Second Reading Speech by Senior Minister of State for Law, Mr Edwin Tong, on the Insolvency, Restructuring and Dissolution Bill
01 OCT 2018
1 Oct 2018 Posted in Parliamentary speeches and responses
- I beg to move, “That the Bill be now read a Second time.”
- Sir, Singapore’s debt restructuring and insolvency laws have undergone significant changes in the last three years, guided by the recommendations of two expert committees: —
- Firstly, the Insolvency Law Review Committee in 2013, which conducted a holistic study of Singapore’s insolvency and restructuring landscape; and
- Secondly, the Committee to Strengthen Singapore as an International Centre for Debt Restructuring in 2016, which focused on strengthening Singapore’s debt restructuring ecosystem.
- The Committees together made close to 150 recommendations. On top of these recommendations, MinLaw also conducted further studies and received extensive stakeholder feedback proposing other reforms.
- In view of the large number of complex legislative changes required to give effect to the recommendations and other reforms, a phased approach to implementation was adopted.
- Prior to this Bill:
- In 2015, the Bankruptcy Act was amended to create a more rehabilitative discharge framework for bankrupts, encourage institutional creditors to exercise financial prudence when granting credit, and facilitate better utilisation of public resources by requiring institutional creditors to appoint private trustees in bankruptcy.
- In 2017, the Companies Act was amended to enhance our corporate rescue and debt restructuring process to strengthen Singapore as a forum of choice for debt restructuring. The reforms introduced features adapted from Chapter 11 of the United States Bankruptcy Code, and the UNCITRAL Model Law on Cross-Border Insolvency.
- I am pleased to report that the amendments to the Companies Act that came into effect on 23 May 2017 have made a positive impact.
- In a little more than a year, close to 100 applications under the new provisions have been filed with the Singapore courts, which is a significant number within a short period of time. It is heartening that parties are taking advantage of the new provisions to seek better outcomes for creditors, debtors and other stakeholders like the employees of financially distressed companies.
- Our reforms have also garnered attention internationally, including Singapore being recognised as the “Most Improved Jurisdiction” at the inaugural Global Restructuring Review Awards in June 2017.
OBJECTIVES OF THE BILL
- This Bill is the last phase of this current round of reforms, and builds on the foundations laid by the earlier amendments. Taken together, these reforms ensure that our insolvency and restructuring laws remain progressive and modern.
- The Bill achieves this aim through three specific objectives.
- First, to promulgate a new single Act, which consolidates the corporate and personal insolvency and debt restructuring laws into one place. They are currently found in two separate statutes. This has numerous benefits, including: —
- Setting out common principles and aligning procedures across the regimes under a single law, rationalising existing inconsistencies and minimising current uncertainty due to cross-referencing across the various pieces of legislation; and
- Enhancing the clarity and accessibility of the laws for advisers and the parties involved. This will be welcomed as it removes the need to refer to multiple primary and subsidiary legislation.
- Second, the Bill establishes a regulatory regime for insolvency practitioners. This will professionalise and raise the quality and standards of insolvency practitioners.
- Third, the Bill also enhances our insolvency and debt restructuring regimes. In particular, the reforms continue the enhancement of Singapore’s corporate rescue and debt restructuring framework that commenced under the Companies Act amendments last year. The latter introduced US Chapter 11 concepts into our English law-based schemes of arrangement regime, such as worldwide moratoriums, super-priority rescue financing, pre-packaged restructurings and cram-downs. This Bill will further enhance the restructuring regime, with new provisions such as restrictions on ipso facto clauses, which I will touch on in a minute.
- Taken as a whole, these reforms:
- Benefit local businesses experiencing financial difficulties by providing them with more robust tools to rehabilitate, to get back onto its feet;
- Position Singapore as a forum of choice for foreign debtors to restructure, creating new and greater opportunities for our professional services such as the legal, accounting and financial services.
- Create value for our economy, by supporting Singapore’s position as an international legal, financial and business centre through a strong restructuring regime.
- With that, Mr Speaker, let me take the members through the key provisions of the Bill.
- NEW SINGLE LEGISLATION
- The Bill introduces a new legislation that consolidates the personal and corporate insolvency and debt restructuring laws, that are currently in the Bankruptcy Act and in the Companies Act, into a single Act.
- If the Bill is passed and comes into force:
- The Bankruptcy Act will be repealed in its entirety;
- The provisions in the Companies Act relating to corporate insolvency and restructuring will be repealed.; and
- Necessary consequential or related amendments will be made to about 70 other Acts of Parliament.
- The repeals however will not affect existing cases and pending applications that are now before the courts under the current Bankruptcy Act and Companies Act, as long as they are before the date of commencement of the Bill. The relevant provisions of the Bankruptcy Act and Companies Act will continue to apply to those cases and applications.
- I will go over some of the key provisions relating to personal bankruptcy.
- Clauses 273 to 437 relate to personal bankruptcy. These provisions have been ported over from the existing provisions in the Bankruptcy Act, and remain largely unchanged. Given the significant amendments that were made in 2015, the present amendments are less substantial.
- Of these, one of the changes is to make the administration of bankruptcy cases more efficient.
- Currently, secured creditors do not need to indicate an intention to claim interest on debts owed by the bankrupt. Under clause 327(4) of the Bill, secured creditors are required to notify the trustee administering the bankruptcy, within 30 days after the bankruptcy order, if they intend to claim interest on the debt for the period after the making of the order.
- Given that secured creditors are in most cases paid out fully from their security, this change allows the trustee to have a more complete picture of the full extent of the bankrupt’s assets and the liabilities early on. This facilitates greater certainty and transparency in projected returns to relevant stakeholders and also facilitates a more efficient administration of the bankruptcy.
- Next, I turn to liquidation which appear in clauses 119 to 250.These provisions have also been ported over from the Companies Act with various amendments. The key changes include the reforms made to the appointment of the Official Receiver as liquidator, the introduction of a new early dissolution procedure, and also a new wrongful trading provision. Let me deal with these.
- Clause 135 sets out the circumstances where the Official Receiver may be nominated as liquidator in a Court application to wind up a company. Currently, the Official Receiver is the default liquidator where there is no liquidator appointed by the Court, or there is a vacancy in the position of liquidator in a Court-ordered winding up.
- This is undesirable because there is no obligation imposed on the applicant to attempt to appoint a private liquidator, even where the company may have sufficient assets to pay for such liquidators. This amendment thus re-focuses the Official Receiver’s role on overseeing the conduct of liquidation and cases.
- Under clause 135(3) of the Bill, the Official Receiver may only be nominated to act as liquidator if the applicant for a winding up has taken reasonable steps, but is unable, to obtain the consent of a licensed insolvency practitioner to be appointed as liquidator, and the Official Receiver then consents to such nomination.
- Second, clauses 209 to 211 introduce a new procedure for the early dissolution of a company in liquidation. In the present regime, there is no summary procedure that caters to cases where companies may have insufficient assets to pay for the administration of their own winding up.
- The impetus for this new procedure is to streamline the use of public resources and funds in administering cases where there are insufficient assets to fund even the administration of the liquidation. There are a sizeable number of such cases and to give Members a sense of the scale: As of 31 August2018, there were more than 100 companies undergoing winding up by the Official Receiver, with estimated realisable assets of less than S$1,000 in each case.
- Without the new provision, significant number of man-hours and public resources will need to be expended to liquidate such companies, with little or even no return to creditors.
- The early dissolution procedure may be utilised by the Official Receiver and by private liquidators who have obtained the prior consent of the Official Receiver. It may be used where the liquidator has reasonable cause to believe that:
- the realisable assets of the company are insufficient to pay even for the expenses of the winding up; and
- where the affairs of the company do not otherwise require further investigation. In such cases, the liquidator may give notice to the creditors and contributories that the name of the company will be struck off the register and the company will be dissolved at the expiration of 30 days from the date of the notice. Relevant stakeholders who oppose the early dissolution may appoint a replacement liquidator or apply to the Court for relief. So, there is a consequence if one doesn’t agree with the proposal.
- Third, clause 239 introduces a new “wrongful trading” provision that replaces the old insolvent trading regime in sections 339 and 340. In particular, sections 339(3) and 340(2) of the Companies Act. The current regime is unsatisfactory as criminal liability must first be found as a prerequisite before the making of an application to impose civil liability against the officer of the company, and has not, as far as we are aware, been used in any reported case in Singapore.
- Under clause 239 therefore, a company trades wrongfully if the company incurs debt or liabilities without reasonable prospect of meeting them in full when the company is insolvent, or becomes insolvent as a result of the incurrence of such debt or liability. The new clause 239 empowers the Court to declare that any person who was a knowing party to the company trading wrongfully shall be personally liable and responsible for those debts or liabilities of the company.
- Clause 239(10) further provides that a company or any person party to, or interested in becoming a party to, the carrying on of business with a company, may apply to the Court for a declaration that a particular course of conduct, transaction or series of transactions would not constitute wrongful trading.
- LICENSING AND REGULATORY REGIME
- I now turn to deal with the licensing and regulatory regime.
- Clauses 47 to 60 establishes a new licensing and regulatory regime applicable to all persons acting as “insolvency practitioners”, as defined in clause 47.
- Currently, such practitioners are regulated, if at all, under the professional regimes to which they belong. For example, accountants are regulated by ACRA. However, there is no specific regime applicable only to and for insolvency practitioners and this has led in some cases to undesirable situations where either a liquidator or a judicial manager whose conduct has fallen short of standards could not otherwise be punished besides or beyond looking at that individual’s own professional licensing regime. So it’s a narrower framework.
- To raise standards and improve accountability, the Insolvency and Public Trustee’s Office under the Ministry of Law will regulate more than 300 insolvency practitioners, who will fall under this new regime. Its key features include:
- First, the licensing of insolvency practitioners, who must meet minimum qualifications and prescribed requirements to obtain and renew their licences under clauses 50 to 51. In particular, clause 50 provides that a “qualified person” means any person who is an advocate or solicitor, a public accountant, a chartered accountant or possesses such other qualifications as the Minister may prescribe; and
- Second, the investigation and discipline against insolvency practitioners for breaches of their conduct as insolvency practitioners under clauses 56 to 60.
- ENHANCING OUR DEBT RESTRUCTURING REGIME
- I turn next to touch on the enhancements made to our debt restructuring regime.
- A successful debt restructuring avoids liquidation and allows the company to get back onto its feet, to continue its business as a going concern. Compared to liquidation, this provides a better return to creditors, and also benefits stakeholders such as employees who get to keep their jobs and trading counterparties who rely on the company’s businesses.
- When the Companies Act was amended last year to strengthen Singapore’s debt restructuring regime, it was noted during the Second Reading that “[t]he need for debt restructuring is on the rise globally”, referring to high profile cases such as Hanjin Shipping, and Singapore-listed businesses like Swiber and Ezra.
- Since the passage of those amendments, several more high profile cases, illustrating the need for an effective debt restructuring and rehabilitation scheme, have been in the news, including well-known names like Toys“R”Us in the US, Noble, our own Hyflux, and Nam Cheong.
- This Bill further strengthens our debt restructuring regimes for the rehabilitation of companies in financial distress, while including appropriate safeguards to balance the interests of stakeholders.
- With this in mind, I will touch on the amendments to schemes of arrangement first, followed by judicial management, and finally the restrictions on ipso facto provisions.
Schemes of Arrangement
- In respect of schemes of arrangement, the Bill makes two amendments.
- First, clause 64 re-enacts section 211B of the Companies Act, with a new subsection (12)(b). Clause 64(1) gives the Court the power to make one or more orders restraining certain actions and proceedings against the company, on an application by a company that has proposed a compromise or an arrangement with its creditors, or intends to do so. Clause 64(8) provides for an automatic moratorium of not more than 30 days to apply upon the making of an application under clause 64(1).
- The new clause 64(12)(b) provides that neither an order by the Court under clause 64(1) nor the automatic moratorium under clause 64(8) affects “the commencement or continuation of any proceedings that may be prescribed by regulations.” This amendment empowers the Minister to prescribe by regulations that the commencement of specified proceedings, or the continuation of specified proceedings, or both, is not affected by the moratoria. The intention is to apply this power in a targeted manner where necessary – in particular, with respect to writs for an action in rem against a vessel. The current practice, as I understand it, is that for urgent cases, in rem writs and applications for leave are to be filed simultaneously and the Supreme Court registry accepts such filings with the Court thereafter deciding if the claim may proceed. The power under clause 64(12)(b) will be used to provide that the first step of the filing of an in rem writ is not itself impeded by the moratoria, and this is in order to preserve the claims against the vessels, because time stops running when you have filed the claim. However, leave of Court under clause 64(1)(c) or (8)(c) will still be required to continue with such proceedings. A similar provision is also inserted at clauses 65(7)(b), 95(3)(b) and 96(5)(b).
- Second, clause 70 empowers the Court to approve a scheme of arrangement despite there being dissenting classes of creditors, provided that the scheme is fair and equitable to the dissenting class. This re-enacts section 211H of the Companies Act, but with one key difference at clause 70(4)(b)(ii)(B) that persons subordinate in priority to the dissenting class must not receive or retain any property “of the company”.
- The insertion of the words “of the company” clarifies and confirms the position outlined in Parliament last year when this provision was introduced; that the cram-down provisions introduced were “not concerned with adjustments to shareholder interests”.
- Turning to judicial management, clause 94 is a new tool which seeks to allow a company to place itself into judicial management provided the creditors agree to it, and support it in doing so. Currently, a company may only enter judicial management by a Court order. Clause 94 provides an alternative mode of entry into judicial management in cases where creditors are supportive. The aims of this provision is to minimise the expense, the formality and the delay in such cases. And the expedited procedure will allow the company to focus its resources on rehabilitation. It must be emphasised that once the company is placed into judicial management, the judicial management process will then continue in the same manner and under the supervision of the Court, regardless of how the judicial management was started. That is obvious because it is a judicial management with the Court having oversight.
- Clause 99 and the First Schedule provide for the powers of the judicial manager, including a new power at paragraph (f) of the First Schedule, to assign in accordance with the prescribed regulations the proceeds of an action set out in that paragraph.
- Judicial managers are provided certain powers under those provisions set out in paragraph (f) to bring an action in Court to unwind prejudicial transactions and avoid acts detrimental to creditors. For example, where errant directors have entered into a transaction to transfer assets of the company to a third party for no value, or no valuable consideration. Currently, a majority of such actions may not be pursued due largely to there being a lack of financial resources.
- These new provisions allow the judicial manager to assign proceeds from such an action to a third-party, in exchange for funding of the action. This new avenue of funding may increase the likelihood of such an action being pursued. This will in turn benefit stakeholders by providing higher recoveries, if such actions are successful. This new power is similarly provided to liquidators in clauses 144(1)(g) and 177(1)(a).
- To avoid doubt, these new provisions are only intended to provide for the assignment of proceeds from such an action brought by the judicial manager or liquidator. This is not intended to affect other funding arrangements that are allowed under common law, such as funding for causes of action that belong to the company as its property, and funding for the investigation of potential causes of action for financially distressed companies.
- Clause 102 re-enacts section 227I of the Companies Act, which provides that the judicial manager of a company is deemed to be the agent of the company, but in Clause 102, it omits the imposition of personal liability on the judicial manager. Let me explain. The present regime imposes personal liability on judicial managers for contracts entered into or adopted by the judicial manager; although the judicial manager is allowed to disclaim personal liability, and usually does so. The availability of such a disclaimer of personal liability ensures that the judicial manager is not otherwise discouraged from entering into or adopting contracts that would be beneficial to the company. However, the net effect of this practice is that it renders the imposition of personal liability quite academic in the first place. Therefore, at clause 102 of this Bill, the provision imposing personal liability on judicial managers has not been re-enacted.
Ipso Facto Clauses
- I turn now to clause 440 which introduces a new restriction on the operation of certain types of ipso facto clauses. Ipso facto or in English, ‘without more’ clauses in contracts allow one party to terminate or modify a contract upon a specified event occurring to the other party. In the restructuring and insolvency context, such clauses typically allow one party to terminate the contract upon the occurrence of a specified insolvency-related event affecting the other party, such as an application for a judicial management order, or an application for a scheme under the Companies Act.
- Currently, there is no restriction on the operation of ipso facto clauses. If a company’s business relies on key contracts and such contracts contain ipso facto clauses, that company will have difficulty commencing or entering into a debt-restructuring process because of the risk that counterparties would simply by that reason alone be able to terminate those key contracts.
- This new provision therefore facilitates the attempts of such a company to restructure by protecting its valuable commercial contracts from being terminated by reason only that the company has embarked on restructuring efforts, under certain specified circumstances. The concept of restricting the application of ipso facto clauses is also found in the laws of jurisdictions such as the US, Canada and Australia. The language in clause 440 in particular takes reference from Section 34 of the Canadian Companies’ Creditors Arrangement Act.
- Clause 440(1) provides that no party may by reason only that any restructuring proceedings as defined in clause 440(6) are commenced or that the company is insolvent and thereafter: —
- terminate or amend, or claim an accelerated payment or forfeiture of the term under, any agreement with the company; or
- terminate or modify any right or obligation under any agreement with the company. This restriction, if applicable, operates from the commencement of those restructuring proceedings – that means from the commencement of the judicial management proceedings or the restructuring by schemes, until their conclusion.
- At this juncture, it is necessary to make clear that clause 440 only limits a certain specific subset of ipso facto clauses – those I have just outlined above. In other words, by reason only of the restructuring efforts of the company. It does not affect ipso facto clauses that are triggered on any other contractually provided grounds.
- So let me illustrate. In a case of a developer and a main contractor entering into a contract for the construction of a building, where the contract contains ipso facto clauses that may be triggered either on the commencement of restructuring proceedings, or the failure to meet construction milestones, which is not untypical in such a contract:
- If the main contractor is in financial distress and files an application to Court to place the company into judicial management, the developer will be restricted by clause 440 from relying on the ipso facto clause, because it is triggered by the filing of the application for a judicial management order, which is one of the specified restructuring proceedings in clause 440(6).
- If, however, in addition to the filing of the restructuring proceedings, the main contractor also fails to meet construction milestones and timelines, which are built into the contract, the developer may use the ipso facto clause in that situation, to terminate the contract or for a variety of other reliefs as specified in the contract. So it is only by reason of the restructuring efforts set out in Clause 440 alone that these ipso facto clauses are restricted.
- To balance the interests of the counterparty and other stakeholders, safeguards have also been included in clauses 440(4) and (5):
- First, certain types of contracts are exempted from this provision. These exemptions recognise that restricting the application of ipso facto clauses in certain categories of transactions or contracts would have a disproportionately adverse impact on markets, whilst balancing the efficacy of the restriction. These include prescribed eligible financial contracts, and prescribed contracts that affect the national interest or economic interest of Singapore.
- Second, a counterparty may apply to Court nonetheless for relief on the basis of significant financial hardship. This provides an additional safeguard for relief in certain specific individual cases.
- Sir, in conclusion, this Bill ensures our debt restructuring and insolvency laws remain modern and progressive. In particular, it strengthens our corporate debt restructuring regimes to better support companies, creditors, and other stakeholders who seek to rehabilitate local and foreign companies here, balancing the commercial interests of all concerned.
- This Bill would not have been possible without the extensive consultation over the years with the industry bodies, with leading industry practitioners, academics, and other stakeholders in the insolvency regime, such as the courts. We received many helpful suggestions. These have been carefully considered in detail and incorporated into the Bill, where appropriate, and this makes the Bill far more robust.
- This Bill is a part of a wider concerted effort to enhance Singapore’s debt restructuring ecosystem. For example, just last week, the Supreme Court of Singapore concluded two Memoranda of Understanding with the US Bankruptcy Court for the District of Delaware and the US Bankruptcy Court for the Southern District of New York. This follows from the MOU with the Seoul Bankruptcy Court in May earlier this year. These MOUs with key commercial and insolvency jurisdictions bode well for the future, and will facilitate efficient cross-border restructurings and insolvency proceedings between the courts.
- With this Bill, and our collective efforts, we will create a world-class restructuring and insolvency ecosystem in Singapore.
- Mr Speaker, I beg to move.
Last updated on 02 Oct 2018