First published on 11 November 2020.
Introduction
Singapore’s IRDA was enacted on 1 October 2018 and finally came into operation on 30 July 2020. The IRDA is the third and final phase of Singapore’s effort to modernise and strengthen its insolvency and bankruptcy laws.
Companies should now review their contracts and transactions in light of the changes brought about by the IRDA.
What was the previous situation?
Before the IRDA came into force, insolvency provisions in Singapore could be found in the Bankruptcy Act and the Companies Act.
The IRDA now repeals the whole of the Bankruptcy Act and the insolvency parts of the Companies Act and moves them to the IRDA with several key changes.
What changes were made?
This newsletter will cover the following 5 key changes to the insolvency regime brought about by the new IRDA:
(1) Restrictions on Ipso Facto Clauses
(2) Changes to wrongful trading provisions
(3) Assignment of proceeds from antecedent transactions
(4) Placing a company under judicial management by creditors’ resolution
(5) Director’s rights to wind up the company in certain circumstances
(1) Restrictions on Ipso Facto clauses
What are they? – Ipso Facto clauses allow parties to accelerate payment or to terminate/ modify agreements upon specified events occurring, including insolvency proceedings commenced against a company.
The IRDA now restricts counterparties from exercising Ipso Facto clauses solely based on the commencement of a scheme of arrangement or judicial management proceedings until the end of the debt restructuring exercise. This is a statutory restriction that cannot be contracted out of by the parties.
Certain types of contracts however are excluded from this statutory restriction, such as prescribed financial contracts, contracts or licences or approvals issued by the government or statutory bodies, contracts that affect the national interest of Singapore, commercial charters of ships, or any agreement that is the subject of a treaty to which Singapore is a party of.
Companies which have previously agreed to such Ipso Facto clauses, but which would thereby likely face significant financial hardship due to the unenforceability of such Ipso Facto clauses, may also make an application to the court for a declaration that this restriction in the IRDA would not apply to them.
(2) Changes to wrongful trading provisions
Under the previous insolvent trading regime, criminal liability was a pre-requisite before an application can be made to impose civil liability against officers of the company for wrongful trading.
Under the IRDA however, the pre-requisite for an officer to be found criminally liable before an application for civil remedies can be made has now been removed. Thus, a company would be considered to have traded wrongfully so long as it makes trades with no reasonable prospect of meeting of them in full because the company is insolvent or becomes insolvent as a result of placing such trades.
Further, it appears that personal liability for wrongful trading under the IRDA has been significantly expanded to include other parties such as employees, contractors and counterparties, in addition to directors.
In light of this change, the company or any person who, with the company’s consent, is a party to or interested in becoming party to the carrying on of the business of the company may also apply to court for a declaration as to whether a particular transaction would constitute wrongful trading.
(3) Placing a company under judicial management by creditors’ resolution
Previously, a company could only be placed under judicial management by way of Court order.
Now, under the IRDA, a company may place itself under judicial management by way of a resolution of the company’s creditors, instead of having to go to Court for a judicial management order.
(4) Assignment of proceeds of antecedent transactions
The powers of judicial managers and liquidators have also been widened to include the power to assign the proceeds of antecedent transactions in favour of third party funders who have agreed to fund the costs of civil action to which the company is entitled.
(5) Director’s rights to wind up the company in certain circumstances
Previously, a director was unable to file an application to wind up the company when he or she faces difficulties in certain situations, for instance, where the shareholders and other directors have abandoned the company, and the locally resident director becomes subject to liability for insolvent or fraudulent trading or failure to file annual returns.
Now, under the IRDA, a director is given the right to commence winding up proceedings against the company, but only where the 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 to do so.
Concluding words
The IRDA, after years of consultation and reform efforts, will significantly improve the current insolvency and restructuring regime in Singapore and contribute to Singapore’s efforts to establish itself as an international hub for debt restructuring.
Companies however would do well to review its contracts and transactions to ensure that it does not fall foul of the new provisions in the IRDA. Companies should also talk to their legal advisors if they intend to commence insolvency proceedings under the new IRDA regime, such as winding-up, judicial management or scheme of arrangement applications.
Please note that this newsletter is to be taken as general information only and ought not to be taken as legal advice in any way. If you require any advice on the full implications of the IRDA, please do not hesitate to approach us.
Disclaimer
The information in this article is correct as of the date of this article. The article does not constitute legal advice in any way. If you require advice in relation to the contents of this article, please approach us for further assistance.
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Authors: Lim Ming Yi, Yeo Shan Hui, Jaryl Lim, Gabriel Kwek.