Finally Debtor in Possession Financing Arrives in Singapore

leesoonkie
Jan 12, 2017
2 min read

Or rather it will be coming soon.

One of the more interesting amendments to the Singapore Companies Act came in the last quarter of 2016. Under proposed amendments to the Companies Act changes will be made to schemes of arrangements allowing finally debtor in possession (“DIP”) financing.

The proposed changes will also see Singapore adopting the United Nations Commission on International Trade Law, or UNICTRAL Model Law on Cross-Border Insolvency. The Model Law has been adopted by many key jurisdictions such as US, UK, Australia, Canada and New Zealand. With the proposed changes, Singapore’s aspirations as a major center for debt restructuring will be given a major boost when the amendments are passed in early 2017.

DIP Financing

The proposed changes cannot come soon enough in today’s environment. Under current laws rescue financing such as DIP financing for a company undergoing restructuring is almost impossible. Even if there is a potential lender willing to provide finance they may not, due to legal challenges from other creditors and priority of claims. Unlike the US where Chapter 11 provisions allow for DIP financing to take super priority over other creditors, there is no such provisions in Singapore unless creditors agree to allow such financing to take precedence over their own claims. This is unlikely due to the disparate claims and conflicts of lenders and creditors.

In many situations DIP financing is sorely needed to allow for a proper reorganization of the debtor. There may be ongoing project works where the incremental cost to completion is significantly lower than the expected receipts or in a retail operation, allowing a quick cash infusion through DIP finance allows an orderly sale of goods rather than a “lelong” approach where the goods are sold at a pittance of their values. In these situations keeping the company going may actually be better.

As an aside the phrase debtor in possession comes from the US bankruptcy laws. When a company files under Chapter 11, the company’s management and board of directors remain in possession of its business (unless a trustee is later appointed) thus "debtor in possession".

The devil is of course in the details. Most of the major law firms in Singapore have put out articles on the proposed changes and it would be worthwhile to go through them.

Who will Lend?

While the laws will change allowing rescue financing to finally take off in Singapore, the question is who will. Existing banks are unlikely to. Faced with a non performing loan, the mantra “don’t throw good monies after bad” is imprinted in the subconscious of credit managers.

The likely lenders will come from private funds attracted by high interest rates and the formal protection of the revised laws. The US has a rich history of such funds sadly the ticket size may be too small for them. There is room for a local fund willing to work with smaller ticket size.

Paradoxically attracting these funds means more companies must fall into distress. The economy must get worse which is a perverse kind of logic.