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26 October, 2018
On 1 October 2018, the Singapore Parliament passed the Insolvency, Restructuring and Dissolution Bill (“Bill”). Once in force, this new omnibus legislation will consolidate the personal and corporate insolvency and restructuring laws into a single statute. The Bill seeks to implement changes to buttress Singapore’s position as a debt restructuring hub.
This update sets out key highlights of the Bill that will impact banking transactions.
Ipso facto clauses – Limitation on certain contractual rights
Clauses entitling one party to unilaterally terminate the contract, or provide for the contract to automatically terminate, upon the other party’s insolvency are common. In the financing context, financing contracts commonly include a clause stipulating a debtor’s insolvency as an event of default and/or trigger event which permits the unilateral termination or modification of the financing contracts. Presently, the use of such clauses (commonly referred to as “ipso facto clauses”) are not prohibited.
The new Bill limits the use of such clauses.
Under the Bill, contracting parties are prohibited from terminating or amending or claiming an accelerated payment or forfeiture of the term under any agreement with the company, or terminating or modifying any right or obligation under any agreement the company, for the only reason that the company is insolvent or is undergoing restructuring proceedings. Such restructuring proceedings include an application by the company for a scheme of arrangement or judicial management.
While the legislative amendments do not require the further advance of credit (and the insolvency or restructuring proceedings affecting the debtor company may continue to act as a draw-stop), this prohibition against ipso facto clauses may affect a lenders’ ability to accelerate outstanding loans, call an event of default and enforce its security.
The wide ambit of this prohibition could also potentially limit lenders’ ability to terminate or modify financing terms that are linked to insolvency and restructuring events. These include price adjustment, repayment and prepayment schedules, extension of loan availability period, roll-over, accordion line, additional security, cash top-up and condition precedent or subsequent, that are linked to insolvency and restructuring events.
This prohibition does not extend to any legal right under commercial ship charters and “eligible financial contracts”. In the US and Canada, repurchase contracts, securities contracts, derivatives and master netting agreements in relation thereto, are excluded from the scope of the restriction on ipso facto clauses. It remains to be seen whether Singapore will similarly exclude derivative contracts, securities lending and repurchase contracts and master netting agreements from this prohibition.
Provisions on voidable transactions
The Bill has amended the statutory provisions on the statutory claw-back provisions.
Transactions at undervalue
The time period for undervalue transactions of a company has been reduced from five years to three years before the commencement of judicial management or winding up. A new “good faith” defence has also been introduced, where a company has entered into the transaction in good faith and for the purpose of carrying on its business, and at the time the transaction was entered into, there were reasonable grounds for believing that the transaction would benefit the company.
Unfair preference
The time period for transactions to be set aside as an unfair preference provided by the company to an existing creditor, has been increased from six months to one year before the commencement of judicial management or winding up where the preferred party is not connected to the company.
Where the preferred party is connected to the company, the claw-back time period remains unchanged at two years before the commencement of judicial management or winding up.
Floating charges for past value
Currently under the Companies Act, floating charges granted by a company may be voidable if the company was insolvent after granting the floating charge and fresh “cash” was not provided, at the time of or after the creation of the floating charge, by the person to whom the floating charge was created in favour (“charge”).
The Bill has amended this claw-back provision to recognise other forms of value (and not just cash), that the chargee may provide to avoid such floating charges from being invalidated. Such value may be furnished in the form of a discharge or reduction of an existing debt.
This is relevant for lenders in the context of financing transactions, where additional security in the form of a floating charge is furnished by a borrower and no new credit lines are provided to the company. If the transaction reduces the existing debt, such “value” may prevent the floating charge from being set aside as a floating charge for past value.
Overlap of the claw-back time period with the moratorium period for a scheme of arrangement
Where the following time periods (“Scheme Moratorium Period”):
(a) the automatic moratorium period when a company proposes, or intends to propose, a scheme of arrangement;
(b) the period when a company proposes, or intends to propose, a scheme of arrangement and an order restraining the passing of a resolution for the winding up of the company is in force;
(c) (where the company is a subsidiary or holding company of a company that is proposing a scheme of arrangement) the moratorium period which is extended to the company; and
(d) the period when a court order restraining proceedings against the company proposing a scheme of arrangement is in force, overlap with the statutorily prescribed time periods for unwinding transactions that are unfair preferences, transactions at undervalue or floating charges for past value, the Bill provides that such Scheme Moratorium Periods will be added on to extend the statutory claw-back time periods.
This adopts the recommendation of the Insolvency Law Review Committee, that the statutory claw-back periods should exclude any time period commencing from the making of an application for a scheme of arrangement and the subsequent withdrawal or dismissal of that application. This prevents insolvent parties proposing a scheme of arrangement to evade the avoidance provisions in hope that the statutory claw-back time periods would have expired by the time judicial management or liquidation proceedings formally set in.
Introduction of an out-of-court judicial management procedure
Lenders should take note that the Bill introduces a new out-of-court procedure to place a company in judicial management.
A company will soon be able to place itself in judicial management, if a majority in number and value of the company’s creditors present and voting approve the company’s entry into judicial management. This new procedure is intended to reduce the expense, formality and delay associated with the judicial management process, and is likely to facilitate companies' entry into judicial management.
To safeguard the interests of stakeholders of a company and prevent an abuse of this out-of-court procedure, the company’s directors are required to lodge with the Registrar of Companies, a statutory declaration stating, amongst others, that the company is or is likely to become unable to pay its debts, and the directors believe that one or more of the purposes of judicial management is likely to be achieved.
Power to disclaim contracts extended to judicial managers
The Bill has extended the power to disclaim to judicial managers.
Under the current legislative regime, only liquidators have the power to discard onerous property of the insolvent company under its powers to disclaim. This power to disclaim allows liquidators to unilaterally terminate executory contracts such as leases or ongoing supply contracts.
In addition to extending the power to disclaim to judicial managers, the scope of the power to disclaim has been augmented with the introduction of a wider definition of “onerous property”. “Onerous property” has now been defined as any unprofitable contract or any other property which is unsaleable, not readily saleable or may give rise to a liability of the company to pay money or perform any other onerous act.
Lending transactions may be affected by the increased availability of this power to disclaim. Where a lender has taken security over contracts, the value of such security may be diminished if counterparties to these contracts enter into restructuring proceedings and such contracts are disclaimed.
Summary of comparative changes
Please refer to the enclosed table for a comparative summary of some of the changes that impact banking transactions.
Conclusion
The new restructuring regime introduced by the Bill is a significant development to Singapore’s legal landscape. In particular, the new contractual limitation on ipso facto clauses is likely to have significant impact on commercial contracts. Banks are well-advised to closely examine the structures and terms of their existing financial arrangements. Going forward, banks may have to modify their established transactional arrangements to ensure that their interests remain protected in view of these new legislative amendments.
