In 2017, Singapore introduced wide-ranging reforms to its insolvency and restructuring laws with a view to enhancing its attractiveness as an international centre for debt restructuring. These 2017 reforms draw on the recommendations made by Singapore’s Insolvency Law Review Committee in its report in 2013, but more directly on the subsequent report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring in 2016 (2016 Report). Central to these reforms is the transplantation (with modification) of certain provisions from Chapter 11 of the US Bankruptcy Code including the automatic moratorium that covers actions against the debtor and its related parties, the availability of cross-creditor cram-down (which previously only allowed within-creditor class cram-down), rescue financing and pre-packs. These provisions are engrafted into the existing schemes of arrangement provisions in the Singapore Companies Act (which work broadly along similar lines as the UK schemes of arrangement).
In our paper recently published in Journal of Corporate Law Studies, we have drawn upon the US experience and similar reform proposals in the European Union (including the UK), and we critically evaluate the impact of the new Singapore law. We argue that there remain challenges in ensuring that the transplantation works well and highlight the possible unintended consequences of such transplantation.
Our main findings are as follows. First, while transplant of the US Chapter 11 provisions into the Singapore’s scheme of arrangement procedure (‘law in the books’) has taken place within a very short period of time (being less than one year from the publication of the 2016 Report to enactment of the reforms), the challenges will lie in how these provisions will be implemented in practice (‘law in action’). The scheme of arrangement in Singapore, as in the UK, has proven to be a very flexible tool, though not without its flaws, and the addition of innovative features from Chapter 11 has been carefully considered with reference to Singapore conditions. For example, the moratorium provisions have been carefully crafted to cover not only the debtor but also its related corporations and to avoid the problems of delay that are sometimes associated with Chapter 11. However, some of the reservations that are raised in the UK relating to rescue financing could potentially continue to apply in the Singapore context. Moreover, the new cram-down provisions could see many disputes in respect of valuation including evaluating whether the directors and scheme managers have properly discharged their duties. Chapter 11 is itself very complex and when its provisions are juxtaposed into the existing scheme of arrangement procedure which has been shaped by judicial authority in Singapore (as in the UK), there remains much that is hazy and uncertain.
Second, while the 2017 reforms seek to take the desirable features of Chapter 11 and avoid its disadvantageous elements, ultimately, there is a fundamental shift in power from the existing creditors to the debtor company. In Singapore (and many other Asian countries) where the majority of companies have concentrated shareholdings (including publicly listed companies), and managers are often not independent of the controllers, the question is whether the managers and/or controlling shareholders in a debtor-in-possession model will abuse their leverage and act in ways that are contrary to the creditors’ interests. In particular, the Singapore reforms, unlike Chapter 11, while allowing for cross-class creditor cram-down, do not allow for an express shareholder cram-down which may unwittingly give shareholders and/or management leverage at the expense of the junior creditors even when shareholders are clearly ‘out of the money’ on any valuation of the company’s worth.
Finally, it remains to be seen whether the Singapore schemes will be recognised overseas. This is especially the case where a scheme is approved in relation to a foreign company or purports to modify debt obligations that are governed by a non-Singapore law. Political factors are complex and may militate against the recognition of Singapore proceedings when the interests of a foreign state or government linked entity are involved, irrespective of how well fashioned Singapore’s restructuring and insolvency laws may be.
Gerard McCormack is a Professor of Law at the University of Leeds
Wai Yee Wan is an Associate Professor of Law and Lee Kong Chian Fellow at Singapore Management University