Chapter 11 proceedings of REITs are not recognised under the Singapore Model Law

By Alexander McMyn, Charles McConnell and Joann Ho (White & Case)

In Re Tantleff, Alan [2022] SGHC 147, the Singapore High Court considered for the first time whether the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency (30 May 1997) (the "UNCITRAL Model Law") as enacted under the Insolvency, Restructuring and Dissolution Act 2018 ("IRDA") (the "Singapore Model Law") applies to real estate investment trusts ("REITs"). The court decided that REITs do not come under the part of the IRDA which pertains to the restructuring regime or the Singapore Model Law and suggested the Singapore trustee of the REIT should make a separate application to a court in Singapore for recognition of Chapter 11 proceedings under common law.

Facts

Eagle Hospitality Real Investment Trust (the "EH-REIT") is part of a stapled trust and is a publicly held REIT in Singapore, with a geographical focus in the US. In 2020, EH-REIT faced financial difficulties, in part due to the defaults of its hotel lessees and the onset of the global COVID-19 pandemic. In 2021, EH-REIT and its subsidiaries including its two Singapore subsidiaries (the "Singapore Subsidiaries") filed for Chapter 11 reorganisation (the "Chapter 11 Proceedings"). The US Bankruptcy Court approved the plan (the "Chapter 11 Plan") and entered into an order confirming the Chapter 11 Plan for the liquidating Chapter 11 entities (the "Confirmation Order"). Under the Chapter 11 Plan, the EH-REIT trustee is to dissolve the EH-REIT and the Singapore Subsidiaries in accordance with, and subject to, Singapore law. The decision before the Singapore High Court was whether to recognise the Chapter 11 Proceedings, and the Chapter 11 Plan and Confirmation Order. The Chapter 11 Plan binds the Chapter 11 entities, their creditors and the over 3,700 stapled security holders of the EH-REIT, who were not entitled to vote in the Chapter 11 Proceedings.

Recognition of Chapter 11 Proceedings

The High Court separated out the recognition of the Chapter 11 Proceedings into the recognition in relation to (i) the EH-REIT and (ii) the Singapore Subsidiaries.

EH-REIT

The High Court decided that REITs do not come under the scope of the Singapore Model Law because the language in the part of the IRDA which pertains to the restructuring regime only extends itself to corporate entities and not to REITs. Moreover, the Singapore Model Law specifically excludes from its application entities "authorised" under the Singapore Securities and Futures Act 20 and REITs are authorised thereunder as collective investment schemes. The High Court further declined to follow the US position that a "corporation" can include a REIT, pointing to the difference in the way "corporation" is defined in the US, as compared to in Singapore. The US definition includes a "business trust" which can conceivably be expanded to include a REIT, while the Singapore definition does not explicitly include or exclude a business trust or REIT.

In addition, the High Court dismissed English precedent which recognised Chapter 11 proceedings involving a business trust in order for the English court to provide assistance to a "bona fide insolvency proceeding taking place in a foreign jurisdiction". While the High Court appreciated the "need to promote uniformity", it emphasised the ability of the contracting States to retain sovereignty to exclude entities from the scope of their enacted versions of the UNCITRAL Model Law where there are policy considerations. To this end, the court interpreted the legislative intent of the Singapore Model Law to exclude REITs from its scope.

Singapore Subsidiaries

As for the Singapore Subsidiaries, the High Court determined that the Singapore Subsidiaries' Chapter 11 Proceedings were "foreign proceedings", and specifically "foreign main proceeding[s]", given the Singapore Subsidiaries' centres of main interests ("COMI") were in the US, with operations and assets in the US, significant creditors located in the US and US law governing various agreements.

Recognition of Chapter 11 Plan and Confirmation Order

EH-REIT

The High Court suggested that the Singapore trustee of EH-REIT proceed by way of a separate application for common law recognition of the Chapter 11 Proceedings. The court questioned the standing of the foreign representative applicant in this case to submit the separate application, as the Singapore trustee would need to satisfy the Singapore court that the winding down and other steps contemplated are in accordance with Singapore law and appropriate under the terms of the trust deed.

The Singapore trustee would also need to demonstrate to the court that there would be no prejudice to the stapled security holders. Under the Chapter 11 Plan, the stapled security holders would receive contingent interests in a liquidating trust, which would entitle them to distribution only if there is value available in the EH-REIT after holders of claims against it are paid in full. However, the court noted that the stapled security holders are not expected to receive any distributions based on current projections.

The High Court did not provide any guidance as to whether common law recognition of the Chapter 11 Proceedings would be available or would succeed.

Singapore Subsidiaries

After determining that the Chapter 11 Proceedings are "foreign proceedings" under the Singapore Model Law, the High Court followed the US position that Article 21(1)(g) of the Singapore Model Law grants recognition of the Chapter 11 Plan and Confirmation Order as appropriate additional relief.

The court then considered whether, and affirmed that, the relevant creditors and shareholders were adequately protected. The High Court considered that there was an opportunity for the creditors to appear and be heard before the US Bankruptcy Court. In addition, Singapore creditors were duly notified of the Chapter 11 Proceedings and Chapter 11 Plan through public announcements on the web, including SGXNet, and no objections had been made.

Discussion

Following this case, market participants would be cautioned not to make any blanket assumptions that the Singapore restructuring regime will follow the US position or precedents from any particular jurisdiction. While the High Court admitted that its decision requiring the separate application for the common law recognition of the Chapter 11 Proceedings of the EH-REIT may add to the complexity of the implementation of the Chapter 11 Plan and Confirmation Order, it maintained that the separate application is "what [the Singapore] legal framework requires".

In another deviation from US precedent, the High Court inserted commentary that advised market participants that in considering COMI, Singapore courts would not consider the location of Chapter 11 proceedings and activities of foreign representatives. The court explained that following US precedent to consider the location of the proceedings and activities would "[allow] the parties to choose their COMI (so to speak) in an artificial manner".

Finally, the High Court reminded market participants of the court's role as a gatekeeper: "the Singapore Court is not merely acting as a rubber stamp". Creditors can take comfort that the Singapore courts will consider whether they are adequately protected, as the court elaborated, "[Singapore courts] must carefully scrutinise the circumstances in which the foreign order was granted and ensure that interested parties were given an opportunity to be heard and that the relevant creditors and shareholders are adequately protected".

(*) This article was previously published on the website of White & Case.