Schemes of Arrangement (Part 3) : What can and cannot be done

In this third article of our restructuring series, we cover financing considerations which arise during restructuring, and the possibility of enforcement in Singapore against companies that restructure overseas.

Rescue financing and super-priority

Under section 67 of the Insolvency, Restructuring and Dissolution Act (“IRDA”), Singapore courts are empowered to give super priority to a provider of rescue finance to the company seeking a scheme of arrangement (“SA”). This feature is designed to incentivise rescue financing to distressed companies, and priority can be ordered in either of the following ways:
  • Equal priority to the costs and expenses of the winding up of the debtor if it is later wound up;
  • Priority over other preferential claims in any subsequent winding up;
  • Security interest in the debtor’s property that is subordinate to any existing security; and
  • Security interest in the debtor’s property that is of the same or higher priority than existing securities (this will only be granted if, amongst other things, there is adequate protection for existing secured lenders).
The restructurings of Asiatravel.com (which in February 2021 also become the first company whose financier secured a second super priority order), Swee Hong Ltd, and Design Studio Group Ltd involved successful applications for rescue financing. In deciding whether to order rescue financing, Singapore courts will consider factors such as the following:
  • Whether rescue financing is in the best interests of other creditors, and whether their interests are adequately protected.
  • Whether there is a good probability that the restructuring will succeed, and whether the financing will be used for risky investments.
  • Whether better financing proposals are available, especially proposals which do not require super priority.
  • Whether the terms of the financing are reasonable, consistent with sound business judgment, made in good faith, for proper purpose and are fair, reasonable and adequate.  

In Re Design Studio Group Ltd [2020] SGHC 148, the High Court also approved for the first time, a “roll-up” rescue-financing, i.e., injection of funds by a lender for the purpose of paying off some or all of its pre-existing debt (causing the pre-existing debt to effectively be “rolled-up” into the super-priority post-petition debt). The Court found that the provision governing rescue financing (now s 67 of the IRDA) was broad enough to include roll ups, and roll ups constitute a form of financing as long as they are necessary for (i) the survival of the company as a going concern or (ii) a more advantageous realization of its assets compared to a winding up.

We add however that in light of Re Prosafe [2021] CSOH 94 (see our earlier article), it is doubtful whether super priority status can effectively be granted to rescue financiers ahead of a foreign security holder which (i) does not have any presence in Singapore, and (ii) is a creditor in respect of a debt governed by the laws of a jurisdiction which adopts the rule in Gibbs, i.e. that a foreign law debt can only be compromised by the courts of that foreign law. In such a case, the security holder may be able to enforce against overseas assets of the scheme company, notwithstanding a Singapore super-priority order.

Third-party funding to pursue claims 

A company seeking to restructure is likely to be cash-strapped, and may find it challenging to allocate funds to financing litigation to pursue claims. It may however be able to tap into third-party funding to do so.

Judicial managers have been given an express statutory power under section 99 of the IRDA to assign the proceeds of actions relating to avoidance of undervalue and unfair preference transactions, extortionate credit transactions, wrongful/fraudulent trading and assessment of damages against delinquent officers – thus permitting third-party funding for pursuing such claims. Other causes of action (e.g., breach of contract or recovery of outstanding receivables) can continue to be assigned at general law and financed by third parties.

As a significant development in the context of schemes of arrangement, in 2021, the Singapore High Court reportedly granted super-priority status to a third party funder’s financing of a private international arbitration pursuant to section 67 of the IRDA. This is a welcome development for restructuring companies as it expands financing opportunities for them, while permitting the financier to be paid out of the recovery proceeds.

Singapore enforcement action against companies restructuring overseas

Singapore has enacted the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”). The first opportunity to consider consider the principles applicable to recognition of foreign proceedings under the Model Law arose in the recent case of United Securities Sdn Bhd v United Overseas Bank Ltd [2021] 2 SLR 950 (“USSB v UOB”). The Model Law divides foreign insolvency proceedings into two categories: “foreign main proceedings” and “foreign non-main proceedings”:
  • Foreign main proceedings are cases pending in the country where the debtor has its centre of main interest. If a Singapore court recognises a case as a foreign main proceeding, the Singapore Model Law provides an automatic stay on, amongst other things, actions concerning the “debtor’s property, rights, obligations, or liabilities” within the territory of Singapore.
  • If a Singapore court recognises a case as a foreign non-main proceeding, the Singapore Model Law provides for discretionary relief, which may also include an automatic stay, subject to the requirement that all creditors are “adequately protected”.
In USSB v UOB, USSB, a Malaysian company had been wound up in Malaysia, and UOB commenced proceedings to enforce its security over USSB’s assets in Singapore. On the facts, it was undisputed that the Malaysian winding up proceeding was a “foreign main proceeding” and that UOB’s enforcement action was an “individual action or individual proceeding ‘concerning the debtor’s property, rights, obligations or liabilities’” which fell within the scope of the automatic stay under the Model Law. The question was whether the Singapore courts should nonetheless grant leave for UOB’s enforcement proceedings to proceed.

The Court noted that the automatic stay under the Model Law has “the same scope and effect” as if the debtor had been wound up in Singapore. Further, the Model Law also provides that the stay and suspension do not affect any right to take steps to enforce security over the debtor’s property, provided that such rights would have been exercisable if the debtor had been made the subject of a winding up order under the IRDA.

Accordingly the Court proceeded to consider the position if USSB had been wound up in Singapore, and noted that Singapore courts generally permit secured creditors to proceed with enforcing their security against the assets of liquidated companies provided it can show a prima facie case that has been “brought bona fide, underpinned by credible facts and is, even without a serious investigation of the factual matrix, capable of succeeding if and when heard”. On the facts, the Court found that UOB had established itself as a prima facie secured creditor and, on the face of the evidence, it had security over the assets of USSB. This was sufficient for the court to grant UOB leave from the automatic stay to proceed with its enforcement proceedings.

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