The global economy has been impacted by the Covid-19 pandemic, resulting in a trail of corporate casualties mired in financial quagmire. In Singapore, some prominent recent collapses include giant oil trader Hin Leong Trading, Falcon Energy, ZenRock Commodities Trading, Agritrade International, Hontop Energy and former market darling, Hyflux.

As the number of companies seeking restructuring in Singapore looks set to increase, this casts a spotlight on the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) that came into effect on 30 July 2020. The genesis of the IRDA can be traced back to the Ministry of Law’s appointment of an Insolvency Law Review Committee in 2010 to review the then existing bankruptcy and corporate insolvency regimes in Singapore. Later, changes were made in three phases to unify and consolidate the laws on insolvency, restructuring and winding-up into an omnibus statute. The first two phases introduced amendments to the (now repealed) Bankruptcy Act (BA) and the Companies Act (Chapter 50 of Singapore) (CA) in 2015 and 2017 respectively. The enactment of an omnibus IRDA is the third and final phase of the reform.

To help you distil and make sense of the purposes of judicial management (JM) and the debtor in possession (DIP) restructuring scheme, Robson Lee Teck Leng of Gibson Dunn has provided important insights and case examples in Singapore with scenarios of a company placed under JM, where an external judicial manager is appointed by the court to take control of its management to restructure the company—and in a DIP Scheme, where the existing directors remain in management control and lead the company in seeking a compromise or arrangement with creditors to give the company a new lease of life.

[Read Robson Lee’s Commentary on the Collapse of Eagle Hospitality Trust]

The Pros and Cons of Management-Led Restructuring Under the IRDA

“Businesses fail for many reasons, but distressed companies often signal some weakness in management. This brings into question the basis for allowing existing management to continue running the company after it has fallen into a financial quagmire under its watch,

However, if management teams are removed at the outset, the impetus and ability to drive the company through a restructuring process could be diminished. By keeping existing management in place, there is arguably a better chance of rehabilitating a viable business. Judicial managers appointed by the court will not have the same relationship and goodwill with the customers, suppliers and existing business partners of the company that the incumbent management has. Professionals who are parachuted into the company in a JM will have to spend considerable time understanding the nature and peculiar issues and challenges facing the company that is already beset with liquidity and financial problems. Striking a compromise and arrangement with all and sundry to give the company a new lease of life could be more difficult, especially if the business of the company is complex. The statistics to date since JM was first introduced in Singapore’s corporate insolvency laws in 1987 show that few companies in Singapore have been successfully rehabilitated via JM.

While management-led restructuring can be beneficial to many companies, there are several salient points to note. Unlike JM, management-led restructuring is not bound by an initial statutory timeline of 180 days (subject to extension) to achieve a definitive outcome or to effect a winding-up of the company if no viable compromise with creditors is reasonably achievable. A management-led restructuring thus enjoys more latitude in that it is not required to be conducted within a statutorily prescribed period. To balance this, courts have increasingly chosen to grant shorter moratorium periods. This would require the company and its advisers to frequently update the court on the status and progress of any ongoing plan of restructuring before an extension of moratorium is granted. In the cases of Kris Energy and Design Studio Group, the court granted moratorium periods of three to four months upon their first applications from 2019 to 2020. In the earlier cases relating to Hyflux and Swee Hong, the companies were each granted moratorium periods of six months upon their respective first applications in 2018 and 2019.

In a JM, on the other hand, the major creditors play a dominant or even determinative role in the outcome of any restructuring proposal recommended by the judicial managers. In court hearings requested by the JM to update the court, unlike creditors and save with the leave of court, shareholders of the company do not have the right to make submissions or raise objections against actions or any plan of restructuring proposed by the judicial managers.

Hyflux is a recent case of management-led restructuring. The company and its advisers were able to stave off an initial application by creditors to put the listed company under JM. However, after more than two years of negotiations between the company and two groups of potential investors that did not lead to any fruitful outcome, the company’s creditors became frustrated with the lack of progress. Creditors started to question the unduly long and protracted delays in achieving any meaningful outcome. There were also concerns raised publicly regarding the high fees that management had agreed to pay its advisers and the increasing drain on the company’s cash reserves. The disquiet is exacerbated by the adverse publicity surrounding investigations by enforcement agencies against previous and current directors of the company. The train of developments and long delays aggravated the negative optics. All these factors contributed to an increasing loss of market and media confidence in the restructuring endeavours of the company led by its existing management and advisers.

Management-led restructuring is reliant on court supervision. While the court does constantly monitor the restructuring progress, there is a lack of legislative signposts as to when the court should direct a transition from a management-led restructuring to JM. Indeed, this is one reason behind the uncertain and protracted Hyflux restructuring. The court is however likely to order an insolvent company to be placed under JM when there are reasons to believe that the incumbent management team can no longer be reposed with the trust to continue in management. This could happen when senior management is under investigations by enforcement authorities or facing criminal charges. A recent case in point is the Hin Leong-related companies, where the court ordered the relevant companies to be put under JM notwithstanding the vigorous objections raised by their respective management teams.

Eventually, the court directed Hyflux to be placed under JM. The court had given the company’s management and its professional advisers significant amount of time to come up with a viable restructuring plan to get the beleaguered company back on its feet. This did not happen despite more than ten moratorium extensions. No Messiah had emerged despite a number of potential suitors that surfaced in the management-led restructuring. The court in directing Hyflux to transition to JM lost confidence that the hitherto management-led restructuring would lead to any fruitful outcome.

It is important to note that unlike restructuring advisers who are appointed by the company in a management-led restructuring, a judicial manager is an officer appointed by the court with statutory duties to be carried out under close court supervision.

A judicial manager will ensure an orderly dissolution of the affairs and sale of the assets of the company if it is no longer possible to give the company a new lease of life through any white knight rescue.

It is possible for a company under JM to attract a white knight rescue. The JM has wide discretionary powers to manage the company and to deal with its assets including contracting a rescue plan with a white knight to enable the company to recover its balance with the support of its creditors.”

How Judicial Management Works

“During a JM process, the company’s business is managed by a judicial manager for 180 days (subject to further extensions), and the board of directors is displaced. Prior to the appointment of a judicial manager, the court may appoint an interim judicial manager to carry out those functions. As mentioned above, a judicial manager is an officer appointed under court supervision with a wide range of powers. He can enter into contracts on behalf of the company to sell or dispose the company’s assets or businesses, and set aside certain transactions entered into by the company prior to the JM on certain grounds (such as if the transaction was made at an undervalue). He can also seek an extension of the JM from the court, and apply to wind up the company after the objects of the JM have been achieved, or if in the opinion of the judicial manager, the objects of the JM cannot be reasonably achieved.

Separately, creditors or shareholders who feel that they have been prejudiced by a judicial manager’s actions may apply to the court for relief. However, the court is usually reluctant to second-guess the decisions of a judicial manager on commercial matters if the decisions are not unreasonable in the court’s opinion. This is particularly so where creditors holding a majority of the company’s debts are supportive or have approved the judicial manager’s proposal.”

The Involvement of White Knights

“A white knight is usually a third-party investor who ‘rescues’ the company from insolvency. However, different white knight rescue proposals may not weigh out the same from different stakeholders’ perspective. When considering a rescue proposal from a white knight, the judicial manager must primarily consider whether the proposal is most likely to achieve the objectives of the JM. He has the right to elect and recommend a rescue proposal for creditors’ approval over other competitive bids, even if the recommended proposal may appear to be less beneficial to certain minority creditors or shareholders.”

[Related: Gibson Dunn Partner Robson Lee on the Importance of Good Governance for Charities]

How the Court Balances the Interests of Shareholders Versus Creditors in a Reorganisation Proceeding

“When a company is insolvent, its assets effectively belong to its creditors as they must go towards repaying the company’s debts. Creditors’ interests become paramount, and the shareholders’ rights rank secondary. It must be noted that any restructuring option would invariably entail substantive compromises and significant concessions amongst shareholders and creditors. The reality is that shareholders’ interests would often ultimately be compromised in an insolvency situation where creditors’ rights are ranked higher.

For example, in a JM situation where the judicial managers have signed a contract with a bidder to sell all or substantially all of the company’s assets and undertaking, once the requisite majority of the creditors have approved the proposed disposal, dissenting creditors or shareholders can only seek judicial recourse by applying to court on the ground that the act(s) or proposed act(s) of the judicial manager have been or would be prejudicial to the interests of the applicant. The court is, however, restricted by the present regime not to make any order that will prejudice or prevent the implementation of any compromise under a Scheme that has been duly approved in accordance with the CA or by the court under the IRDA.

In a management-led restructuring, even though creditors may have duly approved a disposal of all or substantially all of the company’s assets in a Scheme meeting, the directors would still be obliged to convene a shareholders’ meeting under Section 160 of the CA for shareholders to endorse the sale of all or substantially all the assets of the company.

When we consider roll-ups and cross-collateralisation, DIP financing could also pose a conflict between new rescue financiers and existing creditors as well. A roll-up involves the debtor drawing from the new DIP financing to pay off an existing loan, thus ‘rolling-up’ a debt that was previously incurred to the detriment of other creditors. Similarly, cross-collateralisation occurs when the debtor grants an existing creditor with a security interest in assets acquired after its insolvency, to secure its pre and post-insolvency debt.”

Final Thoughts

“It is not always clear whether management-led restructuring or JM is the better option to restructure a distressed company. Like management-led restructuring, JM may at times be a rather lengthy process. Swiber Holdings, for example, has been under JM for over four years. A choice between the two options depends on the company’s peculiar circumstances that could change dynamically over time for any number of reasons.

Broadly, management-led restructuring is preferable when the company wishes to avoid the stigma of JM. Certain reasons may also justify having existing management remain its control over the company (e.g., need to protect management ties with key trade creditors and customers, reliance on management’s familiarity with the day-to-day operations, etc.). On the other hand, JM is more useful in cases where the company lacks restructuring expertise, or where there are doubts about the integrity or ability of the company’s existing directors to remain in management control.

The pandemic has brought many global corporations to their knees, most recently, the liquidation of Singapore’s 162-year-old iconic retailer, Robinsons. The government’s foresight to legislate the present regime in the omnibus IRDA (that started 10 years ago) is a laudable move to position Singapore as a regional hub for corporate insolvency and debt restructuring. The enactment of the IRDA is an important first step. The next step must be to attract more regional companies with good fundamentals (regardless of financial difficulties) to Singapore to rehabilitate, and to eventually get back on their feet. Establishing Singapore as a regional debt restructuring centre would depend very much on whether a culture similar to the concept of the US-style Chapter 11 rehabilitation can progressively take root here. In this respect, banks and financial institutions (which invariably form the major creditors of an ailing corporation) will play a large role in helping to establish such a culture. Engendering such a culture will help achieve not just the letter but more importantly the true spirit of the omnibus legislation.”

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Robson Lee Teck Leng is a partner in Gibson Dunn & Crutcher LLP, an established 130-year-old global law firm with offices in the major cities of the U.S., Europe, Asia and the Middle East.   

This article contains the personal views of the author. This article is not intended to contain any form of legal advice. Readers should consult their professional advisers when encountering any issues concerning corporate insolvency and/or corporate debt restructuring.