Lauren Tang from law firm Stephenson Harwood (Singapore) Alliance on what lies ahead for bust Swiber Holdings.
The 60% slump in oil prices over the last two years has caused a major downturn in the oil and gas industry, which in turn has led to many Singapore companies taking drastic measures to cut costs. Unfortunately, some companies remain unable to satisfy their debt obligations and have consequently been wound up.
The two latest victims of the oil slump are Swiber Holdings and its subsidiary, Swiber Offshore Construction, which applied to wind up on 28 July 2016. Yet days later, they withdrew from winding up and instead applied to place themselves under judicial management (JM).
It is not surprising that JM is one of the lesser known alternatives to winding up. It was introduced in Singapore in 1987 after Pan Electric Limited, a public-listed company, collapsed and caused the Singapore Stock Exchange to close for three days. It was then decided, like in the United Kingdom administration regime, that viable companies should be given breathing space to reorganise their affairs under the court’s supervision and potentially be restored to profitability.
The breathing space is created from the immediate moratorium on any legal action against the company once the JM application is made. This means that no resolution can be passed to wind up the company, no legal action can be commenced against it and creditors cannot take steps to enforce any security over the assets unless with the leave of the court.
The court will grant the JM order if it believes that the company can be nursed back to financial health. For this, it must be shown that the company is or will be able to pay its debts and that there is a reasonable probability of rehabilitating the company or preserving a part of or all of its business. The interests of the creditors must also be considered to be better served than if winding up were resorted to.
The court will also appoint the judicial manager usually nominated in the JM application, unless his appointment is opposed by a simple majority of creditors in number and in value. The nominee must be a public accountant who is not the auditor of the company.
The judicial manager then takes control of the company and the powers of the directors will cease. Once in control, the judicial manager has 60 days to make a rehabilitation proposal and convene a meeting of the creditors to consider the proposal.
A creditor intending to vote must lodge a proof of debt. A creditor may not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained, nor shall a creditor vote in respect of any debt on or secured by a current bill of exchange or promissory note held by him unless he is willing to treat the liability of other parties on the note as a security and deduct those liabilities from his proof for purposes of voting.
The proposal must be approved by the majority of creditors in number and value. If approved, the proposal will be implemented by the judicial managers. If declined, the court may discharge the JM order or make interim orders as it thinks fit.
In practice, the JM regime has not secured a very successful track record. Between January 2001 and December 2010, only 27 of the total 124 JM cases were successful and the other 78 cases were unsuccessful, dismissed or withdrawn.
This could be because secured creditors know that they will not be able to enforce their security if the company is under JM. Even when in JM, it may not be easy to get the majority of creditors (in number and value) to agree to the rehabilitation proposal. In the meantime, the company attracts negative publicity which in turn adversely affects employee morale and shareholder confidence.
There are however more advantages to JM. First, in winding up proceedings, unsecured creditors usually have little hope of recovering the debt in full as they have to wait for the secured creditors to be paid first, before then sharing equally the remaining funds (if any). With JM, the judicial manager will try to realise the company’s assets at maximum value thereby giving the creditors the opportunity to recover a greater proportion of their debt. Second, the immediate moratorium imposed on the company ensures that there is little or no risk of asset depletion. Last, as they are the ones voting on the rehabilitation proposal, the creditors have the ability to influence the next steps that the company should take. Most importantly, with JM, the vulnerable company has a chance to be nursed by to health, much like Florence Nightingale tending to her patients.
This explains why oil and gas companies such as Mercator Lines (Singapore), Punj Lloyd’s Singapore and Technics Oil & Gas have or are turning to JM.
In conclusion, JM has played and continues to play an important role in Singapore’s insolvency regime by providing a viable alternative to pulling the plug to a vulnerable company. It is certainly an option which every company looking for a second chance should consider.