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15 June, 2017
Globalisation has been described as an evolving set of consequences – some good, some bad and some unintended. In this regard, when companies go global, insolvency is perhaps the furthest thing from their minds. Yet, while business failure may be unintended, when a global company becomes insolvent or attempts debt restructuring, its insolvency representative e.g. liquidator or manager, will often have to deal with assets and creditors across the globe.
In this regard, to maximise the value of those assets and to prevent a "free-for all, catch-as-catch-can situation"[1] as creditors scramble to enforce their claims, an insolvency representative must first procure access to the domestic courts of all the jurisdictions in which the debtor has assets, usually either by an application to recognise the foreign insolvency or by commencing local insolvency proceedings. Even with such recognition, the insolvency representative may have to separately apply to stay legal proceedings in each jurisdiction and then start pursuing claims to recover the debtor's assets.
Cross-border insolvency issues also affect creditors. For example, a creditor would want to know if it can sue the debtor or execute against the debtor's assets in jurisdictions where formal insolvency proceedings have not yet commenced. A creditor would also understandably be concerned about a debtor which is insolvent in one jurisdiction but continuing to trade (or worse, disposing of assets) in another.
It is these issues, amongst others, that the UNCITRAL Model Law on Cross‑Border Insolvency ("the Model Law"), seeks to address. The Model Law's stated purpose is to assist states to equip their insolvency laws with a modern, harmonised and fair framework to address more effectively instances of cross-border insolvency proceedings.[2] Introduced in 1997 and since adopted by 43 states in 45 jurisdictions,[3] the Model Law has finally been implemented in Singapore on 23 May 2017, through the Companies (Amendment) Act 2017 ("the Amendment Act").
Singapore law prior to the amendment
Prior to the Amendment Act and the implementation of the Model Law, the position in Singapore was articulated by the Court of Appeal in Beluga Chartering GmbH (in liquidation).[4] In that case, the Court of Appeal observed that (a) Singapore courts were not bound to recognise any foreign insolvency proceedings; and (b) whether or not a Singapore court would exercise its inherent jurisdiction to render assistance to foreign insolvency proceedings through regulation of its own proceedings would depend on the particular circumstances before it. In other words, each application to recognise a foreign insolvency proceeding would be dealt with on an ad-hoc, case-by-case basis.
The subsequent High Court decision in Re Taisoo Suk[5] was the first case where a Singapore court exercised its inherent jurisdiction and recognised foreign insolvency proceedings. This case concerned an ex-parte application by a foreign representative of Hanjin Shipping for the Singapore courts to recognise the South Korean rehabilitation proceedings and grant a stay and moratorium of all proceedings against Hanjin's subsidiaries and vessels in Singapore. The High Court applied various considerations in deciding to grant the orders sought, including the foreign proceedings' impact on domestic creditors and whether it was fair and equitable in the circumstances to give recognition. Ultimately, the High Court granted the orders sought, on an interim basis, after a single ex-parte hearing.
In the more recent February 2017 applications by member companies of the EMAS group for recognition of the group's US Bankruptcy Code Chapter 11 proceedings in Singapore, the Singapore High Court ultimately recognised the Chapter 11 proceedings to the extent of allowing a limited stay and moratorium against proceedings in Singapore. No grounds of decision were issued for the EMAS applications and therefore, it is not apparent what considerations the High Court applied. However, it is noted that the High Court allowed the stay and moratorium only after seven hearings and only upon (arguably) onerous undertakings being given by the applicant companies to keep interested parties continuously notified of all developments in the Chapter 11 proceedings.
The two High Court decisions above, while ultimately recognising the foreign insolvency proceedings, showcase the issues with an ad-hoc approach. In one case, the court granted the recognition, without undertakings, after a single hearing but in the other, it took several hearings and substantive undertakings being given before recognition was granted. Against the backdrop of these cases, a foreign insolvency representative would be understandably uncertain about the approach he should take to procure recognition. Uncertainty inevitably increases the cost of insolvency administration and reduces the assets available to the creditors. There is therefore a clear need for certainty and predictability in the law regarding recognition of foreign insolvency proceedings.
Legal position under the amended Act
The Model Law aims to provide such certainty by providing a transparent, globally-accepted legislative framework for (a) access to local courts for foreign insolvency representatives; (b) recognition of certain orders issued by foreign courts; (c) relief to assist foreign insolvency proceedings; and (d) cooperation among the courts of states where the debtor's assets are located.
In 2013, the Insolvency Law Review Committee recommended the adoption of the Model Law. It has taken three years for the Model Law to be finally implemented in Singapore. Now, at last, Section 41 of the Amendment Act implements the Model Law and gives it the force of law in Singapore.
Under the Model Law, a foreign representative[6] can apply to the Singapore High Court for recognition of foreign insolvency proceedings. The application must be accompanied by (a) a certified copy of the decision commencing the foreign insolvency proceedings and appointing the foreign representative; and (b) a statement identifying all insolvency proceedings in respect of the debtor that are known to the foreign representative.
Recognition is largely a formalistic process and generally, upon an application being made by a foreign representative in the proper form, foreign insolvency proceedings will be mandatorily recognised. However, the Model Law does make a distinction between recognition of the foreign insolvency proceedings as either a main proceeding or a non-main proceeding, with each engendering different reliefs and consequences.
A main proceeding is one taking place where the debtor had its centre of main interests ("COMI"). This is presumed to be the registered office or habitual residence of the debtor. However this is a rebuttable presumption and the debtor's COMI does not always coincide with its place of registration.[7] The effect of a foreign insolvency being recognised as a main proceeding includes (a) stays of actions or enforcement proceedings by individual creditors against the debtor or its assets; and (b) a suspension of the debtor's right to transfer or encumber its assets. These reliefs flow automatically upon recognition of foreign insolvency proceedings as a main proceeding.
In contrast, a non-main proceeding is one taking place where the debtor has an "establishment", defined as "any place of operation where the debtor carries out non-transitory economic activity with human means and goods or services." When foreign insolvency proceedings are recognised as a non-main proceeding, separate applications must be made to a Singapore court for appropriate relief. In such cases, relief would only be granted if the court is satisfied that the interests of the creditors and other interested persons are adequately protected.
The reason for the distinction between main and non-main proceedings is obvious. In principle, a main proceeding (of which there can be only one) is expected to have principal responsibility for managing the insolvency of the debtor. Therefore, the Model Law accords proceedings commenced in that location greater deference and more immediate, automatic relief. Other states in which the debtor has assets are expected to recognise and support the main proceedings.
Conclusion
In the short term, the implementation of the Model Law will streamline the process of recognising foreign insolvency proceedings in Singapore, thereby reducing the cost in insolvency administration and increasing asset recovery for creditors. In the longer term, with the assurance of more certain and efficient cross-border recognition, companies may be incentivised to site their restructuring in Singapore and in this regard, structure their business such that their COMI becomes Singapore. In turn, this should lead to increased foreign investment into Singapore.
It is well publicised that Singapore seeks to become a regional hub for restructuring and insolvency administration. Amongst other benefits, this will allow Singapore to supplement and leverage its existing strengths, particularly in dispute resolution, which is frequently insolvency's handmaiden. To this end, the implementation of the Model Law is a big step in the right direction.
[1] Re Taisoo Suk (as foreign representative of Hanjin Shipping Co Ltd) [2016] 5 SLR 787
[2] Details can be found in the UNCITRAL's Guide to Enactment and Interpretation of the UNICTRAL Model Law on Cross-Border Insolvency.
[3] The full list can be found at http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html
[4] Beluga Chartering GmbH (in liquidation) and others v Beluga Projects (Singapore) Pte Ltd (in liquidation) and another (deugro (Singapore) Pte Ltd, non-party) [2014] 2 SLR 815
[5] Re Taisoo Suk (as foreign representative of Hanjin Shipping Co Ltd) [2016]5 SLR 787
[6] A 'foreign representative' is defined under the Model Law as 'a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s property or affairs or to act as a representative of the foreign proceeding'.
[7] The determination of COMI has spawned a substantive body of case law and it is not the subject of this article to discuss the various considerations to be applied.
For further information, please contact:
Prakash Pillai, Partner, Clyde & Co
prakash.pillai@clydeco.com
