.jpg)
3 August, 2017
INTRODUCTION
In Singapore on 29 March 2017, the Companies (Amendment) Act (the “CAA”) was assented to by the President, having been passed by Parliament on 10 March 2017.1
The Singapore government had previously appointed an Insolvency Law Review Committee (“ILRC”) to review
the then-existing bankruptcy and corporate insolvency regimes and to report its recommendations on an omnibus insolvency bill. After the government had reviewed the ILRC’s report,2 it substantially agreed with the recommendations therein and set about making the necessary amendments. It opened a public consultation for feedback on the proposed amendments to the Companies Act3 (the “Act”) for six weeks from 21 October 2016 to 2 December 2016.4
As a result of the CAA, the Act has undergone quite some amendments in the following areas, viz:
a. Schemes of arrangement;
b. Judicial management; and
c. Cross-border insolvency.
This article aims to provide a brief overview of the changes the CAA has introduced to the areas above, as of 23 May 2017 when those changes came into force.
SCHEMES OF ARRANGEMENT
The CAA amended the Act by inserting ss 211A to 211J immediately after s 211.5
Those sections therefore form part of Part VII of the Act, which is concerned with arrangements, reconstructions and amalgamations of companies.
Section 210 of the Act gives the Court the power to do certain acts when there is a scheme of arrangement. That power arises where a “compromise or an arrangement” is proposed between certain classes of persons and the company (“Scheme”). That ss 211A to 211J of the Act applies to schemes of arrangement, insofar as they are concerned with compromises or arrangements between a company and its creditors, is seen from s 211A(1), which uses the same turn of phrase in its reference to ss 211B to 211J of the Act: “Application of sections 211B to 211J, etc. 211A.—(1) Sections 211B to 211J only apply in a case that involves a compromise or an arrangement between a company and its creditors or any class of those creditors.
WALKTHROUGH OF THE KEY NEW SECTIONS (A) SECTION 211B: POWER OF COURT TO RESTRAIN PROCEEDINGS, ETC. AGAINST COMPANY
Section 211B(1) sets out the various orders a Court may make, upon the company’s application, to restrain proceedings against the company because it is proposing or intends to propose a Scheme.6
In the insolvency context, a company proposes a Scheme when it is in financial difficulty and it may be in the interest of members and creditors to agree to a moratorium in respect of monies owed to them.7
In light of that, the introduction of s 211B(1) becomes clear: the aim is to keep the company alive by restraining proceedings against it so as that it may carry out the proposed Scheme. The Court may order the moratorium to be “in force for such period as the Court thinks fit”.8
It can also, by s 211B(7), extend the moratorium period if the company applies for an extension before the moratorium expires. Presumably, the extension is also “for such period as the Court thinks fit”.
Of particular interest is s 211B(1)(c), which grants the Court the power to restrain the “commencement or continuation of any proceedings … against the company”. This provision is premised upon the company’s application and even enables the Court to hold ongoing proceedings against the company in abeyance. After the company has made an application under s 211B(1), because of s 211B(8) read with s 211B(9), there is an automatic moratorium period which starts on the date of application and ends either on the earlier of thirty days after the application or the date on which the application is decided by the Court.
Naturally, the Court’s powers to order such moratoriums are not without limit. They are circumscribed by the requirements set out in s 211B(2).
Even so, the Court’s powers are wider and greater with the introduction of s 211B as compared to previously, when the Court’s powers were pursuant only to s 210(10) of the Act and relatively weak.9
For instance, under that section, the Court did not appear to have the powers to restrain the repossession of personal property (as it does under s 211B(1)(e)) against or to restrain landlords seeking to exercise their right of re-entry to a leasehold property.10
If anything, the introduction of s 211B is at least a welcome clarification on the Court’s powers to order moratoriums with regard to other proceedings against the company.
B) SECTION 211C: POWER OF COURT TO RESTRAIN PROCEEDINGS, ETC., AGAINST SUBSIDIARY OR HOLDING COMPANY
Section 211C is similar to s 211B, with one key difference—it sets out the Court’s powers to order a moratorium (where the Court has made an order under s 211B(1) in relation to a company) upon an application by a subsidiary, a holding company or an ultimate holding company of the company in question.
It should be noted that s 211C(7) prevents the powers under s 211C(1) from affecting the regulations on arrangements prescribed by the Minister under s 411 of the Act. Such arrangements include a set-off arrangement, which is defined at s 211C(8) as “an arrangement under which 2 or more debts, claims or obligations can be set-off against each other.” For completeness, s 211C(7) provides that the “exercise of any legal right under any arrangement … may be prescribed by regulations under section 411.” The Minister of Finance has exercised the powers so conferred by s 411.11
Regulation 3 of the Companies (Prescribed Arrangements) Regulations 2017 (“CPAR 2017”) which came into force on 23 May 2017, provides that “The exercise of all legal rights under any security interest arrangement is prescribed for the purposes of sections 211B(12), 211C(7) and 227D(5) of the Act.” In turn, a netting arrangement and a security interest arrangement12 is defined in Regulation 2 of the CPAR 2017.
C) SECTION 211D: RESTRAINT OF DISPOSITION OF PROPERTY, ETC., DURING MORATORIUM PERIOD
So far, the sections above have worked in the company’s favour, giving the Court the power to keep creditor actions against it away.
Section 211D, however, keeps the weighing scale balanced. It enables the Court to make an order restraining the company from disposing of its property save where such disposition is in good faith and in the ordinary course of business.13
It also enables the Court to make an order restraining the company from transferring shares or altering the rights of
any of its members.14
The Court may even make both orders at once if it deems necessary.15
The Court may order the above restraints upon the application of any creditor of the relevant company, such company being either a company which has made an application under s 211B(1) or s 211C(1).16
Any creditor may apply for the order whenever a moratorium is in place. In other words, a creditor may apply for such an order when an automatic moratorium is in force because an application under s 211B(1) has been made, when an order under s 211B(1) is in force, or when an order under
D) SECTION 211E: SUPER PRIORITY FOR RESCUE FINANCING
Traditionally, in the event of insolvency, the priority of a company’s creditors was governed by s 328 of the Act. That section sets out which groups of people are owed preferential debts and the fact that they take priority over unsecured creditors.18
The previous ranking of creditors has changed with the introduction of s 211E. Specifically, s 211E(1)(b) enables rescue financers to take priority over other creditors by enabling the Court to:
“… order that if the company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company is to have priority over all the preferential debts specified in section 328(1)(a) to (g) and all other unsecured debts, if the company would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given the priority mentioned in this paragraph …” (emphasis added).
In turn, the definition of “rescue financing” is found at s 211E(9) and means:
“any financing that satisfies either or both of the following conditions:
(a) the financing is necessary for the survival of a company that obtains the financing, or of the whole or any part of the undertaking of that company, as a going concern;
(b) the financing is necessary to achieve a more advantageous realisation of the assets of a company that obtains the
financing, than on a winding of the company”.
What is clear from the foregoing is this. The company must require the financing for its survival and/or more advantageous realisation of its assets and must not have been able to obtain that financing but for the giving of such priority.
(i) Other orders the Court may make in relation to rescue financing
The Court now also has the power to order that the debt(s) arising from rescue financing
(1) be treated as if it was part of the costs and expenses of winding up the company19 ,
(2) be secured by a security interest on the company’s property where that property is not otherwise subject to any such interest, 20
(3) be secured by a security interest subordinate to an existing security interest on the company’s property,21 and
(4) even be ranked on par or higher than another pre-existing security interest on the company’s property.22
Before the debt(s) arising from rescue financing are ranked on par or higher than another pre-existing security interest as per s 211E(1)(d), two conditions must be fulfilled. The first is that the company would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is secured in the manner mentioned in this paragraph. The second is that there must be adequate protection for the interests of the holder of that existing security interest. These two conditions are found at s 211E(1)(d)(i) and (ii) respectively.
(ii) Can there be more than one super priority debt?
The answer is yes. Sections 211E(3) and (4) provide for the event “[w]here a company that has 2 or more super priority debts is wound up”.
More interesting is the question whether a company may undergo two or more rounds of rescue financing. Arguably, it appears so. Sections 211E(3) and (4) remain silent as to whether the super priority debts must be incurred at the same time. Therefore, a scenario where a company might require more than one round of rescue financing seems to have been envisaged.
It would appear that a company, having received a first round of rescue financing and realising it requires further rescue, might receive a second (and even further) round of rescue financing from another party orvother parties. All such super priorities, including the first, would then rank equally23 and be paid out in full or abated in equal proportions between them.24
For the avoidance of doubt, the super priorities of rescue financing are unaffected by the clawback provisions in the Act. This is specifically provided for in s 211E(7) and will certainly reassure any potential financers of companies seeking rescue.
While the United States has had similar provisions under the Bankruptcy Code for some time,25 it will be interesting to see how the local companies take to such provisions.
JUDICIAL MANAGEMENT
The judicial management scheme in Singapore is governed mainly by Part VIIA of the Act.26
Prior to the recent amendments, a company could only enter judicial management pursuant to a Court order.27
As proposed by the ILRC, the recent amendments to the Act have changed this by simplifying the process of applying for judicial management.28
For instance, companies may now apply for a judicial management order if it “is or is likely to become unable to pay its debts”29.
This is earlier than previously, where it had to wait until it “is or will be unable to pay its debts”.30
Other simplifications include doing away with the need to publish a company’s application for judicial management in a Chinese newspaper.31
ALIGNMENT WITH COMPANY LIQUIDATION
There are also further amendments to the judicial management scheme to bring it in line with that of company liquidation.
A new s 227D(4) has replaced the old version and it brings with it an expansion of the moratorium in place when a judicial management order is in force. For instance, under the new s 227D(4)(f), “no right of re-entry or forfeiture under any lease in respect of any premises occupied by the company may be enforced” unless the judicial manager has consented or the Court has granted leave.32
The new s 227D(4)(f) dovetails the moratoriums put in place when a company enters a scheme of arrangement and when a judicial management scheme is ordered because its wording is in pari materia with s 211B(8)(f). This amendment specifically addresses a shortfall of the previous statutory regime. Prior to the recent changes, the protection afforded by the statutory moratorium provided at s 210(1) of the Act (which concerns schemes of arrangement) was relatively weak compared to the judicial management scheme.33
It did not apply to landlords seeking to exercise their right of re-entry to registered leasehold property.34
Now, landlords of companies placed under either scheme must consider the respective sections. Section 227HA has also been added to the Act and grants the Court similar powers in relation to super priority for rescue financing, but vis-à- vis a judicial management scheme instead.
CROSS-BORDER INSOLVENCY
One major amendment to the Act is the addition of a new Division 6 to Part X. By way of this new division, specifically s 354B, the United Nations Commission for International Trade and Law Model Law for Cross-Border Insolvency (“UNCITRAL Model Law”) has force of law in Singapore.35
The full text of the UNCITRAL Model Law is set out in the Tenth Schedule of the Act and applies with certain modifications to adapt its application in Singapore.
The adoption of the UNCITRAL Model Law is significant because it cements Singapore’s universalist stance and its view on the importance of cooperation between various jurisdictions in cross-border insolvency law. The UNCITRAL Model Law seeks, amongst other things, to improve cooperation between the countries that have adopted it and thereby provide greater legal certainty for trade and investment.37
CONCLUSION
While the above is not an in-depth review of the recent amendments, it is hoped that it provides a broad overview of changes in the insolvency landscape and a better understanding of the same.
1 See Government Gazette: Acts Supplement No. 17 of 2017.
2 See Ministry of Law website, “Public Consultation Open for Feedback on Proposed Changes to Singapore’s Debt Restructuring Scheme” (21 October 2016) <https://www.mlaw.gov.sg/content/minlaw/en/news/press-releases/publicconsultation-open-for-feedback-on-proposed-changes-to-sin.html> (accessed 3 July 2017).
3 Cap 50, 2006 Rev Ed. Unless otherwise stated, sections referred to are sections of the Act.
4 See Ministry of Law website, “Public Consultation Open for Feedback on Proposed Changes to Singapore’s Debt Restructuring Scheme” (21 October 2016) <https://www.mlaw.gov.sg/content/minlaw/en/news/press-releases/publicconsultation-open-for-feedback-on-proposed-changes-to-sin.html> (accessed 3 July 2017).
5 See s 22 of the CAA.
6 See especially s 211B(1)(c) of the Act.
7 See Andrew Chan (ed) et al, Halsbury’s Laws of Singapore, Vol 13: Insolvency (LexisNexis Singapore, 2013 Reissue) at para 150.015.
8 See s 211B(1) of the Act.
9 See [7] of Chapter 7: Schemes of arrangement in the Report of the Insolvency Law Review Committee at p 136.
10 See [7] of Chapter 7: Schemes of arrangement in the Report of the Insolvency Law
Review Committee at p 136.
11 See s 211C(7) of the Act cf. pre-amble to the Companies (Prescribed Arrangements) Regulations 2017.
12 A netting arrangement is also defined in s 211C(8) of the Act. It is expressly referred to in s 211C(7) of the same, and thereby unaffected by the powers in s 211C(1).
13 See s 211C(1)(a) of the Act.
14 See s 211C(1)(b) of the Act.
15 See s 211D(1) of the Act: “The Court may … make either or both of the following orders… .” (emphasis added)
16 See s 211D(2) of the Act.
17 See s 211D(2) of the Act.
18 See s 328(1) of the Act.
19 See s 211E(1)(a) of the Act.
20 See s 211E(1)(c)(i) of the Act.
21 See s 211E(1)(c)(ii) of the Act.
22 See s 211E(1)(d) of the Act.
23 See s 211E(3)(a) of the Act
24 See s 211E(3)(b) of the Act.
25 See [64] and [65] of Chapter 6: Judicial Management of the ILRC Report 2013 at pp 107–108 and s 364(c) of the US Bankruptcy Code.
26 Part VIIA of the Act spans ss 227A to 227X.
27 See [7] of Chapter 6: Judicial Management of the Report of the Insolvency Law Reform Committee 2013.
28 See [36]–[38] of Chapter 6: Judicial Management of the ILRC Report 2013 at pp 95–96.
29 See s 25(a) of the CAA amending s 227B(1)(a) of the Act.
30 Section 227B(1)(a) of the Act prior to the recent amendments.
31 See s 25(c) of the CAA amending s 227B(4)(a) of the Act.
32 See s 26 of the CAA.
33 See [7] of Chapter 7: Schemes of Arrangement of the ILRC Report 2013 at p 136.
34 See [7] of Chapter 7: Schemes of Arrangement of the ILRC Report 2013 at p 136.
35 See s 41 of the CAA.
36 See s 354B of the Act.
37 See [19] of the Chapter 11: Cross-Border Insolvency of the ILRC Report 2013 at p 228.
