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Cross-Border Insolvency Issues

An introduction to some of the difficulties faced in cross-border insolvencies, especially in the Singapore context wherein most assets of a Singapore company may be located in foreign jurisdictions.

Introduction

When Singapore first industrialised in the late 1960s and early 1970s, the first industries were low value, high volume industries, attracting investment from higher cost industrial centres like Japan, the USA and Europe. As Singapore progressed in its rapid industrialisation and improved the lives of its population with the higher standard of living, so did the cost of doing business in Singapore. While the higher costs of production in Singapore meant that, by necessity, the production in Singapore had to move up the food chain and focus on more high value production, the low value, high volume industries were then moved to lower cost production centres like Malaysia, Thailand and then the Peoples’ Republic of China. Subsidiaries were set up in these foreign jurisdictions to take advantage of tax incentives and lower costs. This economic diaspora presents special challenges to insolvency administrators (whether they be scheme managers, judicial managers or liquidators).

Singapore has not adopted the UNCITRAL Model Law on cross-border insolvency. Neither are there any statutory provisions governing the recognition of foreign insolvencies under Singapore law. Court orders obtained in foreign insolvency proceedings can only be enforced in Singapore if the Singapore courts recognise these proceedings. Although they retain a discretion in recognising these proceedings, it is generally accepted that Singapore courts adopt a pragmatic approach in dealing with cross-border insolvency cases and appear to be increasingly willing to recognise and enforce foreign insolvency proceedings. The Singapore courts have previously approved various multi-jurisdictional schemes of arrangement, involving insolvent companies in multiple jurisdictions.

However, this does not mean that the challenges of cross-border insolvencies are in any way diminished.

Distinctive features of the Singapore economy today

Due to the high cost of doing business in Singapore, many Singapore companies do not have any core assets or business physically located in Singapore. Instead, they may only maintain offices in Singapore and hold their assets and investments in other countries, such as the Peoples’ Republic of China, Vietnam, Malaysia, India and Indonesia, through the Singapore holding companies.

Difficulties Faced in Cross-Border Insolvencies

The other feature of the Singapore business scene is that the government has been very successful in attracting multi-national companies to set up businesses in Singapore. When insolvencies occur, these distinct features of businesses in Singapore may bring to the fore some of the following difficulties faced in cross-border insolvencies:

1 Lack of mutual recognition with foreign countries as to insolvencies in other countries;

2 Limited access by insolvency administrators to assets of companies located in foreign jurisdictions;

3 Differential treatment between local and foreign creditors, particularly in terms of recognition and priority of access to assets;

4 Enforcement issues for creditors over assets in foreign jurisdictions; and

5 Lack of communication and co-ordination between local and foreign courts and administrations.

Recognition of insolvency
administrators

One of the biggest challenges that is faced by an insolvency administrator in Singapore is the recognition of his position in a foreign jurisdiction. One example is that when an application is made to court for the appointment of a judicial management order, there will be a moratorium on the enforcement of rights by creditors, including the enforcement of a retention of title clause.

However, due to the time lag between an application and the appointment of a judicial manager, there is an opening for a forceful creditor to take matters into his own hands and go directly to the foreign jurisdiction where the asset is located and either exercise the remedy of self-help and enter into the premises and repossess the assets in question; or he may take out an application in the courts of the foreign jurisdiction and obtain a court order giving him the right to the asset. Of course, the judicial manager may either intervene in such judicial process or he may seek to set aside the foreign court’s order. However, by this time, if the assets are chattels, they may have been removed from that foreign jurisdiction and it would be an uphill task for the judicial manager to trace the assets in question.

The same would apply where a winding up is in process. Under the Companies Act, any action or continuation of an action against the insolvent company would require that leave of the court be sought before such action or continuation of an action may be brought against the company. However, if the creditor were to commence action in a foreign jurisdiction, there may not be much that the liquidator may be able to stop such creditor. The liquidator and his legal team may find themselves having to defend actions commenced in various jurisdictions around the world.

These actions will necessarily drain resources, distract the liquidator from his main purpose of winding up the company and adversely impact the other creditors of the company. In fact, in such jurisdictions where the courts will permit a suit to be brought despite the fact of the winding up and there being the more obvious and cheaper option of the disgruntled creditor proving his claim in the winding up, the courts may be by the same reasoning permit the creditor, if successful, to look to any assets within that court’s jurisdiction for satisfaction of any judgment in its favour. This will in turn further diminish the pool of funds available for distribution to the creditors of the company.

Discrimination between foreign and local creditors

In a Singapore insolvency, there is no discrimination between Singapore creditors and foreign creditors. Foreign creditors may commence and participate in liquidation, judicial management or receivership proceedings as well schemes of arrangement and are given the same rights as Singapore creditors. However, there is case law that the assets of a foreign insolvent company situated in Singapore shall be ring-fenced to satisfy Singapore creditors before any remaining proceeds are then repatriated to the country of incorporation of the insolvent company. While this decision has since been clarified that the provision of the Companies Act in question only applies to a foreign company which has been registered under the Companies Act in Singapore, it does give rise to the possibility of interesting dog fights in court whereby the Singapore creditors may seek to winding up the Singapore branch of the foreign company, while the liquidator (or foreign creditors) will strenuously seek to prevent such winding up. The reason is obvious: if there is a winding up of the Singapore branch, the Singapore creditors will be satisfied first with any remaining funds repatriated to the country of incorporation of the insolvent company; if there is no winding up, then the Singapore creditors would have to prove in the foreign winding up and be paid pari passu with all the creditors of the company.

Similarly, a winding up application by a liquidator may be challenged by creditors in that jurisdiction, particularly, where the creditors have obtained judgment against the company or branch of the foreign company. If the winding up application is successful, then the creditors would be deprived of the fruits of their victory in court and would have to prove in winding up along with all other creditors of the company. If the winding up application is not successful, or if the creditors enforce their judgments before the application is made, then they will able to satisfy their debts in full rather than having to prove in winding up and perhaps only having a fraction of their claim satisfied.

An insolvency administrator may be given certain powers to examine the former directors and other officers of the insolvent company to obtain more information in respect of the affairs of the company. However, such powers are conferred by the Companies Act and such powers face a twin challenge: tracking down these persons in a world where movement between countries is easier than it was even just 10 years ago; and these powers may not be recognised nor can they be exercised without more in a foreign jurisdiction. The powers of compulsion which are vested on a liquidator under the Companies Act may not be something which can exercised out of jurisdiction without an application to the foreign court. This will necessarily result in delay and further costs which will have an adverse impact on the pool of insolvency funds available to creditors. Even this course of action is not always available to a liquidator because the courts of the jurisdiction in question may not recognise the court order conferring such powers on the liquidator.

The assumption that one may sometimes make is that there will be no complications in gathering all the assets of the insolvent company. However, because of the transnational nature of businesses today, most of the valuable assets of the insolvent company may be based in one or more of the investment centres around the region. Because the regimes of these various countries will allow for different degrees of recognition of the winding up order, there will necessarily be challenges in the way of a speedy and expeditious gathering and liquidation of such assets. For one thing, every different jurisdiction will present different legal processes which will have to be undergone before the liquidator may take over the assets. For another, each jurisdiction may have its own mandatory rules of priority over these assets. Some countries may have special protection in respect of workers’ welfare or local creditors. These issues will have to be addressed before the liquidator is able to take over the assets. Local creditors may also challenge any attempt to simply repatriate the assets to the home insolvency of the company. If the assets are interests in land, there will usually be restrictions on the rights to these land and how they may be dealt with.

Independent nature of subsidiaries

A further challenge which faces liquidators is the company may be structured such that the Singapore entity is merely a holding company with foreign operational subsidiaries in various investment centres around the region and even the world. With the winding up of the Singapore holding company, it does not necessarily follow that these subsidiaries are wound up as a consequence: they are independent legal entities and may continue to exist despite the insolvency of its parent company. The dilemma which then faces the liquidator is whether these subsidiaries should be wound up or if they should be hived down and then sold off to raise funds. Even if the former is route is chosen, the liquidator will find himself faced with possibly a foreign winding up process with all manner of claims against the asset pool of the subsidiary. If this subsidiary is not wholly owned but a joint venture with a local company in that jurisdiction, the liquidator will then have to grapple with issues of the shareholders’ agreement and local company law before he may be in a position to understand the constraints he is under and before he may be in a position to make an informed decision as to how to deal with the shareholding in the subsidiary.

If the foreign subsidiary were to face difficulties with working capital due to the insolvency of the parent company, it may itself face the prospect of being subject to the foreign insolvency regime. In such a case, the liquidator may find himself in the position of merely a creditor or, even worse, a contributory of the now insolvent foreign subsidiary. The liquidator may then have to bide his time and allow the foreign insolvency process to run its course before he may be able to recover something from the remains of the foreign subsidiary either as a creditor receiving a dividend in the insolvency, and, if there is any surplus after meeting the claims of the secured creditors, the statutory preferred creditors and unsecured creditors, as a contributory of the subsidiary. It may be a long wait, and the wait may be in vain.

Too many cooks for the books

The appointment of different liquidators in different jurisdictions may also lead to a further set of problems. If the liquidators appointed are from the same international firm of insolvency practitioners, the prospect of sharing of information and pooling of resources may make for a more efficient and effective winding up. Furthermore, such sharing of information and co-ordination of investigation efforts into the affairs of the companies in the group will also allow the liquidators form a more complete picture of the last days of the company. It is an unfortunate but common phenomenon that parent companies and their subsidiaries tend to move funds around the group without there always being full and complete records. In such a situation, the bringing together of the many pieces of the puzzle will lead to a more thorough and speedier process in information gathering. This will in turn allow the liquidators to commence their claw back actions much sooner before the assets in question are dissipated.

However, other creditors in the foreign subsidiaries may not subscribe to the same point of view: after all, all the abovementioned sharing of information and resources is mainly to benefit the liquidator of the parent company, and consequently, the creditors of the parent company. There will inevitably be concerns of a conflict of interest: the more stringent the scrutiny being applied to the proofs of debt of the foreign subsidiary and fewer claims being allowed will in turn mean that there is more funds leftover for the pool of funds available to the creditors of the parent company; furthermore, if there are inter-company loans and other transfers, the parent company may well be one of the creditors of the foreign subsidiary. There would be some concern amongst the creditors of the foreign subsidiary that if the same firm of insolvency practitioners are appointed as liquidators for both the parent company and foreign subsidiary, then the liquidator may be torn between on the one hand recovering as much as possible for the creditors of the parent company, while at the same time being duty bound to the creditors of the foreign subsidiary. The liquidator would on the one hand be adjudicating the proofs of debt of the subsidiary while filing a proof of debt himself on behalf of the parent company. It is not a happy state of affairs and the foreign courts may hence be suspicious of such a situation and reluctant to allow such concurrent appointments.

If the situation where the parent company and the foreign subsidiary has different firms of insolvency practitioners running the two liquidations, while it may well be true that, as professionals, they would not be averse to sharing information, the masters they serve will necessarily be different. Furthermore, because their powers as liquidators arise from different court orders, they are not bound to communicate or indeed co-ordinate their investigation or recovery efforts. Hence, a free flow of information between the two sets of liquidators will be more apparent than real.

Conflicts of laws

One of the biggest challenges facing both lawyers and insolvency practitioners in cross-border insolvencies is that of foreign laws and regulations. The insolvency of a parent company in one jurisdiction may have a different impact on its subsidiary in another jurisdiction depending on the laws applicable to the subsidiary. A winding up order in one jurisdiction is not recognised without more in another jurisdiction. The rules, and consequently the steps to be taken, will differ from jurisdiction to jurisdiction. Each jurisdiction will necessarily have a different team working on the winding up, fluent in the rules, regulations and legal processes of their specific jurisdiction.

For companies incorporated in jurisdictions other than Singapore, the laws of the relevant countries may apply to the assets and proceedings outside Singapore. In a situation such as this, there may be conflicting laws in respect of how to deal with the assets of the company. The additional skirmishes undertaken by the various parties to the dispute will only add to costs and reduces the pool of assets available to all parties.

Conclusion

As a final note, the fact that Singapore has not adopted the UNCITRAL Model Law on cross-border insolvency does present particular challenges insofar as our special economic circumstances are concerned. As our business go out into the region and expand, as well as we attract foreign investment into Singapore, our local insolvency administrators and practitioners will increasingly face the problems highlighted above. This article does not pretend to be exhaustive, but merely serves to highlight some of the particular issues which will face them in the current recession.

The diversity of the legal systems in the main investment centres in the region will continue to present challenges because of the different legal systems that are in place. Different jurisdictions will continue, in the foreseeable future, to bear witness to differing policy considerations. This will especially so when the global economic conditions take a hold on the local population and governments seek to insulate their people from the impact of the global recession. There will always be jurisdictions that will favour local creditors or have classes of preferred creditors such as employees of the local subsidiary.

The only advice that one can give to any lawyer advising on cross-border insolvencies is to exercise caution – one should never assume that there is harmony of the laws relating to insolvencies and with respect to rights in relation to assets. It behoves them to take advice from local counsel as there will almost invariably be differences between the various local insolvency regimes. The legal minefield that any cross-border insolvency practitioner faces will be with us for some time to come. We may all be part of the global economy; yet there is no universal set of rules governing insolvencies that may arise in the context of cross-border businesses.

Lee Kiat Seng

Baker & McKenzie.Wong & Leow

E-mail: [email protected]