The Insolvency, Restructuring and Dissolution Bill was passed in the Parliament on 1 October 2018 and assented to by the President on 31 October 2018. Today, i.e. 30 July 2020, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) will finally come into effect. In this article, which is the first of five in a series of articles covering various aspects of IRDA, we will provide an overview of its main features.
History of Singapore's insolvency regime
Prior to IRDA, the legislative framework for Singapore's insolvency regime was largely set out in the Companies Act (Cap. 50) and the Bankruptcy Act (Cap. 20), with additional provisions scattered across a myriad of other legislations. Put simply, the Companies Act set out the framework for corporate insolvency, making provisions for the liquidation, judicial management and receivership of companies, as well as schemes of arrangement. The personal insolvency regime was addressed through the Bankruptcy Act, which provided for the bankruptcy of individual debtors, the procedures for individual voluntary arrangements, and debt repayment schemes. The provisions of the Companies Act and the Bankruptcy Act were, in turn, supported by subsidiary legislations containing detailed rules governing the conduct of bankruptcies, liquidations, and judicial management.
As early as 2002, the Company Legislative and Regulatory Framework Committee recommended the enactment of an omnibus Insolvency Act that would be applicable to both companies and individuals. Although, the Government at that time accepted this recommendation, it did not implement the same.
In November 2010, the Ministry of Law decided that, as part of its ongoing review of the insolvency laws of Singapore, it would appoint a committee of insolvency practitioners, academics and stakeholders to form an Insolvency Law Review Committee ("the Committee") to review the then-existing bankruptcy and corporate insolvency regimes, and to issue a report making recommendations on an Omnibus Insolvency Bill. The guiding objectives of the Omnibus Insolvency Bill were to unify the bankruptcy and corporate insolvency regimes in a single piece of legislation, and modernize the law of bankruptcy and corporate insolvency and adopt practices best suited to Singapore.
As a starting point, the Committee recognised the fact that Singapore's insolvency framework was due for a revamp, as the source legislation (the Bankruptcy Act and the Companies Act) stemmed from Singapore's colonial legal heritage and over the years, had undergone "piecemeal" and "patchwork" amendments. The Committee stated in its report:
"As with any other legislation, there is a constant need to revise insolvency law to ensure that it remains modern and relevant. This has been driven not only by Singapore's growth as a regional financial and business hub, but also the proliferation of complex credit and financing transactions. The increased volatility of the global economy has also underscored the need to strengthen our corporate rescue mechanisms."
Revisiting the recommendations of the Company Legislative and Regulatory Framework Committee, made back in 2002, the Committee considered that an "omnibus" insolvency act was the need of the hour. The Committee cited multiple reasons for this, for example: (a) insolvency law had developed into a discrete area of commercial law, underpinned by a unique set of concepts, principles and policies; (b) the consolidation of the various insolvency regimes into a single piece of legislation would enhance clarity and access to Singapore's laws by members of the commercial sector; and (c) an omnibus act would help to address the inconsistencies and uncertainties that invariably arise from having to cross-refer to concepts from various pieces of insolvency legislation.
The Committee also recognised that cross-border trade had become a common feature of Singapore's commercial landscape, with companies having assets, creditors, and debtors located across several jurisdictions. It was important for Singapore's relevance in the global economy, that its insolvency laws be equipped to deal with cross-border insolvencies.
Against the above context, the Committee released its Final Report in 2013 and recommended wide ranging amendments to be made to the bankruptcy and corporate insolvency regimes. Some notable recommendations included:
- Setting up of a regulatory regime to regulate the licensing and discipline of insolvency practitioners;
- Introducing an expedited bankruptcy procedure for cases where there is a real risk that the debtor's assets would be diminished and providing for early dissolution of companies where conditions are met;
- Expressly granting judicial managers and liquidators the power to assign the fruits of certain causes of action to third party funders;
- Allowing the company to place itself into judicial management without the need for an application to court;
- Granting super-priority for rescue financing and introducing cram-down provisions;
- Removing the prior requirement for criminal liability as a condition for civil liability in respect of wrongful trading; and
- Adopting the UNCITRAL Model Law on Cross-Border Insolvency.
The Committee's recommendations in the Final Report were largely accepted by the Government. The Government recognised the rising demand for restructuring services in Singapore and to address this demand, the Ministry of Law set up the Committee to Strengthen Singapore as an International Centre for Debt Restructuring ("CSSICDR") in May 2015. The CSSICDR's task was to recommend initiatives/legal reforms to enhance Singapore's effectiveness as a centre for international debt restructuring.1
The CSSICDR released its Report on 20 April 2016 and made a total of 17 recommendations targeted at providing a better legal framework for debt restructuring in Singapore, creating a friendly ecosystem for restructuring and addressing the perception gap to raise awareness of the benefits of conducting restructuring in Singapore.
Given the large number of recommendations made in the Committee's Final Report and the Report of the CSSICDR, the Ministry of Law undertook a three phased approach to implementing the various recommendations made.
The first phase commenced with amendments being made to the Bankruptcy Act in July 2015. The recommendations made by the Committee were largely implemented and the amendments provided for a more rehabilitative discharge framework for bankrupts.
Thereafter, the second phase commenced in May 2017 with amendments made to the Companies Act to enhance the corporate insolvency and restructuring processes. This would increase Singapore's attractiveness as the "go to" place for debt restructuring. The amendments to the Companies Act were significant and included the introduction of provisions similar to those in Chapter 11 of the US Bankruptcy Code, such as a cross class cram-down on dissenting creditors in schemes of arrangement.
The third and final phase of the reform is the enactment and commencement of the IRDA, which was passed by the Singapore Parliament on 1 October 2018. With the enactment of the IRDA, the statutory provisions that govern Singapore's insolvency regime are to be consolidated under IRDA, repealing the Bankruptcy Act in its entirety and relevant provisions of the Companies Act.
Structure of the IRDA
As stated above, the IRDA repeals the Bankruptcy Act and the relevant provisions in the Companies Act which relate to corporate insolvency and restructuring. It also amends 72 different pieces of legislation for consistency.
The IRDA is a mammoth piece of legislation that consists of 25 parts. In particular:
- Provisions relating to Scheme of Arrangement can be found at Part 5
- Provisions relating to Receivership can be found at Part 6
- Provisions relating to Judicial Management can be found at Part 7
- Provisions relating to Winding Up can be found at Part 8
- Provisions applicable to both Judicial Management and Winding Up can be found at Part 9
- Provisions relating to Cross-Border Insolvency can be found at Part 11
- Part 9 on relating to Bankruptcy can be found at Parts 14 to 21
For the purpose of this article, we will briefly introduce some of the changes which have a more general application across the various regimes below. However, we will be releasing four more articles in this series where we will undertake an in-depth analysis of the regimes of Schemes of Arrangement, Judicial Management, Winding Up and Cross-Border Insolvency under the IRDA.
New licensing and regulatory regime for all insolvency practitioners
Prior to the IRDA, there was no dedicated regime for the licensing and regulation of insolvency practitioners, such as accountants appointed to act as liquidators, judicial managers or receivers. Section 50 of the IRDA now expressly provides that solicitors can act as liquidators, judicial managers or receivers as well, a move which is in line with the practice in other jurisdictions.
To raise standards and improve accountability amongst the expanded class of insolvency practitioners, a system of safeguards has been put in place through the implementation of the licensing and disciplinary regime contained in Section 47 to 60 of the IRDA.
For insolvency practitioners who wish to continue their practice on and after 30 July 2020, will be required to submit their licence application as soon as possible within the 6 month transitional period (i.e. from 30 July 2020 to 30 January 2021).2
While waiting for the licence application to be approved, the insolvency practitioner may perform insolvency or debt restructuring work commenced under the IRDA, provided that he or she possesses the necessary qualifications to do so work under the Bankruptcy Act and/or the Companies Act.3
If the insolvency practitioner's application for a licence is unsuccessful, his or her appointments undertaken during the transitional period will have to cease and no new appointments may be undertaken.
Third-party funding in judicial management and liquidation
Before the enactment of the IRDA, there was arguably some uncertainty as to whether an insolvent company could enter into third-party funding agreements to pursue courses of action against parties who had committed a wrong against the company. To address this, the Singapore Courts had in recent years been actively laying down the applicable principles for approving third-party agreements entered into by insolvent companies.4
The IRDA now expressly provides that judicial managers and liquidators can enter into third-party funding agreements in respect of the following causes of action:
- Judicial managers now have the power to enter into third-party funding agreements and assign, in accordance with prescribed regulations, the proceeds of an action arising out of avoidance of undervalue5 and unfair preference transactions6, extortionate credit transactions7, wrongful8/fraudulent trading9 and assessment of damages against delinquent officers 10 (the "Contemplated Causes of Action").
- Liquidators will similarly have the power to assign the proceeds of an action arising out of the Contemplated Causes of Action after approval from Court or from the committee of inspection has been obtained 11.
It should be noted that the IRDA does not provide for third-party funding of an insolvent company's claims against a counterparty for unpaid receivables, or breach of contract. Thus, despite the new provisions in the IRDA, the common law principles established by case law in respect of when third-party funding agreements will be approved by the Court are likely to still remain applicable.
Restriction on "Ipso facto clauses"
"Ipso facto clauses" are clauses that entitle a party to terminate the contract upon the fact of occurrence of a triggering event, such as the application for winding up or the commencement of a formal restructuring process (e.g. an application for leave to call a creditors meeting to consider a Scheme of Arrangement).
Prior to the IRDA, there were no statutory restrictions on Ipso facto clauses. This left much to be desired as struggling companies seeking to restructure their liabilities would be put in an unenviable position of having their counterparties terminate contracts, thus potentially losing valuable assets and incurring liabilities. To address this situation, Section 440(1) of the IRDA restricts parties from terminating contracts due to the sole reason or fact that the company has commenced restructuring efforts.
The practical effect of Section 440(1) remains to be seen as Section 440(1) does not prevent a party from terminating the contract by relying on other triggering events contained in the ipso facto clause, such as the failure to meet a performance deadline.
The IRDA has also provided for statutory carve outs on the application of Section 440(1):
- Under sub-section (4), a party may obtain a declaration from Court that Section 440 does not apply if the Section 440(1) restriction will cause him significant financial hardship; and
- Sub-section (5) expressly carves out the applicability of Section 440(1) for various prescribed contracts such as certain financial contracts, commercial charters, contracts entered into by the Government or a statutory body and any contract that is likely to affect the national interest, or economic interest.
New provision on "wrongful trading"
It is well known that directors have a fiduciary duty to act in the best interests of the company. Usually, this means that they must act in a way which benefits the shareholders as a whole. However, when a company is insolvent or at risk of insolvency, this fiduciary duty may extend to taking into account the interests of the company's creditors when making decisions for the company. The rationale for such a duty is that, when a company is insolvent, the creditors' interests come to the fore as the company is effectively trading and running the company's business with the creditors' money.
Prior to the IRDA, the statutory regime for a director's duties in the context of the company's insolvency was set out at Section 339 and 340 of the Companies Act. In particular:
- There was "insolvent trading" under Section 339(3) of the Companies Act, which provided that if a director who was knowingly a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation of the company being able to pay the debt, the director can be found guilty of an offence. One of the features of the insolvent trading regime was that the person had to be criminally convicted first before he could be made personally liable for the whole or part of the debt pursuant to section 340(2) of the Companies Act.
- There was also "fraudulent trading" under Section 340(1) of the Companies Act, which provided that if a director had knowingly been a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the director can be made personally liable for the whole or part of the debt.
The IRDA has largely kept the provision on fraudulent trading but has also introduced a new concept of "wrongful trading" which replaces the old concept of "insolvent trading". Under the new regime, a company "trades wrongfully" if it incurs debts or other liabilities, when insolvent (or becomes insolvent as a result of incurring such debts or other liabilities), without reasonable prospect of meeting them in full (Section 239(12)) of the IRDA).
The "wrongful trading" regime also abolishes the pre-requisite (present under the insolvent trading regime) of having to establish criminal liability first before the director could be made personally liable for the debt. Section 239(1) of the IRDA simply provides that in the course of the judicial management or winding up of a company or in any proceedings against the company, the Singapore Court may, on the application of a judicial manager, liquidator or creditor or contributory of the company, declare that any person who was a party to the company trading wrongfully is personally responsible for any or all of the debts or other liabilities of the company if that person: (a) knew the company was trading wrongfully; or (b) as an officer of the company ought, in all the circumstances, to have known that the company was trading wrongfully.
The IRDA also introduces a new statutory defence (Section 239(2)) which allows the Singapore Court to relieve the person declared responsible from the personal liability if: (a) the person acted honestly; and (b) having regard to all the circumstances of the case, the person ought fairly to be relieved from personal liability.
Certain provisions of the IRDA have been temporarily amended because of COVID-19 12
The COVID-19 (Temporary Measures) Act ("COVID-19 Act") grants temporary relief for businesses and individuals who are facing financial difficulty. The monetary thresholds for bankruptcy/insolvency in the IRDA have been temporarily increased 13:
For individuals: The monetary debt threshold is raised from $15,000 to $60,000. 14 Further, the suitability of an individual for a debt repayment scheme, and the avoidance of bankruptcy, is lifted from $100,000 to $250,000 15;
For businesses: The monetary debt threshold is raised from $10,000 to $100,000 16.
Individuals and businesses also have up to 6 months (instead of 21 days) to respond to demands from creditors before a presumption of insolvency will arise. 17
The IRDA has commenced at a time where many businesses and individuals are reeling from the effects of COVID-19. The temporary relief afforded by the COVID-19 Act is due to end soon on 19 October 2020. At the time, we can expect to see a sharp increase in insolvency and restructuring activities, which will put the provisions of the IRDA through a stress test. Interested parties should continue to watch this space as we continue to bring you updates on the application of the IRDA.
If you are interested in finding out more about the IRDA, you are most welcome to approach us.
1 Report of the Committee to Strength Singapore as an International Centre for Debt Restructuring, 20 April 2016, page 3.
3 Section 527(1) of the IRDA.
4 Our article considering the principles on when the Court will sanction a third party funding agreement can be found at https://www.clydeco.com/en/insights/2020/07/third-party-funding-in-the-context-of-insolvency-p.
5 Section 224 of the IRDA
6 Section 225 of the IRDA
7 Section 228 of the IRDA
8 Section 238 of the IRDA
9 Section 239 of the IRDA
10 Section 240 of the IRDA
11 Sections 144(1)(g) and 177(1)(a) of the IRDA.
12 See https://www.clydeco.com/en/insights/2020/04/covid-19-singapore-guide-to-temporary-measures-act and https://www.clydeco.com/en/insights/2020/04/covid-19-insolvency-considerations-for-the-singapo
13 Effective for the period of 20 April 2020 to 19 October 2020, subject to any further extension
14 Section 21(d) of the COVID-19 Act
15 Section 21(a) of the COVID-19 Act
16 Section 23(1)(a) of the COVID-19 Act
17 Sections 21(1)(e) and 23(1)(b) of the COVID-19 Act
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.