The post-pandemic restructuring landscape - three trends from Asia
By Emmanuel Chua and Shriram Jayakumar (Baker & McKenzie Wong & Leow)
The worldwide rollout of covid-19 vaccines is well underway. But there is no inoculation yet available from the pandemic’s economic fallout. As government support schemes are rolled back, cratering demands across various industries have necessitated radical relooks at business models, capital requirements and cash deployment. The impetus for change is strong.
More restructuring, less waste
Corporate restructuring in Asia has traditionally been held back by two factors. First, there remains a perception around corporate insolvencies - particularly those involving family-owned companies - of personal failings on the part of the controllers or owners. The resulting "loss of face" or diminution in social standing is often sufficient to deter any formal rehabilitation efforts until it is too late. Somewhat unfairly, restructurings are often tarred with the same brush.
Second, restructuring in Asia has traditionally been characterised by underdeveloped or inadequate restructuring laws and inconsistent outcomes and approaches across jurisdictions. Transparency remains a concern, as is the impression of “home ground” advantage where proceedings are commenced in the debtor's home jurisdiction.
But the tide is quickly shifting. As Asian businesses become more international, there has been greater sophistication and appreciation of the value of a well-run restructuring process as a pivot back towards financial viability. While positive examples previously invariably tended towards Chapter 11, Asian jurisdictions are moving quickly to fill in the void.
Singapore is a prime example. Significant reforms to its restructuring laws were introduced in 2017 to incorporate elements of the Chapter 11 regime, culminating in the enactment in July 2020 of the Insolvency, Restructuring and Dissolution Act 2018. The Singapore regime today is characterised by the relative ease in which jurisdiction over foreign companies may be established, the availability of robust and flexible moratoria reliefs, the ability to obtain rescue financing (or "roll-ups") on a priority basis, and more recently, restrictions on ipso facto clauses.
Other Asian jurisdictions are following suit. Malaysia has recently introduced two key corporate rescue mechanisms, namely judicial management and corporate voluntary arrangements. India has undertaken ground-breaking reform with the introduction of the Insolvency and Bankruptcy Code. The Myanmar Insolvency Law 2020 was passed in February 2020, introducing a new corporate rehabilitation procedure. The Philippines also introduced the Personal Property Security Act in 2019 which will have a significant impact on the taking and enforcement of security in the Philippines. On a cross-border level, the UNCITRAL Model Law on Cross-Border Insolvency has also been substantially implemented in a number of countries across Asia, including Japan, South Korea, Singapore and the Philippines.
These efforts are starting to bear fruit. In Singapore for example, between 2017 when the enhancements to the restructuring provisions were introduced and 31 December 2020, 117 scheme applications and 70 judicial managements were filed. As a matter of (COVID-fuelled) necessity, it is almost inevitable that more Asian companies will avail themselves of these formal restructuring mechanisms. Increased familiarity with these processes together with positive experiences and outcomes will be key factors driving the uptake in corporate rehabilitation, where winding up might once have been considered inevitable.
No shame in shopping
It inevitably follows from the above that we will see increased instances of distressed entities engaged in rehabilitation efforts outside their home jurisdictions. This is not an altogether novel development; distressed Asian entities have a history of heading out of Asia to restructure their debt. Prominent examples include Singapore-based Ezra Holdings and Emas Chiyoda Subsea seeking Chapter 11 protection in 2017. More recently, Malaysia Aviation Group, the parent company of Malaysia Airlines Bhd, obtained court approval in the UK in February 2021 sanctioning a restructuring plan valued at over RM 3.6 billion (US$870 million).
As noted in Re Codere Finance (UK) Ltd, there is no conceptual or policy objection to forum selection per se. There are often good and legitimate reasons to do so. These include the strength of the foreign insolvency process, the ability of the process to bind creditors (particularly overseas creditors) and, conversely, the debtor’s access to adequate protection and necessary tools to conduct an effective restructure. Chief Justice Sundaresh Menon of Singapore in his Keynote Address at the 18th Annual Conference of the International Insolvency Institute in 2018 went as far as to argue that forum selection is the "necessary and responsible thing" to do to achieve the best restructuring outcome.
These factors are particularly pronounced in Asia. For all the developments in the region's restructuring laws, Asia is geographically and politically vast and remains a patchwork of civil and common law systems. Law reforms are still a work in progress, as is the adoption of the Model Law, particularly in ASEAN (the Association of Southeast Asian Nations) where Singapore and the Philippines are the only signatories. In the meantime, there is no equivalent to the EC Regulation on Insolvency proceedings, and insolvency laws continue to differ significantly across Asian jurisdictions.
All of these factors suggest that forum selection will be an increasing feature of restructuring in Asia, at least in the near future. Two likely trends worth looking out for.
First, it is likely that we will see a “flight to quality”, with major restructurings gravitating towards specific jurisdictions with the necessary ecosystem for developing good restructuring solutions. CJ Menon has described these as “nodal” jurisdictions characterised by a robust legal framework, restructuring tools, an independent and experienced bench, an active capital and debt market, and a strong base of insolvency professionals.
Jurisdictions such as the United States and England have traditionally served this function. In Asia, Singapore has concrete aspirations of filling the void. Almost a decade-now in the making, the Singapore restructuring regime today has a full suite of legislative tools adopted and adapted from leading global restructuring jurisdictions. For cross-border situations, it also has in place a specialist international judiciary in the form of the Singapore International Commercial Court, set up in 2013 as a division of the Singapore High Court and featuring prominent jurists from civil and foreign law jurisdictions. Singapore has also taken an active role in the making of “soft law” and cross-border coordination efforts, notably taking a lead role in establishing the Judicial Insolvency Network (JIN), a global network of leading insolvency judges which aims to further court-to-court communication and cooperation between national courts.
We are already seeing the green shoots of these efforts. Nam Cheong Limited, a Malaysian headquartered company, completed its debt restructuring exercise via schemes in Singapore. Jakarta-based conglomerate PT MNC Investama Holdings obtained noteholders’ approval to pass a pre-packaged scheme of arrangement in relation to US$231 million of secured notes. More recently, Indonesian real estate giant PT Modernland commenced proceedings in Singapore to restructure its existing debts of over US$400 million. These are all cases that previously might have gone the way of a Chapter 11 restructuring. They are important “test” cases, and positive outcomes will likely increase confidence in Singapore as the centre of gravity for Asian restructuring.
Second, it is unfortunately inevitable that we will see attempts by debtors to push for jurisdictions with the primary aim of evading their debt obligations. We have seen some prominent examples involving Asian companies. In Re Indah Kiat International Finance Company BV for example, the applicant had shifted its COMI to England from the Netherlands three months prior to the application for the sole purpose of promoting a scheme. The English court declined to grant an order to convene a meeting of scheme creditors in light of concerns of inadequate notice and disclosure, and evidence that the real objective of the scheme was to secure the release of the parent company's debts.
To this, the role of the courts and the threshold requirements under restructuring legislation takes on greater significance. In Singapore, control exists in the form of, first, the requirement for relevant creditor support before an application can be taken out and, second, the broad discretion granted to the court in determining the specific reliefs afforded to distressed entities. The case of Rooftop Group International Pte Ltd, which involved an application for the recognition of ongoing Chapter 11 proceedings, provides some illustration on how the courts will balance the competing interests. Notwithstanding the court's concerns around the foreign representative’s ability to discharge his duties even-handedly, it nevertheless proceeded to recognise the foreign representative, but imposed strict conditions for leave before any steps were taken to oversee the assets
To (credit) market, to (credit) market
Finally, we expect greater demand and involvement of credit markets and distressed players in the restructuring space. Challenging economic conditions, coupled with the acceleration of long-term structural trends such as digitalisation, mean that the demand for funding will remain strong. At the same time, liquidity continues to be abundant in Asia, driven by a potent combination of prolonged fiscal stimulus and uninspiring bond yields.
Restructuring laws in Asia can play an important role in matching this demand and supply. For example, the introduction of the debtor-in-possession financing regime in Singapore will provide new opportunities for distressed companies and financiers alike. Since its inception in 2017, there have been no less than four successful cases, including the recent approval by the Singapore court of a second round of rescue financing in the AsiaTravel.com restructuring.
Another avenue for credit participation is in the ability to seek (or provide) third-party funding to distressed companies to pursue claims, for the purposes of maximising recovery to creditors of the company. Under Singapore’s Insolvency, Restructuring and Dissolution Act, judicial managers and liquidators may enter into third-party funding agreements (upon obtaining court approval or authorisation of the committee of inspection) to pursue claims relating to transactions at undervalue, unfair preference transactions, extortionate credit transactions, fraudulent or wrongful trading, and assessment of damages against delinquent officers of the company.
The pandemic has certainly thrown down the gauntlet to the continuing growth of restructuring in Asia. The coming years will be pivotal, and the trends and developments that emerge will set the stage for what is to come.
(*) This article was originally published in the Global Restructuring Review.