Lemonade out of a pandemic lemon?
Legal and commercial issues resulting from the crisis could advance Singapore's ambitions as a restructuring hub in a post-Covid environment.
Singapore has spent considerable effort establishing itself as an international dispute resolution venue of choice. It now boasts a world-class judiciary with an international division (the Singapore International Commercial Court), is the No 1 seat for arbitration in Asia, and has a United Nations convention on mediation named after it. Singapore has also revamped its restructuring and insolvency laws as part of a concerted push to promote the Republic as an international centre for debt restructuring. In 2017, it was recognised by Global Restructuring Review as "most improved jurisdiction".
Like the little pig that built its house out of bricks, Singapore's meticulous planning and efforts are set to stand it in good stead in the face of the slew of legal and commercial issues that look to follow from the Covid-19 pandemic. In particular, Singapore has the opportunity to leverage its reputation for efficiency with its strong framework of laws to establish itself as an international restructuring hub.
Significant amendments were introduced to Singapore's restructuring and insolvency regime in 2017. These changes, which drew inspiration from the United States Chapter 11 process, introduced an enhanced framework to attract and facilitate regional and international corporate rescues and debt restructurings in Singapore. This was achieved primarily by allowing foreign companies to avail themselves of Singapore's scheme procedure, and by introducing a number of powerful tools to facilitate a restructuring.
Among other things, companies now enjoy automatic temporary protection against legal action being taken against them upon filing of a scheme or judicial management application, and also may apply for enhanced moratoriums that cover related companies. Companies may also attract and obtain fresh financing, on a priority basis viz existing debts of a company where this is necessary for its continued survival as a going concern. To fast-track the scheme process, courts may now approve a "pre-packaged" scheme without the need for scheme meetings, where they are satisfied that the requisite majority of creditors would have approved the scheme. The Chapter 11 experience suggests that pre-packs will be particularly suited for more common restructuring transactions such as capital-raising exercises and debt-to-equity swaps.
A common observation is that save for the moratorium provisions, the new measures have not been utilised as frequently as may have been hoped. The pandemic presents an opportunity to change this, particularly once the temporary protection offered by the Covid-19 (Temporary Measures) Act ends. For companies in fiscal distress, the ability to seek and obtain rescue financing, in circumstances where existing shareholders and investors are reluctant to take on further exposure in an unprecedented business environment, can be the difference between survival or demise. The ability to obtain some breathing room against legal action while a company works out a viable way forward will also be essential; the likes of Hin Leong and Ocean Tankers are currently under court-order moratorium protection as they explore plans for a potential restructuring. A "pre-packaged" restructuring will also be a serious option for beleaguered debtors seeking to minimise administrative costs and time.
Good time for further change
The distressed climate also represents opportune timing for the introduction of the Insolvency, Restructuring and Dissolution Act (IRDA). The related Bill was passed by Parliament on Oct 1, 2018 and is expected to come into force sometime this year. It is noteworthy that the Covid Act makes specific reference to the IRDA. Other jurisdictions, notably the United Kingdom, are also tabling updated restructuring laws in anticipation of the surge in cases.
The IRDA will consolidate Singapore's corporate and personal insolvency and restructuring laws into a single legislation. It also introduces a number of new and noteworthy provisions in the corporate insolvency space, including the establishment of a new licensing and regulatory regime for Singapore insolvency and restructuring practitioners.
In particular, the IRDA will introduce restrictions on the operation of ipso facto clauses. An ipso facto clause is a contractual provision that allows one party to terminate or modify the operation of the contract (or provides for this to occur automatically) by reference to the counterparty's insolvency. The IRDA will prevent a contracting party from terminating or amending any term of an agreement or claiming accelerated payment under any agreement with a counterparty solely by reason that restructuring or judicial management proceedings have commenced against the company, or that the company is insolvent.
These restrictions will be welcomed by companies in financial difficulties. They make it more likely that key contracts of the company (such as key supply contracts) will be kept alive and at the same time reduce the prospects of the company, and its other creditors, being "held ransom" by a small number of contractual counterparties. The triggering of protections may also incentivise management to restructure and "sort out their houses" earlier. On the flipside, the restriction fundamentally interferes with the parties' contractual agreements. Existing counterparties of the company may also be compelled to perform their contractual obligations in circumstances where there is no guarantee of being repaid.
The distressed environment will provide further opportunities for the Singapore courts to develop jurisprudence and guidance on the restructuring regime, which will in turn provide more certainty and confidence in the use of these laws.
Mediation to the fore
Singapore has made significant strides in advancing the use and enforceability of mediation. In 2019, the United Nations Convention on International Settlement Agreements Resulting from Mediation, also known as the Singapore Convention on Mediation, was signed by 46 countries. The convention is groundbreaking in the way that it facilitates international enforceability of settlement agreements over commercial disputes. This follows the establishment of the Singapore International Mediation Centre (SIMC) in late 2014, which caters to international commercial cross-border disputes alongside its domestic counterpart, the Singapore Mediation Centre (SMC).
Alternative dispute resolution (ADR) processes have traditionally not played a big role in restructuring and insolvency processes. However, as these become more complex and costlier, there is a growing recognition of the role that ADR can bring to the table in focusing and resolving underlying disputes. Experiences in high-profile restructurings in the US have demonstrated this. In the US insolvency of Lehman Brothers, the use of a structured mediation protocol was instrumental in the expeditious resolution of a significant number of derivatives-related claims, resulting in a very significant saving of costs and time. In the MF Global Holdings collapse, the resolution of disputes through mediation between the US and UK estates of MF Global enabled substantial assets of over US$1 billion of the collective estate being distributed to creditors.
The current environment presents a renewed opportunity for Singapore to leverage mediation in restructuring matters. In his keynote address in the 2018 Singapore Insolvency Conference, Justice Kannan Ramesh spoke about the importance of consensus building in restructuring, particularly cross-border matters involving complex issues of jurisdiction and recognition. He also referred to the economic potential of mediation as a new source of work for insolvency professionals.
The resources are in place. Singapore is well-stocked with qualified insolvency professionals and practitioners with substantial experience in Asia and beyond. The Singapore Mediation Centre maintains an "Insolvency Panel" comprising qualified mediators well versed in insolvency and restructuring. The Supreme Court is currently spearheading the SGUnited Mediation Initiative, under which the court will identify and refer suitable cases for mediation at the SMC at no cost to the parties. As more states sign and ratify the Singapore Convention, mediation settlements made in the context of restructuring and insolvency proceedings will be increasingly enforceable and attractive.
Foresight and astute planning have given Singapore a valuable headstart in dealing with the legal and commercial fallout from the pandemic. The coming months will be key in building on the advantage to ride out the storm.
The writer is an independent disputes and restructuring lawyer.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.