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Global | Publication | Q2 2022
Singapore continues to develop its status as an upcoming international hub for debt restructuring. The nation-state updated and strengthened its restructuring and insolvency laws in recent years, primarily through enacting the omnibus Insolvency, Restructuring and Dissolution Act 2018 (IRDA) and incorporating the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) into Singapore law.
The Singapore courts have also rendered recent decisions that strike a balance between strengthening pro-cross border reorganisation goals and adhering to the creditor-friendly history of Singapore law.
This article provides a brief survey of certain significant decisions in Singapore relating to rescue lending, restructuring and winding up.
In United Securities Sdn Bhd (in receivership and liquidation) v. United Overseas Bank Ltd  SGCA 78, the Singapore Court of Appeal provided two key clarifications on the Model Law (as incorporated into Singapore law by IRDA).
The Court of Appeal essentially held that it would only grant such a stay under the Model Law if a stay would have been available in the equivalent Singapore insolvency proceeding. This potentially impacts a company's ability to seek a stay in Singapore for support of a foreign insolvency under the Model Law.
Briefly, a winding up order had been made against United Securities Sdn Bhd (in receivership and liquidation) (USSB) in Malaysia. United Overseas Bank Ltd (UOB), a secured creditor of USSB, however, commenced an action in Singapore to enforce its security against USSB (the Singapore Proceedings).
USSB took out an application in the Singapore court for recognition of the Malaysian winding up proceedings as a "foreign main proceeding". USSB also sought a stay of the Singapore Proceedings under Article 20 of the Model Law.
The Singapore Court of Appeal provided clarification on the scope of a stay or suspension upon the recognition of a "foreign main proceeding". The court held that the ambit of any stay or suspension arising from Article 20(1) is limited to what would have been available under Singapore law had the debtor company been wound up in Singapore. A stay of the Singapore Proceedings would not have been available under Singapore law had USSB been wound up in Singapore, as secured creditors would readily be granted leave to enforce their security in a winding up. Accordingly, a stay would also not be granted under Article 20 of the Model Law.
USSB had also commenced a writ action against, inter alia, UOB in Malaysia (the Malaysian Writ Action). The issue of whether the Singapore Proceedings ought to be stayed under the Model Law in recognition of the Malaysian Writ Action as a "foreign proceeding" had, for various reasons, become moot, but the Singapore Court of Appeal dealt with it anyway. On this, the Court of Appeal expressed the view that the Malaysian Writ Action was not a "foreign proceeding" within the meaning of Article 2(h) of the Model Law for several reasons. First, it was not "a collective proceeding". It did not contemplate the consideration and eventual treatment of the rights, obligations and claims of USSB's creditors generally. Second, it did not have a basis in the law relating to insolvency. Third, the Malaysian Writ Action did not involve the Malaysian High Court's control of or supervision of USSB's property and affairs. Fourth, the purpose of the Malaysian Writ Action was not USSB's re-organisation or liquidation, but was instead to determine the parties' rights, liabilities and obligations. The significance of this finding is that it lay out the requisite attributes for a proceeding to be "a foreign proceeding" under the Model Law in Singapore.
In Re Design Studio Group Ltd  SGHC 148, for the first time, the High Court approved a "roll-up" rescue-financing package and granted super-priority over the rescue finance.
A "roll-up" is when new funds are injected by a financier into a company post-petition to pay off some or all of the lender's pre-existing debt such that the pre-existing debt is effectively "rolled-up" into the super-priority post-petition debt owing to the financier.
The question before the court was whether a bank could inject fresh funds into a company (that had obtained a moratorium on its debts for the purposes proposing a scheme of arrangement to its creditors) to pay off the bank's pre-existing debts and have that injection of funds treated as rescue financing (i.e. a "roll-up") and be given super-priority.
The court found in Re Design Studio Group Ltd that the statutory provision providing for super-priority for rescue financing (now s 67 of IRDA) was broad enough to encompass "roll-ups". This was because "roll-ups" constitute a form of financing as long as they are necessary for the survival of the company as a going concern or necessary for a more advantageous realization of its assets compared to a winding up. There was nothing in the language of the statutory provision that prohibited a rescue financier from stipulating condition in the grant of its rescue finance, and there was no legislative intent to prohibit all "roll-ups" from constituting rescue financing.
In short, the court held that there was no general prohibition of "roll-ups", and "roll-ups" can constitute rescue financing provided they meet the requirement of what constitutes rescue financing.
The court also provided guidance on how it would exercise discretion to grant super-priority to "roll-ups", which involve a pre-existing lender leapfrogging over other creditors to get to the front of the queue for assets upon liquidation, with possibly no or little benefit to the rest of the creditor body. The court, therefore, would especially consider the extent to which unsecured creditors are likely to benefit or be prejudiced if super-priority were to be permitted. Special note would also be given to the interests of specific creditors who were previously prioritised equally or above the pre-petition debt, but would now be prioritised below or equal to the post-petition debt.
This is a significant decision for Singapore as it paves the way for "roll-up" rescue financings to feature more prominently in Singapore's restructuring landscape and will be a welcome development for lenders and distressed companies alike.
In Sun Electric Power Pte Ltd v. RCMA Asia Pte Ltd  SGCA 60, the Court of Appeal clarified that the cash flow test is the only test for deemed insolvency under s 254(c) of the Companies Act (now re-enacted in s 125(2)(c) of IRDA).
The provision states that a company shall be deemed to be unable to pay its debts if "it is proved to the satisfaction of the Court that the company is unable to pay its debts; and in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company".
The Court of Appeal held that the cash flow test should be the "sole and determinative test" for deemed insolvency under s 254(c) of the Companies Act / s 125(2)(c) of IRDA and that the balance sheet test was inapplicable.
In reaching its conclusion, the court favored the plain wording of the provision and comparative case law and found that Parliament could not have intended the balance sheet test to apply as it would not be a good indicator of the company's present ability to pay its debts. It also noted that, in the case of personal bankruptcy, there was an express provision that the balance sheet test was applicable (together with the cash flow test), whereas there was no such express provision in the case of corporate insolvency. It was reasonable, therefore, to conclude that it was not the legislative intention to include the balance sheet test in corporate insolvencies.
The court elaborated on the cash flow test, which assesses whether the company's current assets (meaning assets realisable within 12 months) exceed its current liabilities (meaning debts which will fall due within 12 months) such that the company is able to meet all debts as and when they fall due. The court also gave guidance on factors that should be considered under the cash flow test:
The Court of Appeal's affirmation of the cash flow test is significant as prior to this, the Singapore courts had taken the approach that both the balance sheet and cash flow tests were applicable. This clarification from the highest court has been long overdue and should make it easier for distressed enterprises to meet the insolvency test and enter a proceeding under Singapore's new law.
Finally, of note are the High Court's remarks in RCMA Asia Pte Ltd v. Sun Electric Power Pte Ltd  SGHC 205 (which was unsuccessfully appealed in the Sun Electric appeal decision discussed above). The court expressed, albeit in non-binding terms, that winding up can be ordered at the request of a creditor in exceptional cases, even if there was a substantial and bona fide dispute regarding the creditor's debt.
In coming to this decision, the court favoured the English position that the dismissal of winding up petitions involving disputed debts was a rule of practice rather than a rule of law. The court opined that this approach would give flexibility to deal with exceptional cases where applying a general rule to wind up would lead to injustice.
The court's view was obiter dicta (i.e. not essential to its final decision), and the issue was not determined on appeal but it is nonetheless instructive of the approach that the court may take in an appropriate case in the future.
The court's comments on the facts of the case will also be of useful guidance to creditors, in particular in cases where the debtor is clearly insolvent and has carried out seriously prejudicial acts.
In RCMA Asia, the court was of the view that there would have been exceptional circumstances justifying the winding up even if the debt were disputed. The debtor was clearly insolvent and had itself lodged judicial management and interim judicial management applications on the basis that it was insolvent and was unable to repay its debts. Further and critically, the debtor had diminished funds that were the subject of a court-ordered injunction and this led to a serious risk that the creditor would eventually be left without a remedy if winding up were not ordered. Conversely, if the debtor were wound up, a liquidator could investigate dealings with the funds and take action in the interests of the creditors.
These cases represent recent significant developments in the jurisprudence relating to the restructuring and insolvency regime in Singapore. They reflect the ongoing balancing act in Singapore between its creditor-focused history and the potential shifting towards a rehabilitation-friendly regime. Stay tuned for more to come.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
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