Date: August 11, 2021
First published in Business Times on 11 August 2021
- The debt restructuring process in Singapore, particularly in the case of troubled companies like Hyflux, needs to be improved and streamlined to maximize the likelihood of a successful restructuring and avoid liquidation.
- Time is of the essence, and companies should consider seeking help from restructuring experts and the court as early as possible.
- Communication between companies and their stakeholders, particularly retail investors, needs to be more transparent and regular updates on the progress of the restructuring should be mandated.
- The fees charged by advisers during the restructuring process should be reviewed and a framework for fees legislated to ensure fairness and oversight by the court.
- There is a need for independent sources of funding for representation during restructuring.
The entire process of debt restructuring can be improved and streamlined
The falls of the once-high-flying water treatment company Hyflux, as well as of other oil and gas companies, have cast a spotlight on the debt restructuring process and insolvency proceedings in Singapore.
Over the past few years, the Securities Investors Association (Singapore) (Sias) was involved in several court-sanctioned restructurings. Many of these were for companies in the oil and gas sector. Drawing on this experience, Sias’ view is that while the intention of Section 211 (B), which has now been replaced by Section 64 of the Insolvency, Restructuring and Dissolution Act (IRDA), is to give debt-ridden, troubled companies breathing space to restructure their debts via schemes of arrangement, the entire process can be improved and streamlined for future cases.
Time is of the essence
In order to maximise the likelihood of a successful restructuring and to avoid liquidation, time is essential. The earlier the restructuring process gets underway, the better the chances that some form of resolution might be reached.
Granted, convincing companies to go public with their financial woes is not easy. This is particularly so for owner-controlled companies as there could be worries over loss of “face”, in which case every attempt would be made to delay going public with their problems.
Moreover, lending banks are likely to object because they would then have to make substantial provisions in their accounts. They may nudge companies towards some form of consensual restructuring.
Notwithstanding this resistance, Sias would like to point out that in almost all cases, each company’s problems were already widely known to the market way before the actual application was filed. Delaying the filing usually served little useful purpose.
Ultimately, therefore, it comes down to a judgement call by the board and senior management. They should ask themselves what would serve their stakeholders better – waiting to try and fix the problems themselves and possibly using up valuable time and resources, or getting the help of the court, restructuring experts and white knights as early as possible?
Transparency in communication
As an investor advocate, Sias has always emphasised the need for transparent and open communication between companies and their stakeholders.
In Hyflux’s case, Sias sent dozens of questions to the company. Although most were answered, many were boilerplate responses that appeared to say a lot but in reality conveyed very little useful information.
Sias recognises that there are limitations to what can and cannot be said – once a debt moratorium has been activated and numerous experts have been appointed, the natural tendency is to say as little as possible in order to avoid problems later.
The problem is that for retail investors facing the possibility of losing all their money invested, there is nothing worse than being left to grope in the dark for answers with no information forthcoming. Institutional investors have much better access to information and what goes on behind the scenes, but it is typically the small investor who suffers when companies run into trouble.
It is important to find an acceptable middle ground for communications and updates. Perhaps regulators or the court can mandate a disclosure schedule with a prescribed framework of contents that troubled companies must follow to provide the public with regular updates on the progress of the restructurings, possibly every three to four weeks. This is not uncommon in some other jurisdictions.
Advisers’ fees: Can there be a limit?
In most restructurings, considerable expenses are incurred paying advisers for the company throughout the entire restructuring process. But there is no guarantee that the company could be saved.
Indeed, it can be argued that significant resources could be preserved for stakeholders if the company either seeks Section 211 (B) protection at the earliest opportunity, or there is a formal framework for how fees are to be paid to advisors, or both. Perhaps, a framework for fees can be legislated providing guidelines for the fees to be charged.
Currently, fees are determined by the company and its advisers. Sias recommends re-looking this arrangement. And with a framework in place, the court should oversee fee payments.
Advice to investors: Who pays?
Hyflux had initially agreed to fund legal and financial advice for medium-term note holders and the informal steering committee of the PnP security holders. But when the funds ran out, these advisors continued to serve with no prospect of payment. Surely that is not a fair nor sustainable situation.
There is clearly an urgent need to find independent sources of funding that are sustainable for representation during such a restructuring.
In 2017, Sias and law firm Rajah & Tann Singapore jointly submitted to the Monetary Authority of Singapore a two-pronged proposal calling for bond issuers to take up an insurance policy at the time of issuance so that aggrieved investors will be guided legally in the event of a default.
If there is a default, the payout from the policy can go towards funding the costs of calling for meetings, as well as the legal and financial advisory fees. It is heartening to know that Singapore Exchange Regulation is reviewing the retail bond listing requirements and safeguards.
Overall, the scheme of arrangement approach to restructuring a troubled company’s debts under S 64 of IRDA needs to be complemented through the resolution of the issues raised above. In this way, Singapore can cement its reputation of being a leading restructuring hub.
- The writer is David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)