Pride may hurt Singapore's aim to be restructuring hub

When businesses in Asia start to fail, they often try to maintain the facade, rather than to acknowledge the reality

    Published Thu, Apr 7, 2022 · 12:12 PM

    SINGAPORE is gaining traction as the centre for debt restructuring in Asia, offering a powerful combination of an accessible and transparent legal system and judicial expertise and integrity. But is there embedded within the Asian business community an intangible and perhaps uniquely Asian impediment to the Singapore restructuring regime reaching its full potential: that even when a company is clearly headed into financial distress seeking help would be an unacceptable admission of failure?

    In laying the foundations of an Asian insolvency hub, Singapore has matched characteristic vision with equally characteristic rapid innovation. Through law reform culminating in the Insolvency, Dissolution and Resolution Act, legislators in Singapore have taken the best of the restructuring frameworks in the United States and the United Kingdom, the world's leading restructuring hubs. At the same time, Singapore's International Commercial Court has appointed one of the world's most prominent and respected bankruptcy jurists.

    Forum for restructuring

    The result of these impressive efforts is that Singapore is now a highly attractive forum for restructuring, and not only for domestic enterprises. Several offshore conglomerates have restructured under Singapore law, including Malaysia's iflix and Indonesia's Modernland and Pan Brothers. However, for Singapore to realise its ambition as an Asian insolvency hub, more Asian businesses will have to embrace the opportunities afforded by timely restructuring.

    In the UK, and indeed in Europe generally, debtors are familiar with the processes around restructuring distressed debt and consider these processes to be a "safe harbour" to be accessed at the time, or in advance, of distress. Conversations take place with lenders promptly when management sees the business getting into trouble, the robust insolvency regimes are engaged and the rules are followed.

    In the US, filing for protection under Chapter 11 of the Bankruptcy Code is commonly flagged in advance, and is seen as the accepted alternative to a consensual restructuring. It attracts no social stigma - it is seen as the right to fail and then to be able to start afresh.

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    Distressed corporates have to be given the time and protection from legal action to restructure their debts, but also, and of fundamentally equal importance, creditors need to be assured of a level playing field, with a rigorous and independent assessment of the feasibility of a restructuring and confidence in the judicial process.

    These are the hallmarks and the essence of what Singapore offers: a highly credible domestic and cross-border alternative to the US, the UK and now the new European processes, and one which is easily accessible for Asia-based or invested companies. Debtors are supported in their efforts to work through financial distress and to restructure their debts under the supervision of a largely, and by preference, non-intrusive but nonetheless astute and commercially aware Court.

    So what is it about restructuring that is unique to Asia? In Asia, there is often intense privacy in business and very substantial businesses remain family-controlled, with many listed on Asian stock exchanges. Over 50 per cent of the world's billionaires are Asian, with highly entrepreneurial individuals building empires and dynasties and displaying justifiable pride in their achievements.

    So when the unthinkable happens and a business starts to fail, the natural inclination is to try to maintain the facade, rather than to acknowledge the reality, engage with key stakeholders and professional advisers, and provide the access, information and cooperation essential for the restructuring process.

    Risky strategy

    This is a strategy which is inherently risky, seldom works and when carried through beyond the point of no return is both trust and value destructive, descending into a cat-and-mouse chase in which creditors are forced to employ increasingly aggressive methods to corner increasingly evasive debtors and personal guarantors.

    Encouraging debtors to accept early recognition of potential problems allows for advisers to be retained and fully briefed and enables open and transparent conversations to take place with regulators and financiers. This minimises value erosion, maintains the confidence of business partners and trading counterparties and opens up the full range of potential options and solutions to be explored - whether these are through consensual or statutory processes. But as with most things, with the carrot comes a stick, there has to be an expectation of corporate discipline and enforcement of corporate governance. The privilege of accessing a world-class restructuring regime must carry with it that entry ticket.

    Singapore's expansion as an insolvency hub depends on Asian businesses opening up when they need help. That change must come. The question is whether it will come from within businesses or be forced by investors, creditors and regulators insisting on good governance and on directors fulfilling their duties.

    The writers are lawyers in Allen & Overy's Asia-Pacific Restructuring & Recovery Group.

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