Schemes Of Arrangement Under The Insolvency, Restructuring And Dissolution Act

• Published date: 12 August 2020
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Clyde & Co
• Author: Mr Junxiang Koh and Prakash Pillai

On 30 July 2020, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) came into operation. The IRDA is an omnibus legislation housing all of Singapore's insolvency and restructuring laws in one single piece of legislation.

The general framework of the IRDA has been discussed in the first article in our series of articles covering the various aspects of IRDA and can be found here.

In this article, which is the second article in our series we will touch upon the Scheme of Arrangement provisions contained in the IRDA, including an overview of a Scheme of Arrangement and its features, significant amendments to the Scheme of Arrangement regime that were implemented in 2017 and relevant modifications made to the regime in the IRDA.

Introduction

Schemes of Arrangement have been a part of Singapore's restructuring and insolvency landscape since 1967. Prior to the IRDA, the procedures for a Scheme of Arrangement were set out in Section 210 and 211 of the Companies Act (Cap. 50). In 2017, the Companies Act was amended to significantly enhance the Scheme of Arrangement regime, introducing improved statutory moratoriums and pre-pack schemes, amongst other innovations. The existing statutory regime for Schemes, as amended in 2017, have been largely transplanted into the IRDA, with minor modifications.

What is a Scheme of Arrangement?

Simply put, a Scheme of Arrangement is an agreement between the company and its creditors, containing terms that allow the company to restructure and meet its debt obligations. A Scheme (unlike other forms of restructuring) is primarily a "debtor-in-possession" rehabilitation process, where the company's existing management is not displaced in favour of a court-appointed officer. Schemes are fundamentally contractual in nature, being grounded in the Scheme document, which has the character of a contract between the company and its creditors However, where a Scheme differs from a contract is that it can, in certain circumstances, bind even dissenting creditors Therefore, to prevent abuse, there is also an element of Court supervision over the process.

Briefly, a Scheme of Arrangement will become binding on a company's creditors after the following three steps are completed:

1. The company must apply to the Court for leave to convene a creditors' meeting, the purpose of which is to consider and if thought fit, to approve the proposed Scheme of Arrangement. To give itself temporary respite and time to convene the meeting, the company may also seek a moratorium on further proceedings in any action or proceeding against the company;
2. At the creditors' meeting, the proposed Scheme of Arrangement must be approved by a majority of the creditors present and voting in each class (i.e. more than 50%) and this majority must represent 75% in value of the voting class. Once the requisite majority is achieved, the dissenting minority will also be bound by the Scheme. This "cram down" effect on the dissenting minority is unique to Schemes of Arrangement and represents a significant departure from usual contractual principles - a party can become bound to the terms of the Scheme even if it did not consent to the same; and
3. Lastly, the company will need to apply to obtain the Court's sanction of the Scheme. This step is necessary because of the potential for a Scheme to bind even a non-consenting creditor, to prevent abuse. Once the Court has sanctioned the Scheme, it will become binding on all creditors upon the lodgement of the Court order sanctioning the Scheme with the Registrar of Companies.

2017 Amendments to the Companies Act

Prior to the IRDA, the legislative framework for Schemes of Arrangement was set out in Part VII of the Companies Act. Part VII of the Companies Act was amended in 2017 by the Companies...