Saved by the bell?: How Singapore's new insolvency laws could extend lifelines for distressed companies

MORE than three years ago, governance advocates were deeply disappointed when the liquidator of failed S-chip Celestine Nutrifoods dropped its suit against the wound up firm's China-based bosses and two Singapore independent directors for breach of director's duties, including alleged fat fee and bonus payouts. The liquidator also discontinued claims of over S$20 million against them. Many had speculated then that the lack of funds may have frustrated the pursuit of actions against the scandal-hit maker of soya and biofuel products.

From here on out, money could become less of a hurdle under the Insolvency, Restructuring and Dissolution Act (IRDA), which came into force just a fortnight ago.

One of its key features is that the Act empowers liquidators and judicial managers to secure third-party funding to unwind unfair transactions in troubled firms and make directors face the music.

"This is important," remarks Mak Yuen Teen of the National University of Singapore's NUS Business School.

"When a JM or liquidator is appointed, he may discover wrong done against a company. However, the company may have no funds to pursue any action and the culpable directors walk off scot-free with no personal liability.

"With third party funding explicitly allowed, we could see more cases of JMs or liquidators being appointed after a company collapses and actions pursued against directors," he continues.

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And the IRDA, Singapore's more creditor-friendly omnibus legislation, which also has features of Chapter 11 of the US bankruptcy code and hopes to loosen the debt noose over sick firms, packs a lot more punch than just that.

Stressed & distressed

IRDA's roll-out is the victory lap of a long march for reforms that began seven years ago, for a holistic update of Singapore's insolvency laws to galvanise its debt-workout ecosystem and raise its corporate-rescue game on a wider, global pitch.

TSMP Law Corporation's director of litigation and dispute resolution Felicia Tan says: "There is a steady and continuous focus towards better facilitation of debt restructuring while discouraging a rush to wind the company up."

The final amalgamation of Singapore's personal bankruptcy, corporate insolvency and debt restructuring rules into a single statute is spot on with timing.

Corporate defaults and insolvencies are ratcheting up amid a ruthless Covid-19 outbreak that has hurt companies across countless sectors, from travel and leisure, retail, tourism to food & beverage and oil and gas.

The Singapore economy shrank 13.2 per cent year on year in the second quarter - its worst on record - underscoring the pain from an extended lockdown that has crushed businesses and retail spending. The Gross Domestic Product for 2020 is now expected to contract between 5 per cent and 7 per cent year-on-year.

The calendar for court-supervised rescue plans for debt-hit companies, be it judicial management (JM), schemes of arrangement or liquidation, isbulging with activity.

Some notable collapses on the back of an oil slump include giant oil trader Hin Leong Trading and peers ZenRock Commodities Trading and Hontop Energy, which are not only limping on hefty debts as cash has dried up, but are also hit by fraud allegations. These cases have rocked Singapore's mammoth oil sector, a key global hub.

"Whether by design or coincidence, the IRDA coming into operation during this period would be beneficial for ailing business or impecunious individuals, who can now rely on the full measure of Singapore's reformed laws," saysWithers KhattarWong's partner Justin Yip.

Noah's ark

Between January and March this year, applications filed for compulsory liquidation saw an over 70 per cent uptick to 102, while 98 companies were wound up, double the number from the same period a year ago, based on statistics from the Law Ministry's Insolvency Office website. (In a compulsory liquidation, the creditor, shareholder or a judicial manager of a company applies to the High Court for an order to wind up the company).

The data could have easily turned more dour, but was saved by the Singapore government's relief measures - from cash grants, rental relief to tax rebates and the added safety net of the Covid-19 (Temporary Measures) Act, which froze creditors' rights to commence legal action against debtors for loan defaults, effective for six months from April 20.

As a result, the ensuing months of April and May saw only 28 applications filed for compulsory liquidation and four companies wound up - starkly lower than the trend earlier in the year and dramatically lower than during the April-to-May 2019 period which saw 70 applications filed and 43 companies close shop.

Singapore Management University (SMU) law lecturer Aurelio Gurrea-Martinez attributes the reduced cases to these "highly desirable initiatives" and non-legal mechanisms such as encouraging out-of-court talks between creditors and debtors, particularly SMEs who tend to have few creditors, making debt negotiations easier.

"The current situation may lead to a wave of insolvency cases that can overwhelm any judicial system.

"Therefore, it is important to flatten the 'insolvency curve' by incentivising out-of-court restructurings," he says.

But while the financial props, chiefly the Covid Act or "Noah's Ark" as Law Minister K Shanmugam put it, have cushioned the pandemic damage, more pain could be unmasked when the circuit breaker is completely liftedin two months (unless of course, it is extended).

"One of the likely reasons the (Law) Ministry decided to bring the IRDA into effect now is to give users and lawyers time to familiarise themselves with the provisions, so that all are well prepared when the deluge hits (once the Covid-specific legislation ends)," says Clyde & Co Clasis Singapore partner Prakash Pillai.

Phased evolution

Indeed, while IRDA marks the finish line of a phased evolution of Singapore's insolvency regime and has several fresh key features, much of the heavy lifting in reforms happened in May 2017 when big amendments to the Companies Act came into force.

The amendments provided more options and protection for distressed debtors with viable businesses, thus avoiding immediate liquidation and unnecessary value destruction, while it also has safeguards for lenders against "opportunistic" use of the new rules by debtors, says SMU's Associate Professor Stephen Bull.

This included provisions for a more powerful, automatic moratorium to restrict creditor proceedings against debtors seeking court-led restructurings, which has worldwide effect and could also be extended to related companies.

"The enhanced Scheme of Arrangement regime and the associated moratorium have been widely used by debtors as their first port of call in restructuring efforts. This trend is likely to continue," says Mr Pillai.

The provisions of super-priority rescue financing, cross-class "cram down" to prevent minority dissenting creditor class from frustrating a debt revamp and allowance for "pre-packaged" schemes to fast-track the scheme process were the other key changes.

Ernst & Young's Asean restructuring leader Angela Ee deems the super-priority rescue financing clause "especially helpful" for vulnerable companies hit by financial woes as it gives them a shot to snag new fundings, a "critical lifeline for survival".

Construction firm Swee Hong and premium furniture maker Design Studio Group, whose shares are suspended on the Singapore Exchange, have successfully applied for such rescue financing.

"This is positive as it shows that the industry players are getting more familiar with and are utilising the restructuring regime," says Rajah & Tann Singapore's restructuring & insolvency head Sim Kwan Kiat.

Ailing water treatment firm Hyflux, whose rescue by a white-knight has been drawn out and is facing a looming JM, has been covered by the debt moratorium since it filed for bankruptcy protection in 2018.

Another ground-shifting amendment in 2017 allowed a foreign firm, for the first time, to be placed under JM in Singapore.

With that, in 2018, China Sports International Ltd became the first foreign company to be placed into JM here.

The 2017 changes have been carried over into the IRDA, mostly without further amendment. Shook Lin & Bok partner Daniel Tan says: "The IRDA builds on these amendments to the Companies Act in 2017 and equips restructuring professionals with more tools when working with a company in distress... these tools create new opportunities for restructuring professionals, distressed debt funds and financial institutions."

Completing the picture

IRDA completes Singapore's insolvency toolbox and gives it a better shot at becoming a global hub for cross-border debt restructuring - a long-held vaunted goal.

Assistant Professor Gurrea-Martinez says: "If an insolvency regime is not attractive to debtors, it can harm entrepreneurship, innovation, and the quick reorganisation of viable businesses. If an insolvency regime is not attractive to creditors, it can harm firms' access to debt finance. Therefore, an insolvency framework should ideally be pro-both."

But legislation is only one of several key drivers. The rest of the road to turn into a mighty debt-rehab regime depends on factors that can't be legislated - the general economy, culture and mindset and business sentiments.

For that, all parties at the restructuring table need to pull their weight.

IRDA: Packing a punch

SINGAPORE'S Insolvency, Restructuring and Dissolution Act (IRDA) which came into force on July 30, is the consolidation of two separate statutes - the Bankruptcy Act and Companies Act - into a single legislation. Some of its latest highlights include:

Now, everyone needs a licence: A significant feature of the IRDA and the "talk of the town" is that for the first time, there is a licensing and regulatory regime for "insolvency practitioners". After end-January 2021, unless they hold a valid licence, insolvency practitioners won't be able to handle winding up, judicial management, receivership, bankruptcy and voluntary arrangement engagements. Could this mean that they have less room to misbehave or charge eye-popping fees?

Less so, ipso facto: The restriction of ipso facto clauses is the most impactful revolution, says TSMP Law Corporation's Felicia Tan. Suppliers or counter-parties are prevented from exercising this clause and terminating contracts on the sole basis that a debtor has initiated a restructuring procedure. This gives viable companies a reprieve and a chance at maintaining their businesses.

Still, this is no bulletproof vest. A veteran turnaround expert says: "Commercial contracts tend to have a gazillion other grounds for termination such as non-payment of fees or covenant breaches and so forth. Usually when a company is in trouble, it has more than one organ failure. So, while restricting the ipso facto clause is a nice vaccine, it remains to be seen if it's the right antidote in practice."

No money, no case: Liquidators/JMs are expressly empowered to seek third-party funding, with the court's sanction, to pursue legitimate claims, which could be a source of funds for distribution among creditors. Often, liquidators simply lack funds to do so. While in the past, some have managed to tap on the insolvent company's creditors or shareholders, this opens up a fresh source of funding and in a more transparent manner too.

Generally, third-party funding would be provided by specialist funding companies, which charge a certain percentage of the sums claimed, in the event the claimant (JM or liquidator) is successful. Some of these third-party funders may even charge fixed fees, which vary depending on the recovery rate or chances, say market experts.

A wider net for wrongful trading: Unlike in the previous "insolvent trading regime", criminal conviction is not a prerequisite for a director or any party to the company to be held liable for "wrongful trading" (if the company incurs debts/liabilities when insolvent or becomes insolvent as a result, without reasonable prospect of being paid in full). This makes it easier and more cost effective for the liquidator/JM to pursue claims against, but not limited to, directors. Given the tough climate currently, companies and those in the know "walk a tightrope" on whether or not to continue trading.

This is obviously a space worth watching once the prescribed period for temporary relief from wrongful trading provided under the Covid-19 Act expires in October, says TSMP's Ms Tan. NUS Business School's Mak Yuen Teen says: "I can think of many cases involving commodities traders, offshore & marine companies and others where this may have happened. With the wrongful trading provision, they can be held personally liable... hopefully, more directors will wake up from their slumber or stop their egregious behaviour".

Cut to the chase: There is a new procedure for "early dissolution" of a company that does not have enough assets to pay even the costs of liquidation.

Thinking out of the box: Debtors can now reach an "out-of-court" agreement with lenders to place the company under judicial management without a court order. This saves time and money. Also, most companies seek help when it's too late and they are mired knee-deep in debt trouble. Settling on a quicker fix could remedy that. The earlier companies seek to work out their debt, the higher their survival rate.