High Profile Corporate Restructurings – A Market Awash in Red

For the Singapore market and its listed companies, this past year has been littered with high profile insolvencies.

On 30 June 2016, listed China Fishery Group filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. The scope of the Chapter 11 proceedings were expanded on 3 May 2017 with further petitions for fourteen additional indirect subsidiaries.

At the end of July 2016, Swiber Holdings Limited, a Main Board listed offshore services firm, applied for provisional liquidation. Swiber, once a darling in the offshore and marine industry, shocked its bankers by making a winding-up application less than four weeks after the banks had supported the group with fresh financing. Two days later, the company u-turned on its winding-up and opted for judicial management instead. As at October 2016, the group was awash in US$539 million of red ink.

Also in July last year, the Singapore-listed division of the Pacific Andes Group, Pacific Andes Resource Development Ltd (“PARD”) and its subsidiaries sought moratoria from the Singapore High Court against legal proceedings by creditors from both Singapore and overseas. This was a bid to supplement a potential group-wide restructuring plan. The Pacific Andes Group stretches from the BVI and Bermuda to Peru and the UK. On 27 September 2016, the High Court held that it had no jurisdiction to restrain PARD’s creditors other than those in in Singapore, and granted a moratorium in respect of Singapore incorporated PARD only. Given this limited protection, PARD sought protection from the US Courts, obtaining a Chapter 11 order to, among others, stay a winding up petition that had been brought in Bermuda. The Chapter 11 proceedings are currently on-going.

2017 brought more bad news. Oilfield services firm, Ezra Holdings Limited, and two of its subsidiaries announced in the first quarter that they too had filed for Chapter 11 bankruptcy.

Insolvencies – Across Oceans Blue

As Singapore’s corporate sector continues to expand and diversify, our companies have expanded their businesses and assets overseas. When they run into financial trouble, they face the prospect of managing insolvency proceedings in different jurisdictions.

A shipping company could be applying for the equivalent of judicial management in Korea, an order which does not bind creditors in Singapore, who can arrest its ships docking in Singapore. This in fact happened to Hanjin Shipping Co Ltd in September last year.

A White Paper on the New Insolvency law

In March 2017, the Singapore government passed the Companies (Amendment) Bill 13/2017, which contains major changes to Singapore’s restructuring and insolvency laws. These changes, including the adoption of the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), came into effect on 23 May 2017.

One of the key purposes of the Model Law is to allow different jurisdictions to cooperate in each other’s insolvency processes. It allows insolvency officeholders (such as judicial managers) to apply for recognition in other states, eliminating the need to start insolvency proceedings in multiple jurisdictions. Under the Model Law, a company can implement a global restructuring plan, approved by the courts in one jurisdiction, which would potentially be recognized and enforced in reciprocal states. However, while Singapore may have adopted the Model Law; the reciprocal recognition would depend on the other jurisdiction likewise adopting it. As of the date of writing, 43 countries have adopted the Model Law – including Australia, Canada, the Philippines, the United Kingdom (and the BVI), and the United States.

Submission to the Red, White and Blue Jurisdiction

The Model Law is new, so the exact form of its enforcement is not certain yet. But commercial reality has already tilted the world towards a cross-border recognition of insolvency proceedings.

A Chapter 11 order from the United States affords more protection than a similar order in a Singapore Court. It grants an automatic and worldwide stay of proceedings, one of the key reasons why PARD resorted to this after failing to obtain an extraterritorial moratorium in the Singapore Courts. Many financial and institutional companies do not want to find themselves in breach of or in contempt of a US Court Order. They, or their subsidiaries, may have operations or assets in the US. Troubled companies can rely on this to force creditors based outside the US to effectively submit to the US court’s jurisdiction. It’s a back door method of ensuring enforcement.

If PARD’s troubles had detonated this year, instead of in June 2016, PARD could have filed for Chapter 11 bankruptcy, and subsequently applied for these proceedings to be recognized in Singapore, thereby obtaining a worldwide moratorium (under the US Bankruptcy Code) that would be recognised under Singapore law.

The Chapter 11 process is also regarded as debtor-friendly. Under Singapore’s judicial management regime, judicial managers are appointed over the company, and the directors’ powers are suspended immediately. This is not the case under Chapter 11 proceedings, where the directors of the company retain control after proceedings are commenced.

Moreover, qualifying for the Chapter 11 process is relatively easy. Foreign companies with only a place of business or property (including a bank account) in the US will suffice. TMT Procurement Corporation, a global shipping company based in Taiwan, managed to take advantage of this – opening an office in Houston mere days before filing for Chapter 11 protection.

The flipside is that legal proceedings in the US can be extremely expensive. Given this, such processes may only be viable for companies with a very real possibility of a successful restructuring and on a scale that would justify the cost.

One thing is certain: as the world becomes an increasingly inter-connected place, Singapore is fighting for its place as an international “restructuring hub”, like London or New York. Let’s hope we see the rebirth, the reboot and the regeneration of our corporate eco-system, instead of the lose-lose spectre of liquidation.