How many firms under JM could be staring down the barrel of liquidation?

Singapore

FROM the get-go, the corporate rescue of debt-hit ZenRock Commodities Trading had seemed like a long shot.

The trader of crude oil and petroleum products counted oil majors and China refineries as customers. And it had faced severe financial strain earlier this year as oil prices plumbed, credit tightened and the Chinese markets shut down due to Covid-19.

After key creditor HSBC Holdings filed to place ZenRock under judicial management (JM) and the court granted the interim JM (IJM) order in May, ZenRock was deemed cash-flow and balance-sheet insolvent. By then, business had shrunk to a "minimal level" while banks and counterparties shunned the firm on the back of allegations of suspicious practices.

It is, therefore, hardly shocking that after roughly three months of embarking on the proceedings to save the firm, the court-appointed officers from KPMG decided to ditch the JM plan and sought instead to wind it up - an order that the Singapore High Court granted last Monday.

ZenRock, which last year earned a gross profit of US$35 million on the back of US$8 billion in revenue, has come undone on US$150 million debt.

All wound up

While debt restructuring is a complex process, the conventional practice of cutting losses and winding up or liquidating a firm can be just as complicated and protracted. Let this sink in: Pan-Electric Industries, which collapsed spectacularly in the mid-1980s and shut down the stock markets in Singapore and Malaysia for three days, is still under liquidation - 34 years later.

It makes sense, then, that in the current pandemic-strained environment, JMs have become a favoured route.

This is particularly understandable with creditors that want to oust the top management of distressed firms and replace them with court-appointed independent managers. When firms have been rocked by not just debt but also bad practices, JM can be a palatable option for debt recovery.

But the jury is still out on whether the JM regime is effective as a tool to save businesses or merely a precursor to liquidation.

Such fears are in fact widespread, more so among founders of companies and entrepreneurs who have painstakingly built and grown their business empires.

Bitter pill

In contesting OCBC's application to place Singapore-listed oil services firm KS Energy under IJM, the company's founder Kris Wiluan asserted that if the application was granted it would cause the firm "irreparable damage".

Mr Wiluan, who is also facing charges of alleged false trading and market rigging, has pushed instead for a consensual restructuring. He also wants the current management to be allowed to carry on with the job of securing rig contracts and hunting for potential investors. Last month, OCBC won its bid in court to place the embattled firm under IJM.

"...the IJMs are accountants with no significant experience or track record in the oil and gas industry, and no knowledge of conditions on the ground," Mr Wiluan argued in court documents.

The lack of requisite expertise by accountants, who are no doubt competent in their profession, was in fact one of the factors cited for JMs' low level of success in a 2013 report by the Insolvency Law Review Committee.

The other was late intervention - little can be done to salvage firms that are knee-deep in financial woes.

Tough sell?

The JM mechanism has been significantly fortified under the Insolvency, Restructuring and Dissolution Act (IRDA) - Singapore's omnibus legislation that came into force end-July.

The new legislation is now being tested as the combined impact of low oil prices and the pandemic hits Singapore's oil and gas-related companies hard.

For some - such as oil trader Hin Leong Trading - it is hoped that JM will provide a lifeline.

The case of Hyflux, an ailing water treatment firm whose restructuring process continues to drag on - not least due to divergent interests of stakeholders - will be another test of the regime.

Meanwhile, once high-flying offshore and marine players who have sought rehabilitation under JM, namely Swiber Holdings, Swissco and Ezra Holdings, have yet to come out looking any better years later.

Will this court-supervised tool pull its weight as a viable rescue option and help cement Singapore's long-held goal to become an international hub for debt workout? Or, given all its shortcomings - elusive full recovery, lengthy process and notoriously high costs (and by extension, lucrative for insolvency practitioners) - could more distressed firms under JM be staring down the barrel of liquidation?