Singapore’s system of insolvency laws comprises procedures for liquidation as well as rehabilitative debt restructuring procedures. The main types of proceedings within the latter category are judicial management and schemes of arrangement. The key statute governing insolvency and corporate rescue mechanisms in Singapore is the Companies Act. As regards personal insolvency and rehabilitative mechanisms, the Bankruptcy Act (Cap 20, 2009 Rev Ed) is the key statute. Parliament passed significant amendments to various insolvency and debt restructuring provisions in the Companies Act in 2017 and those have come into force with effect from 23 May 2017.
The liquidation or winding up of a company is a process by which the company’s assets are pooled together and realised in order to pay off the company’s debts. Any monies remaining after all debts, expenses and costs have been paid are then distributed amongst the shareholders of the company. When liquidation is complete, the company is formally dissolved and ceases to exist.
There are broadly two types of winding up: (1) voluntary winding up and (2) compulsory winding up. Voluntary winding up may take the form of a members’ voluntary winding up or a creditors’ voluntary winding up. A members’ voluntary winding up is only available in respect of a solvent company. The members of the company must pass a resolution that the company be wound up. If the company is insolvent, and wishes to be wound up, it may do so by way of a creditors’ voluntary winding up. The company must convene a meeting of its creditors to consider the proposal for the company to be wound up voluntarily. Apart from voluntary winding up, winding up may also be ordered compulsorily. The Companies Act specifies the parties who may apply to have a company wound up compulsorily, as well as the grounds on which a company may be ordered to be wound up. A common ground is that the company is unable to pay its debts.
When a company is wound up, its assets and affairs are taken over by the Official Receiver or a private liquidator (depending on which is appointed on the winding up of a company), whose powers, duties, and functions are regulated by statute. Within 14 days of the winding up order, the directors and secretary of the company must deliver a statement of affairs to the liquidator, which details the company’s assets and liabilities. This, as well other statutory provisions, allows the Official Receiver or liquidator of the company (as the case may be) to investigate the affairs of the company. Once a winding up order is made, no action against the company may be commenced or continued without leave of the Court. A liquidator’s powers also include the ability to avoid or “reverse” certain transactions which may have wrongfully depleted the assets of the company prior to the winding up proceedings.
The Companies Act specifies the procedures by which creditors may lodge their claims with the liquidator. The liquidator adjudicates on the claims and, upon realising the company’s assets, distributes the proceeds amongst the creditors according to the pari passu principle. The Companies Act specifies that certain types of unsecured creditors are owed preferential debts which take priority over the company’s general unsecured creditors. However, with the recent amendments to the Companies Act, the Court now has the discretion to order that a creditor which provides “rescue financing” to an ailing company be afforded super-priority over the company’s other secured and unsecured creditors.
Apart from winding up, an insolvent company may also be placed under judicial management. Whereas this was previously only available to Singapore-incorporated companies, the 2017 amendments to the Companies Act make judicial management available in respect of foreign companies with a “substantial connection” with Singapore.
Judicial management can be ordered where the company is or is likely to become unable to pay its debts, and where judicial management is likely to fulfil one or more of the following objects: (1) the survival of the company as a going concern; (2) effecting a scheme of arrangement between the company and its creditors; or (3) a more advantageous realisation of the company’s assets than would otherwise occur on a winding up. The Court also has the power to make a judicial management order where it considers that the public interest so requires.
Upon the making of an application for judicial management, a statutory moratorium takes effect which, in brief, prevents the passing of any resolution or the making of any order for the winding up of the company, and which also prevents any legal and enforcement proceedings being commenced or continued against the company without leave of the Court. The scope of this moratorium is further extended when a judicial management order is made.
Upon the making of the judicial management order, the judicial manager takes over the affairs of the company from the board of directors. The judicial manager then presents a statement of proposals to the creditors. If these proposals are approved, the judicial manager must manage the company’s affairs in accordance with the approved proposals. A judicial management order is discharged after 180 days unless extended by the Court.
Schemes of Arrangement
An ailing company and its creditors may privately reach a compromise arrangement under which the creditors may agree to forgo all or part of their claims against a company, or to reschedule their debts. This may be done without the assistance of the court, but to do so would require the unanimous consent of all affected creditors, which may be difficult to obtain. A court-sanctioned scheme of arrangement, on the other hand, would allow a company to reach a compromise arrangement which is binding upon all creditors without obtaining the unanimous consent of its creditors.
The process begins with the company itself or a creditor of the company making an application to Court to convene a meeting or meetings of creditors of the company. For the purposes of such a meeting or such meetings, the creditors must be divided into separate classes if their rights are so dissimilar that they cannot sensibly consult together with a view to their common interest.
If the Court makes such an order convening the meeting or meetings of creditors, a proposal must then be tabled before the relevant meetings and approved by the requisite majority of each class of creditors. The requisite majority is a majority in number representing three-fourths in value of each class of creditors present and voting at the meeting. However, the 2017 amendments to the Companies Act give the Court wider “cram down” powers. The Court may now sanction a scheme notwithstanding that the requisite majority has not been obtained in respect of every class of creditors. It has the power to “cram down” one or more classes of dissenting creditors provided that certain conditions are satisfied, including the condition that the compromise must not discriminate unfairly between two or more classes of creditors and is fair and equitable to each dissenting class. Once sanctioned by the Court, the scheme then becomes binding on all of the company’s creditors, whether they were in favour of the scheme or not.
Unlike judicial management, an application for the Court to convene a meeting of creditors to set in motion the process of reaching a scheme of arrangement does not automatically set a moratorium in place, unless an application is made under the newly introduced s 211B of the Companies Act pursuant to the 2017 amendments. In the latter instance, an automatic 30-day moratorium arises upon the filing of such a s 211B application. The company applying for the moratorium must, however, furnish the Court with a brief description of the intended compromise or arrangement, and evidence of support for the intended compromise or arrangement from the company’s creditors. The company must also undertake to the Court that it will, as soon as practicable, make an application for the Court to set in motion the process for reaching a scheme of arrangement.
With the 2017 amendments to the Companies Act, the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”) now has the force of law in Singapore. The Model Law is a framework of rules providing the mechanisms for dealing with cases of cross-border insolvency, including (a) access by foreign insolvency representatives to the court of the enacting state; (b) recognition by the enacting state of foreign insolvency proceedings; (c) the granting of relief to assist foreign insolvency proceedings; and (d) cooperation and coordination of concurrent proceedings.
With effect from 1 February 2017, the Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters approved by the Judicial Insolvency Network (“JIN”) supplement all legislation, rules and procedure governing insolvency, following the issuance of Registrar’s Circular No. 1 of 2017. The JIN is a network of insolvency judges from several jurisdictions which aims to encourage communication and cooperation amongst national courts, and the network to date comprises judges from Argentina, Australia (Federal Court and New South Wales), Bermuda, Brazil, the British Virgin Islands, Canada (Ontario), the Cayman Islands, England & Wales, Singapore and the United States of America (Delaware and Southern District of New York). While Singapore’s adoption of the Model Law provides the legislative basis in Singapore to recognise and give effect to foreign insolvency proceedings, the JIN Guidelines serve to supplement how courts may coordinate concurrent cross-border insolvency proceedings while considering whether the foreign insolvency proceedings commenced in one court should be recognised by another court.