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19 June, 2017
On 23 May 2017, key features of the Chapter 11 regime of the US Bankruptcy Code were formally introduced into Singapore's restructuring and insolvency regime. To prevent the legislative amendments from unduly disrupting financial markets, subsidiary legislation has been passed to exclude certain security interest arrangements from the moratorium. The Companies (Prescribed Arrangements) Regulations 2017 (the “Regulations”) provides that all legal rights under any security interest arrangement remains enforceable during the moratorium.
Enforceability of “Security Interest Arrangements” during the Moratorium
The Companies (Amendment) Act 2017 introduces an automatic moratorium upon the filing of an application for a scheme of arrangement or judicial management. The moratorium may extend to the subsidiaries and holding companies of the company undergoing restructuring.
The latest legislative amendments have prompted public concern that the wide moratorium may have a disproportionately adverse effect on financial markets. The volatility of financial markets, and the volume and speed of financial transactions mean that the insolvency of a market participant may trigger a chain reaction of insolvencies. The stability of financial markets would be undermined if the certainty of financial transactions is threatened by the indefinite suspension of obligations of a party subject to a moratorium.
In response, the Government has passed the Regulations to ensure the continued enforceability of all legal rights and remedies against corporate borrowers, its holding companies and subsidiaries under any "security interest arrangement".
The Regulations define “security interest arrangements” as an arrangement under which:
(a) a security interest is created; and
(b) that security interest secures any of the following transactions:
(i) a securities contract;
(ii) a derivatives contract;
(iii) a master netting agreement; or
(iv) a securities lending or repurchase agreement.
Secured parties to contracts for the sale of securities, derivative contracts, securities lending and repurchase contracts and master netting agreements are now not affected by the moratorium. Parties to security interest arrangements (as defined) can enforce all security and contractual rights, including rights of set-off and netting off.
The Regulations appear to take inspiration from the safe harbour provisions found in the US Bankruptcy Code. Safe harbour provisions in the US Bankruptcy Code exempt certain financial and derivative contracts from the automatic moratorium, thereby allowing banks, stockbrokers, and other financial institutions to exercise their contractual rights to terminate, liquidate or accelerate contracts.
Conclusion
Banks would be well-advised to closely examine the structure and documentation of their existing arrangements involving such financial instruments to ensure that these arrangements are “security interest arrangements” within the definition and protection of the Regulations. The Regulations are most relevant for banks holding a capital market services licence to undertake financial activities regulated under the Securities and Futures Act.
Contracts for the sale of securities, securities repurchase arrangements, commodity derivative contracts, master netting agreements are some of the regulated transactions under the Securities and Futures Act that fall within the purview of the Regulations.
