The Insolvency, Restructuring and Dissolution Act 2018 (the "IRDA") came into force on 30 July 2020. The consolidation of all personal and corporate insolvency and debt restructuring legislation into a single statute, along with other legislative changes, seeks to further strengthen Singapore's position as an international debt restructuring hub. This note highlights the new restrictions on ipso facto provisions effected by the IRDA, which will be of particular interest to loan market participants.
Restrictions on ipso facto clauses
Ipso facto1 clauses allow a party to terminate or modify the operation of a contract (including accelerating payment) upon the occurrence of certain events of default such as a counterparty's insolvency or restructuring. If a company's business relies on contracts that contain ipso facto clauses, that company will have difficulty commencing or entering into a restructuring process because of the risk that counterparties would by that reason alone be able to terminate those contracts. As a result, the chances of the company continuing as a going concern can be undermined through the termination of key contracts with suppliers, service providers or financiers.
In order to assist distressed companies in preserving their critical business contracts with a view to facilitating a rescue of the company, section 440 of the IRDA restricts a party from:
(a) terminating, amending, or claiming an accelerated payment or forfeiture of a term under any agreement; or
(b) terminating or modifying any right or obligation under any agreement (including a security agreement),
with a company by reason only that the company has commenced proceedings for judicial management or a scheme of arrangement or that the company is insolvent. The restriction applies to contracts entered into on or after 30 July 2020. The restriction does not have retroactive effect.
The restriction is not all encompassing. Certain contracts are excluded from the restriction (see the section "Excluded contracts" below). In addition, a counterparty may obtain a declaration from the court that such restriction does not apply to it on the basis that restricting the application of ipso facto clauses would "likely cause the applicant significant financial hardship".2 However, Canadian practice suggests a high threshold for what qualifies as "significant financial hardship".3
Note that the restriction can apply to a foreign company so long as there is a substantial connection to Singapore which can be established by, among others, being party to an agreement governed by Singapore law or having substantial assets in Singapore. It should also be noted that the restriction does not expressly confine its effect to contracts governed by Singapore law.
There are certain contracts that are not subject to the restriction.4 These include:
(a) derivatives contracts, margin lending agreements5 or securities contracts;
(b) master netting agreements, securities/commodities lending or repurchase agreements, or spot contracts, that contain a netting or set-off arrangement;
(c) covered bond or connected agreements;
(d) debentures6 or connected agreements;
(e) any agreement to clear or settle transactions relating to a derivatives contract; and
(f) business rules of an approved exchange, a licensed trade repository, an approved or recognised clearing house or a recognised market operator.
Loan agreements are not excluded
Notably there is no exception for syndicated loans or bilateral loans. In Singapore, the Ministry of Law had considered an exception for loan agreements, and ultimately decided such an exception would be too broad and unjustifiable. The Ministry of Law rejected the market participants' argument that financial institutions ought to be given sufficient autonomy to determine whether to enforce their ipso facto rights on the basis that they are reputable, reasonable and responsible lenders which will benefit from the rehabilitation of an ailing company. The Ministry of Law reasoned that there are various safeguards in place (such as the ability to apply for relief on the basis of significant financial hardship under section 440(4) of the IRDA) and the ability to exercise contractual rights where the borrower breaches a separate contractual obligation, for example failure to repay loan obligations. The protection offered by Singapore's ipso facto regime is akin to that provided in the US. In contrast, the protections offered in the UK and Australia are narrower – Australia provides an exception for syndicated loans while the UK restriction only applies in respect of contracts for the supply of goods and services.
The impact of the ipso facto restriction on lenders can be mitigated through the operation of other clauses within the loan agreement as the restriction only renders the ipso facto provisions (such as accelerating due solely to an event of default relating specifically to the "proceedings" referred to in section 440 of the IRDA or to the company's insolvency) unenforceable7. It does not render the entire agreement or other clauses unenforceable. Where the ipso facto provision is invalidated by the ipso facto restriction, other relevant contractual rights may still be exercised if there is another event of default, most obviously in the loan context, a non-payment or breach of financial covenant.
The following example was provided during the second reading of the Insolvency, Restructuring and Dissolution Bill: a developer and a main contractor enter into a contract for the construction of a building, where the contract contains ipso facto clauses that permit termination of the contract either on (1) the commencement of restructuring proceedings or (2) the failure to meet construction milestones. If the main contractor is in financial distress and makes an application to be placed under judicial management, the developer will be restricted from relying on the ipso facto clause because it is triggered by the filing of the application for a judicial management order. However, if in addition to the filing of the restructuring proceedings, the main contractor also fails to meet an agreed construction milestone, the developer may in that situation terminate the contract based on the above clause.8 That said, once a company is subject to scheme of arrangement proceedings or judicial management, the moratorium available thereunder may inhibit the usefulness of these other contractual provisions.
Note however that the IRDA provides that the restriction does not require the lender to make further advances of money or credit (i.e. the loan can be drawstopped).9
In addition, the ipso facto provisions do not explicitly prevent a lender from making a claim against a guarantor under a guarantee. The ipso facto restriction under the IRDA notably only restricts the exercise of such provisions with respect to the company that is insolvent or that is subject to relevant proceedings. Whilst not entirely clear given the reference in section 440(3) to "[a]ny provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is contrary to this section is of no force or effect", the provisions do not explicitly preclude lenders from making a claim against a guarantor under a guarantee. Under the terms of a typical guarantee clause, a lender may only claim for amounts that are due and payable. If lenders are unable to accelerate against the borrower, and thereby make the loan due and payable, the lenders may similarly not be able to claim against the guarantor until there is a failure by the borrower to make a scheduled payment of principal or interest. In light of the introduction of ipso facto restrictions in Australia, the APLMA10 proposed suggested wording to be included in guarantee clauses to enable the lenders to claim under the guarantee and require the guarantor to pay the full amount of the loan despite the stay on enforcement in respect of the borrower.
It remains to be seen if the Singapore market will similarly move to include in guarantees a provision that upon the occurrence of an ipso facto event (i.e. the borrower being the subject of relevant proceedings or being insolvent) the lenders can immediately, on demand, require that the guarantor pays all amounts outstanding. However, note that if the guarantor is itself also subject to the proceedings or insolvent, the lender may also be restricted from enforcing against the guarantor.
1 Meaning "without more" or "by that very fact or act".
2 Section 440(4) of the IRDA.
3 See, e.g., Toronto-Dominion Bank v Ty (Canada) Inc 42 CBR (4th) 142, 2003 CanLII 43355.
4 Regulation 3 of the Insolvency, Restructuring and Dissolution (Prescribed Contracts under Section 440) Regulations 2020.
5 Note that in Canada the equivalent exclusion applies to a margin loan in so far as it is in respect of a securities account or futures account maintained by a financial intermediary and in Australia the equivalent exclusion applies to a contract, agreement or arrangement that is, or is directly connected with, a margin lending facility (which has a specific definition under the Corporations Act 2001 (Cth)). In both cases, the scope of the exclusion of margin-lending agreements is fairly limited to that set out under the respective legislation. Given that this term is not defined in the IRDA, it may be the case that not all margin lending agreements are excluded and guidance can be sought from Canada and Australia on the scope of such exclusion.
6 "Debenture" is defined in the IRDA by reference to the definition in the Securities and Futures Act (Cap. 289) to include, among others, debt securities issued or proposed to be issued by a corporation or a trustee-manager or trustee of a business trust or real estate investment trust, respectively. Notably the definition of "debenture" is not sufficiently wide to cover a debenture in the loan context.
7 Section 440(3) of the IRDA.
8 See for example paragraphs 58 and 59 of the Second Reading Speech by Senior Minister of State for Law on the Insolvency, Restructuring and Dissolution Bill on 1 October 2018.
9 Section 440(2) of the IRDA.
10 APLMA Australian Branch – New Riders for Syndicated and Bilateral Facility Agreements to Take Account of the Ipso Facto Provisions.
Nigel Yee (White & Case, Legal Assistant, Singapore) contributed to the development of this publication.
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