12 August 2020
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Singapore’s Insolvency, Restructuring and Dissolution Act (the “IRDA“), together with 48 pieces of subsidiary legislation, comes into force on 30 July 2020 (available here).
The IRDA consolidates Singapore’s personal and corporate insolvency and debt restructuring laws into a single piece of legislation. It also introduces a number of significant reforms designed to simplify and modernise Singapore’s insolvency framework. It is the final part of an ambitious set of legislative updates which are intended to make Singapore an international centre for debt restructuring – and a timely one in this current climate.
We have previously written in detail about the reforms made by the Act and the near decade long legislative process leading up to its enactment. We summarise below some of the new rules that will be of most interest to businesses based in Singapore or dealing with Singapore counterparties:
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Restrictions on ipso facto clauses: in the insolvency context, an ipso facto clause is one that entitles a party to terminate or modify the operation of a contract upon a counterparty’s insolvency or restructuring. These clauses are now unenforceable in certain circumstances. Specific types of contracts, including commercial ship charters, government contracts and eligible financial contracts, are excluded from this new restriction. A counterparty may also apply to a court for a declaration that the new restriction does not apply to it, on the basis that rendering an ipso facto clause unenforceable would “likely cause the applicant significant financial hardship“.
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Wrongful trading provision: previously, civil liability for ‘insolvent trading’ only arose where an individual had been successfully criminally convicted. Now, a party may be found personally liable for all of a company’s debts if they knew the company was trading wrongfully or, as an officer of the company, should have known it was doing so. A company trades wrongfully if it incurs debt or liabilities when insolvent. This provision can be used not merely to target directors, but also other employees, contractors or counterparties of the company if they were “party to the company trading in that manner“.
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Out of court voluntary appointment of judicial managers: it is now open to a company to call a meeting of its creditors to pass a resolution to place the company into judicial management, without going to court. The company must consider that (i) it is likely to become unable to pay its debts and (ii) there is a reasonable probability of achieving one or more of the purposes of judicial management. A majority in number and value of the company’s creditors present and voting must approve the resolution. Previously, a company had to apply to a court even to be voluntarily placed into judicial management.
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Assgnment of proceeds of claims by judicial managers to third party funders: liquidators and judicial managers may now assign to third parties the proceeds of actions involving undervalue transactions, unfair preferences, extortionate credit transactions, fraudulent and wrongful trading or delinqiuent company officers. These assignments will typically be made in exchange for funding of the action, providing greater opportunity and clarity as to how liquidators and judicial managers may seek to explore third-party funding.
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Modifying the operation of the scheme of arrangement cross-class ‘cram down’ power: the Companies (Amendment) Act 2017 introduced a mechanism to allow majorities of one class of creditor to bind another non-consenting class of creditors to a scheme of arrangement. This mechanism was little used in practice however, as, for an unsecured class of creditor to be bound, existing shareholders were required to divest themselves of their shares in the company unless all unsecured creditors were paid in full. The IRDA removes the requirement that shareholders be divested of their shares in the company if unsecured creditors are to be crammed down.
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Summary dissolution: The IRDA introduces a summary procedure for the dissolution of a company. The company must show that there is reasonable cause to believe that it has insufficient assets to cover the winding up expenses, and that the affairs of the company do not require further investigation. This procedure serves to avoid the cost and expense of appointing liquidators or court processes, preserving the maximum possible value in its assets for creditors and shareholders instead. Companies seeking to dissolve their operations should consider their eligibility for the procedure to avoid unnecessary costs.
Finally, and as we noted in our COVID-19 update, the Singapore government has introduced various measures to alleviate the pressures of the pandemic on businesses and individuals. In particular, the Temporary Measures Act increased debt thresholds for personal and corporate insolvency (to S$60,000 and S$100,000, respectively), which remains in effect until 20 October 2020, until further notice. The Act also introduces moratoriums against the commencement of actions on the basis of debts. Please see here for more details as to how these laws may affect your strategies in Singapore and the region.
We are seeing a rise in the number of disputes involving insolvency issues, for instance, disputes over debts which are subject to arbitration agreements. A range of issues arise in this context: see here, for example, for our recent updates.
Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.
For further information, please contact:
Tomas Furlong, Partner, Herbert Smith Freehills
tomas.furlong@hsf.com
