Insolvency, Restructuring and Dissolution Act to be amended to establish Simplified Insolvency Programme amid Covid-19
17 December 2020
The Insolvency, Restructuring and Dissolution (Amendment) Bill (“Bill”) was passed in Parliament on 3 November 2020 following the first reading of the Bill on 5 October 2020. On 7 December 2020, the Insolvency, Restructuring and Dissolution (Amendment) Act 2020 (“Amendment Act”) was gazetted.
The Amendment Act will amend the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) to establish a Simplified Insolvency Programme (“SIP”) to assist micro and small companies (“MSCs”) to:
- restructure their debts to rehabilitate their businesses, for example where there is a ready investor prepared to come into the business or alternatively where the company is in a position to re-negotiate with its creditors;
- wind up the company, where the business has ceased to be viable, in a quick, efficient and low-cost manner.
The Amendment Act will provide for temporary processes that fit these purposes and benefit stakeholders of the company, such as employees, trading counterparties, creditors and shareholders, by reducing the time it would take to either restructure or wind up and maximise potential recoveries. As the existing IRDA generally provides processes for companies with substantial assets, the solutions offered may not be well suited for distressed micro and small businesses, particularly those that have depleted their resources as a result of the Covid-19 pandemic.
The provisions in the Amendment Act relating to the establishment of the SIP will come into operation on a date to be appointed by the Minister for Law (“Minister”) by notification in the Gazette.
To qualify for SIP, MSCs must meet certain specified eligibility criteria which are intended to ensure that only cases that are suitable are accepted. As highlighted by the Second Minister for Law Edwin Tong, in the second reading speech for the Bill, the qualifying criteria for the programme include having 30 or fewer employees, 50 or fewer creditors and total liabilities of S$2 million or less. For simplified winding up only, there is a cap of S$50,000 on realisable unencumbered assets. The company must also not be in the midst of any other debt restructuring or some other form of insolvency process. To provide flexibility, the figures mentioned may be substituted by the Minister and prescribed by way of order in the Government Gazette.
SIP comprises a restructuring portion and a liquidation portion. The two programmes will be open for application by eligible companies for a “prescribed period”. Subject to further consultation and review, the “prescribed period” is intended in the first instance to be six months. This may be shortened or extended for a period to be determined by the Minister. The window for application will be shorter than the overall lifespan of the proposed provisions, which is three years after its commencement.
Where any company applies to the Official Receiver under the relevant “prescribed period”, and the Official Receiver assesses the eligibility requirements and is satisfied on the face of the application, the Official Receiver will send a notice of the application to the following parties:
- Applicant company;
- All creditors named in the application; and
- In the case of liquidation, also to every contributory or officer named in the application.The Official Receiver will also publish the notice on the designated website.
Where there is any objection to the acceptance of the applicant into the relevant programme, the Official Receiver must consider the objection and decide whether or not that particular company qualifies.
The applicant company has to pay a fee and a deposit, which is used to defray the costs of the Official Receiver. To provide flexibility to address companies that merit assistance under the programmes even if they might miss out on the eligibility requirements, the Minister may direct the Official Receiver to send and publish the notice of application, and then to accept the applicant into the programme.
Simplified debt restructuring
A new Part 5A will be introduced in the IRDA to provide for the simplified restructuring of debts of companies. Set out below are key features of the simplified debt restructuring programme as highlighted in Mr Tong’s second reading speech:
- The simplified debt restructuring programme is modelled on the existing pre-packaged scheme in section 71 of the IRDA.
- Instead of two applications to the High Court as required in a typical scheme of arrangement, a pre-packaged scheme of arrangement in a simplified debt restructuring requires only one application.
- Upon the acceptance of a company into the simplified debt restructuring programme and before the company is discharged:
- the company will enjoy a statutory moratorium under the new section 72K(1), which among other things, restrains the commencement or continuation of any proceedings against the company;
- the company is also restrained from disposing of its property under the new section 72K(3) unless it is done in good faith and in the ordinary course of business. This is to ensure the company’s assets are not dissipated while there is a moratorium in place; and
- creditors are also prohibited from exercising certain contractual rights under an ipso facto clause under the new section 72T, which applies section 440, which is the ipso facto clause in the IRDA. This is done with modifications as appropriate for smaller companies.
- There will be a Restructuring Advisor appointed for the company to assist the company to formulate a proposed compromise or arrangement. The Restructuring Advisor will advise the company to prepare its papers and generally guide the company through this process.
- The court may only approve the compromise or arrangement if there is an agreement of a majority of two-thirds in value of creditors. Two-thirds in value of the debts that are owed by the company must approve this scheme. There is no specific number of creditors required to assent to the scheme, unlike a “traditional” scheme of arrangement.
- In considering whether the threshold is met, the court must disregard the agreement or disagreement of any related party of the company. However, the court retains an overriding discretion under the new section 72M(5) to take into account the agreement or disagreement of any related party if the circumstances so require, and the result of doing so would be fair and equitable to all the creditors.
- To provide certainty to the company on the default approach towards classification of creditors, given the simpler nature of the debt structure of these MSCs and to avoid potential litigation in relation to the way in which the company classifies its creditors, there will be three classes of creditors in the scheme:
- Secured creditors;
- Preferential (unsecured) creditors; and
- Unsecured ordinary creditors.
- The court may, without hearing oral arguments, grant or dismiss the application, as the case may be; and instead of having the company being required to engage counsel, a duly authorised officer of the company may represent the company in the relevant court proceedings without leave of court.
- The programme will have a shelf life in the first instance of 90 days.
Simplified winding up
Provisions relating to the simplified winding up of companies will be set out in a new Part 10A of the IRDA. The simplified winding up process will adapt the existing creditors’ voluntary winding up process in the IRDA and remove the necessity of a court application to wind up a company. Set out below are the key features as highlighted in Mr Tong’s second reading speech:
- Upon acceptance of a company into the simplified winding up programme, the voluntary winding up of the company commences at that stage.
- The Official Receiver is the liquidator of the company and may also appoint a qualified person to act as a special manager.
- There is no need for a committee of inspection.
- As the winding up is treated as if it were a creditors’ voluntary winding up, the provisions that apply to the creditors’ voluntary winding up will also apply in relation to the company, unless they are modified under section 250L.
- A company is discharged from the simplified winding up programme when the company is dissolved, or if an order is made by the court to wind up the company, stay the proceedings, or terminate the winding up.
- The new section 250O sets out the non-exhaustive circumstances in which the Official Receiver (as liquidator) may apply to the court under section 124 of IRDA to wind up the company. Such circumstances include where the Official Receiver is satisfied that the company either did not meet, could not meet, or no longer meets the eligibility criteria for the programme.
Licensing of insolvency practitioners
With effect from 15 December 2020, the IRDA is amended to provide for the power to exempt persons from certain criteria in relation to insolvency practitioners’ licences. According to Mr Tong, this power will be exercised judiciously on a case-by-case basis. It is not intended to allow a person to circumvent the general requirements, but is intended to be used in exceptional cases where the exemption is justified.
The following materials are available from the websites of the Ministry of Law www.mlaw.gov.sg, Parliament www.parliament.gov.sg and Singapore Statutes Online sso.agc.gov.sg:
- Insolvency, Restructuring and Dissolution (Amendment) Bill
- Second Reading Speech by Second Minister for Law, Edwin Tong, on Covid-19 (Temporary Measures) (Amendment No. 3) Bill and Insolvency, Restructuring & Dissolution (Amendment) Bill
- Insolvency, Restructuring and Dissolution (Amendment) Act 2020
- Insolvency, Restructuring and Dissolution (Amendment) Act 2020 (Commencement) Notification 2020