Simplified Insolvency Programme Guide: Debt Restructuring

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What is the Simplified Debt Restructuring Programme?

The Simplified Debt Restructuring Programme (SDRP) is intended to assist with the debt restructuring of micro and small companies which may not have substantial assets, such that the regular debt restructuring procedure would be too costly to be practical.

To assist in this debt restructuring process, the SDRP provides small and micro companies with:

  • Protection from creditors while the company prepares a “pre-packaged scheme of arrangement”; and
  • Reduced approval thresholds for preparing the pre-packaged scheme of arrangement itself.

What is a pre-packaged scheme of arrangement?

A pre-packaged scheme of arrangement is a proposed arrangement between the company and its creditors as to the repayment of the company’s debts that can be approved and enforced by the court. Unlike a regular scheme of arrangement, the company does not need to call a meeting of creditors for the pre-packaged scheme.

The court may approve of such a scheme on the basis that if a meeting of creditors had been called, a sufficient majority of them would have approved of the arrangement. This may be proved by the company showing evidence of out-of-court approval by creditors, such as writing to each creditor with the details of the proposed scheme and obtaining their written consent.

The SDRP is one-half of the Simplified Insolvency Programme, which also includes a simplified creditors’ winding up process. This article will explain:

When can I Apply for the Simplified Debt Restructuring programme?

The Insolvency, Restructuring and Dissolution (Amendment) Act establishing the Simplified Insolvency Programme, including the SDRP, has been passed by Parliament and assented to by the President, but it has not yet come into operation. It will come into operation only on the date stated by the Minister for Law in the Government Gazette.

Following that date, companies will have a period of 6 months to make use of the SDRP. However, this period is subject to changes as ordered by the Minister.

Which Companies are Eligible for the Simplified Debt Restructuring Programme?

To qualify for the SDRP, a company must:

  1. Have an annual sales turnover of $10 million or less;
  2. Employ not more than 30 employees;
  3. Have 50 creditors or fewer; and
  4. Owe less than $2 million in debts.

Additionally, the company must not:

  1. Presently be undergoing any winding up or judicial management proceedings;
  2. Be unlikely to obtain the requisite two-thirds majority in value of creditors’ approval of a pre-packaged scheme of arrangement within 90 days;
  3. Have one-third in value or more of its creditors object to the SDRP.

This means that for the SDRP application to be granted, not only must the company fall within the thresholds for annual turnover and debts, but a pre-packaged scheme of arrangement must also have a possibility of succeeding. This is because it must not be unlikely for the scheme to obtain the requisite two-thirds creditor approval.

Benefits of Using the Simplified Debt Restructuring Programme

The SDRP caters to micro and small companies lacking the same resources that larger companies have access to, and aims to be faster and cheaper than existing debt restructuring processes. Compared to the normal scheme of arrangement process under the IRDA:

  1. There are fewer applications to court required;
  2. The automatic moratorium period, during which winding up and debt enforcement proceedings cannot be commenced against the company, lasts till the end of the SDRP instead of lasting only 30 days;
  3. A lower creditor approval majority is required for the pre-packaged scheme of arrangement.

The moratorium period is especially beneficial as it gives the company time and space to formulate a restructuring proposal or to turn its business around. Following this, a successful scheme of arrangement would allow the company to restructure its debts with its creditors in a consensual manner, to avoid costly court processes and help the company avoid being wound up.

How to Apply for the Simplified Debt Restructuring Programme

During the period that the SDRP is available, the company must make an application to the Official Receiver, an appointed public official who acts as a regulator for the SDRP, to be accepted into the SDRP. The application may be made on a website designated using the provided form (website has yet to be designated), and must attach:

  1. A special resolution passed by 75% of shareholders of the company authorising the application
  2. A list of all creditors of the company and the amounts owed
  3. Any fees that may be payable upon application

It is important to ensure that the information provided is accurate as directors or other executives of a company that provides false or misleading statements, information or documents to the Official Receiver will be guilty of an offence.

The Official Receiver may appoint a Restructuring Advisor to assist the company throughout the SDRP process, including the making of the SDRP application. The Restructuring Advisor may continue to assist throughout the process, up to informing the Official Receiver when the company may be discharged from the SDRP.

If a company is eligible for the SDRP and complies with the application requirements, the Official Receiver will send a notice of application to the company and its creditors. It will also publish the notice on the designated website.

The notice of application will set out the details of the company and the procedure for submitting an objection to the company entering the SDRP. These objections must be made within 21 days of the notice of application being published.

Note that if one-third in value or more of the company’s creditors object to the SDRP, the application will fail as it would no longer be eligible for the SDRP.

If the Official Receiver does not receive any objections within the 21 days, the company will be accepted into the SDRP. On the other hand, if the Official Receiver has been notified of objections from less than one-third in value of the company’s creditors, it has the discretion to accept or reject the company’s SDRP application.

What Happens If the Application for the Simplified Debt Restructuring Programme is Successful?

Company is notified and has to pay a deposit

If the company’s application to enter the SDRP is successful, the company will be notified of its acceptance into the SDRP. The company’s acceptance into the programme will be published on the designated website.

The company will also be required to pay a deposit used to cover the expenses incurred by the Official Receiver. If the deposit is not paid, the company will not be accepted into the SDRP.

Duration of SDRP

The default duration of the SDRP is 90 days starting from the publication of the company’s acceptance into the SDRP. During the SDRP, however, the company may apply to the Official Receiver for an extension of this period if required.

The SDRP may be discharged before the expiry of the 90-day period if any of the discharge events described in the section below (under “discharge from SDRP”) occurs. These include the expiry of the SDRP period, a court deciding on the pre-packaged scheme of arrangement and other events.

Moratorium on legal proceedings

For the duration of the SDRP, the following restrictions on legal proceedings or other claims against the company apply:

  1. The company may not be wound up;
  2. The company may not be placed under judicial management or receivership;
  3. No litigation can be commenced or continued against the company unless the court grants leave to do so;
  4. No enforcement of security or claim of debts may be made against the company.

However, creditors may still enforce their right to set off what they owe the company against what the company owes them. For example, if the debtor company owes a creditor $20,000, and the creditor owes the debtor $10,000, the creditor is permitted to set-off his debt such that the creditor company owes him only $10,000.

Offences relating to disposing of property

If a company that has been accepted into the SDRP disposes of property in a manner that is not in good faith or not in its ordinary course of business, it will be liable for a criminal offence.

Additionally, a director of the company who consented to or permitted the disposal of property to occur, while having knowledge of such disposal, will also be personally liable for a criminal offence.

Seeking approval for a pre-packaged scheme of arrangement

To enjoy the benefits of the SDRP, including the protection from creditors, the company must apply for the approval of a pre-packaged scheme of arrangement. If an application is not made, such that there is no likelihood of a scheme being approved, the SDRP will be discharged.

In applying to the court for the scheme, the company must have first informed the creditors intended to be bound by the scheme of:

  1. The interests of the company and the effect of the scheme on those interests;
  2. The business position of the company and its prospects;
  3. How the scheme will affect the creditors;
  4. Any other information that may be relevant to the creditor in determining if it wishes to approve the scheme.

In addition, the company needs to inform creditors of how they can object to the application and the deadline for filing the objection.

Finally, under the SDRP, the court must be satisfied that a majority of at least two-thirds in value of the creditors or class of creditors would have voted in favour of the scheme. This is a lower requirement compared to the normal IRDA scheme of arrangement, which requires approval from at least three-quarters in value and more than half in number of creditors.

A company may prove this to the court by preparing the scheme and obtaining the written agreement of its creditors to the scheme.

Classifying creditors

In determining whether the creditors would approve of the scheme, creditors must first be classified according to the nature of the debts they hold.

Firstly, any agreement or disagreement to the scheme by creditors who are related to the company must be disregarded. This includes directors of the company, shareholders of the company and sister companies. This is to prevent such creditors related to the company from voting in favour of a scheme of arrangement that is in fact unfavourable to other creditors in the same class.

For example, the unsecured debtors of a company may include a majority director-shareholder of the company who is owed $70,000 and a bank which is owed $30,000. In this case, the director voting in favour of a scheme would normally cause the scheme to pass the two-thirds majority threshold regardless of how the bank votes.

This scheme could have the effect (subject to court approval) of writing off the debts of all unsecured creditors. This would then cause the bank to lose $30,000 while the director-shareholder may recoup his loss through the corresponding increase in the net assets of the company. Such situations would be unfair to creditors who are not related to the company.

Next, creditors may be classified according to:

  1. Creditors who are secured;
  2. Creditors who are unsecured but have priority;
  3. All other unsecured creditors.

For a scheme to be approved, the court must be satisfied that a two-thirds majority of each class would vote in favour of the scheme.

Approval of the scheme of arrangement

If the requirements for the scheme of arrangement are satisfied, the court will approve the scheme of arrangement. This approval may be subject to the court altering the scheme or placing conditions on the scheme.

Once the scheme is approved, it will be lodged with ACRA. After which, it becomes binding on all the company’s creditors, including those that did not consent to the scheme.

Discharge from the Simplified Debt Restructuring Programme

When will the company be discharged from the programme?

The SDRP ends on the earliest of the following events happening:

  1. The court making a determination on the pre-packaged scheme application. This is regardless of whether the court grants or dismisses the application
  2. The period of the SDRP, including any extensions applied for, expires
  3. The Official Receiver determining that the company does not comply with the SDRP eligibility requirements, including the company’s suitability for a pre-packaged scheme of arrangement and the likelihood of such a scheme succeeding
  4. The Official Receiver determining that the company made false or misleading statements in relation to the SDRP application
  5. The company failing to cooperate with the Restructuring Advisor
  6. The company failing to obtain a two-thirds majority approval for the scheme of arrangement from its creditors

What happens after the company is discharged from the programme?

Upon the discharge of the SDRP, notice of the discharge will be published by the Official Receiver in the Government Gazette and the designated website.

At this point, the moratorium on legal proceedings ends. This means that creditors can once again demand payment of debts from the company, enforce security against the company or sue the company.

However, if the company had been able to bind its creditors via a scheme of arrangement, these creditors may be contractually prevented from taking such action against the company.

If you manage a small business that is facing cashflow issues with pending debts, you should strongly consider applying for the SDRP once it is available. Your company does not need to be insolvent for it to be eligible for the SDRP.

In applying for the SDRP, you should contact a corporate lawyer to assist in providing the required information to creditors and publishing the relevant notices on the designated website or Government Gazette. This is especially important as failing to disclose information, or making a false statement, can result in the SDRP application failing or even criminal liability for the directors or other executives of the company.

A corporate lawyer will also be able to help classify your creditors and structure the pre-packaged scheme of arrangement, such that it has the highest possible chance of achieving the requisite two-thirds approval from all classes of creditors. Given that the default SDRP period is only 90 days, it may be crucial to have the scheme approved as quickly as possible.

You may get in touch with experienced corporate lawyers here.