Nearly two years after it was first passed in Parliament on 1 October 2018, the Insolvency, Restructuring and Dissolution Act (“IRDA”) has now come into operation on 30 July 2020. The IRDA not only unifies Singapore’s legislation in relation to personal and corporate insolvency and debt restructuring, but also introduces significant changes to the present regime.

In this update, we will highlight nine key changes of the new provisions of the IRDA.

1. Restriction of Ipso Facto Clauses in Insolvency/Restructuring Proceedings

Broadly speaking, an ipso facto clause provides for rights to terminate or modify the operation of a contract upon the occurrence of certain trigger events.

Pursuant to section 440(1) of the IRDA, contractual clauses that (a) terminate or amend, or claim an accelerated payment or forfeiture of the term under, any agreement with a company or (b) terminate or modify any right or obligation under any agreement with a company solely due to the company being insolvent or undergoing restructuring proceedings (scheme of arrangement or judicial management) will no longer be enforceable in the Singapore courts. In this regard, any provision attempting to ‘contract-out’ of section 440(1) is rendered of no force or effect by section 440(3). Since section 440 also applies to foreign companies that have a substantial connection to Singapore seeking restructuring or judicial management under the IRDA, this new provision is good news to both local and foreign companies undergoing insolvency or restructuring proceedings, and may even help creditors in seeking recovery of debts.

There are, however, several statutory carveouts to the application of section 440(1):

• First, section 440(5) provides that the restriction imposed under section 440(1) does not apply to certain contracts, such as the commercial charter of a ship, and eligible financial contracts prescribed under the Insolvency, Restructuring and Dissolution (Prescribed Contracts under Section 440) Regulations 2020.
• Second, section 440(6) specifies that section 440(1) does not apply to certain prescribed companies, such as a covered bond special purpose vehicle or a securitisation special purpose vehicle, as prescribed under the Insolvency, Restructuring and Dissolution (Prescribed Companies under Section 440) Order 2020.
• Third, section 440(4) allows for a contractual party to apply to the court for a declaration that section 440(1) does not apply if the operation of the section would likely cause significant financial hardship. This therefore leaves some room for a contractual party to exercise its rights under an ipso facto clause.

Given the savings provisions under Regulation 3(1) of the Insolvency, Restructuring and Dissolution (Saving and Transitional Provisions) Regulations 2020, ipso facto clauses falling within the purview of section 440(1) are only unenforceable in Singapore when the contract is entered into on or after 30 July 2020. A party to a contract entered into before 30 July 2020 would therefore still be able to exercise its rights under an ipso facto clause upon the formal insolvency of the counterparty.

2. New Provision on Wrongful Trading

Section 239 of the IRDA introduces a new provision on wrongful trading. Under this section, a company trades wrongfully if it incurs debts or other liabilities without reasonable prospect of meeting them in full when it is insolvent, or if it becomes insolvent as a consequence of incurring these debts or other liabilities.

In such a situation, the court has the power to declare a person who is a party to the company trading wrongfully to be personally liable for all or any of the debts or other liabilities of the company. Previously, the court may only impose such civil liability only after a person has been criminally convicted for an offence of insolvent or fraudulent trading. Given that the civil standard of proof on a balance of probabilities is lower than the criminal standard of proof beyond a reasonable doubt, creditors are now more likely to recover their monies from these persons. 

3. Safeguards on Litigation and Availability of Third-party Funding

In ensuring accountability for litigation proceedings commenced by insolvent companies, liquidators are now required to seek prior authorisation from the court or a committee of inspection before bringing or defending against legal proceedings.

Upon obtaining such approval, the liquidator may assign to third parties the proceeds of certain actions in court, such as actions to unwind antecedent transactions at an undervalue or unfair preference transactions, in exchange for funding for litigation. This may in turn lead to higher recoveries of monies if the action is successful, and can therefore facilitate the liquidation or restructuring of the company.  

4. Increased Monetary Thresholds Under the Corporate Insolvency and Bankruptcy Regime

There are now changes in certain monetary thresholds under the IRDA which lean in greater favour of debtors.

For companies, the minimum sum for a statutory demand for winding up has been increased from a sum exceeding $10,000 to a sum exceeding $15,000. This brings about a closer alignment to the bankruptcy regime, where the sum owed by an individual who is deemed unable to pay his debts must be at least $15,000.

Further, pursuant to Regulation 4(1) of the Insolvency, Restructuring and Dissolution (Debt Repayment Scheme) Regulations 2020, the maximum debt threshold for a debtor to qualify for the Debt Repayment Scheme (“DRS”) has been increased from $100,000 to $150,000.

Given the impact of the COVID-19 pandemic in the present circumstances, financially distressed companies and individuals are afforded greater leeway as a result of modifications to the IRDA by the COVID-19 (Temporary Measures) Act 2020. As such, the maximum debt threshold for DRS is currently $250,000, whereas the minimum amounts to be stated in statutory demands issued against companies and individuals have been temporarily increased to $100,000 and $60,000, respectively.

5. New Requirement to Nominate a Licensed Insolvency Practitioner and Introduction of Summary Dissolution in Liquidation Proceedings

In winding-up proceedings, the official receiver is no longer the default liquidator. Instead, when making up a winding-up application, the applicant must now nominate a licensed insolvency practitioner (as elaborated in point nine below) and is therefore likely to face an increase in liquidation costs. The official receiver may still be appointed as liquidator, but only if the applicant has not been able to obtain the consent of a licensed insolvency practitioner despite having taken reasonable steps to do so, and if the official receiver consents to such nomination.

The IRDA has also introduced a new procedure for the early dissolution of a company in liquidation, which will help to avoid further unnecessary expenditure in winding up the company. In this regard, a company can be summarily dissolved where there is reasonable cause to believe that the realisable assets of the company are insufficient to cover its winding-up expenses and if the affairs of the company do not require further investigation.

6. Voluntary Judicial Management by Creditors’ Resolution

There is now no longer a need for a company to make an application to the court in order to be placed under the judicial management. Section 94 of the IRDA provides the option for a company to be placed under judicial management upon obtaining a resolution of the company’s creditors to do so. Once a resolution is passed by a majority in number and value of the creditors present and voting, the voluntary judicial management process can then commence without the need to incur any court expenses.

7. Exceptions to the Moratoria in a Scheme of Arrangement Application

The repealed section 211B of the Companies Act is reenacted in similar terms under section 64 of the IRDA, which provides for, amongst other things, an automatic 30-day moratorium restraining the commencement or continuation of proceedings against a company upon its application to propose a scheme of arrangement.

However, there is now an exception to this under section 64(12)(b): the moratoria does not apply to certain proceedings prescribed by regulations. At present, as prescribed under Regulation 4 of the Insolvency, Restructuring and Dissolution (Prescribed Arrangements and Proceedings) Regulations 2020, only admiralty proceedings may be commenced notwithstanding the moratoria. Leave of court will nonetheless still be required to continue with such proceedings.

8. Requirement for Secured Creditors to Provide Notice to Claim Interest on the Debt Owed by a Bankrupt

In order to claim interest on the debt owed by the bankrupt, secured creditors are now required to notify the trustee in bankruptcy or the official assignee within 30 days after the bankruptcy order of their intention, and must also realise the security within 12 months after the date of the bankruptcy order. This new requirement facilities the overall administration of the bankrupt’s estate as the trustees in bankruptcy or the official assignee would be able to have a clearer picture of the bankrupt’s assets earlier on.

9. New Licensing and Regulatory Regime for Insolvency Practitioners

A new licensing and regulatory regime has been established to raise standards and improve accountability of insolvency practitioners. Previously, insolvency practitioners were only regulated under the professional regimes to which they belonged.

Under this regime, a person is required to hold a valid insolvency practitioner’s licence with the Ministry of Law in order to undertake insolvency officeholder appointments. While applying for this licence, insolvency practitioners can still perform insolvency or debt restructuring work up until 30 January 2021.

However, this license is not required if the person wishes to be appointed as a liquidator in a members’ voluntary winding up, or a scheme manager in a scheme of arrangement commenced under the IRDA.

Concluding Remarks

The implementation of the IRDA reflects the modern and progressive nature of Singapore’s laws and marks a new beginning in the local insolvency and restructuring regime. As observed by the Senior Minister of State for Law during the second reading of the bill for the IRDA in 2018, the IRDA is part of a wider concerted effort to enhance Singapore’s debt restructuring ecosystem. Together with the various memorandums of understanding signed by the government in facilitating efficient cross-border restructurings and insolvency proceedings, the IRDA brings Singapore one step closer towards becoming an international centre for debt restructuring and insolvency.