Judicial Management: What is It and How Does it Work?
Judicial management is a method of debt restructuring where an independent judicial manager is appointed to manage the affairs, business and property of a company under financial distress. The company is also temporarily shielded from legal proceedings by third-parties, giving it the opportunity to rehabilitate.
Application for Judicial Management
The following parties can apply for the company to be placed under judicial management:
- The company itself
- The company’s directors
- The company’s creditor(s)
The application is made through an originating summons, supported by an affidavit stating the grounds for the application.
Nomination of judicial manager
In the application, the applicant has to nominate a judicial manager. The nominee must be a public accountant who is not the auditor of the company. However, the Court has the right to reject the applicant’s nomination and appoint another person, who may not necessarily be a public accountant, as judicial manager instead.
The Minister for Finance may also nominate a person to act as the company’s judicial manager if the Minister thinks this is necessary in the public interest.
After the application for judicial management has been made and before the Court makes its decision on whether to grant the order for judicial management, an interim moratorium (i.e. a temporary suspension of a certain activity) will kick in to restrain certain actions from being taken against the company.
These actions include the starting of lawsuits against the company and the enforcement of charges on, or security over, the company’s property.
The effect of the moratorium is that it prevents the company’s existing assets from being dissipated through a series of claims initiated by third-parties. The assets can then be better used to satisfy claims by the company’s creditors later on.
Interim judicial manager
An applicant may also apply for an interim judicial manager to manage the company’s affairs and prevent dissipation of the company’s assets.
Court Order for Judicial Management
The Court may make an order for judicial management if:
- It is satisfied that the company is or is likely to become unable to pay its debts; and
- It considers that placing the company under judicial management would be likely to achieve at least one of the following purposes:
However even if these requirements have been satisfied, the Court can still refuse to grant the order if it thinks this is necessary. In exercising its discretion, the Court may consider factors such as:
- Creditors’ interests;
- Creditors’ opposition to the granting of a judicial management order;
- Likelihood of the company’s successful rehabilitation; and/or
- Suitability of judicial management against other regimes, such as winding up.
Finally, there is one situation where the Court must dismiss an application for a judicial management order. This is when:
- A floating charge holder opposes the making of the order; and
- The court is satisfied that the prejudice caused to the floating charge holder if the order was granted would disproportionately outweigh the prejudice caused to the company’s unsecured creditors if the application for judicial management was dismissed.
What Happens During Judicial Management?
Judicial manager takes control of the company
Within 60 days of the court order for judicial management, the appointed judicial manager has to prepare a statement of his proposals on how he intends to achieve the purpose(s) which the judicial management order was made for.
The judicial manager then summons a creditor’s meeting for the creditors to decide whether to approve the proposals. If more than 50% in number and value of creditors approve, the judicial manager is obliged to manage the company’s affairs, business and property in accordance with the proposals.
At the same time, the judicial manager will take control of the company’s property. The judicial manager may then sell, dispose of, or grant security over this property.
The judicial manager is also empowered to exercise other powers as stated in the Eleventh Schedule of the Companies Act. For example, the judicial manager can:
- Carry on the company’s business;
- Borrow money and grant security over the company’s property;
- Initiate or defend any lawsuit in the company’s name and on its behalf;
- Make any payment necessary or incidental to the performance of the judicial manager’s functions;
- Make any scheme of arrangement on the company’s behalf; and
- Make or defend an application for the company to be wound up.
Throughout the judicial management process, the judicial manager is expected to be honest, impartial and to avoid conflicts of interest. The company’s directors and officers are also obliged to give the judicial manager information on the company and its business, dealings, affairs or property, and also address any of the judicial manager’s concerns, at any time as the judicial manager may reasonably require.
While the company is undergoing judicial management, there will be a temporary moratorium on certain activities such as the:
- Winding up of the company;
- Appointment of receivers and/or managers over any company property or undertaking;
- Starting or continuing of any lawsuits against the company (except with the judicial manager’s consent, or with the Court’s leave and subject to any of its terms);
- Enforcement of any security over the company’s property (except with the judicial manager’s consent, or with the Court’s leave and subject to any of its terms); and
- Re-entry of, or forfeiture of the company’s leases over, any premises (except with the judicial manager’s consent, or with the Court’s leave and subject to any of its terms).
What if the judicial manager has mismanaged the company’s affairs?
If a company creditor or member is of the view that the judicial manager has mismanaged the company’s affairs, he or she can apply to the Court to have the order for judicial management discharged.
When making this application, the applicant will have to show that the judicial manager has managed the company’s affairs, business and property in a way that is or was unfairly prejudicial to:
- The company’s creditors or members, in general;
- Some part of the company’s creditors or members (including the applicant, at the very least); or
- A single creditor representing 25% in value of the claims against the company.
Alternatively, the applicant can show that any of the judicial manager’s actual (or proposed) acts or omissions is (or would be) unfairly prejudicial to any of these parties.
Duration of Judicial Management
Unless the order for judicial management order has been discharged, judicial management will last for 180 days from the date that the order has been made. However, the judicial manager can apply to the Court for an extension of time.
Discharge of Judicial Management Order
The judicial manager must apply to the Court to discharge the order for judicial management if it appears to him that the purpose(s) specified in the order has either been achieved, or is incapable of achievement.
Judicial management is just one method of debt restructuring in Singapore. There are other methods available. However, judicial management might be most appropriate in situations where the company’s financial distress is due to its directors’ possible mismanagement or poor management of the company.
This is because judicial management is undertaken by an independent third-party (i.e. the judicial manager), instead of the company’s board of directors (as is the case for a scheme of arrangement). In addition, the company’s directors are also legally obliged to cooperate with the judicial manager.
If you need legal advice on whether your company will benefit from being placed under judicial management, feel free to get in touch with one of our corporate and commercial lawyers.
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