Singapore's updated insolvency kit may see more use next year as government support tapers off

Singapore

SINGAPORE'S updated legal toolkit for corporate insolvency and debt workouts was rolled out only recently, and amid a pandemic-wrecked business environment. Thus far, its rescue funding, pre-pack scheme and out-of-court restructuring features have offered the most bite.

Even so, experts reckon the Insolvency, Restructuring and Dissolution Act (IRDA), a mammoth statute that came into force end-July 2020, will be tested further as the government tapers its Covid-19 support for certain sectors.

"Once the expiration of these latter measures are analysed in conjunction with the end of the financial support provided to certain businesses and industries, and the inability of many companies to return to their pre-pandemic levels of liquidity and profitability, there will be a greater need to use the insolvency system.

"We will probably observe an increase in the number of companies using the IRDA," said Singapore Management University law lecturer Aurelio Gurrea-Martinez.

The Covid-19 (Temporary Measures) Act 2020 - a vital crutch for financially-distressed businesses whipped by pandemic-led curbs - expired last year. But some relief measures, including wage support for hard hit sectors, remain in place. These are expected to be phased out.

Assuming the aid packages end and the Singapore economy has yet to fully reopen, Shook Lin & Bok partner Daniel Tan expects a "significant uptick" in the use of provisions under IRDA.

This omnibus legislation for personal and corporate insolvency and restructuring proceedings is deemed kinder to debtors as they endeavour to free themselves from a debt spiral.

Between January and October this year, 197 applications for compulsory liquidation were filed - up a negligible 1.5 per cent from the same period last year. Statistics from the Law Ministry's Insolvency Office website showed 149 companies were wound up, versus 182 over the corresponding period last year and 225 cases in the first 10 months of 2019.

These low numbers during the pandemic period may, in part, reflect the effectiveness of the legal and economic measures adopted by the government amid the Covid-19 crisis.

Rescue financing

IRDA marked the finish line of an extensive and phased evolution of Singapore's insolvency regime, with much of the heavy lifting in reforms having took place in May 2017 when big amendments to the Companies Act came into force.

A salient provision under the statute involves rescue financing.

From super-priority funding to third-party funding for clawback actions, these tools provide much needed liquidity to fund ongoing operations or pursue litigation claims all in the name of maximising recovery, said Tan of Shook Lin & Bok, adding that these are also the most frequently used features of the statute.

Many agree with that view.

"It addresses one of the key challenges faced by companies in distress - that of access to cash," said Ernst & Young's Asean restructuring leader Angela Ee.

Robson Lee, a partner in Gibson Dunn's Singapore office, adds that new lenders are usually unwilling to lend to a sick company while existing creditors begrudge extending more loans. He therefore deems the availability of priority rescue financing, under the respective judicial management and debtor-in-possession financing frameworks, a concept inspired by Chapter 11 of the US bankruptcy code, a "main development".

In an insolvency situation, creditors are ranked by the seniority of their debt. The priority rescue financing framework allows rescue financing loans to rank equally or above the senior creditors of the company, or take senior or equal security over an existing security over the company's assets. Having a statutory priority facilitates and encourages the provision of rescue financing to distressed companies, Lee explained.

Some of the companies that successfully applied for super priority status include Asiatravel.com Holdings, an online travel agency that was the first to be granted this order; as well as civil engineering contractor Swee Hong and interior designer Design Group Studio. In September, the Singapore High Court granted this vital plank to a third-party funding for an international arbitration involving commodity trader Antanium Resources.

"This (provision) sets an important precedent for rescue financing (or financing to pursue claims the distressed company has against debtors) in insolvencies. It is also yet another step forward in encouraging value preservation via debt restructuring rather than liquidation," said TSMP Law Corporation partner Felicia Tan.

Debt workouts

The out-of-court debt workout, also promoted by IRDA, is another useful tool. Its advantages are threefold: it can significantly slash crippling direct and indirect costs of companies facing insolvency, keep the available distribution pie bigger for creditors, and lighten the load on the judicial system.

There is limited data on the use of debt workouts, given their informal nature, but their use is said to have risen. "There has been an uptick in out-of-court restructurings as creditors are aware that debtors could utilise the enhanced rights and protections under the IRDA. A classic example is Pacific International Lines, which adopted a hybrid approach, said Tan.

The cash-strapped company, one of South-east Asia's leading shipping companies, would have been allowed, under the IRDA, to file a court application for an automatic moratorium to ban creditors from action. Its creditors were therefore incentivised to accept a consensual standstill.

A "pre-negotiated" scheme was thrashed out and subsequently sanctioned by the court, which led to the successful debt workout of a massive US$3.3 billion.

Pre-packs

The present regime also introduced a faster and more cost-effective route for a workout scheme to be implemented. The court has the power to approve a pre-negotiated scheme without the need to convene a creditors' meeting to vote on it, said Gibson Dunn's Lee.

Hoe Leong Corporation, a heavy equipment supplier, was the first pre-pack reported in Singapore. It was able to fast-track its debt restructuring, with its scheme sanctioned approximately 2 months from the dispatch date of its scheme documents.

The core benefit of using a "pre-pack" plan, said EY's Ee, is that a number of requisite formal hearings can be skipped, offering considerable time and cost savings for the company in distress.

Other companies that have benefited from the scheme include Malaysian video streaming service iflix and Jakarta-based conglomerate MNC Investama.

On the whole, market practitioners said, the IRDA has fortified Singapore's insolvency framework. But there are nuts and bolts that can be tightened.

Ee, for one, suggested a carve-out of compliance to certain listing manual rules for Singapore-listed companies. As restructurings typically involve asset disposals to raise much-needed cash, the listing rules require shareholders' nod in a general meeting. These take time and money.

Additionally, shareholders usually do not benefit from such transactions because the general principle of insolvency is that creditors should be repaid out of the assets of an insolvent company before any distribution is made to shareholders). Yet, shareholders are, in theory, given "veto rights" over such transactions, she said.