BG: Restructuring in the O&G/Commodities Sector – 10 Questions Relating to Singapore Court Procedures
The past three months have seen an unprecedented level of queries on court restructuring procedures under Singapore’s Companies Act, namely, the Scheme of Arrangement under section 210 (“SA”) and Judicial Management under Part VIIIA of the Act (“JM”). The SA can also be complemented by an enhanced moratorium under section 211B of the Companies Act (“Enhanced Moratorium”). We provide ten of the most frequently asked practical questions on navigating Singapore’s restructuring landscape.
1. What is the difference between a SA and a JM?
Both mechanisms share the overarching objective of facilitating a company’s survival and a more advantageous realisation of its assets than in liquidation. The process starts with a court application and culminates in a proposal for running the company and/or restructuring its debt. Typically, the Scheme Manager in consultation with the company’s directors (“SM”) or the judicial manager prepare such proposals, and the creditors vote on them. Creditors may be classified into different classes (e.g. secured and unsecured) and their votes are weighed in proportion to their debt. The key difference between a SA and a JM is that a JM involves a third party (the judicial manager) running operations of the company while the companies’ directors retain the company’s operations in a SA.
2. What are the practical considerations in choosing between the two mechanisms?
A JM would be most suited when there is uncertainty over the ability or integrity of a company’s directors. A judicial manager, once appointed, replaces the company’s directors, and take over operations. A judicial manager also has extensive powers to investigate and challenge antecedent transactions. On the flipside, significant time and costs are needed for the judicial manager to get up to speed and manage the company’s affairs.
In a SA, the company’s directors are still in control, and may be better placed to deploy existing banking facilities to carry on trades in the ordinary course of business. The company’s directors may also be better placed to secure capital injection from potential white knights in the sector.
3. When to apply for restructuring?
A company or its creditors can apply for a JM, SA or Enhanced Moratorium and there are numerous considerations on timing. Generally, a company makes an application when it lacks sufficient cashflow to answer demands for repayment from creditors. Creditors may have concerns over the company assuming further liabilities, the propriety of its transactions, preferential payments to certain creditors, or dissipation of assets.
Where the ability or integrity of the company’s management is in doubt, creditors can consider making a JM application and where these concerns are urgent, an interim judicial manager can be appointed.
Alternatively, where a company is already in advanced stages of preparing a scheme proposal for its creditors, it can apply for a SA under section 210. If however a company needs more time to prepare a proposal, it can first apply for a moratorium under section 211B (the Enhanced Moratorium) to prevent any enforcement action or legal proceedings while it prepares the proposal.
4. What is different about the Enhanced Moratorium?
The Enhanced Moratorium under section 211B does not create a standalone restructuring mechanism for creditors. It is to be used to obtain a more effective moratorium in conjunction with a scheme being prepared or proposed. It has unique features such as:
- An automatic 30 day stay against proceedings and enforcement against the Company.
- Availability of worldwide stay against specific proceedings and enforcement against the company (although recognition of such a stay will depend on the foreign courts).
- Availability of protection for subsidiary/holding companies.
- Ability of the court to cram down dissenting classes of creditors to a scheme proposal.
5. What cannot be done during a moratorium?
When a company applies for a section 211B Enhanced Moratorium there is an automatic 30-day moratorium during which time the company is to seek leave to convene a scheme meeting. This period can be extended by the Court if the company needs more time to put forward its application and can be subject to further conditions/ restrictions on the company. Similarly, a moratorium applies when an application for JM is made to the Court.
During the moratorium, no winding-up applications or legal proceedings can be commenced or continued against the company without leave of court. Further, no receiver or manager may be appointed nor can any security be enforced without leave. The company however remains at liberty to dispose of its assets in the ordinary course of business.
6. What information may be relevant to whether a creditor opposes or accepts a restructuring?
When a company seeks to restructure, it typically procures a professional financial analysis extolling how a SA or a JM would result in a more advantageous recovery for creditors than the company’s liquidation. The financial modelling is based on assumptions and should be carefully examined, particularly in trade finance. Creditors can and should seek more information on the company’s activities such as:
- Substantiated valuation of the company’s significant assets.
- Viability of recovering the company’s receivables, relevant considerations being the size and age of debt, time and costs needed to secure judgments against debtors as well as recovery and enforcement challenges in foreign jurisdictions.
- Details of any intended capital injection and its suggested deployment.
- Details of how the company intends to carry on business going forward, including whether there is a reduction of products, diversification, and availability of financing from lenders.
7. As a secured creditor, can I enforce my security? What can be done on disputes with another secured creditor on the priority of charges?
No action for enforcing security can be taken during a moratorium without leave of court. A key factor in securing such leave is to demonstrate that enforcing the security does not prejudice other creditors, for example, an undisputed fixed charge over the collection account or specified goods in favour of a creditor.
It is not uncommon for creditors to crystallize their floating charges before a company applies for restructuring. Disputes over competing security interests feed into negotiations with respect to priority of repayment in the restructuring.
8. Can new contractual arrangements be entered with the company?
A company undergoing restructuring is still a going concern and can conclude new contractual arrangements (in a JM, such arrangements are concluded by the judicial manager on behalf of the company). The key risk for a trading company’s counterparts is payment risk. Sellers dealing with the company on LC or SBLC terms face relatively low risk. In other cases, the risk depends on the financing available to the company, and creditworthiness of its end buyers. Open account trades with a company under restructuring is naturally risky. If possible, novation of existing chain trades can be considered.
9. Can existing unperformed contracts with the company be terminated?
Most counterparties for unperformed term delivery contracts may seek to terminate their contracts. Commercially, the decision depends on the prospect of default. Legally, it depends on the governing law of the contract. Most trade contracts are governed by Singapore or English law, and both the legal systems recognise (among others) the following two means of termination which are relevant to trade contracts.
The first is contractual clauses which specify termination events, e.g., failure to open a letter of credit. Contracts also typically include an “insolvency event” as an event of default giving rise to termination. Depending on the language of the insolvency event clause, it should be possible to terminate the contract once the company applies for a JM, SA or Enhanced Moratorium. That said, there is ongoing debate on the application of insolvency event clauses as they can undermine the purpose of the restructuring if all counterparts refuse to do business with the company. In Singapore, restrictions on invoking insolvency event clauses are imminent under the Insolvency, Restructuring and Dissolution Act 2018 (the “IRDA”). The IRDA has been passed but is only expected to come into force later this year. It is important therefore to seek legal advice before triggering such contractual rights.
The second category is under general law, on the basis of a party’s repudiation or renunciation of the contract. This includes a termination based on an anticipatory repudiation, i.e. where a party declares or otherwise conveys its inability or refusal to perform in advance. Common law termination rights are attractive as they allow for termination ahead of the time for contractual performance.
10. What are the powers of a judicial manager? Can transactions be reviewed?
A judicial manager has wide powers to all things necessary for the realisation of the company’s property (including selling or disposing of any charged property) as well as to carry on the business of the company. A judicial manager also has powers to obtain information from the company’s officers, to apply for a SA or winding-up, and to set aside or unwind transactions at an undervalue or undue preferences or extortionate credit transactions. It should be stated that a scheme manager does not have similar powers to investigate transactions. In addition, a liquidator appointed after a failed SA may find himself out of time to challenge such transactions under the Companies Act. This uncertainty will be addressed once the IRDA comes into force, as the IRDA makes provision for “freezing” these timelines during a failed SA.