New provisions to the Companies Act enhance judicial management and schemes of arrangement for distressed companies in Singapore
In the recent Companies (Amendment) Act 2017 (the “Amendments”)passed in Parliament on 10 March 2017, the legislative framework for debt restructuring in Singapore has been enhanced and modernised to streamline the restructuring of corporate entities. The changes mirror several features of debt restructuring provided for in Chapter 11 of the U.S. Bankruptcy Code.
An overview of schemes of arrangement and judicial management
In the context of debt restructuring, a scheme of arrangement (“SOA”) is a court-sanctioned compromise between a debtorcompany and its creditors to vary or forego the debt of a company. SOAs are often proposed when a company is not able to pay its debts, and considersthatthe proposed SOAcould result in greater repayment of the loans over a defined period as compared to an immediate liquidation.
Judicial management (“JM”) refers to the court-sanctionedmanagement of companies that are or will be unable to pay its debts. A pre-condition of a JM order is that the JM must belikelytoachieve the result of the survival of the company, of the approval of aproposedSOA, or of the more advantageous realisation of the company’s assets than would occur in a winding up.
A moratorium refers to a stay on all legalproceedings against a companyi.e.all ongoing and prospective legal proceedings against a company will be halted.Before the Amendments, a moratorium wouldautomatically arise upon an application for JM; however, no moratorium would ariseupon an application foraSOA. The Amendmentsnow provide that upon an application for a moratorium to propose a SOA, an initial automatic moratorium of 30 days will immediately take effect, while the application is pending.This automatic moratorium will only apply to 1 SOA application made by the company in every12-month period.
Secondly, prior to the Amendments, moratoriums grantedby the Court–whether for JM orders or a SOA –are only effective forproceedings in Singapore. Given the international nature of many companiestoday, the lack of an extraterritorial moratorium for debt restructuring is a serious weakness. The Amendments will empowerthe Singapore Courtsto grant moratoriums against any creditor,over whom the Singapore Courtshavepersonal jurisdiction,from taking action anywhere in the world. The effectiveness of such moratoriums hinges on the fact that many international financing entities are registered or have 2 subsidiaries incorporated in Singapore, and are hence under the jurisdiction of the Singapore Courts.In addition, the Amendments make clear that moratoriums that the Court may grant can restrain:
- The passing of resolutions for winding up
- The right of any creditor to appointreceivers or managers
- The commencement, continuation or levying of any execution, distress or other legal process against any property of the company
- Any step taken to enforce any security or to repossess any goods held by the company under any chattelsleasing agreement, hire-purchase agreement or retention of title agreement; and
- Any enforcement of re-entry under any lease in respect of premises occupied by the company.The Court is also empowered to grant moratoriums in respect ofa subsidiary, holding company, or ultimate holding companyof the debtorcompany.
Requiring disclosure of information upon moratorium application
To ensure that the automatic moratorium is not abused by errant debtor companies, a new requirement under the Amendments compelsdebtor companiesto provide adequate information to creditors upon application for a moratorium for the purposes of proposing a SOA. Key information tobe disclosedinclude:
- Evidence of creditor’s support for the SOA
- A list of the company’s secured creditors; and
- A list of 20 largest unsecured creditors of the company in terms of their claim.
Furthermore, the company is compelled to submit to the Court sufficient information relating to the company’s financial affairs,to enable the company’s creditors to assess the feasibility of the proposed SOA, as the Court may specify.Such information includes:
- Valuations on the company’s significant assets
- Periodic financial reports of the company; an
- Forecast of profitability of, and cash flow from the operations of the company.
The Amendments introducethe concept of pre-packaged restructuring to Singapore (“Pre-Pack”). A Pre-Pack isa restructuring plan that is negotiated between the company and its major creditors prior to any court proceedings for a proposed SOA. The Pre-Pack is then approvedby the Court, whomay then dispense of the requirement fora creditors’ meetingbefore approving a SOA.Under the Amendments,the Court is empowered to make an order approving aSOA pursuant to a Pre-Pack ifcertain safeguards are met. The Court may still review any act, omission, or decision, by the company or the scheme manager of the SOA even after the SOA has been approved pursuant to a Pre-Pack.
Making rescue financing moreattractive and viable
The concept of super-priority liens is introduced in Singapore throughthe Amendments. It allows debt provided for the purposes of restructuringadistressedcompany to be repaid before all administrative expense claims and ahead ofall other unsecured claims. Alternatively, a super-priority lien may entitle the lienholder to obtain superior or equal security to previously encumbered assets.
However, such liens are subject to Court approval. For example, the Court may compel the debtor company to make cash payments to existing secured lenders to compensate for any decrease in value of his existing security interest.
Making JM orders more accessible
The Amendments have made JM orders accessible even before the distressed company isunable to pay its debts as they fall due. Presently, a JM order can only be granted when it is proven to the Court that the company “is or will beunable to pay its debts”. The Amendments have changed the threshold such that a company that “is or is likely to become unable to pay its debts” can avail itself to JM. As a result, a JM order may be granted earlier, increasing the chances of rehabilitation of distressed companies.
Furthermore, prior tothe Amendments, any party with the entitlement to appoint a receiver and manager can veto an application for JM. Such a veto right effectively subsumes JM under receivership, since the party entitled to receivership almost always vetoes the JM to appointa receiver forits own benefit. The Amendments state that while such entitled parties retain their right to veto a JM application, the veto would only be effective if the Court is satisfied that the prejudice caused to that entitled party if a JM order is made is disproportionately greater than the prejudice caused to unsecured creditors of the company if the JM application is vetoed.
Prior to the Amendments, a SOA can only be granted if the requisite majority of creditors within each class of creditor approves of the SOA. This mechanism incentivisedminority creditors to withholdtheir consenttoextractgreaterreturns. As a result, aSOA,which would have benefitted creditors as a whole, can be unduly frustrated.
Under the Amendments, the Court is empowered to “cram down” dissenting creditors and approve a proposed SOA nonetheless. Safeguards to ensure that cramming down would be fair include ensuring that a majority of the creditors meant to be bound by the SOA, who also constitute three-fourthsin value of thecreditors under the proposed SOA, werepresent and have agreed to the SOA. In addition, the SOA must notdiscriminate unfairly between twoor more classes of creditors, and must be fair and equitable to each dissenting class of creditors.
Given that the Amendments will come into force in the near future, creditors and companies should do well to familiarise themselves with the Amendments and to consult their legal advisors on the specific impacts these Amendments may have on them.