Roger Milburn, Investment Manager, Litigation Capital Management, Singapore
Among its objectives, Singapore’s new Insolvency, Restructuring and Dissolution Act 2018 (IRDA) – which came into effect on 30 July 2020 – consolidates the domestic insolvency and bankruptcy regimes into one piece of ‘progressive and modern’ legislation, introduces a licensing and regulatory regime for insolvency practitioners, and overall is intended to better position Singapore as an attractive international hub for business and finance.
Particularly welcome is the clarity now provided around access to third-party capital for Judicial Managers. Whilst third-party funding of international arbitration has been permissible in Singapore since adjustments to the regulatory framework were made in 2017 and case law had established that liquidators could turn to third-party funders to assist with the cost burden of pursuing claims for the benefit of the creditors of the company in liquidation, the position with respect to Judicial Managers was not clear. The new omnibus IRDA has put paid to any such doubt.
What are the benefits of the legislative change?
Judicial Management is an insolvency process – akin to administration in the UK – whereby a Judicial Manager is appointed to a struggling company with a view to rehabilitating its financial health. With a focus on trying to nurse a company back out of Judicial Management, office-holders will clearly need to focus on liquidity, liabilities and cash flow. This means that Judicial Managers commonly have to make difficult decisions about how to spend the limited resources a company has. With spending required to maintain operations on a day to day basis – for example in paying staff, rent and other operating expenses – paying legal fees to pursue meritorious legal claims will often be seen as something of a luxury and something which the insolvent company cannot afford.
The explicit confirmation on a legislative footing that Judicial Managers can use third-party funding to help bring those claims will mean that Judicial Managers can now approach such decisions from a different perspective. The claims can now more properly be regarded as assets which can be realised – with external financial help – for the benefit of the company’s creditors. Deployment of third-party funding in this way will increase the assets of the company where claims are successful. This will increase the chances of the company exiting Judicial Management having recovered (rather than taking the next step into liquidation), which in turn will benefit various parties which have an interest in a company surviving, such as its shareholders, employees and customers.
It is expected that corporate defaults and insolvencies will increase in number in the coming months as economies deal with the fall out of the Covid-19 pandemic. This is as true in Singapore as it is in other jurisdictions, particularly when the temporary relief granted by the Covid-19 (Temporary Measures) Act – which suspended creditors’ rights to commence legal claims against debtors for a period of six months – comes to an end (a step which is currently scheduled for October 2020). The change to the law in Singapore with regard to the options open to Judicial Managers may arguably increase the prospects of some of the impacted companies being saved.
For which claims can Judicial Managers use third-party funding?
As a result of the IRDA coming into force, Judicial Managers now have express statutory powers to assign certain causes of action to third-party funders, in accordance with prescribed regulations. This mirrors similar reform in the United Kingdom and Australia and generally follows principles applied in recent years by the Singapore High Court for approving agreements between third-party funders and insolvent companies.
Under the IRDA, Judicial Managers may enter into agreements with funders for claims relating to undervalue transactions, unfair preferences, extortionate credit transactions, fraudulent or wrongful trading and damages against delinquent company officers. The IRDA does not however extend to third-party funding of claims against a counterparty for unpaid receivables or breach of contract.
Third-party funders will only have a commercial interest in claims. However, there are wide-ranging scenarios where it will be beneficial for Judicial Managers to have access to third-party capital, including being able to monetise claims that may have overwise been abandoned due to a lack of resources. Furthermore, should the Judicial Managers choose to permit it via payments out, creditors can benefit from access to those funds (as well as any recoveries made) without having to face protracted and costly litigation, the risk of their claim(s) not succeeding and the risk of the company falling into liquidation and being unable to make payment in full or at all even if claims are won.
Whilst the IRDA strengthens Singapore’s efforts to establish itself as an insolvency and re-structuring hub, it also boosts the jurisdiction’s reputation from a third-party funding perspective by way of its legislative confirmation that Judicial Managers can use third-party funding to assist their administration of companies under their control. This widens the spectrum of scenarios in which parties can use the cost and risk management tool which third-party funding represents in dealing with their Singapore related disputes.
It is hoped that further options will emerge in the coming months following the announcement by the Ministry of Law in late 2019 that further regulatory changes will be made to permit third-party funding of domestic arbitration (which will bring Singapore into line with Hong Kong where funding by professional funders of domestic arbitrations is already permitted), certain proceedings in the Singapore International Commercial Court as well as mediations connected with such actions.