Singapore as a new restructuring hub: how does it compare with the Australian regime?

By Karen O'Flynn and Flora Innes

Singapore has recently introduced changes to its restructuring laws with a view to becoming an international restructuring hub. What does this mean for foreign entities looking to take advantage of the Singaporean regime? How do the laws compare to Australia? What are the issues?

Changes to Singapore's statutory regime for schemes of arrangement, which came into effect in May 2017, are aimed at placing Singapore on the map as an international debt restructuring hub.

The new regime has been described as a hybrid of the English scheme of arrangement and Chapter 11 of the United States Bankruptcy Code, and has been designed to capture the best elements of each. As a debt restructuring tool, it has a number of attractive features, which make it a more user-friendly and efficient procedure and, ultimately, one which is intended to be more conducive to a successful restructuring outcome for the debtor companies.

Improved access by foreign entities

Foreign debtors can now take advantage of Singaporean schemes, provided they can demonstrate a “substantial connection” with Singapore. The “substantial connection” test has a fairly low threshold. It is met if, for example, the debtor is registered as a foreign company, carries on business or has substantial assets in Singapore or if it has submitted to the jurisdiction of the Singaporean Courts or has chosen Singaporean law as the law governing a loan or other transaction to which it is a party.

Enhanced moratorium

Where a debtor company proposes, or intends to propose, a scheme it can file an application for a moratorium with the Court. An automatic 30-day moratorium (on proceedings and enforcement actions) commences as soon as the application is filed. A longer moratorium can be sought (for example, for the duration of the scheme process), and the Singaporean Court may now expressly apply it to any creditor actions outside of Singapore, provided that the creditor itself is in Singapore or within the jurisdiction of the Singaporean Courts. Further, the Court may, on application by the debtor’s subsidiaries or holding companies, extend the moratorium in favour of those related entities.

Super priority for rescue finance

Where a scheme is proposed, the Court may give super priority to a provider of rescue finance. This feature is designed to incentivise financiers to provide rescue finance to distressed debtors. In making orders regarding priority, there are four categories of priority that the Court will consider:

  • equal priority to the costs and expenses of the winding up of the debtor if it is later wound up;
  • priority over other preferential claims in any subsequent winding up;
  • security interest in the debtor's property that is subordinate to any existing security; and
  • security interest in the debtor's property that is of the same or higher priority than existing securities (this will only be granted if, amongst other things, there is adequate protection for the existing secured lenders).

Cross-class cram-downs

Schemes may be approved by the Court notwithstanding the existence of one or more dissenting classes of creditors, if:

  • a majority in number of creditors (across all the classes) that were present and voting have voted in favour of the scheme;
  • that majority represents 75% in value of creditors present and voting;
  • the scheme is approved by the requisite majority of at least one class of creditors (that is, a majority in number holding 75% in value of the creditors present and voting in that class); and
  • the Court is satisfied that the scheme does not discriminate between two or more classes, and is fair and equitable to each dissenting class (ie. amongst other things, dissenting creditors must receive under the scheme an amount representing at least what they would most likely receive if the scheme did not proceed).

Pre-packs

Restructuring plans that are pre-negotiated between the debtor and key creditors before commencement of the scheme proceedings can also be approved by the Court, if certain notice and disclosure requirements are met (eg. notice of application sent to all creditors) and the Court is satisfied that the scheme would have been passed if a meeting of creditors or classes of creditors had been held. This carries with it the benefits of certainty and efficiency for both the debtor and the key creditors.

Adoption of the UNCITRAL Model Law on Cross-Border Insolvency

As an adjunct to this legislative reform, and consistent with its desire to become the new “restructuring hub”, Singapore adopted the UNCITRAL Model Law on Cross-Border Insolvency in March 2017. This provides a well-established framework that will allow the Singaporean Courts to more readily recognise and assist foreign insolvency proceedings and facilitate cross-border restructuring efforts.

Complexities, uncertainties and omissions

The new Singaporean regime carries with it certain complexities and uncertainties.

  • The cram-down mechanism may be difficult to utilise. For example, where a class of unsecured creditors is the subject of a cram-down, the legislation requires that, unless those unsecured creditors are paid in full, the existing shareholders must not retain any of their shares in the company. In practice, this could mean that a cram-down might not be available unless the company’s shareholders agree to divest their shares voluntarily and for no value.
  • It is doubtful whether the Singaporean Court can grant super priority status to rescue financiers ahead of foreign security holders or in respect of foreign insolvency proceedings. Thus, where the scheme company (or its foreign subsidiaries) has substantial assets overseas, existing security holders with foreign law governed securities may be able to enforce against those overseas assets, notwithstanding any order of super priority made by the Singaporean Court.
  • To give effect to a Singaporean scheme overseas, the company will likely require recognition of the scheme in one or more foreign jurisdictions. Whether a Singaporean scheme will be recognised by a foreign court will depend on the laws of that foreign jurisdiction. Even if the Model Law were adopted in the foreign country and recognition were granted, the foreign court may nevertheless make ancillary orders to protect creditors that are local to that jurisdiction, which orders may derogate from the effects of the scheme.

At around the same time as the Singaporean legislative reforms were effected, the Australian Parliament also rolled out significant insolvency law reforms to bolster Australia's restructuring capability, including a stay on enforcement of ipso facto rights in contracts entered into on or after 1 July 2018 during certain restructuring procedures, including voluntary administrations and schemes. This is currently not a feature in the newly revised Singaporean regime for schemes of arrangement, which is a major shortcoming of that regime as a restructuring tool.

Should Australian companies be looking to Singapore for its debt restructuring?

For Australian companies, particularly those that are members of multi-national corporate groups, Singapore may now be an attractive forum, comparable to the US or the UK, for undertaking debt restructuring transactions.

Given the relatively low jurisdictional threshold, an Australian company with assets in Singapore or which has Singaporean law transactions with Singaporean counterparties could take advantage of the Singaporean scheme procedure if, for example:

  • it has negotiated a pre-pack with key creditors and wishes to expedite the approval process; or
  • it wishes to offer potential financiers super priority for restructuring funding; or
  • its restructuring plan will not be approved under Australian law given the classes of its creditors but is likely to be approved utilising the cram-down mechanism.

Companies in multinational corporate groups may also be attracted to the availability of a worldwide moratorium that can be extended to all the entities within the group (even if an entity has no substantial connection to Singapore), and may ultimately choose Singapore over the US if, say, their operations are based primarily in Asia.

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