Comparing the corporate insolvency framework: UK, Singapore …€¦ · · 2015-05-18Comparing the corporate insolvency framework: UK, ... Comparing the corporate insolvency framework:

Comparing the corporate insolvency framework: UK, Singapore and India

Comparing the corporate insolvency framework: UK,Singapore and India

Anjali Sharma, Rajeswari Sengupta

May 15, 2015


Part I

What drives optimal insolvency law design


What is optimal design?

Insolvency laws in various countries differ substantially in many respects.

The variation reflects the underlying differences in:Economic and institutional conditions including legal tradition;Path dependency of economic and institutional development; andPolitical economy factors.

While the law deals with firms that are already insolvent, it affects thebehaviour of all debtors and creditors in the economy.

There is no generally applicable best solution.


Objectives and outcomes

Theoretical underpinning:Creditors wealth maximisation and the creditors’ bargain (Jackson) –German Insolvency Law.Broad based contractarian approach (Korobkin) – The US Insolvency Law.Multiple values/eclectic approach (Warren)

Choice of objectives determines design and outcomes.

For multiple objectives, priority of objectives needs to be stated.

Measures of evaluation: efficiency, expertise, accountability andfairness.


Central questions in insolvency

Central questions in insolvency:1 Control – who makes the critical decisions and with what level of discretion.2 Priority – order of distribution of assets as a matter of substantive law.

There exists a trade off between ex post and ex ante efficiency.


Objectives of insolvency law (Warren, 1993)

1 To maximise return to creditor by enhancing value of failing debtor.

Early recognition of distress and collective action.Value as going concern versus in liquidation.Preserving value of insolvency estate.Dealing with frivolous petitions.

2 To distribute value , as far as possible, in the pre-insolvency order of claims.

Priority.Equitable treatment of similar creditors.Rights of creditors that do not have legal claims to assets.

3 To internalise the costs of the business failure to parties to the process.

Minimising externalisation.Decision making by experts and concerned parties rather than courts.Costs associated with public goods, courts, regulatory and informationsystems.

4 Reducing strategic behaviour.

Liability for frivolous/fraudulent behaviour or not taking suitable actions indischarge of duties.


Resolution outcomes

Rescue:

Methods – reorganisation, restructuring, refinance, downsizing, partialsell-offs, management buy-outs, debt equity swaps, take overs.Informal vs. formal.If not initiated early, may just be a step before liquidation.Require expert judgment of viability and rescue possibility.

Liquidation:

Methods – sale of business or assets followed by winding up.Distribution of proceeds according to a pre-defined priority. The design ofthe priority impacts credit markets ex-ante.Specialised skills required for valuation and realisation.


Part II

The UK corporate insolvency code


Evolution of the corporate insolvency framework

Joint Stock Companies Winding up Act, 1844.

Amendments in 1848, 1849 and 1857 – winding up jurisdiction with ChanceryCourt. Formal separation of the procedures for companies and individuals.

Companies Act (1862-1985) – detailed provisions for winding up and pari passudistribution. Several provisions of various Bankruptcy Acts such as provable debtand fraudulent prference incorporated over time.

Insolvency Act, 1986 – consolidated insolvency provisions for companies andrepealed repealed insolvency provisions in Companies Act. Few insolvencyprovisions remaining in Companies Act:

Provisions for safe harbors in insolvency law for financial market contracts/arrangements (Part VII).

S. 754 (priority in case debentures are secured by floating charge), Pt. 25 (registration of charges)

and Pt. 26 (Scehme of Arrangements and reconstructions).

Amended in 2000 – new provisions for company voluntary arrangement (CVA)and moratorium.

Enterprise Act, 2002– replaced Administrative Receivership with Administration.

Reserved part of floating charge realisations for unsecured creditor and abolished

Crown preference.


The framework and institutional setting

Insolvency Act, 1986

Insolvency Rules, 1986

Companies Act, 2006

Banking Act, 2009

Ancillary laws:- Directors Disqualification Act, 1986- Financial Services and Markets Act, 2000- Employee legislation- Pensions legislation- Human Rights Act, 1998

Department ofBusiness Innovationand Skills

InsolvencyService

R3IP Association

INSOL

InsolvencyRules

Committee

JointInsolvencyCommittee

Legal Regulatory

Advisory

Professional

Seven IPlicensing bodies

Bankruptcy and Companies Court

Chancery Division

of High Court

Judicial Information

Credit Bureaus

CRAs

Companies House Register

London Gazette

InsolvencyService Website

Private monitoring

InsolvencyPracticesCouncil

IPs


Insolvency procedures

Financial distress/Insolvency event

Administration. Moratorium. IP

appointed to managebusiness.

Voluntary restructuring.No moratorium. BoD

in control.

Liquidation(compulsory or

company voluntary)

Receivership(creditors enforce

security)

Negotiated scheme(London Approach.

No court involvement)Scheme of Arrangement(Court must agree that

scheme meets minimumstandard threshold)

CVA(Court must agree that

scheme meets minimumstandard threshold)

Sale of assets orsale of business

Sale of assets anddistribution to

secured creditors

Restructuring/rescue.Company continues as

going concern.Company liquidated

and wound up.


Details of procedure

Administration CVA Scheme CVL CL

Objective To hold a companytogether whileplans are made forits rescue, sale orliquidation.

CVA can be forreorganising or liq-uidating a companyand can be standalone or within anAdministration orLiquidation. MostCVAs involve saleof business of thecompany, followedby winding up.

Used by compa-nies with complexcapital structuresto reach a com-promise on debts.They are useful asthey are bindingeven on securedcreditors.

Winding up of aninsolvent companythrough a specialresolution by share-holders and a voteby creditors to ap-point a Liquidator.

Winding up of ancompany by orderof the Court follow-ing a petition.

Trigger For a QFC holderno requirement foractual or impend-ing insolvency. Inall other cases,court requires ac-tual or impendinginsolvency to beestablished.

No default or insol-vency trigger.

No default or insol-vency trigger.

Voluntary windingup without declara-tion of solvency byDirectors.

Default on anundisputed debt ofGBP 750, inabilityto pay debts asthey fall due, assetsless than liabilities,application thatvoluntary wind-ing up not beingproperly conducted.

Who can trigger Holder of a QFCor the company orits BoD by filinga notice and otherprescribed docu-ments at court.Court can alsoorder an Admin-istration in somecases.

BoD for a standalone CVA, Admin-istrator or Liquida-tor in case CVA inwithin an Adminis-tration or a Liqui-dation. Membersand creditors can-not propose a CVA.

BoD in consulta-tion with majorcreditors or credi-tors or members.

BoD Any creditor, com-pany, Directors,members andAdministrator. Allor any of theseparties can peti-tion separately ortogether.

CVA - Company voluntary arrangement; CVL - Creditor voluntary liquidation; CL - Compulsory liquidation




Control Administratormanages the com-pany and theprocess. Com-pany’s BoD losecontrol. If Adminis-tration results in aCVA or a Scheme,the BoD is likely toregain control. Ifit results in a liqui-dation, Liquidatorgets control.

BoD in case ofstand alone CVA.If CVA is an out-come of Adminis-tration or Liquida-tion, the Adminis-trator or Liquidatoris in control.

BoD. Creditors throughthe Liquidator.

Court and Liquida-tion committee.

Role of IP As Administratorhas full manage-ment powers andis required to takeany actions to (1)rescue as a go-ing concern, or (2)achieve better valuethan in windingup, or (3) realiseproperty for distri-bution to securedand preferentialcreditors. Usuallyappointed by theBoD but responsi-ble to creditors asa whole.

Drafting of theCVA proposal,as an “intendednominee” for rec-ommending theCVA for voting,as a “supervisor”of the debtor’scompliance withCVA terms.

No requirementof an IP, unlessScheme precedesa Liquidation oris part of an Ad-ministration. Insuch cases IP actsas Administra-tor/Liquidator.

As Liquidator col-lect and realise as-sets for distribu-tion as per statu-tory priority. Re-sponsible for run-ning the companyin winding up. Re-quired to investi-gate causes of fail-ure and bring tobook delinquent Di-rectors. Appointedby the company orby creditors and re-sponsible to credi-tors as a whole.

Same as in vol-untary liquidation.Initially court ap-pointed but credi-tors can later ap-point a private Liq-uidator.




Role of Court Administration ap-plication by BoD ora QFC holder canbe by filing formsand documents atcourt. Only whereunsecured creditoror company itselfapply, court mayconsider appropri-ateness. Court hasoversight throughthe Administrator.Administration canconclude withoutany involvementby a judge.

Company BoD ap-ply to court forpermission to pro-pose CVA to cred-itors. Court cannotvary the terms ofa validly approvedCVA.

Court involvementat each stage of theapproval process toensure that proce-dure is compliedwith and is with-out prejudice to anystakeholder.

Court generally notinvolved apart fromits supervisory role.

Court adjudicatesinsolvency andmakes an orderfor a compulsoryliquidation.

Moratorium Interim moratoriumon filing of anAdministrationapplication. Mora-torium continuesthrough the pro-cess, covers allcreditors and lastsfor 1 year + 6months with courtapproval.

No moratorium ex-cept for small eligi-ble companies.

No moratorium. No automatic stayon proceedingsagainst the com-pany. Liquidatorcan apply to Courtfor a stay.

Automatic stay onproceedings againstthe company ex-cept by securedcreditors.

Cram down Possible on dissent-ing creditors andmembers except onsecured and prefer-ential creditors.

Scheme bindingon all creditors,including securedcreditors.


Creditor waterfall or priority

Statutory order of priority or creditors’ waterfall. Applicable to bothAdministration and Liquidation.

Proceeds from fixed charge assets net of costs of realisation to fixed chargeholders.Liquidation/administration expense, including contracts entered into bythem as agents, to the counterparty.Preferential debts, primarily employee dues, subject to statutory maximums.Prescribed part, up to a maximum of GBP 600,000 set aside from proceedsof floating charge assets, for unsecured creditors.Proceeds of floating charge assets net of costs of realisations to floatingcharge holders.Unsecured creditors.Deferred creditors pari passu.Any surplus to company/shareholders in accordance with Articles.


Insolvency statistics

Procedure 2008 2009 2010 2011 2012 2013 2014CL (%) 34 35 29 31 26 22 23

CVL (%) 61 82 69 73 73 69 63

Administration (%) 29 25 17 17 15 14 11

CVA (%) 4 4 5 5 5 4 3

Receiverships (%) 5 9 8 9 7 6 4

Total new cases 21,811 25,432 20,954 21,858 20,749 18,849 17,120

Source: Insolvency Service. CL - Compulsory liquidation; CVL - Creditor voluntary liquidation; CVA - Company voluntary arrangement.


Part III

The Singapore corporate insolvency framework


Overview

The Singapore Bankruptcy Act deals with individual insolvency.

Statutory provisions for insolvency of companies is in the Companies Act 2006.

The provisions for companies are largely modeled on the legislative provisions ofUK and Australia.

The Singapore Companies Act was enacted in 1967. It was modeled onCompanies Act, 1961 of Victoria, Australia.

While the law is based on principles established in UK, it differs in the detail.


Insolvency procedures



Judicial Management Scheme Compulsory Liquidation Receivership

Objective To give viable compa-nies in financial distressa chance to rehabilitatethemselves. Likely toachieve: (1) survival ofcompany or part of it asa going concern, (2) im-plementation of a schemeof arrangement, or (3) amore advantageous real-ization of company’s as-sets than in liquidation

To rehabilitate debtorsthrough a compromisewith creditors

Winding up of company byorder of the Court follow-ing a petition.

Discharge of debtssecured by floatingcharge.

Trigger Company is unable to payits debts.

No requirement of de-fault or insolvency.

Company is unable to payits debts either on the ba-sis of cash-flow test or thebalance sheet test. Peti-tioner may also show com-pany has failed to pay adues in excess of SGD10,000 on demand within3 weeks after demand.

Actual or impendinginsolvency. The rightto appoint a receiverand manager includedin security documents.

Who can trigger The company, its direc-tors or its creditors. IfReceiver/Manager is ap-pointed, no order can bemade.

Company prepares asample scheme andmakes an applicationto court for a meeting(”Scheme Meeting”) ofthe creditors.

Creditors, the companyand judicial manager canpetition.

A secured creditor ap-points a receiver incircumstances where acompany is already in-solvent or nearing in-solvency.




Control Judicial Manager takesover running of companyand management is dis-placed. JM responsi-ble for managing busi-ness and property of com-pany. Creditors may es-tablish committee to mon-itor the process. Any re-visions require approval ofmajority of creditors.

Management retainscontrol of businesswhile restructuring.

Liquidator nominated bycreditor, appointed bycourt has responsibility towind up affairs of com-pany. From time to timehe needs to report to theofficial receiver. Creditorsmay form a committee ofinspection.

Receiver controls run-ning of business.

Role of IP Preserve part or all ofbusiness as going concern.Present rescue plan tocreditors, takes into cus-tody all property and man-age company’s affairs ac-cording to plan.

No requirement of anIP.

Collect assets and cred-itors’ claims. Carry onbusiness during the pro-ceedings. Post assess-ment, adjudicate claimslodged against company,realise company’s assetsand distribute proceeds inorder of statutory priority.

Take control of all ormost of company’s as-sets. Cannot be dis-placed even if companyis placed under liquida-tion. Liquidator has towait until receiver hascompleted his task.




Role of Court Application for procedureis presented to court whichappoints the JM if itis satisfied that companyis unable to pay debts.Court has power to ad-journ creditors’ meeting,allow amendments to res-cue plan and make interimorders. It also extend du-ration of the procedure atJM’s request.

Two fold functionof court: ensuringstatutory procedurehas been compliedwith, resolutions arepassed by requisitemajority of creditorsat scheme meetingsas well as determiningthat scheme is fair andreasonable.

Court involvement in ini-tial stage of petition andorder. Any disposition ofcompany’s property madeafter commencement ofwinding up is void withoutcourt’s sanction.

Moratorium Automatic and immediatemoratorium.

No automatic mora-torium while Schemeis being proposed.Application may bemade to court for stayof proceedings pendingagainst the company.

Post winding up order, au-tomatic stay on proceed-ings against company un-less court permits pro-ceedings to continue.

No moratorium.

Cram down A validly approvedScheme is binding onall creditors (if requi-site majority of eachcreditor class (simplemajority in numberand 75% in value)approves scheme andcourt confirms it).


Creditor waterfall or priority

Secured creditors have priority over all other claims.

Claims of creditors secured by floating charge rank behind liquidator’s fees andexpenses and preferential claims.

The general order of payment priority:

Receivers’ expenses.Claims secured by fixed charges.Costs and expenses of winding up.Employees’ remuneration and other payments due to employees.All taxes assessed before date of commencement of winding up or assessedat any time before expiration of time fixed for proving of debts.Claims secured by a floating charge.Unsecured creditors.Any surplus to company/shareholders.


Insolvency statistics

Since its introduction in 1987, Judicial Management has not been used verysuccessfully.

From 2001 to 2010, only 124 cases were filed.A review of 105 of these cases fund that only 26% of them were successful.48% were unsuccessful and 26% were dismissed or withdrawn.

Scheme of Arrangement has emerged as the favored corporate rescue regime inSingapore.

Of the cases filed between 2002 and 2009, 77% of companies for which aScheme had been sanctioned by the court continue as going concerns.


Part IV

World Bank indicators


World Bank indicators (I)

Indicator India UK Singapore

Time (years) 4.3 1.0 0.8

Cost (% of estate) 9.0 6.0 3.0

Outcome (0-sale; 1-going concern) 0 1.0 1.0

Recovery rate (cents on dollar) 25.6 88.6 89.6

Strength of insolvency framework (0-16)

6.0 11.0 9.5

Commencement of proceedings (0-3) 2.0 3.0 3.0

• Procedures available to debtor Liquidation only (0.5) Liquidation & reorganization(1.0)

Liquidation & reorganization(1.0)

• Creditor filing for debtor’s insolvency Yes, liquidation only (0.5) Yes, liquidation & reorganization(1.0)

Yes, liquidation & reorganization(1.0)

• Basis for insolvency commencement Inability to pay debts (1.0) Inability to pay debts or financialdistress (1.0)

Inability to pay debts (1.0)

Management of debtor’s assets (0-6) 3.0 5.0 4.0

• Continuation of contracts supplyingessential goods & services

No (0.0) No (0.0) Yes (1.0)

• Debtor’s rejection of burdensomecontracts

Yes (1.0) Yes (1.0) Yes (1.0)

• Avoidance of preferential transactions Yes (1.0) Yes (1.0) Yes (1.0)• Avoidance of undervalued transac-tions

Yes (1.0) Yes (1.0) Yes (1.0)

• Debtor obtaining credit post com-mencement

No (0.0) Yes (1.0) No (0.0)

• Priority to post commencementcredit

No (0.0) Yes, over unsecured creditors(1.0)

No (0.0)


World Bank indicators (II)

Indicator India UK Singapore

Reorganization proceedings (0-3) 0.0 1.0 0.5

• Creditors voting on plan N/A Only creditors whose rights areaffected by proposed plan (1.0)

All creditors (0.5)

• Dissenting creditors receive at leastas much as in liquidation

No (0.0) No (0.0) No (0.0)

• Creditor class-based voting and equaltreatment

No (0.0) No (0.0) No (0.0)

Creditor Participation (0-4) 1.0 2.0 2.0

• Creditor approval for selec-tion/appointment of IP

No (0.0) Yes (1.0) No (0.0)

• Creditor approval for sale of debtor’sassets

No (0.0) No (0.0) No (0.0)

• Creditor right to request informationfrom IP

Yes (1.0) No (0.0) Yes (1.0)

• Creditor right to object to decisionsaccepting/rejecting claims

No (0.0) Yes (1.0) Yes (1.0)


World Bank indicators (III)

India U.K. SingaporeGetting Credit (Rank) 28 1 3• Index of legal rights strength (1. . .10) 8 10 10• Private bureau coverage (%) 19.8 100 60.3

Enforcing Contracts (Rank) 186 56 12• Time (Days) 1420 437 150• Procedures (No.) 46 28 21

Resolving Insolvency (Rank) 121 7 4• Time (Years) 4.3 1 0.8• Recovery rate (cents per $) 25.6 88.6 89.4

Domestic Credit by 77.1 195.6 112.6financial sector (% of GDP)Source: World Bank Doing Business Report, 2014

World Bank World Development Indicators, 2014


Thank you

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Comparing the corporate insolvency framework: UK, Singapore …€¦ · · 2015-05-18Comparing the corporate insolvency framework: UK, ... Comparing the corporate insolvency framework: