Singapore aims to be Asia’s restructuring hub. The commercial world is now seeing the plan unfolding.
LSR recently assisted a client who was baffled about a debtor who had “gone into CHAPTER 11 in SINGAPORE”, a scheme outside the USA you might be unaware of.
Although this issue was discussed widely in legal circles, it’s only with the passage of time that its effect is seen within the commercial world, as companies’ counterparts fail and creditors seek to recover debts.
Following on from last week’s post about Cross-Border Insolvency, we briefly outline Singapore’s bold move to establish itself as the debt-restructuring hub of Asia.
Within 6 months of the new laws being enacted in 2017 there had already been some significant cases brought within its jurisdiction. These included Bakrieland Development Attilan Group, TT International, Emas Offshore and Nam Cheong. More recent cases have included the current high profile Hyflux case, whose initial“automatic”30 day moratorium was made in May 2018. More time was granted until November 2018 and then again until April 2019, despite objections from some creditors concerned about transparency.
So, what are the MAIN points about Singapore’s restructuring environment? Please refer to the “Companies (Amendment) Bill 2017” and “FACT SHEET ON THE COMPANIES (AMENDMENT) BILL 2017 AND LIMITED LIABILITY PARTNERSHIPS (AMENDMENT) BILL 2017”.
Overall, the recent changes in Singapore have been well received. It is still in its infancy and “the law in practice” will develop over time, being tested by applications from one party or another seeking an advantage. However, there is no denying that Singapore has stolen a march on its rivals in the region, invested in support infrastructure and sucked in legal expertise to capitalise on this new centre of opportunity.
The world is a global marketplace, held together by mutual commercial relationships, mutual laws and mutual trade practices.
Nowadays the demise of one company can have a dramatic, news-breaking, effect on companies and consumers around the world. The collapse of Hanjin Shipping in 2016 not only put into doubt whether consumers would receive their Samsung TVs for Christmas, but also asked serious questions about how an orderly liquidation or rehabilitation could be conducted if major assets (the ships) were spread across the world and subject to a diverse range of domestic insolvency regimes.
This situation highlighted THREE areas of uncertainty – choice of law, choice of jurisdiction and enforcement of rulings. There are two competing extremes of cross-border insolvency resolution – commonly called the Universal Approach and the Territorial Approach.
Universal Approach – handling of all claims and assets would be resolved in the debtor’s country, under the laws of that jurisdiction and that all courts would act under commonly agreed international laws.
This remains an aspiration of course, waiting for the time when the world operates under one system of laws. The leading attempt is seen in relation to the United Nation’s UNCITRAL Model Law, dating from 1997. Thus far over 45 jurisdictions have signed up, including the USA, UK, South Korea, Japan and South Africa. No China at present. The members of the European Union have a similar agreement, the EC Regulation on Insolvency Proceedings 2000.
Alternatively, the Territorial Approach would see courts in each jurisdiction seize and distribute assets that happened to be under their control, in accordance with local laws. There is an obvious upside for local creditors in this scenario and assets could be liquidated very quickly – but at what cost to other creditors?
So, one extreme doesn’t truly exist and the other provides satisfaction to only a few lucky parties. Hence there is a movement to meet in the middle, with Modified Universalism and Cooperative Territorialism, also known as Hybrid Approaches. Of the two, Modified Universalism is making the most headway. This was the system adopted in the case of Hanjin Shipping and proved the practicality of the system.
In the Hanjin instance individual countries were requested to agree (with South Korea) that the best place to conduct proceedings would be in Seoul. Jurisdictions where assets happened to be located deferred to the South Koreans, whilst retaining the discretion of local courts to protect local creditors’ rights. These rights extend to the point of negotiating special treatment before releasing locally seized assets to the main proceedings, by making sure that in so doing this did not conflict with their country’s public policy.
Going forward, the Modified Universal Approach is the one that is being increasingly adopted. Its overall transaction costs are certainly lower than the Territorial argument.
LSR is often sent emails from clients expressing their concern or frustration about a customer that has gone into receivership / liquidation / bankruptcy / insolvency / Chapter 11 / administration or simply “gone bust”.
Each of these words or phrases has a different meaning and confusion may result in unwanted consequences, such as claims being unregistered or money and time being wasted.
The list below has been compiled to show the subtle, and not-so subtle, differences in terminology (Note: There is no overall law or jurisdiction in mind within the terminology below).
Insolvency: In simple terms, when a company cannot pay debts or service obligations as they fall due because liabilities exceed assets. However, this can be defined more specifically into Cash-Flow insolvency and Balance Sheet insolvency.
Cash-Flow Insolvency: When a company has sufficient assets to cover its obligations, but cannot service the debt as the assets are in the wrong form. For example, a company may own land and buildings, but does not have sufficient cash to pay for raw materials bought on 30 days credit. Cash-flow insolvency can usually be resolved by negotiation, patience or the raising of working capital finance.
Balance Sheet Insolvency: When there are insufficient assets to pay all the debts. A company may still have enough cash to pay bills as they fall due but it would be running the risk of establishing an illegitimate preferred creditor if it did i.e. ranking one creditor above others or the Directors leaving themselves open to accusations of wrongful trading.
Winding Up Petition: Used by a creditor when a debtor continuously refuses to pay its uncontested debts. The creditor presents its petition to the court to have the company closed down. If it’s successful then a winding up order is made by the Court.
Liquidation: This is when the company has been officially declared “dead”, never to be resuscitated. A liquidator is placed in charge by the court that has jurisdiction and it is their sole job to dispose of all assets and distribute the proceeds to creditors (the remainder going to the shareholders).
Court protection: A very broad expression implying that a company is operating under a moratorium provided by a court that has jurisdiction in the matter. The moratorium protects the company from creditors taking legal action against it for recovery of debts.
Chapter 11 – This is specific reference to Chapter 11 of Title 11 of the 54 titles that make up the Code of Laws of the United States. Title 11 of the code addresses bankruptcy and Chapter 11 of that title addresses re-organisation. Chapter 7 covers liquidation. Chapter 11 retains many of the features present in bankruptcy proceedings in the U.S.A. Most importantly it empowers the trustee to operate the debtor’s business. In most instances the debtor in possession (the company itself – and its current management) acts as trustee of the business. The debtor in possession has a number of mechanisms to restructure its business such as obtaining finance on favorable terms by giving new lenders first priority on the business’s earnings. The court may also allow the rejection and cancellation of contracts.
“Singapore Chapter 11” – recent changes in Singaporean law have refined the restructuring facilities available there and brought the country’s legislation more in line with that of the USA’s Chapter 11.
Administration: More often used in the context of English law. A company may enter administration because it is in financial difficulties. An administrator is appointed to manage the company to see whether the company can continue in some form or be sold.
Receivership: Should a company default on a secured debt, the debt holder can call on a receiver to go into the company to sell the company’s assets in order to pay back some or all of the debt. This is a harsh remedy with typically little chance of the company surviving, as management will lose control of the business while the receiver sells the assets with the sole purpose of reimbursing the secured creditor.
Fraudulent trading: This is the continuation of trading despite there being no reasonable prospect of repaying debts and with the intent to defraud creditors. Examples of fraudulent trading include selling off assets at less than market value and accepting payment in advance in full knowledge that the order would not be fulfilled. Historically, fraudulent trading has been difficult to prove but generally it does carry the risk of a prison sentence, disqualification and financial penalties for Directors
Wrongful trading: The (usually) well-intentioned little brother of fraudulent trading. This is a common enough scenario where Directors want to trade through a known difficult situation or ignore the reality of their situation. However, Directors have an obligation to shareholders and creditors to limit their exposure once insolvency is upon them.