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Singapore's New “Supercharged” Scheme of Arrangement

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Singapore's New “Supercharged” Scheme of Arrangement KEY POINTS Feature Singapore’s new regime combines elements of the US Ch 11 process with the traditional creditor 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) cram down 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 restructurings. found in Ch 11 of the Bankruptcy 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 restructuring 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 insolvency 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 creditors 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 282 May 2017 Butterworths Journal of International Banking and Financial Law SINGAPORE’S NEW“SUPERCHARGED” SCHEME OF ARRANGEMENT Feature 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 secured creditor 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
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