Super Priority Rescue Financing in Singapore
By David Chew (Partner, DHC Capital)
Introduction
Singapore introduced major reforms to its debt restructuring regime through the Companies (Amendment) Act 2017 which came into effect on 23 May 2017. These reforms, which were based on the US Chapter 11 regime, were introduced to support debtor-led restructurings through a “turbo charged” scheme of arrangement regime which included rescue financing provisions that allow for the grant of super priority status.
The Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”), which was passed by the Singapore Parliament on 1 October 2018 and came into effect on 30 July 2020, is the latest major phase of reforms to carry to fruition Singapore’s ambition to become an international debt restructuring hub.
The IRDA consolidates Singapore’s insolvency laws for both personal bankruptcy and corporate insolvency under a single piece of “omnibus” legislation and incorporates the reforms that came into effect in May 2017, including the provisions relating to super priority rescue financing. The IRDA also includes several new features including, inter alia, establishing a regulatory regime for insolvency practitioners and restrictions on operation of ipso facto clauses.
The Rescue Financing Provision – Section 67
The rescue financing provision under Section 67 of the IRDA (formerly Section 211E of the Companies Act (“Act”)) allows the Court to grant an order that the rescue financing be afforded super priority status where a company has made an application to convene a meeting for the purposes of a scheme of arrangement under Section 210(1) of the Act or a moratorium under Section 64(1) of the IRDA (formerly Section 211B(1) of the Act).
In summary, the Court can make one or more of the following orders in respect of any debt arising from any rescue financing obtained (4 levels of priority):
• Section 67(1)(a): Treated as part of the costs and expenses of the winding up mentioned in Section 203(1)(b) of the IRDA;
• Section 67(1)(b): Priority over all the preferential debts specified in Section 203(1)(a) to (i) of the IRDA and all other unsecured debts;
• Section 67(1)(c): Secured by a security interest on property not otherwise subject to any security interest or that is subordinate to an existing security interest; and
• Section 67(1)(d): Secured by a security interest on property subject to an existing security interest, of the same priority as or higher priority than that existing security interest.
The Court’s approval for a rescue financing order is subject to the following core pre-conditions being met:
• Reasonable efforts made to secure rescue financing without super priority
The company would not have been able to obtain the rescue financing unless super priority was given – statutorily applies only to Section 67(1)(b) to (d) of the IRDA (formerly Section 211E(1)(b) to (d) of the Act) and is expected under Section 67(1)(a) of the IRDA (formerly Section 211E(1)(a));
• Adequate protection
There is adequate protection for the interests of the holder of the existing security interest (in the event the security is “primed”) – applies only to Section 67(1)(d) of the IRDA (formerly Section 211E(1)(d) of the Act); and
• Meets definition of rescue financing
The proposed financing must constitute “rescue financing” as defined in Section 67(9) of the IRDA (formerly Section 211E(9) of the Act) – (i) financing necessary for the survival of a company that obtains the financing and/or (ii) financing necessary to achieve a more advantageous realisation of the assets than on a winding up.
Successful cases to date
• Asiatravel.com Holdings Ltd (SGX: 5AM) (“ATH”)
On 8 April 2019, the Court granted ATH priority over all the preferential debts specified in Section 328(1)(a) to (g) of the Act (now Section 203(1)(a) to (i) of the IRDA) and all unsecured debts pursuant to Section 211E(1)(b) of the Act (now Section 67(1)(b) of the IRDA).
This is the first successful application for super priority rescue financing under Section 211E of the Act (now Section 67 of the IRDA).
• Swee Hong Ltd (SGX: QF6) (“Swee Hong”)
On 17 February 2020, the Court granted the following orders:
• Debt of up to S$3.1 million shall be secured by way of a first fixed charge over the unencumbered plant and machinery and motor vehicle assets owned by Swee Hong pursuant to Section 211E(1)(c) of the Act (now Section 67(1)(c) of the IRDA); and
• In the event of a winding up, an amount of S$2.9 million shall have priority over all the preferential debts specified in Section 328(1)(a) to (g) of the Act (now Section 203(1)(a) to (i) of the IRDA) and all other unsecured debts pursuant to Section 211E(1)(b) of the Act (now Section 67(1)(b) of the IRDA).
This is the second successful application for super priority rescue financing in Singapore under Section 211E of the Act (now Section 67 of the IRDA) and first case involving super priority over assets not otherwise subject to any security interest under Section 211E(1)(c) of the Act (now Section 67(1)(c) of the IRDA).
• Design Studio Group Ltd (SGX:D11) (“Design Studio”)
On 28 May 2020, the Court ordered that the proposed rescue financing be granted super priority over the preferential debts specified in Section 328(1)(a) to (g) of the Act (now section 203(1)(a) to (i) of the IRDA) under Section 211E(1)(b) of the Act (now Section 67(1)(b) of the IRDA).
The S$62 million rescue financing comprised two separate financing facilities as follows:
• A single-drawdown term loan facility of up to S$12.08 million from an associate of Design Studio’s controlling shareholder; and
• A multi-drawdown banking facility of up to S$50 million from an existing lender of Design Studio and its subsidiaries.
This is the third successful application for super priority rescue financing in Singapore and first case involving a “roll-up” of an existing lender’s pre-filing debt.
Further information on each of the cases can be found at the “Guide to super priority rescue financing in Singapore (second edition)”.
Conclusion
The Design Studio “roll-up” financing is an important evolution in super priority rescue financing in Singapore and demonstrates the tools available for financially distressed companies to access new working capital in order to continue business operations and provides essential breathing room to engage with creditors on a restructuring proposal as opposed to filing for a value destructive insolvency proceeding. Lenders also now have options to extend new credit to financially challenged borrowers to continue business operations and to maximise recoveries by preserving the going concern value of the business and/ or improving their relative security position vis a vis other creditors as opposed to taking immediate enforcement action.
Looking ahead – We highlight the potential areas to be addressed as super priority rescue financing evolves in Singapore:
• Role of the Court
The cases to date reinforce that the Court will take a commercial and practical approach to super priority rescue financing applications provided the core pre-conditions have been met. The Court has also shown a willingness to take guidance from precedent cases from the US Chapter 11 regime on super priority.
The Design Studio financing was uncontested and the Court’s view on commercial terms and conditions in contested “roll-up” cases remains to be seen and will likely involve balancing the need to protect the general body of creditors, the benefits under the proposed scheme against a comparator (likely a liquidation scenario) and the survival of the company as a going concern.
• Additional complexities associated with applications under Section 67(1)(d)
We have not yet seen an application for rescue financing under the highest level of priority pursuant to Section 67(1)(d) of the IRDA (formerly Section 211E(1)(d) of the Act).
It remains to be seen whether new third-party lenders will aggressively challenge “adequate protection” with existing security holders (and by extension challenge security valuation and key assumptions to derive the valuation) or whether the market will follow the Chapter 11 model, whereby existing security holders work closely with the debtor company to agree terms and provide the rescue financing as a method to avoid being primed and to maintain control of the restructuring.