Market volatility in international trade and commodities invariably results in trade defaults. As a hub for international trading companies, Singapore has seen its fair share of insolvencies and restructuring in the past few years as a section of traders felt the effects of the pandemic,
the oil crash and over leveraging on unprecedented levels of liquidity. Creditors of trading companies have had to navigate Singapore’s sophisticated restructuring regime, governed by the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”), grappling with difficult choices between restructuring and liquidation.
When a company starts defaulting on its loans, the often-frenzied stripping of its assets by lenders may debilitate it, although the company is likely to realise more value when restructured holistically from the perspective of creditors or potential investors. Restructuring, particularly of international traders, increasingly also engages extra-territorial issues such as enforcing security or recovering receivables overseas. In this Q&A, we address key issues for traders/their creditors when faced with restructuring.
- What are the restructuring options?
The two key mechanisms to facilitate a distressed company’s survival are schemes of arrangement (SA) and judicial management (JM). Singapore’s restructuring laws provide for two types of SAs.
Under the conventional SA (pursuant to s 210 of the Companies Act), a company makes two applications to the court: first, to convene a meeting of creditors (the “Leave Stage”) and then to have the scheme that creditors vote on sanctioned by the court (the “Sanction Stage”). Normally, the company’s proposal requires support from a majority in number representing 75% of the value of the creditors (or each class of creditors, e.g., secured and unsecured creditors). The court however now also has the power to cram-down a dissenting class of creditors if (i) a majority in number of the creditors meant to be bound by the SA who voted at the creditors’ meeting agree the arrangement, (ii) the majority represents 75% in value of creditors meant to be bound, and (iii) the court is satisfied that the arrangement does not unfairly discriminate between 2 or more classes of creditors, and is fair and equitable to each dissenting class.
A company with an advanced restructuring proposal may also opt for the aptly coined pre-packaged SA under s 71 of the IRDA which dispenses with the first application to convene a meeting of creditors. A pre-packaged SA will be sanctioned if (among other things), (i) the company has provided its creditors with the relevant information to make an informed decision on its proposals, and (ii) the court is satisfied that that had a meeting of creditors been summoned, the company would have obtained the requisite support as required under a normal scheme.
There are similarly two types of JMs: the first is a court-sanctioned JM, which entails a court application by the company/one of its creditors. The court will sanction a JM under s 91 of the IRDA if it is satisfied that the company is or is likely to be unable to pay its debts; and the JM serves one of the following purposes: (i) the survival of the company or the whole or part of its undertaking, (ii) facilitation of an SA by the company, (iii) a more advantageous realisation of the company’s assets than in a winding up. Section 94 of the IRDA introduces an out-of-court avatar, pursuant to which a company can also be placed in JM by approval of a majority in number and value of the creditors (subject to the satisfaction of requirements as to notices, documents, and creditors’ meeting).
- What are the practical considerations in choosing the appropriate restructuring option?
A JM is most suited where there is uncertainty over the ability or integrity of a company’s management. Where these concerns are urgent, an interim judicial manager can also be appointed. This was the case for a number of trading companies impugned with allegations of fraud like Hin Leong and Zenrock that sought restructuring during the pandemic. A judicial manager replaces the company’s directors and takes over its operations; and has powers to investigate and challenge antecedent transactions. Significant time and costs are however needed for the judicial manager to get up to speed with the company’s affairs. An SA on the other hand is appropriate where the restructuring intends to leverage the company’s existing business knowledge and relationships in securing better recovery or a capital injections.
Another practical point affecting the choice between a JM and an SA is that a JM order may only be made if the court is satisfied that the company is or is likely to become unable to pay its debts; there is however no such solvency requirement for an SA. Further, only a company applying for an SA (not JM) may be able to obtain moratorium against enforcement or legal action in favour of its subsidiaries / holding company / ultimate holding company.
Pre-packed SA or out of court JM tends to be suitable for companies with a small number of creditors amenable to consensus-building. It is advisable however to have sufficient lead time to discuss proposals with creditors to ensure support when using these options.
- What information should a restructuring company provide to trade creditors? Will liquidation be a better option?
Trade creditors and lenders should satisfy themselves as to the viability of a restructuring. The financial statements of the company may be insufficient for providing a complete picture of its financial health and more details of for instance, recent disposals or creation of security may be required. Likewise, for most trading companies, the ability to leverage financing is the lifeblood of business and any prospect of restructuring may be bleak if the debtor is unable to demonstrate credible prospective financing.
Ultimately a cold assessment of the company’s assets would be needed to understand the viability of the restructuring. A trading company’s assets may be confined to trade receivables and the likelihood of recovery of receivables should be closely considered, particularly if the restructuring is predicated on giving the company time to recover. Insight into the validity of the receivables, why they have not been paid, the age of the receivables, challenges of legal enforcement in the debtors’ jurisdictions, and the financial solvency of the debtors would also be important. Restructuring may appear more attractive than liquidation, but if the restructuring is predominantly focused on recovering receivables, then fair consideration should be given to whether liquidation might be a more favourable option for creditors.
- Can foreign companies restructure in Singapore?
Since 2017, foreign companies with a “substantial connection” to Singapore can apply for SA or JM in Singapore (s 63(3) and s 88(1) respectively read with s 246(3) of the IRDA). Significantly, a substantial connection for this purpose would be established if a company has chosen Singapore law as the law governing its loan or other transaction, or the resolution of a dispute arising out of them. The choice of Singapore governing law for a trading contract or financing contract is therefore an important consideration. Other non-exhaustive factors which can establish a substantial connection for a company include: having its centre of main interests or substantial assets in Singapore; carrying on business or having a place of business in Singapore; or being registered as a foreign company in Singapore.
In Re PT MNC Investama TBK  SGHC 149, a listed Indonesian company which traded its debts on the Singapore Stock Exchange was found to have a substantial connection with Singapore. The court considered that trading of debts on the stock exchange indicated that the company had a substantial business activity in Singapore, which was not merely transient. Other high-profile foreign companies have since also successfully secured Singapore SAs in 2021 and 2022. This is an important development, which allows foreign debtors in less advanced restructuring jurisdictions to “home” their restructuring in Singapore and avail its advanced mechanisms and potentially extra-territorial reach.
- Can a guarantor restructure the debts of a primary obligor?
As clarified by the Court of Appeal in the 2019 decision of Pathfinder Strategic Credit LP & another v Empire Capital Resources Pte Ltd & another  SGCA 29 (“Pathfinder”), a guarantor can restructure underlying debts. It is not uncommon for parent company guarantees to be given in trade finance facilities so a guarantor’s ability to restructure the underlying debt may be particularly useful where the primary obligor is not able to directly access Singapore’s restructuring options. It can also be helpful in a group restructuring scenario. Instead of the various companies in the group making separate applications, an attempt can be made to have a single application by a guarantor of all companies in the group.
When a guarantor seeks to restructure debts, at the Leave Stage of an SA, the court would consider the connection between the underlying third-party liability and the relationship between the guarantor company and scheme creditors e.g., whether the debts of the company and underlying primary obligors are effectively the same liability. At the Sanction Stage, the court may consider the merits and reasonableness of third-party releases more broadly.
- What cannot be done during a moratorium in support of restructuring?
When a company proposes or intends to propose an SA, it (and its subsidiaries, holding company and ultimate holding company) can seek a moratorium against the following (s 64(1), 64(8) and 65 of IRDA):
- the passing of a winding-up resolution against the company;
- the appointment of a receiver and manager over any property/undertaking of the company;
- the continuation or commencement of any proceedings against the company;
- the issuance/continuation/execution of any enforcement order or the levying of distress against any property of the company;
- the taking of any step to enforce security; and
- the enforcement of any right of re-entry or forfeiture.
A company which applies for JM or interim JM can also benefit from a broadly similar moratorium. Securities contracts, derivatives contracts, master netting agreements, securities lending or repo agreements and margin lending agreements are however not covered by moratoria under the IRDA. A stay against enforcing security could be critical for trade creditors, but it may be possible to seek the Court’s permission to enforce despite a moratorium (see: Qn 8).
- Can a moratorium prohibit enforcement action outside Singapore, e., apply extra-territorially?
A major development since 2017 has been the added ability of Singapore courts to order that a moratorium in support of an SA under s 64 of the IRDA applies to any act of a person who is subject to the jurisdiction of the Singapore courts – irrespective of whether the act takes place in Singapore or elsewhere. An extra-territorial moratorium is however not automatic, and the company must make a specific application for it (Re IM Skaugen SE  3 SLR 979). Since many banks and financial institutions have a presence in Singapore, they will be subject to the in personam jurisdiction of Singapore courts and will therefore be bound by an extra-territorial moratorium.
Where however the creditor has no presence in Singapore, the extra-territorial effectiveness of a Singapore moratorium will depend on whether foreign courts recognise it and give effect to it. In the recent case of Re Prosafe SE; Chang Chin Fen v Cosco Shipping (Qidong) Offshore Ltd  CSOH 94, the Scottish Court of Session dismissed an application by a Singapore scheme applicant to stay enforcement of English law governed claims in support of its Singapore moratorium. The court there was not prepared to restrain the creditor from taking enforcement action – reasoning that an English-law governed debt can only be compromised under English law. This therefore forces a vital consideration of whether the jurisdiction where assets are located would recognise a Singapore moratorium.
- Is there any way to enforce security during a moratorium?
Leave of court is needed to enforce security e.g, charges or pledges over goods during a moratorium. In Hinckley Singapore Trading v Sogo Department Stores (S) Pte Ltd (under judicial management)  3 SLR(R) 119, the Singapore High Court considered the principles applicable to security enforcement during a JM moratorium, and provided the following guidance (which should also apply to an SA moratorium): a creditor should not be prevented from exercising its rights if doing so is unlikely to impede the company’s attempts to restructure. In all other cases, the court should carry out a balancing exercise between the legitimate interests of the secured creditor and the legitimate interests of the other creditors. In carrying out the balancing exercise, great importance is typically given to a creditor’s proprietary interests. A secured creditor should be granted permission to enforce security if he is able to show that a significant loss would be caused by a refusal to grant permission, e.g., any kind of financial loss (direct or indirect) by reason of delay or otherwise, or even non-financial loss. If substantially greater loss is likely to be caused to others by permitting security enforcement, the court may refuse to do so.
- Can existing contracts with the restructuring company be terminated?
Clauses entitling a contractual counterparty to terminate or modify a contractual right (e.g., accelerating payment obligations or terminating remaining shipments) on the occurrence of certain specified events (e.g., insolvency, appointment of an administrator, receiver or liquidator) are commonly used. Such clauses are called ipso facto clauses, and s 440 of the IRDA prevents a party from relying on these clauses where it seeks to do so by reason only that the company is insolvent or has commenced proceedings for JM or SA. This is to prevent an implosion of the company by counterparts terminating solely on the ground of the restructuring attempts (which would negate the very point of a restructuring exercise). Trade creditors should therefore be mindful on terminating on this ground but, there is no limit on a creditor exercising the right for any other reason, e.g., the occurrence of any other event of default such as non-payment. A creditor may also wish to consider the impact of ipso facto restrictions on its ability to call on a guarantee or third-party security, for instance, by negotiating the right to immediately call on the guarantee or secured obligations once an ipso facto restriction is triggered.
- Is there any priority for rescue financing provided to a restructuring company?
Trading companies typically position themselves with favourable credit terms, therefore rescue financing would be critical for a company seeking to revive itself. Since 2017, the court may give super priority to a provider of rescue finance to a company that applies for an SA or JM. This feature is designed to incentivise rescue financing to distressed companies. There have been successful applications for rescue financing, e.g., in the restructurings of Asiatravel.com, Swee Hong Ltd, and Design Studio Group Ltd. In deciding whether to order rescue financing, Singapore courts will consider factors such as the following:
- Whether rescue financing is in the best interests of other creditors, and whether their interests are adequately protected.
- Whether there is a good probability that the restructuring will succeed, and whether the financing will be used for risky investments.
- Whether better financing proposals are available, particularly those that do not require super priority.
- Whether the terms of the financing are reasonable, consistent with sound business judgment, made in good faith, for proper purpose and are fair, reasonable and adequate.
In Re Design Studio Group Ltd  5 SLR 850, the High Court approved for the first time, a “roll-up” rescue-financing, i.e., capital injection for the purpose of paying off some or all of the lender’s pre-existing debt (causing the pre-existing debt to be effectively “rolled-up” into the super-priority post-petition debt).
Author: Baldev Bhinder, Ramandeep Kaur