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Lifting a statutory moratorium under English and Singapore law

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Lifting a statutory moratorium under English and Singapore law

At a Glance…

This note sets out the circumstances in which a creditor may successfully lift a statutory moratorium against a company in administration in England and Wales, and in Singapore.

Authors:  Daniel Perera, Mandip Englund, Johnny Lim (Resource Law LLC), Kyri Evagora, Kohe Hasan, Prajakt K. Samant, Richard G. Swinburn and Justine Barthe-Dejean

English law

Background: A statutory moratorium under Schedule B1 of the Insolvency Act 1986 (IA) will prevent most creditor or third-party actions against a company in administration, from the point at which the administration process is instigated. Policy considerations behind the moratorium hold that the unilateral action by a creditor to protect its own interests can prejudice the prospects of successfully rescuing the insolvent company.

Scope of the moratorium: Unless the administrators consent or a court order permits:

1. “No step may be taken to enforce security over the company’s property” (paragraph 43(2), Schedule B1, IA). “Security” has a broad definition, and includes “any mortgage, charge, lien or other security” (section 248, IA) but is unlikely to include the exercise of a right of set-off. It is unclear what constitutes taking a “step”, although it may include taking preparatory actions in relation to enforcing security. The moratorium does not apply to certain security interests arising under financial collateral arrangements, certain market charges and certain collateral security charges.

2. “No step may be taken to repossess goods in the company’s possession under a hire-purchase agreement” (paragraph 43(3), Schedule B1, IA). This includes agreements with a retention of title provision, conditional sale agreements, and leasing agreements.

3. “No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company” (paragraph 43(6), Schedule B1, IA). The moratorium does not prevent a party from enforcing its contractual rights, such as the right to terminate a contract.1

 

Consequences for a creditor acting in breach of the moratorium: Technically, the creditor would find itself in contempt of court2 (although it is apparently rare in practice for a creditor to face any sanctions). The breach would give rise to a claim in damages by the company for breach of statutory duty.3 Proceedings issued in breach of a moratorium are likely to be stayed by court order.

Lifting the moratorium: The court will balance the detriment to the individual creditor whose proposed action is restricted by the moratorium, against the detriment to the body of creditors as a whole, to determine whether the creditor is permitted to take action.4 Administrators whose permission is sought to act in breach of the moratorium must carry out the same balancing act.5 The following considerations will also apply:

1. The applicant has the burden of demonstrating that the moratorium should be lifted.6

2. Leave should be granted if the action is unlikely to impede the achievement of the purpose of the administration. This involves a pragmatic balancing of individual and collective creditor rights, considering in particular the probability that the relative detriment to the other creditors or the company (or both) will occur.7 For example, if loss to the applicant is virtually certain if the court refuses leave, but loss to the general creditors from granting leave is a remote possibility, that will be a powerful factor in favour of granting leave to lift the moratorium.

3. In assessing the detriment to the other creditors/company, the court will consider matters such as the financial position of the company, the administrators’ proposed strategy for the administration, the period for which the administration order has already been in force and is expected to remain in force, and/or the effect on the administration if the court grants leave.

4. Where the court considers whether to grant leave to enforce security:

a) If the secured creditor is the only party with a commercial interest in the charged assets, it may be appropriate to permit the enforcement of security. Considerations have included whether there was any commercial benefit to the administration in continuing to hold the asset, or whether there were any preferential creditors, or any prospects of return to unsecured creditors.8

b) An important consideration is whether the creditor is fully secured. If so, delay in enforcement is likely to be less prejudicial than in cases where the creditor’s security is insufficient.9

c) Where there is a dispute over the existence, validity or nature of the security to be enforced upon, it is not for the court to decide on that issue on the leave application, unless the issue raises a short point of law that is convenient to determine. Otherwise, the court needs only to be satisfied that the applicant has a “seriously arguable case”.10

d) The conduct of the parties may also be a material consideration. For instance, the court may refuse leave because the applicants have accepted benefits under the administration and only seek to enforce their security at a later stage.11

5. Where the court considers whether to grant leave to pursue proceedings:

a) The state of the proceedings at the time of the application is a relevant factor: “the nearer the outcome of the proceedings, the greater the weight to be attached to that factor”.12 Proceedings in which all that remains is an enforcement hearing are likely to be given leave to pursue.13

b) The parties’ conduct will be a relevant factor (e.g., threatening to appoint an administrator to avoid the enforcement of proceedings).14

c) Only in “exceptional cases” will a creditor be given the right to continue proceedings for a monetary claim that overrides the statutory process. Considerations will be made as to whether the applicant would be prejudiced by proving its claim in the normal course of the administration.15

The above considerations may be relevant, not only to the decision whether to grant or refuse leave, but also to the decision whether to impose terms as a condition on or a requirement in connection with the leave (paragraph 43(7), Schedule B1, IA).

Extra-territorial effect of the moratorium? A moratorium does not have extra-territorial effect, and does not restrict the ability of a creditor to take enforcement action against assets of a company located outside England and Wales.16

However, administrators can protect the assets of an insolvent company that are located in a foreign jurisdiction, by demonstrating to the English court that there are “exceptional” circumstances which justify the English court exercising its power to restrict the enforcement of the creditor’s right under a foreign court order, by way of an injunction for instance.17

Exceptional circumstances may include those where the conduct of the creditor could be categorised as “oppressive or vexatious”, or otherwise “unfair or improper” as to justify departing from the principle of comity.18

COVID-19-related restrictions on lifting the moratorium? The UK government recently announced a series of measures to mitigate the impact of the COVID-19 pandemic on companies’ business operations and finances, including (a) a relaxation of wrongful trading provisions; (b) a temporary prohibition on winding up petitions and orders; and (c) a new insolvency regime, based on changes to English insolvency laws proposed in a 2018 consultation. The proposed new insolvency regime will include a ‘business rescue moratorium’, designed to more quickly and efficiently provide the benefits of a moratorium to a company with a view to it achieving a restructuring and avoiding insolvency.

There is currently little detail on the proposed legislative changes. The 2018 consultation indicated that the proposed changes were intended to apply to companies which are not insolvent, and for an initial period of 28 days, provided certain qualifying conditions are met – including being able to pay debts as they fall due during the moratorium period. The 2018 consultation indicated that the ability of creditors to apply for the moratorium to be lifted would be based on similar principles to those that apply to the lifting of the administration moratorium. However, how these applications will work in practice remains to be seen.

Singapore law

Background: Broadly speaking, there are two formal restructuring regimes in Singapore which confer or can confer a statutory moratorium on legal proceedings against a distressed company – the first being judicial management (similar to the English concept of administration), and the second being where a scheme of arrangement is proposed or in effect.

A. Judicial management (JM) – automatic moratorium on application

1. Section 227B(1) of the Companies Act (Chapter 50) (CA) provides that the Singapore High Court (the Court) may make a JM order if:

a) The Court is satisfied that the company is or is likely to become unable to pay its debts; and

b) The Court considers that the making of a JM order would be likely to achieve one or more of the prescribed statutory purposes, namely: (A) the survival of the company or the whole or part of its undertaking as a going concern; (B) the approval under section 210 or 211I* of the CA of a compromise or arrangement between the company and such persons as are mentioned in those sections; (C) a more advantageous realisation of the company’s assets would be effected than on a winding up.

*A section 210 Scheme of Arrangement is a “conventional” one requiring the leave of the Court to convene shareholder/creditor meetings, and eventually the sanction or approval of the Court for the said Scheme of Arangement. A Section 211I Scheme of Arrangement is a newer, expedited “pre-packaged” Scheme of Arrangement intended only for debt restructuring, adopting certain features of a pre-packaged bankruptcy plan under the U.S. Chapter 11 debtor-in-possession regime. The section 211I Scheme of Arrangement requires only one application to the Court as compared with two under the “conventional” section 210 Scheme of Arrangement.

2. Pursuant to section 227C of the CA, there is an automatic moratorium on all proceedings against the company starting from the time the application for JM is made until the Court makes a determination on the application. On the making of a JM order, section 227D(4) provides that a more extensive moratorium shall come into effect. Under section 227B(8) of the CA, a JM order will be discharged after 180 days from the date that the order was made unless extended by the Court.

3. The moratorium is wide-ranging and restrains, among other things, the passing of a resolution for winding up the company and enforcement actions against any charge or security held over the company’s property, except with the leave of the Court (Section 227C(c), CA).

B1. Scheme of arrangement – moratorium on application (discretionary; under limited circumstances)

4. Pursuant to section 210(10) of the CA, in circumstances where no order has been made or resolution passed for the winding up of a company and where there is a compromise or an arrangement proposed between the company and its creditors (or any class thereof), the Court may, on the application in a summary way of the company or any shareholder or creditor, restrain further legal action or proceedings against the company unless leave of the Court is obtained. This is granted in the Court’s discretion, and applicable only where there is pending legal action or proceedings against the company. An enhanced and more liberal moratorium can arise under section 211B of the CA, as mentioned below.

B2. Scheme of arrangement – enhanced moratorium with (initial) automatic 30-day moratorium on application

5. Pursuant to section 211B of the CA, where a company proposes, or intends to propose, a compromise or an arrangement between the company and its creditors (or any class thereof), the company may apply to the Court to restrain the commencement of certain legal actions (or potentially all of them) (an Enhanced Moratorium), such as:

a) The passing of a resolution for the winding up of the company;

b) The commencement or continuation of any proceedings against the company, except with the leave of the Court and subject to such terms that the Court imposes; or

c) Enforcement of any security over any property of the company, except with the leave of the Court and subject to such terms as the Court imposes.

6. Upon such application by the company, an automatic interim moratorium will kick in on all proceedings against the company, and will subsist until the Court hears the application for the Enhanced Moratorium or until 30 days after the date of the application, whichever is earlier (Automatic 30-day Moratorium).

7. The Automatic 30-day Moratorium restrains further legal action or proceedings against the company in question unless the Court has granted leave for these proceedings to go ahead. Although there have been no leave applications heard before the Singapore Courts with respect to enforcing proceedings against a company under the Automatic 30-day Moratorium, our view is that the same principles governing grant of leave for the purposes of a JM shall apply.

8. It bears mention that, pursuant to section 211C of the CA, when the Court makes an Enhanced Moratorium order under section 211B of the CA, the Court can also, on the application of certain related companies (subsidiary, holding company or ultimate holding company), make similar moratorium orders of the same duration for these related companies, in a sense tagging on” the section 211B Enhanced Moratorium order. This “related company” moratorium has to be specifically applied for and does not automatically kick in, and can only operate if various conditions are satisfied, such as there being no order made and no resolution passed for the winding up of the related company, the continued operation of the section 211B Enhanced Moratorium order, the need to demonstrate that the related company plays a necessary and integral role in the compromise or arrangement proposed by the main applicant which obtained the section 211B Enhanced Moratorium order, and the Court being satisfied that the creditors of this related company will not be unfairly prejudiced.

Consequences for a creditor acting in breach of the moratorium: Parties acting in breach of the moratorium may be held in contempt of the Courts.

Lifting the Moratorium: The Court has to be persuaded to grant leave to allow otherwise prohibited proceedings or enforcement actions to be commenced or continued during the moratorium period.

In the context of a moratorium arising from JM, the Court of Appeal cited with approval the principles laid down in Re Atlantic Computer Systems plc (No. 1) [1991] BCLC 606 governing the grant of leave.19 These are as follows (substituting the English concepts of administrator with judicial manager and with appropriate revisions):

a) In every case, the person who seeks leave (i.e., an applicant) has to make out a case for leave to be given.

b) The moratorium is intended to assist the company, under the management of the judicial manager, to achieve the purpose for which the JM order was made (see paragraph 1(b) above).

c) If granting leave to an applicant with proprietary rights (e.g., a lessor of land to exercise his proprietary rights and repossess his land) is unlikely to impede the achievement of that purpose, leave should normally be given.

d) In other cases when an applicant with proprietary rights seeks to assert those rights (e.g., when a lessor seeks possession), the Court has to carry out a balancing exercise, balancing the legitimate interests of the applicant against the legitimate interests of the other creditors of the company.

e) In carrying out the balancing exercise, great importance, or weight, is normally to be given to the proprietary interests of the applicant.

f) It will normally be a sufficient ground for the grant of leave if significant loss would be caused to the applicant by a refusal. For this purpose, loss comprises any kind of financial loss, direct or indirect, including loss by reason of delay, and may extend to loss which is not financial.

g) But if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the applicant, that may outweigh the loss to the applicant caused by a refusal.

h) In some cases, there will be a dispute over the existence, validity or nature of the security which the applicant is seeking leave to enforce. It is not ordinarily the case for the Court on the leave application to seek to adjudicate upon that issue, unless the issue raises a short point of law (e.g., on a fixed or floating charge point) which it is convenient to determine without further ado. Otherwise, the Court needs to be satisfied only that the applicant has a seriously arguable case.

To date, there are limited applications seeking to lift a moratorium arising from JM, other than, of course, the decision in Hinckley. English case law remains of persuasive value to the Singapore Courts, and it remains to be seen the extent to which the Court would consider and/or follow other English case law, of which Re Atlantic is a bedrock. The principles governing grant of leave for the purposes of a JM are likely to be also applicable for an application seeking the grant of leave for a moratorium arising from or in connection with a Scheme of Arrangement.

Extra-territorial effect of the moratorium? This depends on the statutory basis from which the moratorium arises.

The moratorium arising from JM does not have extra-territorial effect; in other words, it is unlikely to be capable of barring foreign proceedings. Likewise, the moratorium arising from section 210(10) of the CA for a “conventional” section 210 Scheme of Arrangement does not have extra-territorial effect.20

The exception is the Enhanced Moratorium arising from section 211B of the CA. This may be ordered to apply to extraterritorial acts, so long as the person is in Singapore or within the jurisdiction of the Singapore High Court.21 This extraterritorial feature is a newer development arising from changes in Singapore’s Companies (Amendment) Act 2017, which introduced various enhancements for debt restructuring purposes. The Court has, however, taken a cautious approach to this, indicating that the extraterritorial feature would only be ordered for specific acts or acts of a specific party within the jurisdiction of the Singapore Courts. This feature was recently recognised in an English decision: H & CS Holdings Pte Ltd v. Glencore International AG [2019] EWHC (Ch).

Note: The Insolvency, Restructuring and Dissolution Act 2018 was passed as the third and final phase of Singapore’s efforts to modernise and enhance Singapore laws on insolvency and debt restructuring. This has, however, yet to come into effect given its wide-ranging impact (consolidating existing laws on insolvency and restructuring including those contained in the CA). The content above would accordingly be adjusted once this Act is gazetted to come into effect.

COVID-19-related restrictions on lifting the moratorium? While the Singapore government has likewise recently introduced and enacted legislation, called the COVID-19 (Temporary Measures) Act 2020, to address the COVID-19 situation, this does not presently have significant implications on an application to lift a statutory moratorium against a company under JM or where a Scheme of Arrangement is proposed or in effect.

This legislation seeks to grant temporary but targeted relief from legal action for inability to perform certain prescribed categories of contracts, as well as elevated thresholds for bankruptcy and insolvency for financially distressed individuals and businesses. The moratorium relief conferred is a contract-specific moratorium, rather than a business or company-specific one. The moratorium can only cover contractual obligations to be performed on or after 1 February 2020, for contracts executed before 25 March 2020. The prescribed categories are confined to loans for small and medium enterprises, construction and construction-related supply contracts, event- and tourism-related contracts, hire-purchase contracts and certain tenancy agreements, but can be extended to other categories in due course. Disputes arising from the operation of this Act are to be resolved by assessors appointed by the Ministry of Law (select practicing lawyers), who are empowered to grant relief that is just and equitable in the circumstances. This contract-specific moratorium is presently ordered to stay in force for six months, commencing on 20 April 2020.

Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, “Reed Smith”). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith’s Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.

  1. Re Olympia & York Canary Wharf Ltd [1993] BCC 154.
  2. Re Atlantic Computer Systems plc [1992] 2 WLR 367.
  3. Euro Commercial Leasing Ltd v. Cartwright & Lewis [1995] BCC 830.
  4. See footnote 2.
  5. R v. Conden, ex p James (1874) LR 9 Ch App 609.
  6. See footnote 2.
  7. See footnote 2.
  8. Re UK Housing Alliance (North West) Limited [2013] EWHC 2553 (Ch): in this case, it was appropriate to allow the creditor to sell the properties over which it had security because there were no other creditors with any commercial interest in them. There were no preferential creditors and the likely shortfall of recoveries to the secured creditor meant that there was no prospect of the sale of the properties yielding a return to unsecured creditors.
  9. See footnote 2.
  10. See footnote 2.
  11. Bristol Airport plc v. Powdrill [1990] Ch 744
  12. Ronelp Marine Ltd v. STX Offshore and Shipbuilding Co Ltd [2016] EWHC 2228 (Ch)
  13. South Coast Construction Ltd v. Iverson Road Ltd [2017] EWHC 61 (TCC)
  14. Bernhards Sports Surfaces Ltd v. Astrosoccer4u Ltd [2017] EWHC 2425 (TCC) (8 September 2017) and South Coast Construction Ltd v. Iverson Road Ltd [2017] EWHC 61 (TCC).
  15. Unite the Union and others v. Nortel Networks (UK) Limited (in administration) [2010] EWHC 826 (Ch) and AES Barry Limited v. TXU Europe Energy Trading [2004] EWHC 1757 (Ch).
  16. Re Oriental Inland Steam Company ex parte Scinde Railway Company (1874) LR 9 Ch App 557.
  17. Harms Offshore Aht “Taurus” GmbH & Co Kg v. Bloom & Ors [2009] EWCA Civ 632: confirmed a mandatory injunction requiring the creditor to use their best endeavours to procure the release of maritime attachments and garnishments in the U.S. courts, and an anti-suit injunction.
  18. See footnote 17.
  19. Hinckley Singapore Trading Pte Ltd v. Sogo Department Stores (S) Pte Ltd [2001] 4 SLR 154 (Hinckley).
  20. Pacific Andes Resources Development Ltd and Other Matters [2016] SGHC 210.
  21. Section 211B(5), Companies Act (Cap. 50).

If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors – listed below – or the Reed Smith lawyer with whom you regularly work.

Dan Perera's bio photo

Dan Perera
Partner, Singapore
+65 6320 5366
danperera@reedsmith.com

Mandip Englund's bio photo

Mandip Englund
Partner, London
+44 (0)20 3116 3062
menglund@reedsmith.com

Johnny Lim's bio photo

Johnny Lim
Director (Resource Law LLC), Singapore
+65 6805 7366
jlim@resourcelawasia.com

Kyri Evagora

Kyri Evagora
Partner, Singapore
+65 6320 5348
kevagora@reedsmith.com

Kohe Hasan

Kohe Hasan
Partner, Singapore
+65 6805 7388
khasan@reedsmith.com

Prajakt Samant

Prajakt Samant
Partner, London
+44 (0)20 3116 2915
psamant@reedsmith.com

Richard G. Swinburn

Richard G. Swinburn
Partner, London
+44(0)20 3116 3604
rswinburn@reedsmith.com

Justine Barthe-Dejean

Justine Barthe-Dejean
Associate, Singapore
+65 6320 5349
jbarthe-dejean@reedsmith.com

Client Alert 20-301

May 2020

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