Singapore: Insolvency Law Review Committee Recommendations.

November 2013 Singapore: Insolvency Law Review Committee Recommendations. Contents 1 Background In December 2010, the Minister of Law of Singapore (the MoL ) appointed the Insolvency Law Review Committee (the ILRC ) to review the existing bankruptcy and corporate insolvency regimes in Singapore. In response, on 4 October 2013, the ILRC submitted the Insolvency Law Review Committee Report (the Report ) which recommends that these legislative regimes be substantially overhauled. At present, the Companies Act (the Companies Act ) sets out the framework for corporate insolvency; liquidation, judicial management, receivership and schemes of arrangement, whilst the Bankruptcy Act (the Bankruptcy Act ) provides for the bankruptcy of individual debtors, the procedures for individual voluntary arrangements and debt repayment schemes. The ILRC reviewed these regimes, as well as avoidance provisions, the regulation of insolvency practitioners and crossborder insolvency. 2 The New Insolvency Act 1 Background... 1 2 The New Insolvency Act 1 3 The Bankruptcy Regime 3 4 Corporate Insolvency... 3 4.1 Receivership... 3 4.2 Liquidation... 4 4.3 Judicial management... 5 4.4 Schemes of arrangement... 6 5 Avoidance provisions... 7 6 Officer Delinquency... 8 7 Regulation of Insolvency Practitioners... 8 8 Cross-Border Insolvency 9 The Report s main recommendation is for the enactment of a new Insolvency Act (the New Insolvency Act ) that would: (i) consolidate all primary statutory provisions on personal bankruptcy and corporate insolvency into a single piece of legislation; and (ii) organise and standardise rules, procedures and concepts across all insolvency regimes. The ILRC recommended that the New Insolvency Act be based on the UK Insolvency Act 1986, and that where appropriate, the approaches of other relevant jurisdictions, such as Australia, Hong Kong, New Zealand and Canada should be taken into account. The reform should however, be informed by local circumstances and considerations. Jurisdiction The ILRC recommends that the New Insolvency Act should consolidate the statutory basis for all insolvency regimes, i.e. it should address the insolvency of individuals and companies together and should avoid where possibleseparate and differing provisions for individuals and corporations. Insolvency Law Review Committee Recommendations 1

Proof of debt (i) The test of provability of debts should be the same for all insolvency proceedings. (ii) If a claim against an individual or a company is valid and enforceable in general law, then it should also be provable in insolvency law. (iii) The same procedural rules on proofs of debt should, apply to all forms of insolvency proceedings. (iv) Up until 3 years prior to the commencement of liquidation, judicial management or bankruptcy, interest at a contractual rate should be provable and any contractual arrangement which allows accrued interest to be capitalised should be effective for the purposes of lodging a proof of debt. However, the rule against capitalisation and the statutory cap on interest should apply to the calculation of debts within 3 years from the commencement of liquidation or bankruptcy. (v) The law on insolvency set-off should be clarified in light of issues relating to the date of set-off and the set-off of contingent debts and debts the value of which are unascertained as at the date of set-off. Provision should also be made to clarify that proofs of debt filed in a judicial management or schemes of arrangement should take into account any mutual debits or credits between the creditor and the company for the purposes of determining the creditor s right to vote. Realisation of security in liquidations In a bankruptcy, a secured creditor who fails to realise his security within 6 months from the date of the bankruptcy order, or such later date as may be determined by the Official Assignee, loses the right to claim interest on his debt. The Report recommends that this rule should apply to liquidations and be extended to a period of a year. It should also apply to judicial management if leave is granted by the court or judicial manager for the enforcement of security. Preferential debts The New Insolvency Act should, as far as possible, deal with the issue of statutory preferential debts across all insolvency regimes. In particular, statutory preferential debts should be accorded their due priority in judicial management and schemes of arrangement. Furthermore, consideration should be given to the possibility of abolishing the preferential status of tax claims. The amount of remuneration payable as a preferential debt to employees in respect of vacation leave should be subject to a cap of S$7,500. Insolvency Law Review Committee Recommendations 2

Rules of the Court The Rules of Court should apply to all insolvency regimes in instances where lacunae in procedural issues exist, i.e. where no specific provision has been made in the New Insolvency Act or regime. 3 The Bankruptcy Regime A majority of the current Bankruptcy Act is to be incorporated into the New Insolvency Act and recommendations have been made to strengthen the regime and regularise anomalies. The recommendations include: (i) incorporating the pre-bankruptcy rehabilitation measures of Individual Voluntary Arrangements and Debt Repayment Schemes into the New Insolvency Act, with no major amendments; (ii) an expedited bankruptcy procedure where there is a real risk that the debtor s assets would be diminished; (iii) importing provisions on the disabilities, disqualification and duties imposed on a bankrupt into the New Insolvency Act; (iv) excusing bankrupts from criminal liability for failing to comply with their duties, disabilities or disqualifications where they have neither knowledge nor reason to believe that they have been made bankrupt; and (v) enhancing the court s powers to examine the assets of discharged bankrupts in order to identify assets that should have rightfully vested in the estate of the bankrupts. The Report also states that that the Official Assignee s sanction should apply to the defence of any action by the bankrupt, including an action that is commenced or continued with leave of the court; that the word action should include arbitration proceedings; and that section 131 of the Bankruptcy Act should not apply to criminal and matrimonial proceedings but that the bankrupt should be required to promptly notify the Official Assignee of all such proceedings. A clear distinction should be drawn between the Official Assignee s power to approve a composition or scheme of arrangement, and the discretion to grant an annulment of bankruptcy. Further, an annulment shall be granted in cases where all creditors have approved the composition or scheme of arrangement. Where the composition or scheme of arrangement is only supported by the requisite majority, but not all, of the bankrupt s creditors, the Official Assignee shall have the discretion to decide whether to issue the certificate of annulment or certificate of discharge. 4 Corporate Insolvency 4.1 Receivership A receiver is normally appointed by a security holder for the predominant purpose of realising the security and applying the proceeds of sale towards Insolvency Law Review Committee Recommendations 3

the discharge of the debts owed to the debenture holder. Where the security is a floating charge that covers the undertaking of the company, the receiver is also given powers of management over the company. The appointment of a receiver is contractual and no application to the court is required. This provides an expedient and effective procedure for a debenture holder to realise his security and displace the management of the company in favour of an insolvency practitioner of his choice. The ILRC has recommended that the receivership regime be retained, save for some procedural changes: (i) the appointment of a receiver shall be deemed to be made at the time of (a) the making of the order of court or (b) acceptance of appointment by the appointee following receipt of the instrument of appointment; (ii) where a receiver is invalidly appointed, the appointing party may be ordered to indemnify the appointee against any liability which arises solely by reason of the invalidity of the appointment; (iii) the personal liability of a receiver should be extended to any contracts entered into by him and any contract of employment adopted by him in the performance of his function as a receiver and to expressly provide that the receiver is entitled to be indemnified out of the assets of the company; and (iv) the appointment of a receiver should be displayed on the company s website. 4.2 Liquidation Liquidation or winding up is the process by which the affairs and assets of a company are dealt with to distribute the proceeds of realisation to creditors and then shareholders and the existence of the company then extinguished. It comprises several key components: (i) the commencement of the liquidation and the appointment of a third-party administrator known as the liquidator; (ii) the administration of the company s affairs and assets by the liquidator; (iii) the ascertainment of the company s liabilities, the recovery and realisation of the company s assets; (iv) the distribution of the proceeds of realisation to the company s creditors and members; and (v) the eventual dissolution of the company. The ILRC consider the current corporate liquidation regime to be sophisticated and stable. Some of the key recommendations include: (i) the introduction of a system of summary liquidation procedure, similar to that in the UK, where the Official Receiver may apply to court to seek an early dissolution of the company where it appears that the assets of the company are insufficient to cover the costs of winding-up and no further investigation is required. (ii) actions that are statutorily vested in the office of the liquidator should not be assignable, but remain vested in the liquidator and pursued by the liquidator in the interests of the liquidation. However, there are no objections to liquidators being permitted to assign the fruits of the statutory causes of action themselves to third party funders provided appropriate safeguards are Insolvency Law Review Committee Recommendations 4

put in place to control the extent to which a third party funder can control the conduct of the proceedings. (iii) creditors should be able to apply to the court for an order in advance of providing any funding or indemnity. (iv) a director should be given the right to commence winding up proceedings against the company where that director is able to show that there is a prima facie case that the company ought to be wound up, and where leave of court is obtained. (v) prior to the appointment or nomination of a liquidator or provisional liquidator, the powers of directors should not be exercisable without the sanction of the court, except in certain circumstances. (vi) the New Insolvency Act should provide that the unclaimed assets held by a company for an untraceable third party be vested in the Official Receiver. If the assets are not monies, the Official Receiver should be able to obtain a court order that can have the assets converted into monies. Steps will also have to be statutorily prescribed for determining whether and when the third party owner should be regarded as untraceable. 4.3 Judicial management The judicial management regime is modelled on the UK administration regime and offers an alternative to liquidation where one or more of three statutory purposes may be achieved: (a) the survival of the company or part of it as a going concern, (b) the implementation of a scheme of arrangement, and (c) a more advantageous realisation of the company s assets than in a liquidation. The ILRC s recommendations are aimed on reinforcing judicial management as an efficient rescue mechanism. The main recommendations seek to: (i) rebalance the relationship between judicial management and receivership by giving the courts the power to appoint a judicial manager despite the objections of the holder of a floating charge; (ii) make judicial management more accessible by granting the holder of a floating charge the right to appoint the judicial manager, enabling a company to enter judicial management without having to make a formal application to the courts and empowering the court to place the company into judicial management when it is likely to become unable to pay its debt as opposed to when it is insolvent; (iii) increase protection for creditors during the period between the processing of the judicial management application and judicial management order; and (iv) aid rehabilitation of the company under judicial management by granting a priority status to lenders who lend money to the company whilst it is under judicial management (known as super-priority rescue for financing ), allowing the duration of the judicial management to be extended by the creditors without having to go to court, and giving judicial managers the Insolvency Law Review Committee Recommendations 5

power to pay-off debts incurred before the company went into judicial management. Where a judicial management application is filed by the company, the directors should give personal undertakings to the court that, pending the hearing of the application, the company will apply its assets and incur liabilities only in the ordinary course of its business and will not dispose of its assets or make payment to any creditor in respect of any debt or liability incurred prior to the date of the filing. The court should be given the power, upon application by any creditor, to impose restrictions on the acts that may be carried out by the company pending the hearing of the application for judicial management. If a judicial management order is ultimately made, the avoidance provisions should apply to transactions entered into during the period between the filing of the application and the making of the judicial management order. New Insolvency Act provisions to assist transition to liquidation The following provisions should be included in the New Insolvency Act to enable a transition from judicial management to liquidation: (i) upon an application for winding up made by the judicial manager, the length of the judicial management order should be extended to the time when a winding up order is made; (ii) judicial managers should not be discharged if they are also appointed as the liquidators; (iii) the statutory time frames for avoidance provisions and officer liability should be revised to have reference to the point in time when the company is placed under judicial management, even if there is a subsequent winding up; and (iv) where proofs of debts have been filed and adjudicated upon in the judicial management, it should not be necessary for the proofs of debts to be re-filed in liquidation. 4.4 Schemes of arrangement The ILRC recommends that the scheme of arrangement regime should remain fundamentally the same, but that it should be strengthened it by providing greater protection to creditors. This should be done by (i) strengthening and clarifying the scope of the stay against certain actions against the company; (ii) providing greater clarity on the procedure for proofs of debt and creditors right to information; and (iii) providing additional safeguards to creditors during the period between the making of an application and the holding of a meeting of creditors to vote on the scheme of arrangement. Additional reforms adapted from the US Bankruptcy Code include the introduction of super-priority for rescue financing and a procedure to allow a scheme of arrangement to be approved even when a class of creditors votes against the scheme of arrangement. The scope of the statutory moratorium for schemes of arrangement should be no narrower than the moratorium in judicial management, and the court Insolvency Law Review Committee Recommendations 6

should be given discretionary powers to alter the scope of the moratorium. The court should have the power to grant a statutory moratorium where there is an intention to propose a scheme of arrangement, subject to such terms as the court sees fit to impose. Two additional safeguards to afford protection to creditors during the period between the filing of an application and convening a meeting of creditors should be introduced in the New Insolvency Act: (i) the timeframe for the application of the avoidance provisions ought to be suspended once any application for a scheme of arrangement has been filed in court until the scheme of arrangement had been sanctioned by the court or rejected by the creditors or the court; and (ii) there should be a provision that allows any creditor to apply to court to restrict any disposition of property by the company and/or any activities that may be carried out by the company, after the filing of the application for a meeting of creditors to consider a scheme of arrangement. Super-priority should be granted in rescue finance situations and cram-down provisions should be introduced to allow a scheme of arrangement to be passed over the objections of a dissenting class of creditors. However, the court should require a high threshold of proof that the dissenting class is not prejudiced by the cram-down. 5 Avoidance provisions As a general rule, only the assets that encompass the estate of the bankrupt or the insolvent company at the time when a bankruptcy, judicial management or winding up order is made (or a winding up resolution is passed) are available for distribution in satisfaction of the claims of the creditors. However, in certain situations, a transaction entered into by an individual or company prior to the onset of bankruptcy, judicial management or liquidation may be invalidated and assets clawed back under avoidance provisions in insolvency legislation. This is so that the effect of any value improperly lost by the individual or company, or any advantage improperly conferred on a third party as a result of the transaction can be remedied. A number of recommendations are made in relation to the avoidance provisions which operate to undo earlier transactions entered into by the insolvent entity which are applicable to both personal and corporate insolvency. Changes are recommended to the periods of time within which a transaction must have occurred before it may be challenged as an unfair preference, a transaction at an undervalue or an extortionate credit transaction. Other recommendations are made to clarify and regularise how this period of time is calculated, and, further, to provide clearer guidance on how to determine when a person is either an associate of a bankrupt or insolvent company, or a person connected with the company. The ILRC recommended that the test used to determine whether a transaction amounts to an unfair preference should continue to be a subjective one, requiring the person to have been motivated by a desire to Insolvency Law Review Committee Recommendations 7

put the recipient in a better position than would be the case in the event of bankruptcy or insolvency. Other recommendations include amendments to the provisions affecting the validity of a floating charge created within 6 months of the commencement of the winding up of a company. For example, aside from the existing requirement that fresh money must have been provided by the creditor before such a charge will be deemed as valid, the provision will be enhanced to recognise the giving of other forms of value to the company such as goods or services. Recommendations are also made to enable insolvency office-holders to disclaim the company s interest in certain kinds of property that are no longer of any benefit to the company (thus ending the company s rights and liabilities in relation to that property) without having to first obtain the permission of the court or the committee of inspection. 6 Officer Delinquency The current provisions relating to insolvent trading require a criminal conviction of the delinquent officer before civil liability to indemnify the company for the losses caused by that person s conduct can be triggered. The ILRC recommends that this precondition be removed, and that the following provisions be included: (a) extend the scope of the insolvent trading provision (i.e. the contracting of a debt ) to cover transactions involving the incurring of debts or other liabilities ; and (b) provide an express defence such that no liability shall arise where it appears to the court that the officer has acted honestly, and that having regard to all the circumstances of the case he ought to be fairly excused. The New Insolvency Act should also enact: (a) consolidated provisions that set out the investigative and examination powers of liquidators, provisional liquidators, administrators and administrative receivers; and (b) provisions dealing with the investigative and examination powers of trustees in bankruptcy, including the Official Assignee. 7 Regulation of Insolvency Practitioners Licensing and discipline As the New Insolvency Act will come under the jurisdiction of the Insolvency and Public Trustee s Office, the ILRC recommended that the Official Receiver should take over licensing of insolvency practitioners. Qualifying requirements across the bankruptcy and insolvency regimes should be homogenised to ensure common standards, except for scheme managers and liquidators in a members voluntary winding up. The disciplinary processes of existing professional bodies should be used and for those insolvency office-holders who are not a member of an existing professional body, the ILRC recommended: (i) the introduction of a simple regulatory and discipline system; or (ii) to confine insolvency work to professional bodies. Insolvency Law Review Committee Recommendations 8

8 Cross-Border Insolvency Recommendations were made to facilitate Singapore s development into a regional forum of choice for corporate debt work-outs and restructuring. These included: (i) the judicial management regime should be extended to cover all foreign companies; (ii) the UNCITRAL Model Law on Cross-Border Insolvency should be adopted for corporate insolvencies in Singapore, with appropriate modifications; and (iii) the concept of ring-fencing (which requires that debts incurred in Singapore by a registered foreign company shall be paid in priority to the debts owed by it to all other international creditors) should be abolished, save in certain circumstances. The MoL has invited views and feedback on the Report. The consultation period for the Report is from 7 October 2013 to 2 December 2013. Insolvency Law Review Committee Recommendations 9

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