Super-Priority Financing to Be Available for Companies in Distress
05 December 2016
Recent proposed changes to the insolvency regime in the Companies Act should be noted by banks and other lenders as having an impact on priority and enforcement processes. In particular, the proposed regime for super-priority for rescue financing and the adoption of the UNCITRAL Model Law on Cross-Border Insolvency will be of interest.
Recent proposed changes to the insolvency regime in the Companies Act should be noted by banks and other lenders as having an impact on priority and enforcement processes. The changes were set out by the Ministry of Law in a proposed draft Companies (Amendment) Bill 2017 (Draft Bill) issued on 21 October 2016 for public consultation. The Draft Bill generally deals with schemes of arrangement, judicial management and cross-border insolvency. It is the first step in a series of further changes intended to implement the recommendations of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring. This update focuses on the proposed regime for super-priority for rescue financing and the adoption of the UNCITRAL Model Law on Cross-Border Insolvency (Model Law).
Super-priority for rescue financing
Among the various proposals made is one for the court to be empowered to grant super-priority for rescue financing in schemes of arrangement. This means that where an application has been made for a scheme of arrangement, the company in question may apply to court for an order of any of the following in respect of any debt to be provided to it:
that any credit obtained by the company for the purposes of allowing it to continue as a going concern is to be given first priority as a preferential debt together with the costs and expenses of any eventual winding up;
that the debt be accorded priority over all preferential debts and all other unsecured debts;
that the debt be secured by a security interest on property of the company that is unsecured or by a subordinate security interest on property of the company that is already secured; or
that the debt be secured by a security interest over existing secured property of the company where the new debt will have an equal or greater priority over the existing security interest.
For the last three orders set out above, certain conditions must be met for the court to make an order in their terms:
The credit must be for the business of the company to continue as a going concern. In this respect, the Ministry of Law has asked for views on whether the standard to be applied is that the credit is necessary for this purpose or that it would suffice to require that the credit is for the purpose of enabling the company to continue as a going concern.
The company must be unable to obtain the credit from any person unless the court were to make the requested order for super-priority.
Finally, if the debt is to be granted security over existing secured property with equal or greater priority to the existing security interest, that there is adequate protection of the interest of the holder of the existing security interest.
While creditors in a scheme of arrangement may, subject to the required threshold being attained, agree to subordinate their debt to an incoming rescuer, the significance of these provisions is to allow the company through the court to impose such arrangements on creditors even without their agreement if needed for the company’s survival.
Similar super-priority provisions have been proposed with respect to judicial management.
UNCITRAL Model Law of Cross-Border Insolvency
The Draft Bill includes a range of other proposals affecting the insolvency process, most notably the adoption of the Model Law. This would legislatively incorporate the “centre of main interest” test for insolvency proceedings as part of Singapore law. The Model Law assists in cross-border insolvencies by providing a mechanism for a Singapore court to co-operate with the insolvency courts of other jurisdictions where insolvency proceedings against a company have been commenced.
Under the Model Law, the court would generally look to the insolvency court of the jurisdiction of centre of main interest to administer the insolvency proceedings subject to Singapore creditors being adequately protected. This need not be the jurisdiction of incorporation of the company. Hence, for example, the centre of main interest test was applied by Singapore High Court to recognise Japanese insolvency proceedings commenced over a British Virgin Island incorporated company which had issued notes governed by Singapore law (Re Opti-Medix Ltd  SGHC 108, holding that the centre of main interest test applied under the common law).
A Singapore-incorporated company with a centre of main interest outside Singapore might therefore be subject to insolvency proceedings in that jurisdiction and not in Singapore, which proceedings would generally be recognised by the Singapore court pursuant to the Model Law. If a creditor has made a loan expecting the insolvency proceedings of a particular jurisdiction to apply, it should therefore be aware that these need not be those of the country of incorporation and evaluate its risk accordingly.