19 August 2020
On 30 July 2020, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) came into operation. The IRDA is an omnibus legislation housing all of Singapore’s insolvency and restructuring laws in one single piece of legislation.
The general framework of the IRDA has been discussed in the first article in our series of articles covering the various aspects of IRDA and can be found here.
In this article, which is the third article in our series, we will look at the Judicial Management provisions contained in the IRDA, including an overview of Judicial Management and its features, significant amendments to the Judicial Management regime that were implemented in 2017 and relevant modifications made to the regime in the IRDA.
Introduction
Judicial Management was introduced into Singapore’s restructuring and insolvency landscape in 1987, following the collapse of Pan Electric Industries Limited in 1985, which at that time led to an unprecedented closure of the Singapore Stock Exchange for 3 days. Judicial Management, which was based on the English administration regime, was intended as a mechanism through which potentially viable companies could restructure their liabilities and rehabilitate themselves.
Prior to the IRDA, the procedures for a Judicial Management were set out in Sections 227AA to 227X of the Companies Act (Cap. 50). In 2017, the Companies Act was amended to enhance the Judicial Management regime – amongst other things, the threshold for companies to enter into Judicial Management was lowered, and a statutory provision was made to allow for super-priority to be given to rescue financing. The existing statutory regime for Judicial Management, as amended in 2017, was largely transplanted into the IRDA, with some tweaks to further enhance its attractiveness to users.
What is Judicial Management?
Judicial Management is fundamentally a rehabilitation process, which differentiates it from liquidation. In this regard, the Court will only make a Judicial Management order[1] where it serves one or more of the following statutory purposes:[2]
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Implementation of a Scheme of Arrangement;
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Preserving all or part of the company’s business as a going concern; or
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Obtaining a more advantageous realisation of the company’s assets than on winding up.
A Judicial Management order is temporary in nature, generally lasting for 180 days (unless extended by the Court).[3] During this period, a moratorium is placed on proceedings against the company,[4] which gives the company breathing space to try and restructure.
Readers of our previous article in this series may note that there are similarities between Judicial Management and Schemes of arrangement, for example, the imposition of a statutory moratorium against proceedings. What then is the difference between the two regimes? We would suggest that the most significant difference lies in who remains at the helm.
Schemes of arrangement are generally a "debtor-in-possession" regime, where the company's existing management remains in-charge. A Scheme manager is usually appointed to oversee the implementation of the Scheme, but he does not displace the management. By way of contrast, the judicial manager is an independent "outsider" who takes over the running of the company from the management. Under the IRDA, the judicial manager "must" perform his or her functions to achieve one or more of the above statutory purposes. He or she owes a duty to act in the interest of the company's creditors as a whole, and must act as quickly and efficiently as is reasonably practicable.[5] It is pertinent to note that the IRDA expressly stipulates that a judicial manager is an officer of the Court.[6] Stemming from this status, a judicial manager has certain coercive powers, for example to compel the production of documents or information from the previous management.[7]
What this means, in practice, is that Judicial Management tends to be the preferred mode of restructuring in situations where there are allegations of financial misconduct (or even fraud) prior to the company’s insolvency. Creditors tend to prefer Judicial Management over a Scheme of arrangement where they harbour doubts over the ability (or even, bona fides) of the company’s management to rehabilitate the company.
2017 Amendments to the Companies Act
Prior to the IRDA, the legislative framework for Judicial Management was set out in Part VIIIA of the Companies Act. Part VIIIA of the Companies Act was amended in 2017 by the Companies (Amendment) Act 2017 (the “2017 Amendments”).
The Insolvency Law Review Committee noted that since its introduction, the Judicial Management regime was not as successful as it was expected to be.[8] Therefore, pursuant to the recommendations of the Committee, the 2017 Amendments saw the introduction of Sections 227AA and 227HA, which significantly enhanced the Judicial Management regime in Singapore. The most significant amendments implemented in 2017 are set out below.
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Lower threshold to enter into Judicial Management
Prior to the amendments in 2017, Section 227B (1) of the Companies Act provided that a company could only apply to Court to be placed under Judicial Management if it “is or will be unable to pay its debts”. On the face of the provision, this meant that a company could only enter Judicial Management if it was already insolvent. However, this meant that it was often too late to rehabilitate the company.
Therefore, the 2017 Amendments lowered the threshold for a company to be placed in Judicial Management. Section 227B (1) of the Companies Act was amended to allow a company to be placed under Judicial Management if the Court was satisfied that the company “is or is likely to become unable to pay its debts”. This meant that financially distressed companies could consider Judicial Management at an earlier stage, when it was not yet technically insolvent.
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Foreign companies have access to the regime
Where previously, only companies which were incorporated in Singapore could undergo Judicial Management in Singapore, the 2017 Amendments gave foreign companies doing business in Singapore access to the regime.[9] A foreign company wishing to enter into Judicial Management in Singapore must be able to demonstrate that it had a “substantial connection with Singapore”,[10] for example (a) it has assets located in Singapore; (b) it has substantial business in Singapore; (c) Singapore law had been used as the governing law for its business transactions; (d) the foreign company has submitted to the jurisdiction of the Singapore Courts for the resolution of disputes relating to its business transactions; and/or (e) Singapore was the company’s centre of main interests.[11]
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Removal of secured creditor’s veto power
Before the 2017 Amendments, if the holder of a floating charge (i.e. a secured creditor) objected to a Judicial Management application by the company, the Court would be compelled to dismiss the application unless it was against public interest.[12] However, the Insolvency Law Review Committee noted that relying on the public interest ground to obtain an order for Judicial Management was problematic as it was “of uncertain scope and [therefore] is rarely relied on”. Therefore, the relevant section was amended to allow the Court the discretion to override an objection to a Judicial Management application in certain defined circumstances, i.e. where the prejudice to the objecting creditor would not be disproportionately greater than the prejudice caused to the unsecured creditors if the application was not granted.[13]
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Super-priority for rescue financing
For distressed companies, fresh funding is often necessary to ensure continued operations and commencing potential recovery actions for wrongs committed against the company. However, lenders are generally reluctant to extend credit to financially distressed companies given the uncertainty of repayment. In these circumstances, the 2017 Amendments allowed the Court to grant super-priority for rescue financing, similar to that for Schemes of Arrangement[14].
Judicial Management under the IRDA
With the commencement of the IRDA, the sections in the Companies Act dealing with Judicial Management were repealed and largely re-enacted in Part 7 of the IRDA. Although many of the significant amendments to the Judicial Management regime had already taken place in the 2017 Amendments, the IRDA saw the implementation of further enhancements, discussed below.
Out-of-Court Judicial Management
Prior to the enactment of the IRDA, a company could only be placed under Judicial Management by an order of the Court. This meant that the distressed company had to spend precious time and resources in making an application to the Court, when such time and resources could be better channeled into rehabilitating the company.
Section 94 of the IRDA now provides that instead of applying to Court for a Judicial Management order, a company can be placed under Judicial Management if a majority of the creditors (in number and value) so approve[15] after requisite notices and documents have been filed and a creditors’ meeting called.[16]
Once the company is placed into Judicial Management pursuant to Section 94, it is under the supervision of the Court and in the same manner as a Court-ordered Judicial Management to ensure that there is no abuse.
Third-party funding
Before the enactment of the IRDA, there was some uncertainty as to whether a company could enter into a third-party funding agreement to pursue a claim against parties who had committed a wrong against the company. Typically, these companies do not have sufficient funds to pursue claims and third-party funding agreements are an attractive option which the company can tap in to possibly attain a greater realization of the company’s assets. Notwithstanding the uncertainty, the Singapore Courts have actively developed case law on when third-party agreements may be entered into by insolvent companies.[17]
The enactment of Section 99 of the IRDA, read with the new paragraph (f) of the First Schedule, now accords a judicial manager the express statutory power to assign the proceeds of an action arising under Sections 224, 225, 228, 238, 239 or 240 of the IRDA. These sections relate to avoidance of undervalue and unfair preference transactions, extortionate credit transactions, wrongful/fraudulent trading and assessment of damages against delinquent officers. This would be welcome news for distressed companies which are looking to obtain a higher realisation of its assets/recover wrongfully transferred assets but do not have the funds to pursue legal action.
It is worth noting that Section 99 of the IRDA does not extend to third-party funding against a counterparty for unpaid receivables or breach of contract. Further, if we examine the provisions of the Insolvency, Restructuring and Dissolution Bill, it was clarified that the enactment of Section 99 of the IRDA was not “intended to affect other funding Arrangements that are allowed under common law, such as funding for causes of action that belong to the company as its property, and funding for the investigation of potential causes of action for financially distressed companies.” Thus, despite Section 94 of the IRDA, the principles established by case law in respect of when third-party funding agreements will be approved by the Court will still remain applicable.
Removal of personal liability of judicial manager
Section 227I(1) of the Companies Act provided that the judicial manager will be personally liable for contracts adopted by him in carrying out of his functions but the judicial manager may also disclaim personal liability in this regard. In practice however, the judicial manager would always disclaim liability and the imposition of personal liability was therefore rendered academic and served no practical utility. Section 227I has therefore been re-enacted as Section 102 of the IRDA but without the imposition of personal liability on the judicial manager.
Conclusion
The present Judicial Management regime contained in the IRDA is not vastly different from that which was put in place after the 2017 Amendments, prior to the IRDA’s commencement. However, there has been some innovation, especially with the introduction of the out-of-court Judicial Management procedure, which is worth keeping a close eye on as it is put through its paces in the coming months.
For further information, please contact:
Prakash Pillai, Partner, Clyde & Co
prakash.pillai@clydeco.com
[1] Prior to the IRDA, the only way a company could be placed into JM was through a Court Order. Under the IRDA, a company can enter into a JM through a resolution of creditors (more on this below).
[2] Section 227B(1)(b) of the Companies Act, now Section 89(1) of the IRDA.
[3] Section 227B(8) of the Companies Act, now Section 111 of the IRDA.
[4] Sections 227C and 227D(4) of the Companies Act, now Sections 95(1) and 96(4) of the IRDA.
[5] Sections 89(c)(2) and 89(c)(3) of the IRDA.
[6] Section 89(c)(4) of the IRDA.
[7] For example, see section 105 of the IRDA.
[8] Between 1996 and December 2010, not more than 30% of JM applications were successful in that the resulted in the company’s rehabilitation. See Report of the Insolvency Law Review Committee, page 82.
[9] Section 227B(1) read with Section 227AA and Section 351 of the Companies Act. Section 222B(1) has been re-enacted as Section 91(1) of the IRDA and Section 227AA has been re-enacted as Section 88 of the IRDA.
[10] Section 351(1)(d) of the Companies Act.
[11] Section 351(2A) of the Companies Act.
[12] Section 227B(10)(a) of the Companies Act.
[13] Section 227B(5)(b) of the Companies Act. Now Section 91(6) of the IRDA.
[14] Section 227HA((10) of the Companies Act, now Section 101(10) of the IRDA. See previous article on Schemes of Arrangement.
[15] Section 94(11) of the IRDA.
[16] Sections 94(2), 94(3), 94(5), 94(7) – 94(10) of the IRDA.
[17] Our article discussing the principles on when the Court will sanction a third party funding agreement can be found at https://www.clydeco.com/en/insights/2020/07/third-party-funding-in-the-context-of-insolvency-p.
