Knowledge Highlights 30 July 2020
The Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) takes effect from 30 July 2020. IRDA consolidates the personal and corporate insolvency laws, and the laws relating to debt restructuring by individuals and companies, previously found in the Bankruptcy Act and the Companies Act, into a single statute. The Bankruptcy Act has been repealed and relevant provisions in the Companies Act have been deleted following the commencement of IRDA.
According to a Ministry of Law (“MinLaw”) press release, 48 pieces of related subsidiary legislation are also in force on 30 July 2020. The subsidiary legislation sets out, among other things, arrangements and entities that are excluded from the application of section 440 (certain contractual rights limited) and from creditor scheme moratorium and judicial management proceedings under IRDA.
By way of background, the Insolvency, Restructuring and Dissolution Bill (“Bill”) was introduced in Parliament on 10 September 2018 and passed on 1 October 2018. IRDA was gazetted on 7 November 2018.
Set out below is a summary of some of the main changes.
Ipso facto clauses
1. Restriction of ipso facto clauses
Very broadly, ipso facto clauses entitle an innocent party to terminate a contract and/or exercise certain remedies upon the occurrence of certain contractually stipulated events. Section 440(1) of IRDA prohibits a party from terminating a contract with an insolvent company, or from taking certain actions (by relying on a contractual provision) by reason of the company’s insolvency or commencement of scheme of arrangement or judicial management proceedings. As safeguards, section 440 provides for certain carve-outs from the application of section 440(1) which include any eligible financial contract as may be prescribed, any commercial charter of a ship, or any contract that is likely to affect the national interest, or economic interest of Singapore, as may be prescribed.
Further details are set out in the Insolvency, Restructuring and Dissolution (Prescribed Contracts under Section 440) Regulations 2020, which was the subject of a public consultation conducted by MinLaw between 23 March 2020 and 13 April 2020. MinLaw has carefully considered all the suggestions received in detail and have incorporated much of the feedback into the new regulations. For example, the term “contains a netting or set-off arrangement” has been removed in respect of margin lending contracts, securities contracts and derivatives contracts to allow timely enforcement of rights under these contracts which are not dependent on the existence/provision of a netting or set-off arrangement, and there are exclusions for covered bonds special purpose vehicles (“SPVs”) and securitisation SPVs. Companies that are excluded from the application of section 440 are also prescribed in the Insolvency, Restructuring and Dissolution (Prescribed Companies under Section 440) Order 2020.
Section 440 of IRDA applies prospectively to contracts entered into on or after 30 July 2020.
2. Liquidator in court winding up requires permission to bring or defend any action or other legal proceeding or appoint a solicitor
In a court winding up, the liquidator is required to seek prior authorisation by either the court or the committee of inspection before bringing or defending any action or other legal proceeding in the name and on behalf of the company, or before appointing a solicitor for that purpose.
3. Nomination of Official Receiver as liquidator under limited circumstances
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.
4. New procedure for early dissolution of company
There is a new procedure for the early dissolution of a company in liquidation which may be utilised by the Official Receiver and by private liquidators who have obtained the prior consent of the Official Receiver.
5. Liquidator expressly empowered to seek third-party funding
To facilitate third-party funding, the liquidator is expressly empowered to assign proceeds of actions relating to transactions at an undervalue, unfair preferences, extortionate credit transactions, fraudulent trading, wrongful trading and delinquent officers. These statutory provisions reinforce the possibility of third-party litigation funding, which was previously available based only on case law.
6. Court expressly empowered to terminate winding up and direct resumption of management and control of company by its officers
IRDA expressly empowers the court to stay or terminate the winding up of a company. In this connection, the courts are given the express powers to direct, upon the termination of a winding up, the resumption of management and control of the company by its officers. Under the previous section 279 of the Companies Act, the court only had the power to stay a winding up and where the court granted a permanent stay, its effect was similar to a termination of the winding up.
Schemes of arrangement
7. Commencement or continuation of specified proceedings unaffected by moratoria
The previous section 211B of the Companies Act on the power of the court to restrain proceedings against a company in a creditor scheme of arrangement is re-enacted in IRDA with a new sub-section which provides that neither a court order restraining certain actions and proceedings against the company nor an automatic moratorium will affect “the commencement or continuation of any proceedings that may be prescribed by regulations”. This amendment empowers the Minister for Law 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 excluded proceedings are set out in the Insolvency, Restructuring and Dissolution (Prescribed Arrangements and Proceedings) Regulations 2020.
8. Clarification that cram-down provisions not concerned with adjustments to shareholder interests
The previous section 211H of the Companies Act is re-enacted in IRDA to empower 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. In the re-enacted provision, 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 previously when this provision was introduced, that the cram-down provisions introduced were “not concerned with adjustments to shareholder interests”.
9. A company may place itself into judicial management without court order
A company may place itself into judicial management provided that a majority in number and value of the creditors present and voting agree to it. 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.
10. Judicial manager expressly empowered to seek third-party funding
In exchange for funding of a court action to unwind prejudicial transactions and avoid acts detrimental to creditors, judicial managers may assign proceeds from such an action to a third-party. This new avenue of funding may increase the likelihood of such an action being pursued, benefitting stakeholders by providing higher recoveries, if such actions are successful.
11. No personal liability imposed on a judicial manager of a company
The previous section 227I of the Companies Act which provided that the judicial manager of a company was deemed to be the agent of the company is re-enacted in IRDA but omits the imposition of personal liability on the judicial manager.
12. New grounds for creditor or member to seek court order to protect interests
A creditor or member of the company is now able to apply to court for an order to protect the interests of the creditors or members on new grounds such as where the judicial management should not have been commenced at all, that there are no proper grounds for continuing the judicial management, or that the judicial manager is not managing the company according to the approved proposals.
Applicable in winding up and judicial management
13. New wrongful trading provision
In a new provision relating to wrongful trading, the court is empowered to make a declaration that any person who was a knowing party to the company trading wrongfully is personally responsible for debts or liabilities of the company. A company or any person party to, or interested in becoming 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. 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.
14. Receiver or manager personally liable on contract entered into and contract of employment adopted unless he contracts out, also entitled to indemnity
A receiver or manager will be personally liable on any contract entered into by him in the performance of his function as a receiver or manager (except insofar as the contract otherwise provides) and, to the extent of any qualifying liability, on any contract of employment adopted. A receiver or manager is entitled to an indemnity out of the property of the company or corporation.
15. Holder of a capital markets services licence must appoint private trustee to administer bankruptcy when applying to make a debtor bankrupt
The definition of “institutional creditor” previously in section 33(3) of the Bankruptcy Act is now expanded under IRDA to include a holder of a capital markets services licence granted under section 86 of the Securities and Futures Act. This means that a holder of a capital markets services licence will be required to appoint a private trustee to administer the bankruptcy when applying to make a debtor bankrupt.
16. Secured creditor must notify of intention to claim interest on debt
Secured creditors must 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.
17. Maximum debt threshold for Debt Repayment Scheme raised
The maximum debt threshold for the Debt Repayment Scheme has been raised from S$100,000 to S$150,000.
New licensing and regulatory regime
18. New licensing and regulatory regime for insolvency practitioners
There is now a new licensing and regulatory regime applicable to all persons acting as “insolvency practitioners”. The Accounting and Corporate Regulatory Authority has set up a webpage on “New regulatory regime for insolvency practitioners - Commencement of the Insolvency, Restructuring and Dissolution Act (IRDA)” which provides further details.
The following materials are available from the MinLaw website www.mlaw.gov.sg:
- Press release: Insolvency, Restructuring and Dissolution Act to commence on 30 July 2020
- Annex A: Background information on IRDA
- Annex B: Information on the new licensing and regulatory regime
- Press release: Responses to feedback received from public consultation on the exclusions under section 440(5)(a) of the Insolvency, Restructuring and Dissolution Act 2018
- Annex: Ministry’s response to feedback received from public consultation on the exclusions under sections 440(5)(a) of the Insolvency, Restructuring and Dissolution Act 2018
The following materials are available from the Singapore Statutes Online website sso.agc.gov.sg:
- Insolvency, Restructuring and Dissolution Act 2018
- Insolvency, Restructuring and Dissolution (Prescribed Contracts under Section 440) Regulations 2020
- Insolvency, Restructuring and Dissolution (Prescribed Companies under Section 440) Order 2020
- Insolvency, Restructuring and Dissolution (Prescribed Arrangements and Proceedings) Regulations 2020
- Insolvency, Restructuring and Dissolution (Prescribed Companies and Entities) Order 2020
- Other IRDA subsidiary legislation