An alternative paradigm for Singapore jurisdiction in cross-border insolvency?
Singapore aims to become a hub for international corporate and debt restructuring. The foundations for Singapore’s ambitions were first laid through the omnibus Insolvency, Restructuring and Dissolution Act 2018 (IRDA). More recently, legislative changes were made to allow the Singapore International Commercial Court to hear and decide cross-border restructuring and insolvency cases. Since the introduction of the IRDA, more, and more complex, cross-border restructuring cases have come before the Singapore courts. Recent examples include the restructuring of crypto companies like Vauld and Zipmex.
The Zipmex restructuring : further refinement?
Under the IRDA, foreign companies that are not registered with the Accounting and Corporate Regulatory Authority must have a “substantial connection” with Singapore if they wish to apply to the Singapore courts for a moratorium on their debts and legal proceedings.
One of the ways to establish a “substantial connection” is to show that Singapore is the “centre of main interests” (or COMI) of the company. The term COMI was introduced in the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) and a company’s COMI is the jurisdiction which the company is most closely associated with. Generally, this is where the company administers its business.
What COMI is, and how it is to be ascertained, is subject to considerable debate. The Singapore courts have considered how COMI is to be ascertained in the context of granting recognition to foreign insolvency proceedings under the Model Law. However, how COMI is to be determined for the purposes of establishing a foreign company’s “substantial connection” to Singapore had not been considered by the Singapore courts prior to the restructuring of the Zipmex group (Zipmex).
In Zipmex, the Singapore High Court had to consider whether the unregistered foreign Zipmex entities have a “substantial connection” to Singapore as a threshold issue. The High Court held that there should not be differentiation in how COMI is determined in different contexts – ie, in recognition of foreign proceedings under the Model Law, and at common law (outside the operation of the Model Law) when determining a foreign entity’s right to apply for a moratorium under the IRDA. The Court noted that COMI is a useful concept in identifying the jurisdiction with the “closest and most tangible or impactful connection” to a company. On this approach, the Court determined that the COMI of the various Zipmex entities was Singapore, arising from the business structure and operations of the Zipmex group. For the Thai entity (Zipmex Thailand), the use of the “Z wallet” for the “ZipUp+” service was through Zipmex Singapore, a subsidiary of the group holding company (Zipmex Asia, a Singapore company), which allowed the assets to be dealt with by Zipmex Singapore. Similarly, the other subsidiaries authorised Zipmex Asia to trade or commit the “On-exchange Assets”, ie, the crypto assets, for business purposes. Singapore was thus the COMI for the individual Zipmex entities, including the Indonesian and Australian entities. Crucially, the Court highlighted that the consolidation of assets in the hot wallet hosted by Zipmex Asia in Singapore from all the Zipmex entities lay at the heart of the business model and operations of the group. The fact of such consolidation, even if creditors were not actually aware of this, pointed to a Singapore centre of gravity.
In the authors’ view, while the correct outcome on COMI was reached in Zipmex, questions may arise as to the suitability of this approach in future cases. In today’s business environment, companies are adopting increasingly complex corporate structures as businesses grow in scale and sophistication, and it is not beyond the realm of possibility that applying the established test would result in a finding that a company has no COMI, or more than one COMI. FTX is a case in point. Prior to its spectacular failure, FTX was one of the world’s largest cryptocurrency exchanges with more than 100 affiliated entities. At its peak, FTX had global operations with a business model that transcended traditional boundaries. Determining the COMI of the FTX entities, in the context of a hypothetical application for a moratorium, would be no simple task. It may soon become necessary to contemplate an alternative paradigm on how COMI is determined where a foreign company seeks a moratorium from the Singapore courts, especially with the advent of crypto assets and non-fungible tokens.
The debtor’s perspective: paramount considerations
The United States is popular with debtors seeking to restructure. That foreign companies with ostensibly no connection with the US would elect to seek bankruptcy protection from the US Bankruptcy Court is testament to the popularity of the US restructuring regime.
From the debtor’s perspective, considerations such as ease of access to the restructuring court and the ability to have proceedings in another jurisdiction recognised in the forum court are important. No debtor wishes to expend time and limited resources to engage the necessary professionals and prepare a restructuring plan only to be turned away from the restructuring court. Further, as a debtor may require the assistance of the restructuring court to provide it with sufficient breathing space to prepare, propose and implement its restructuring plan, any orders that a restructuring court makes in support of this must be recognised. In this regard, judicial assistance from the courts of other jurisdictions would be crucial.
There is much to commend in the broader US restructuring and insolvency framework. For a debtor to gain access to and protection from the US Bankruptcy Court, a debtor must reside, have domicile, a place of business, or property in the US (or a municipality). A foreign debtor company is not required to have substantial or meaningful connection with the US to seek bankruptcy protection.
On the other hand, the IRDA requires a foreign company seeking bankruptcy protection in Singapore to have a “substantial connection” with Singapore. A foreign company may demonstrate this on various grounds: Singapore is its COMI; it carries on business in Singapore or is listed in Singapore (in one case, the fact that the company had issued secured notes which were listed on the Singapore Stock Exchange was regarded as a sufficient indicator of substantial connection to Singapore); it has chosen Singapore law as the governing law of a loan or other transaction; or it has “substantial assets” in Singapore. Relevantly, assessing whether certain asset classes such as crypto assets and non-fungible tokens fulfil these criteria may not be entirely straightforward, particularly in relation to the last mentioned ground (where thorny issues of valuation arise). However, since a substantial connection may be established on any one, or more, of a number of grounds, it might also be reasoned that the essential touchstone of carrying on business activity that is not merely transient, or being subject to Singapore laws and regulations (which would be the case if a company is listed on the Singapore Stock Exchange), would suffice to found jurisdiction.
A more flexible approach toward recognition of judgments?
While it is important for debtors to have ease of access to a restructuring court, it is equally important that a debtor is able to obtain recognition of any orders or judgments that the restructuring court may make in support of the debtor’s attempt to rehabilitate. This includes further orders or judgments that may be necessary, eg, in relation to the ownership or disposal of disputed assets. There is something to be said in favour of a more accommodating approach which preserves the flexibility of the courts to choose whether or not to recognise foreign insolvency-related judgments according to the unique circumstances of each case, while remaining consistent with the existing legal framework. This flexibility is necessary, since the Model Law is not a treaty and therefore has been implemented in domestic legislation and interpreted by local courts in varying ways.
The saga of the Arcapita restructuring in the US (which spanned more than a decade) and the ruling of the US Bankruptcy Courts in relation to the exercise of US jurisdiction over the foreign parties (Arcapita), is illustrative. In a 2017 ruling, the district court for the southern district of New York (SDNY) exercised personal jurisdiction over a foreign bank party on the basis of that party’s use of New York correspondent bank accounts, notwithstanding that the underlying transaction was between two foreign banks and governed by foreign law. The SDNY dismissed an argument by the foreign bank parties that applying US law would be unreasonable as there was a conflict between the US bankruptcy laws and the foreign law, and the foreign parties expected the foreign law to govern their relationship. Noting that Arcapita concerned the enforcement (as opposed to recognition) of a US court judgment against a foreign party, one wonders if the SDNY’s approach (which the authors understand is based on principles developed under the US common law) may usefully be adapted in an appropriate form in Singapore. Of course, recognition will also bring to the fore other issues involving the avoidance of transactions entered into and recovery of sums paid.
Way forward for Singapore
Despite the introduction of the IRDA, Singapore has yet to be perceived as a “debtor-friendly” jurisdiction, at least not to the same extent as the US. To the extent that being welcoming for debtors furthers Singapore’s ambitions as a restructuring hub, it may be timely to consider how Singapore can become a more “debtor-friendly” jurisdiction. One avenue may be to allow recognition of foreign orders or judgments under Article 21(1)(g) of the Model Law (as implemented under the IRDA), which allows for relief to be granted to a Singapore insolvency officeholder. In a 2022 decision concerning the insolvency of Eagle Hospitality Real Estate Investment Trust, the Singapore High Court held that recognition of a Chapter 11 plan and confirmation order could be granted as additional relief under this provision. In doing so, the Court preferred the US jurisprudence on the issue and declined to follow the UK position. This is yet another welcome example of the development of an autochthonous Singaporean jurisprudence by our courts.
* The article was originally published by Business Times.