25 October 2018 - Events
Court-directed mediations are expected to be part of wide-ranging reforms to Singapore's insolvency statutory regime in the second half of 2018. How would such mediations be used and what benefits await creditors and insolvent debtors?
In May 2017, Singapore unveiled major reforms to its insolvency and debt restructuring laws by amendments to its Companies Act, enhancing its previous regime (which was based on the English law model) by adopting features of Chapter 11 of the US Bankruptcy Code such as super-priority rescue financing, enhanced moratorium against creditor action and a cram-down mechanism for approval over certain dissenting creditors.
These amendments to the Companies Act are a precursor to the long-awaited new Insolvency Bill, an omnibus legislation that will combine personal and corporate restructuring and insolvency (currently in separate legislations), which is slated to be released in the second half of 2018. Among the further wide-ranging reforms expected in the Insolvency Bill is the introduction of alternative dispute resolution methods, specifically mediation, to insolvency disputes – these comprise 3 of the 17 recommendations in the Report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (the “Committee”), all of which have been accepted by the Singapore Ministry of Law.
The expected changes relating to mediation, as set out in the Committee's recommendations, are summarized as follows:
a) Empowering judges to encourage parties to restructuring and insolvency proceedings to consider resolving the dispute via mediation;
b) Local mediation institutions such as the Singapore Mediation Centre (“SMC”) and the Singapore International Mediation Centre (“SIMC”) developing and promulgating rules catering specifically for insolvency related matters; and
c) Strengthening the panels of SMC and SIMC to include expert mediators with experience in cross-border restructuring.
The legislative reforms would presumably adopt the first recommendation, while the onus of adopting the second and third recommendations would be on the SMC and SIMC. To this end, SMC already has an “Insolvency Panel” of expert mediators which include prominent insolvency practitioners.
The Committee has astutely observed that mediation can be effective in the following contexts:
a) Resolving disputes with individual creditors:
This would be similar with existing mediation in civil litigation cases in Court.
b) Managing disputes of the same nature from multiple creditors:
Insolvent debtors typically find themselves fending off a spate of defaults and creditor claims. The majority of these claims can be grouped into 2 main categories – claims by financial lenders and claims by trade creditors of a nature specific to the debtor's trade – and there are therefore benefits to having similar claims mediated together.
c) Achieving consensus in a restructuring plan between the debtor and its creditors:
This is usually achieved via a scheme of arrangement / voluntary arrangement between the debtor and its/his creditors. Consensus to a proposed restructuring plan among a corporate debtor and its creditors makes available the expedited mechanism of a “pre-packaged” scheme of arrangement under section 211I of the Companies Act, which does away with the requirement of holding public creditor meetings.
The incorporation of mediation in the Insolvency Bill is a welcomed development in Singapore law. Debt restructuring is usually a complex process involving negotiations between multiple parties with contrasting interests, and often, entrenched positions. In the recent bond default crisis in Singapore and the region, many of these creditors are individual bondholders who are not professional investors and are in a state of heightened emotions over their perceived loss of investment capital. The introduction of a mediator to such negotiations will improve chances of an amicable, out of court resolution among parties. The benefits of amicably resolving a debt restructuring should not be understated, and include:
a) Higher chances of successfully restructuring and rehabilitating the debtor, by avoiding the strain imposed by a long-drawn restructuring process on an already distressed debtor. This includes the costs and resources required, in addition to the damage caused to the debtor's reputation and goodwill.
b) Higher net recovery due to reduction in costs for creditors, who are usually conscious to not “throw good money after bad money”.