10 January, 2018
Given the anticipated increased economic and investment activity in Asia and the rise in global corporate defaults, there is a real need for a sophisticated insolvency regime in Asia that meets the needs of complex cross-jurisdictional corporate restructurings and rescues.
A major financial, legal and business hub, Singapore is uniquely positioned to be the lead centre in complex multi-jurisdictional restructurings in Asia. Drawing inspiration from the success of the United States in this respect, the Singapore legislature made sweeping changes to the insolvency/restructuring related provisions in the Singapore Companies Act (Cap. 50) (the Act) earlier this year. The stated goal was clear: turning Singapore into a hub for debt restructurings in Asia and beyond.
The recent amendments to the Act are far-reaching and manifold, but this piece will only focus on the provisions relating to the granting of super priority for rescue financing.
Super priority for rescue Financing
Under the Act, a distressed company may apply for an order that the debt arising from any rescue finance be accorded four varying levels of priority:
a) Treated as part of the costs and expenses of the winding up and, therefore, as a preferential debt payable prior to all unsecured creditors.
b) Priority over all preferential debts and unsecured creditors.
c) Security given on property of the company that is either not subject to any security interest, or a subordinate security interest on property subject to an existing security interest.
d) Security given on property of the company that is equivalent in priority, or of higher priority, to an existing security interest.
The concept of super-priority is taken from the US Bankruptcy Code, in what is commonly known as debtor-in-possession nancing. When rescue nancing is accorded super-priority under the US Bankruptcy Code, this simply means that it will be repaid in priority to all unsecured creditors, in the event the restructuring fails. While the terms are used somewhat interchangeably, this is to be distinguished from super-priority liens which, in the appropriate circumstances, allow the fresh funds to be secured by superior or equal security on previously encumbered assets.
Despite some objections to the enactment of the super-priority provisions (in particular, the grant of super-priority liens), in its report the Committee to Strengthen Singapore as an International Centre for Debt Restructuring recommended that rescue finance can, depending on the circumstances, be accorded any of the four varying levels of priority, so as to encourage:
- rescue financiers to extend fresh credit which may improve restructuring prospects substantially and
- established players in for e.g. the US debtor- in-possession industry to provide rescue financing in Singapore.
Potential opportunities
These new provisions are expected to attract significant interest from private equity fund managers focused on special situation strategies, particularly those with a Pan-Asian or South-east Asian investment mandate, and investors specialising in distressed debt. The Singapore Ministry of Law has taken various steps to target promotional activity to create awareness of the relevant incentives amongst entities that are exploring rescue financing activity in the region.
Based on the research done by the Committee on Debt Restructuring, hedge funds and investment banks that buy distressed debts at deep discounts are increasingly playing a major role in many US restructurings as a source of rescue nancing. Current estimates suggest more than 200 such organisations invest US$400-US$450 billion in distressed debts.
Additionally, Asia’s own capital markets and funds ows have deepened, and it is likely that as fund managers look for new avenues to allocate their capital, a sophisticated regime for rescue nancing may encourage funds and financial institutions to provide much needed fresh financing required to rescue distressed but viable businesses in the region.
If these various players are encouraged by the Singapore Companies Act amendments to deploy some of their capital to Asian restructurings, they will significantly boost the availability of financing for distressed companies. New capital can only bode well for the restructuring space in Singapore and Asia Pacific: there will likely be a concomitant increased in demand for professional services such as for legal advice and high quality business valuations, as these will be critical in determining whether, and to what extent, rescue financing should be provided.
Need for case law to be developed
To fully realise the potential of attracting funds/ banks to provide rescue finance to Asia-based restructurings, it is important that the competing rights of stakeholders are carefully balanced whenever rescue finance is provided. In the context of Singapore, this balancing exercise will have to be performed by the Courts, when deciding applications for priority to be accorded.
Judicial decisions will have to carefully balance the competing rights of genuine providers of additional financing – that would otherwise not be available to the distressed company should be accorded the appropriate level of priority – and the need to safeguard the interests of existing creditors. Unless the balance is carefully struck, it could lead to hotly contested, expensive, time consuming litigation, which may deter potential rescue nanciers. At the same time, the dichotomy should not be overstated, as very often the potential providers of rescue nance may come from the pool of existing creditors of the company.
First decision on rescue financing provisions
The Singapore High Court recently issued its rst decision on the rescue nancing provisions Re Attilan Group Ltd [2017] SGHC 283. The Court emphasised that as the grant of super priority would entail a disruption of the established order of priority of the existing creditors, reasonable attempts must be made by the distressed company to secure financing on a normal basis, to move the Court to exercise its discretion to grant super priority.
While the Court ultimately did not grant super priority – the distressed company failed to show that it made any reasonable attempts to source for normal nancing – the Court made clear that so long as credible evidence is shown of such reasonable efforts, it will be willing to grant priority. It is notable, though, that Re Attilan involved an application for the rescue finance to be treated as either an administrative expense, or alternatively, to be paid in priority over all preferential debts and unsecured creditors. When incursion is sought into secured creditor rights, the Court will additionally require that there is adequate protection for the secured creditor(s).
Conclusion
As more and more such cases come before the Singapore Courts and the case law in this area develops, this will lead to greater commercial certainty and assure market participants that additional financing provided will be accorded priority, with due regard for the rights of existing creditors. Given the Singapore Courts’ track record for rendering decisions which are commercially sensitive, and the institution of a docket of specialist judges to hear insolvency cases, we can look forward to positive developments in this area.
By Nish Shetty, Partner, Clifford Chance Pte Ltd, and Keith Han, Associate, Cavenagh Law LLP, Singapore
For further information, please contact:
Ruth Stackpool-Moore, Director of Litigation Funding / Head of Harbour Hong Kong
ruth.sm@harbourlf.com
