Schemes Of Arrangement (Part 2) – What Can And Cannot Be Done During A Moratorium?

In this second article in our restructuring series, we cover three practical points on what can and cannot be done under the framework of schemes of arrangement (“SA”).  

(1)   Enforcing security during a moratorium 

Typically, a company needs a moratorium against proceedings (including the enforcement of security and/or repossession of goods under quasi-security arrangements) before or while it proposes an SA. A company seeking judicial management can also benefit from such a moratorium.

The first question that often arises in light of a moratorium is whether secured creditors can enforce their security? It is possible to do so, but only with the Court’s permission. The principles governing the grant of such permission were considered in Hinckley Singapore Trading v Sogo Department Stores (S) Pte Ltd (under judicial management) [2001] 3 SLR(R) 119. Although Hinckley concerned a moratorium in support of judicial management, similar principles are likely to apply in the context of SAs as well, as follows:

  • A creditor should not be prevented from exercising its rights if doing so is unlikely to impede the company’s attempts to restructure.
  • In all other cases, the court should carry out a balancing exercise between the legitimate interests of the secured creditor and the legitimate interests of the other creditors.
    • In carrying out the balancing exercise, great importance is typically given to a creditor’s proprietary interests.
    • A secured creditor should be granted permission to enforce security if he is able to show that a significant loss would be caused by a refusal to grant permission, g., any kind of financial loss (direct or indirect) by reason of delay or otherwise, or even non-financial loss.
    • If substantially greater loss is likely to be caused to others by permitting security enforcement, or loss which is out of all proportion to the benefit to the enforcing creditor, the court may refuse to do so.

In light of the above, a creditor would generally be in a stronger position to seek security enforcement where for instance, the value of the security is prone to fluctuations and/or the secured asset is not very important to the company’s restructuring attempt. The fact that a creditor can apply for permission to enforce security may by itself offer some leverage for securing more favourable payment terms from a restructuring company. It should also be noted that, a moratorium granted in Singapore may not necessarily prevent a creditor from enforcing security in another jurisdiction.

(2)   Extra-territorial effects of schemes moratoriums

A major development has been the added ability of Singapore courts (under s 64(5)(b) of the IRDA) to order that the scheme moratorium applies to any act of a person who is subject to the jurisdiction of the Singapore courts – irrespective of whether the act takes place in Singapore or elsewhere. An extra-territorial moratorium is however not automatic, and the scheme company must make a specific application for it (Re IM Skaugen SE [2019] 3 SLR 979).

Since many banks and financial institutions have a presence in Singapore, they will be subject to the in personam jurisdiction of Singapore courts and will therefore be bound by an extra-territorial moratorium. A breach may render a creditor liable for contempt of court in Singapore, thus helping to police the extra-territorial moratorium in such cases.

Where however the creditor has no presence in Singapore, the extra-territorial effectiveness of a Singapore moratorium will depend very much on whether foreign courts recognise and give effect to a Singapore court moratorium. Since 2017, Singapore adopted the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), and is among 49 other states (including a number of major commercial jurisdictions such as the UK, US, Australia, Japan and Canada) to have done so. The Model Law facilitates the recognition and assistance of foreign insolvency proceedings. While there have been instances of recognition of Singapore restructuring proceedings in the US, UK and even Bermuda, an important caution must be noted in relation to the enforcement in the UK of Singapore restructuring of debts which are not governed by Singapore law.

Under English law, the proper law of a debt governs how it may be modified or extinguished; thus, an English law debt may only be modified or extinguished under English law. This rule, commonly referred to as the rule in Gibbs (arising from a century-old eponymous decision) remains good law in the UK. By virtue of the rule in Gibbs, in the recent case of Re Prosafe SE; Chang Chin Fen v Cosco Shipping (Qidong) Offshore Ltd [2021] CSOH 94 (“Re Prosafe”), the Scottish Court of Session dismissed an application by a Singapore scheme applicant to stay enforcement of English law governed claims in support of its Singapore moratorium process. In other words, a foreign court might not be prepared to restrain a creditor from taking enforcement action in relation to a foreign law debt.

The UK’s continued adoption of the rule in Gibbs has been subject to some criticism as being at odds with the modified universalism guiding the development of international insolvency law, but remains the present position under English law. In light of this position, parties may wish to consider the governing law of their contract/debt carefully depending on whether they wish to avail the rule in Gibbs. Singapore has confirmed that it no longer follows the rule in Gibbs.

(3)   Restriction on ipso facto clauses

Clauses entitling a contractual counterparty to terminate or modify a contractual right (e.g., by accelerating payment obligations) on the occurrence of certain specified events (e.g., insolvency, appointment of an administrator, receiver or liquidator) are commonly used, particularly in credit/loan agreements. Such clauses are called ipso facto clauses, and the IRDA prevents a party from relying on these clauses where it seeks to do so by reason only that the company is insolvent or has commenced proceedings for judicial management or scheme of arrangement.

That said, there is no limit on a creditor exercising the right for any other reason, e.g., the occurrence of any other event of default such as non-payment of an instalment. A creditor may also wish to consider the impact of ipso facto restrictions on its ability to call on a guarantee or third-party security, for instance, by negotiating the right to immediately call on the guarantee or secured obligations once an ipso facto restriction is triggered. 

An applicant company on the other hand would have to ensure that it applies for an SA promptly independent events of default are triggered in order to preserve its reliance on ipso facto clauses. It may also consider compromising the debts of its guarantors in the SA application.

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