for a judicial management order if the prejudice which would be caused to a Qualifying Debenture Holder is disproportionately greater than the prejudice that would be caused to the unsecured creditors of the company if the application is dismissed.

(c) Rescue financing: rescue financing provisions broadly similar to those applicable to Schemes of Arrangement will be introduced.

Cross-border restructurings

(a) Foreign companies: guidelines will be provided on what the Court may rely on to support a declaration that a foreign company has substantial connection with Singapore, such that it may be wound up, may make an application for a scheme of arrangement or be placed in judicial management.

(b) UNCITRAL Model Law: the UNCITRAL Model Law on Cross-Border Insolvency will be adopted.

(c) No ring-fencing: the current rule which requires liquidators of foreign companies to “ring fence” Singapore assets and pay off debts incurred in Singapore first will be abolished generally in relation to foreign companies, subject to carve outs for certain regulated financial entities.

These reforms to the Singapore Companies Act are aimed at enhancing Singapore’s ability to function as a platform for international debt restructuring. We believe that these reforms would make Singapore a more attractive option to distressed companies and their creditors.

Following from the sustained downturn in commodity prices over the last two years or so, we expect financial institutions to face increased borrower defaults in the coming months. Financial institutions with exposure in Singapore and the region would do well to familiarize themselves with the new restructuring landscape in Singapore.