Singapore's new restructuring regime presents potential pitfalls and opportunities to secured creditors and investors in the commodities sector.
With change comes opportunity: 3 things creditors need to know about Singapore’s new restructuring laws
In view of the sustained downturn in commodity prices over the previous two years, creditors may face an increase in borrower defaults in the coming months. Creditors with exposure in Singapore and the region are therefore well advised to familiarize themselves with the new restructuring regime in Singapore - both to protect their current secured interests and to take advantage of the new opportunities that may arise with a new rescue financing market in Singapore.
The amendments to the Companies Act (which came into effect on 23 May 2017) seek to increase Singapore’s status as an international hub for debt-restructuring. This article touches on some of the important changes which may present potential challenges to creditors and investors in the Commodities sector, as well as new business opportunities.
1. New opportunities for creditors: rescue financing
Protecting one’s capital is a key concern for rescue financiers willing to invest in distressed companies. The introduction of new rescue financing provisions in Singapore, the first of its kind in the Asia-Pacific, which provide for the prioritisation of rescue financing ahead of all other secured debt may generate new investment opportunities for such potential investors in distressed companies. Under the new provisions, the Court may confer “super priority” status on fresh financing necessary for the debtor company’s survival in various ways, including:
- giving the debt priority over all other preferential debts
- granting a rescue financier a security interest on property of the company that is not otherwise subject to any security interest, or
- where a debtor company’s property in question is already subject to a security interest, grant a security that is of the same or higher priority than that existing security interest.
The potential for super priority status for rescue creditors or investors is attractive, reducing risk and providing both incentive as well as protection for such creditors willing to invest in economically sound companies that are otherwise struggling financially. We could expect an active market in rescue financing loans to be created in Singapore as it establishes itself as the regional centre for restructuring, thereby generating more loan opportunities to investors.
2. Potential concerns: protecting existing creditors
The new rescue financing provisions raise concerns for creditors who are holders of pre-existing security interests. The legislation provides that rescue financing may be secured by a security interest that has equal or higher priority on property of a debtor company that is already subject to a pre-existing security interest, provided pre-existing security interest is accorded “adequate protection”. Under US insolvency law, “adequate protection” is meant to protect secured creditors from the diminution in value of their collateral during the restructuring process. It is not available for unsecured creditors. “Adequate protection” is a finding of fact and examples include showing the existence of an equity cushion, third party guarantee, or substitute collateral. The US approach may provide guidance for future Singapore cases.
It remains to be seen whether these newly-introduced provisions strike the right balance between encouraging rescue financing and protecting the interests of existing creditors. It is important for creditors with existing security to ensure that they take these developments into consideration.
3. Greater integration: cross-border insolvency
New opportunities are likely to arise with greater integration in cross-border insolvency in Singapore to establish it as a forum of choice. The amendments, taken together, provide foreign companies greater incentive in conducting insolvency proceedings in Singapore, and creditors too may be more receptive to debt restructuring Singapore.
Singapore’s judicial management regime is now available to foreign companies, and a Singapore Court may assume jurisdiction over a foreign company that can demonstrate a substantial connection with Singapore. This makes it easier for Singapore-based creditors to invoke the Singapore court’s jurisdiction over foreign corporate debtors with respect to judicial management.
Adoption of UNCITRAL Model Law on Cross-Border Insolvency: Singapore has also adopted the Model Law (with various amendments) for the mutual recognition of insolvency orders. This complements the ability of foreign companies to avail themselves of Singapore’s insolvency processes, and facilitates the resolution of cross-border insolvencies with other signatories including the United States, United Kingdom and Japan.
Abolishing the ring-fencing rule in the winding up of foreign companies: This previously required liquidators of foreign companies to “ring fence” Singapore assets and pay off debts incurred in Singapore first. It has been abolished in relation to foreign companies, subject to carve outs for certain regulated financial entities.
These amendments intend to create an environment that is conducive for insolvency and debt restructuring in Singapore. We believe that these reforms will make Singapore a more attractive option for international debt restructuring and in turn will create new loan opportunities for investors willing to invest in distressed companies.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
Simmons & Simmons JWS Pte. Ltd. is registered and incorporated in Singapore as a Joint Law Venture under the Companies Act of Singapore. We are licensed to practise Singapore law in the permitted areas of legal practice according to section 130A(1) of the Legal Profession Act of Singapore. The permitted areas of legal practice excludes (according to Rule 3(1) of the Legal Profession (International Services) Rules 2008 of Singapore) areas such as constitutional and administrative law; conveyancing; criminal law; family law; succession law; trust law; and appearing or pleading in court.