KEY POINTS Feature ––Singapore’s new regime combines elements of the US Ch 11 process with the traditional scheme of arrangement. ––Companies may apply for a broad moratorium that can apply to acts outside of Singapore. Moratoriums can also be granted in respect of certain related companies. ––There is a (cross-class) mechanic in respect of unsecured debt, but its effectiveness in practice is uncertain. ––The changes include introduction of a “pre-packaged scheme” which bypasses the requirement for scheme meetings, where it can be demonstrated the outcome is a foregone conclusion. ––It remains to be seen the extent to which foreign courts will recognise and give effect to a Singapore scheme.

Authors Paul Apáthy and Emmanuel Chua Singapore’s new “supercharged” scheme of arrangement

In this article, the authors consider aspects of Singapore’s new “supercharged” these new provisions are based on concepts scheme of arrangement procedure and its potential use in cross border . found in Ch 11 of the Code. By adopting these concepts, Singapore is seeking to create a new regime that incorporates INTRODUCTION Central to the reforms is the the “best of both worlds” of the scheme of

SINGAPORE’S NEW“SUPERCHARGED” SCHEME OF ARRANGEMENT Singapore is seeking to become an augmentation of the scheme of arrangement arrangement and Ch 11 procedures. ■international debt hub, process with a number of new provisions, akin to London or New York. This aspiration some of which were adopted from the United APPLICABILITY OF SINGAPORE is unambiguously conveyed in the title of the States Bankruptcy Code (the Bankruptcy SCHEMES TO FOREIGN COMPANIES ‘Report of the Committee to Strengthen Code). This article focusses on certain Key to becoming an international debt Singapore as an International Centre for aspects of this new “supercharged” scheme of restructuring hub is enabling foreign Debt Restructuring’ released on 20 April arrangement procedure, and its potential use companies to avail themselves of Singapore’s 2016 (the 2016 Report). The 2016 Report in cross border restructurings. scheme of arrangement procedure. recommended that this be achieved by: A scheme of arrangement may be ––enhancing Singapore’s legal framework SCHEMES OF ARRANGEMENT proposed in respect of any “company”, which for restructuring; Prior to these law reforms, the Singapore means in this context any corporation liable ––creating a restructuring friendly scheme of arrangement regime closely followed to be wound up under the Companies Act. ecosystem by increasing the availability that found in England. The Act introduces The Act has expanded this concept by of rescue financing and strengthening a number of measures to “supercharge” specifically providing that a foreign company the quality of professionals; Singapore creditor schemes of arrangement may (only) be wound up in Singapore if it has and (which only apply in respect of a compromise a “substantial connection” with Singapore. ––addressing the “perception gap” by or arrangement between a company and its A court may rely on the presence of one or communicating the benefits of debt or any class thereof) including: more of the following matters in determining restructuring in Singapore to a wider ––an expanded jurisdiction for foreign that the company has a substantial audience and increasing the involvement companies to access Singapore schemes; connection with Singapore: of Singapore professionals, judges and ––enhanced moratoriums (including a ––Singapore is the centre of main interests academics in international organisations, “world-wide” stay and extension of the of the company; conferences and research. moratorium to related companies); ––the company is carrying on business in ––(cross-class) creditor cram downs; Singapore or has a place of business in A key aspect of these recommendations ––“pre-packaged” schemes that bypass the Singapore; has now been implemented, with the requirement for scheme meetings; ––the company is a foreign company that is Singapore Parliament passing the Companies ––priority rescue funding; registered under Division 2 of Part XI of (Amendment) Act 2017 (the Act) which ––a formal proof of debt regime; and the Companies Act; amends Singapore’s Companies Act (Cap ––various other creditor protections. ––the company has substantial assets in 50) (Companies Act). The Act introduces Singapore; sweeping changes to Singapore’s restructuring Given that (similarly to the English scheme ––the company has chosen Singapore and insolvency framework, including of arrangement regime) the Singapore regime governing law for a loan or other significant amendments relating to schemes of has not been meaningfully updated since its transaction (or for the resolution of a arrangement, judicial management and cross- introduction over 100 years ago, these changes dispute arising out of a loan or other border insolvency. are nothing short of revolutionary. Many of transaction); or

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––the company has submitted to Singapore’s expressed to apply to acts outside of Singapore order. This interim moratorium is available jurisdiction for the resolution of a dispute (provided the relevant person is within the to a company only once within any 12 month relating to a loan or other transaction. jurisdiction of the Singapore court). This period, and applies only to acts within is similar in concept to the “world-wide” Singapore. The interim moratorium ceases 30 The substantial connection concept automatic stay provided for under Ch 11 of the days after the application for a moratorium appears to be a development of the “sufficient Bankruptcy Code, which has extraterritorial order is made (or the date on which the connection” test applied by the English courts reach through the personal jurisdiction of the application is decided on by the court, if this when determining if there is jurisdiction to US bankruptcy courts that can extend to acts date is earlier than 30 days). wind up a foreign company in England, and outside of the US. which also forms the basis for jurisdiction in While a Singapore court order may not CROSS-CLASS CREDITOR respect of schemes of arrangement. The English have quite the global clout of one issued CRAM DOWNS courts have developed this test in the context of by a US bankruptcy court, Singapore is The Act creates a mechanism to force one or schemes of arrangements to facilitate the use of nonetheless a significant financial hub for the more non-consenting classes of creditors to be English schemes to restructure European and Asia-Pacific region. Financial institutions bound by the scheme of arrangement, if: other foreign companies, relying on many of the operating in the region will be wary of ––the scheme is approved by a majority in sorts of matters contemplated above. infringing such an order. Foreign trade number, representing at least 75% of the creditors may be less deterred. value, of those present and voting at the ENHANCED MORATORIUMS Moratorium orders may also be granted meeting of at least one class of creditors; The Act provides that where a company by the Singapore court with respect to a ––the scheme is also approved by creditors proposes, or intends to propose, a scheme of holding or subsidiary company of the scheme comprising a majority in number, arrangement the court may, on the application of company, where: representing at least 75% of the value, of the scheme company, grant a moratorium order. ––the related company plays a necessary those present and voting at the meeting(s) The company must provide specific and integral role in the scheme; of scheme creditors as a whole; and information in support of such application, ––the scheme will be frustrated if a ––the scheme is “fair and equitable” to each including evidence of support from the restrained action is taken against the dissenting class of creditors and does not company’s creditors for the scheme of related company; and “discriminate unfairly” between two or arrangement and an explanation of how such ––the creditors of the related company will more classes of creditors. support would be important for the success of not be unfairly prejudiced by the order. the scheme. The company must also provide a The concept of “fair and equitable” has list of every and the 20 largest Remarkably, it appears the related been adopted from the Bankruptcy Code, and unsecured creditors of the company, and (if company may be a foreign company without a requires that: the scheme has not yet been proposed) a brief substantial connection to Singapore. ––no creditor in the dissenting class receive description of the intended scheme which is The most obvious utility of a “group less under the scheme than it is estimated sufficient to enable the court to assess whether moratorium” order would be to obtain by the court to receive in the most likely the intended scheme is feasible and merits protection not only for a borrower, but also all scenario if the scheme is not passed; consideration by the company’s creditors. of the guarantors of debt subject to the scheme. ––if the creditors in the dissenting class are The scope of the moratorium order is However, there may well be more creative secured, they must receive deferred cash potentially very broad – it may restrain: applications of such an order. The moratorium payments totalling the amount secured ––winding up resolutions; could therefore be a powerful tool to assist with (and security preserved until such time), ––appointment of receivers; multi-national group restructurings (that goes be given a charge over the proceeds of their ––legal proceedings against the company; even beyond what is normally available in Ch 11 secured asset or be entitled to realise the ––execution, distress or other legal process of the Bankruptcy Code). “indubitable equivalent” of the security; and against property of the company; However, the Singapore courts will need ––if the creditors in the dissenting class are ––any step to enforce any security over any to be vigilant that these moratoriums do not unsecured, they must either be paid out property of the company, or to repossess become too easily accessible or abused by in full, or the scheme must not provide for any goods held under lease, hire-purchase – merely intending to propose a scheme is a low any creditor or shareholder subordinate to or retention of title arrangements; and bar, and there are no limits on the period for the dissenting creditor to receive or retain ––re-entry or forfeiture under any lease in which the courts may grant moratorium orders. any property (for these purposes, the term respect of property occupied by the company. The Act also introduces an automatic 30 “unsecured”, appears to be intended to day moratorium, in respect of the scheme include secured creditors to the extent of Upon application, and at the court’s company itself, which runs from the date any shortfall claim that cannot be satisfied discretion, the moratorium order may be that the application is made for a moratorium from the secured collateral).

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In principle, this cross-class cram down PRE-PACKAGED SCHEMES Where a meeting of creditors is mechanic addresses a key weakness of the The Act introduces the concept of summoned, the Act requires that creditors scheme of arrangement procedure. Whilst “pre-packaged schemes”. The court may, on are notified of the manner and period within the requisite majority of creditors can bind the the application of the company, make an order which to file proofs of debt. Failure to comply minority within a class, if the rights of creditors approving a creditor scheme of arrangement with these requirements will disallow a are sufficiently dissimilar they will need to form even though no meeting of creditors (or class creditor from voting at the meeting. a separate class. In practice, this can create a thereof) has been ordered or held. Once a creditor has filed a proof of debt veto for junior classes of creditors, unless an Creditors intended to be bound by the they are entitled to inspect another creditor’s alternative mechanism (such as an English pre- scheme must be notified of the application, and proof of debt, and to object to: packaged share sale, combined provided a statement that contains: ––the rejection of its proof of debt; with inter-creditor release mechanics) can be ––information concerning the company’s ––the admission of another creditor’s proof employed to “burn them off”. property and financial prospects; of debt; or However, the Singapore cram down ––information on how the proposed scheme ––a request by another creditor to inspect mechanism may be difficult to utilise as drafted will affect the rights of those creditors; and its proof of debt. for a number of reasons. The Act incorporates ––such other information as is necessary to (as described in the last bullet above) what is enable the creditor to make an informed Every proof of debt is to be adjudicated known in the US as the “absolute priority rule”. decision whether to approve the by the court appointed chairman of the

SINGAPORE’S NEW“SUPERCHARGED” SCHEME OF ARRANGEMENT This rule requires (among other things) that proposed scheme. meeting. If there is any dispute in respect of to cram down an existing the inspection, admission or rejection of any shareholders may not retain any of their shares The court may not approve the scheme proof of debt such dispute is to be determined in the company unless all unsecured creditors unless it is satisfied that, had a meeting of by an “independent assessor”. The independent are paid in full (subject to the “new value”, the (relevant) creditors been summoned, assessor is appointed either by agreement of “gifting” or other exceptions, to the extent they creditors comprising a majority in number, all parties to the dispute, or by the court (upon are available). The rule effectively requires the representing at least 75% of the value, of application by any party to the dispute or the shares of existing shareholders to be divested, a those present and voting at the meeting of company). If a party to the dispute disagrees power which is provided for in the Bankruptcy each relevant class would have approved with the determination of the independent Code by way of a shareholder cram down the scheme. The Act does not specify what assessor, that person may file a “notice of power. Unfortunately, no such power to cram evidence would be required to demonstrate disagreement” for the court to consider that down shareholders (or otherwise divest their to the court that the scheme would have been dispute when the court hears the application shareholding in the company) exists under approved. However, it could be expected for approval of the scheme. the Act or existing Singapore law. Effectively, that scheme voting or lock-up agreements Previously there was no formal statutory therefore (unless a different interpretation signed by the requisite majorities would be an process for determining creditor claims in of these provisions is adopted in Singapore), it appropriate basis to draw this conclusion. schemes of arrangement. Where the issue appears the Singapore cram down may It should be noted that the pre-packaged arose in practice, it was typically dealt with in rely on shareholders agreeing to voluntarily scheme mechanic cannot be used in conjunction two stages: divest their shares for no value, or on with the cross-class cram down provisions. ––the chairman of the creditors’ meeting traditional enforcement type methods of This provision helps address a common had the power to admit disputed or “burning off” equity (eg enforcement of criticism of schemes of arrangement; that unliquidated claims for voting purposes at share security or sale through a pre-planned they can be expensive and lengthy processes. a value determined by the chairman; insolvency process). The provision effectively allows a company ––the terms of the scheme itself could provide The requirement that the scheme of to dispense with both the court hearing a mechanism for assessing the nature arrangement be approved by creditors reflecting to convene a meeting of creditors, and the of claims with uncertain values (such at least 75% by value and 50% by number of meeting itself, if it can be demonstrated as assessment by an adjudicator) for the schemed creditors (present and voting) as a that the outcome of the meeting is a forgone purposes of dividends under the scheme. whole also seems somewhat arbitrary. This conclusion. This efficiency is to be welcomed. potentially means that a cram down could only In practice however, in the case of schemes reliably be used where the dissenting creditors FORMAL PROOF OF DEBT REGIME that are restructuring financial debt, it comprise a relatively small part of the capital The Act sets out a detailed and formal proof is unusual for there to be any significant structure (regardless of whether they can be of debt process for creditor schemes. This disagreement as to its quantum. demonstrated to be completely underwater or new process appears focussed on determining These provisions in the Act appear to be a receiving a significantly better recovery than creditor claims for voting rather than response to the Singapore case of Royal Bank in ). dividend purposes. of Scotland NV v TT International Ltd [2012]

284 May 2017 Butterworths Journal of International Banking and Financial Law SINGAPORE’S NEW “SUPERCHARGED” SCHEME OF ARRANGEMENT OF SCHEME “SUPERCHARGED” NEW SINGAPORE’S Biog box Paul Apáthy is a partner specialising in restructuring, work-outs, corporate insolvency and Feature distressed investments at Herbert Smith Freehills, Sydney. Email: [email protected] Emmanuel Chua is a senior associate specialising in multi-jurisdictional financial sector dispute resolution at Herbert Smith Freehills, Singapore. He also advises on cross border insolvency and restructuring. Email: [email protected] Website: www.herbertsmithfreehills.com

SGCA 9. In that case a creditor scheme Having said that the rule in Gibbs has and New York as an international centre was passed by a “razor thin margin” of attracted criticism of late, including in for debt restructuring. creditors, and there were allegations that the the recent Singapore case of Pacific Andes There are a number of factors that act in scheme chairman (also the proposed scheme Resources Development Ltd [2016] SGHC Singapore’s favour. The new “supercharged” manager) had made inappropriate decisions 210. It is therefore possible that common law Singapore scheme of arrangement procedure to allow and disallow various creditor claims jurisdictions may move towards a willingness established by the Act introduces a lot of which influenced the outcome. Whilst the to recognise a debt discharge in accordance the powerful tools of the Ch 11 process (as Singapore Court of Appeal made a number with the law of the ’s centre of main outlined above), but still retains much of the of helpful statements in that case as to interests (even when the debt itself is not relative flexibility, speed and cost efficiency proper practice, Singapore’s Insolvency governed by that law). of the scheme of arrangement procedure that Law Review Committee formed the view The UNICITRAL Model Law on Cross has made it such a popular mechanic for cross that there should nevertheless be a formal Border Insolvency (Model Law) is also an border restructurings. Whilst there remain legislative framework for determining proofs important consideration. The Model Law has some potential issues with the new legislation of debt in schemes. been adopted in a number of key jurisdictions (some of which are noted above), Singapore Given that the new provisions appear to around the world, and allows courts in those has demonstrated an ability to quickly focus on the determination of proofs of debt jurisdictions to recognise a “foreign proceeding” supplement its legislation where required. for voting purposes, arguably it would still be and provide various forms of assistance It can therefore be expected that should permissible for the scheme documentation to (including recognising the effectiveness of a any significant problems emerge in practice provide for claim determination mechanics for discharge of debt under that foreign proceeding). with the new legislation they will be resolved dividend purposes. The Model Law defines “foreign reasonably swiftly. There is a risk that this more formal proceeding” as a: In addition, Singapore has already proof of debt regime, including the ability of established itself as an important financial creditors to contest each other’s claims, could “collective or judicial proceeding in a foreign and professional services hub for Asia. Its in some cases protract the scheme timetable State, including an interim proceeding, proximity to and central role in the region if it requires all proof of debt related disputes pursuant to a law relating to insolvency in makes it a natural venue for South East Asian to be determined by the independent assessor which proceeding the assets and affairs restructurings. It also has the advantage of an prior to the scheme meeting. of the debtor are subject to control or English derived common law legal system that is supervision by a foreign court, for the well understood, and a well-regarded judiciary. FOREIGN RECOGNITION OF purpose of reorganisation or liquidation.” Whether it can become a true global player SINGAPORE SCHEMES will however depend in part on the ability of A key aspect of whether these law reforms It is not clear that a Singapore scheme Singapore to attract international restructuring will be effective is whether a Singapore of arrangement is a “foreign proceeding” for professionals to the jurisdiction, and the scheme of arrangement will be recognised and these purposes because, among other things, development of a sophisticated “ecosystem”. given effect to in those foreign jurisdictions it is arguably not a true insolvency process (at Also of critical importance will be the extent where dissenting creditors might seek to least in the traditional sense). However, the to which Singapore debt restructurings enforce their debt or security claims subject to position will depend on how the Model Law are accepted and recognised in other key the scheme. is implemented in each relevant country. The jurisdictions. The rule in Gibbs (named after the US has adopted a broad concept of a foreign We look forward to seeing how this new eponymous 1890 case Gibbs & Sons v proceeding in Ch15 of the Bankruptcy Code procedure works in practice, and whether Societe Industrielle et Commerciale des (its implementation of the Model Law), under other jurisdictions will consider enacting Metaux (1890) 25 QBD 399 (Gibbs)) may be which US courts have regularly been willing similar reforms. n an obstacle to recognition. Gibbs is an English to recognise and give effect to English schemes Court of Appeal decision that held that a debt of arrangement that compromise or discharge may only be discharged by the governing law New York law governed debt, where it can Further Reading: of that debt. This is a significant barrier for be demonstrated that the “centre of main ––Super priority in rescue financing – the recognition in England of a Singapore interests” of the debtor company is in the UK. lifeline or lassoo? [2017] 5 JIBFL 286 scheme that seeks to compromise English law ––Discharge of debts: how foreign governed loans or bonds. This is problematic SINGAPORE AS A DEBT may affect English law given the prevalence of the use of English law in RESTRUCTURING HUB obligations [2016] 4 JIBFL 210 international finance. Furthermore, the Gibbs Singapore has already been successful in ––LexisNexis RANDI blog: Schemes of rule is also likely to apply in a number of other establishing itself as an arbitration hub arrangements: pushing the boundaries common law jurisdictions (eg Hong Kong). and now seeks to compete with London of jurisdiction

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