Singapore: COVID-19 - Out-Of-Court Restructuring Options for Companies to Save Costs

By Sandra Seah, Eef Gerard Van Emmerik, Chelsea Chan


The COVID-19 pandemic has left many businesses badly affected, particularly those in industries such as leisure, travel and F&B, as consumer spending plummets. This article will discuss how companies can restructure businesses and operations to reduce costs. Companies facing financial difficulties or tremendous cost pressures may consider harnessing these out-of-court options to stay afloat and to possibly avoid insolvency proceedings. 

For companies dealing with counterparties at the risk of insolvency, you may refer to our other article here where we have discussed some important considerations and "self-help" mechanisms.

1. Financial Restructuring

Financial restructuring refers to the reorganisation of a company's assets and liabilities. Companies looking to reduce costs through financial restructuring may consider the following options:

1.1 Debt Refinancing

Debt refinancing is the replacement of an existing debt obligation with another debt obligation that offers more favourable terms and breathing space. The new loan or finance package is typically pegged at a lower interest rate or grants a longer repayment period so that monthly repayments are reduced. This helps lower a company's expenses, in turn increasing the availability of working capital for the company.

In general, a company should look at collateral free loans with low interest, longer payback time and flexible repayments. For instance, UOB, DBS and Enterprise SG have all rolled out financing packages to help SMEs tide over the COVID-19 crisis.

Debt refinancing may be a complicated process, especially if the company has many existing creditors and a variety of secured or unsecured debts are involved. The company will need to be prepared to execute and negotiate new finance documents, such as fresh facility or loan agreements and other security documents (for example, personal guarantees or further charges like second debentures). It is also important to consider if any early repayment fees apply in respect of the existing loan, and accordingly weigh that into the cost-benefit analysis of undertaking the debt refinancing exercise.

Debt refinancing may not be an option for companies with weak credit ratings. However, for eligible companies, debt refinancing can be a useful method to take advantage of lower interest rates offered in the market and reduce its overall costs of borrowing.

1.2 Asset Optimisation

Companies may consider a strategic sale of its assets to strengthen its cash position. This will allow the company to divest an underperforming asset, or a business line that it is not able to fully exploit. For the buyer of such assets, these acquisitions provide an opportunity to enjoy price discounts, especially where the seller is financially distressed, while avoiding the risk of 'inheriting' that company's liabilities. Ultimately, asset sales allow the company to optimise its assets and reduce unnecessary costs so that it can continue as going-concern.

When contemplating an asset sale, companies should consider whether there are any encumbrances (for example, charges, mortgages or other security interests) that may affect the purchase value or hinder the transaction. Certain assets also require third-party consent prior to the effecting the transfer (for example, the landlord's consent to assign a lease), which will need to be obtained in advance.

The asset transfer agreement between the company and the proposed buyer will need to be carefully drafted so that the target assets are clearly delineated. This is particularly important where the asset is of an intangible nature, such as intellectual property. Further, different kinds of assets will require different formalities to effectuate a transfer.

Asset sales are a very useful method for a company to optimise its business structure and reorganise its operations, and we have written in greater detail on this topic in our article here.

1.3 Capital Reduction

Capital reduction is the process of decreasing a company's shareholder equity, by returning capital back to its shareholders. This does not necessarily involve in a reduction in the company's shares, as the company may instead return to shareholders a certain dollar amount per unit of share. The objective of this exercise is ultimately to pay out to shareholders any paid-up share capital which is more than the company's budgeted needs.

Capital reduction is a viable option for companies if it does not have distributable profits and if its business outlook indicates that it may not be able to pay future dividends. High growth start-ups may also consider a capital reduction in order to simplify and improve its capital structure to attract financiers or new investors.

Companies considering a capital reduction exercise must first identify whether there are any restrictions in its constitution against this[1]. Additionally, the capital reduction exercise must be done in accordance with the procedure set out in the Companies Act (Cap. 50 of Singapore). This is either by a Court-sanctioned method[2], where the Court will need to approve the capital reduction exercise, or a non-Court sanctioned method[3], where the shareholders must pass a special resolution approving the capital reduction exercise and the directors must make a statement as to the company's solvency.

1.4 Debt Restructuring Plans

For a financially distressed company looking to restructure its debts, it may consider entering into consensual restructuring plans with its existing creditors and other relevant stakeholders. This involves entry into a contractual agreement with these stakeholders to agree on a debt restructuring plan, setting out details including restrictions or targets concerning new investments, debt compromises and the proposed repayment plan. Such restructuring plans would be more relevant to companies nearing insolvency, to allow it to settle its debts more efficiently for continued operations and financial recovery.

A good business advisory consultant can sometimes be a good investment for such an endeavour. A debt restructuring exercise require astute cash flow management, liquidity or revenue forecasts, loan waivers (financial ratios, in particular, may be breached) with existing banks, negotiation for additional loans and relationship management with all stakeholders – a comprehensive step plan from an experienced consultant will give the company a better chance to turnaround.

Difficulties may arise in formulating a plan that all creditors can agree to. If a consensus cannot be obtained, the company may consider court-managed restructuring processes, which are judicial management or a scheme of arrangement; though these 2 options are not out-of-court mechanisms as a third party is often involved in managing or overseeing the restructuring process. The company must also be mindful that institution of these judicial proceedings may trigger termination rights in certain contracts that it is a party to.

1.5 Collateralising Singapore-Domiciled Assets

For organisations with subsidiaries located throughout the world, the shares of Singapore-domiciled subsidiaries can be pledged relatively easily without the need to make a registration of the pledge of such shares in Singapore (although the financer may require the owner of such shares to register a branch in Singapore and then register the pledge of the Singapore subsidiary's shares locally).

Crucially, it is easy to offer the assets owned by Singapore companies as security for loans. The registration regime for pledges and charges of assets are found in sections 131 to 141 of the Companies Act (Cap. 50 of Singapore) and it is robust, transparent, bearing low political or judicial risk. 

Being a global financial centre, professional service firms such as lawyers are also familiar with working with US, Swiss or UK-based counsel concerning financial arrangements and securitising assets of Singapore subsidiaries whether for traditional bilateral, multilateral loan arrangement or for debt capital market purposes.

US or Europe-based corporations routinely use Singapore-domiciled assets as part of their debt financing considerations using security documents based on Singapore law such as mortgages, pledges, debentures, liens, charges, guarantees or other forms of security such as assignment of debts. Combined with a concise and transparent charge registration process, such security documents give the lending corporation assurance that they have effective security over Singapore assets.

2. Organisational Restructuring

Organisational restructuring involves changing a company's organisational structure to optimise costs and streamline its operations. Organisational restructuring may be undertaken by companies for reasons outside of mitigating financial distress, such as responding to new market trends or refocusing its business on a certain competitive advantages for growth.

The more common form of organisational restructuring is restructuring of a company's workforce. A company facing financial difficulties will need to consider how to utilise its manpower costs more efficiently. Often, this may give rise to a situation manpower redundancy, which may push companies to retrench its employees. That said, Singapore's Ministry of Manpower (MOM) has stressed that retrenchment should always be the last resort for a company in managing excess manpower. For companies wanting to retrench their employees, they must do so responsibly, fairly and in line with the guidelines released by Singapore's Tripartite Partners[4], which has been written about in detail in our article here. Failure to follow these guidelines may leave the company exposed to the risk of unfair dismissal claims by employees.

Companies should take a long-term approach in considering how to reorganise its workforce, as retrenchment may not always be an appropriate option if the company's financial difficulties are only short-term in nature. Other alternatives can be considered such as: offering flexible working hours; sending employees for training to upgrade their skills and employability; redeployment of employees to other divisions or departments; adjustment of wages; or implementing no-pay leave.

Large groups of companies with global operations may also wish to consider involving domiciliation in Singapore as part of their organisational restructuring plans. This is because of benefits including attractive tax efficient structures, incentives for pioneer activities, industrial land-efficiency, or corporate treasury, amongst others.

With the COVID-19 pandemic hitting global economies including Singapore's hard, it is also expected that the government will redouble efforts to attract global corporations to headquarter in Singapore by offering enhanced incentives in the coming months. As such, now would be a good time to restructure and put a Singapore-domiciled corporate headquarters as the focal point in a group corporate organisation.

Backing up the selection of Singapore as a key domicile in the organisation, it has a robust IP protection system and strong respect for rule of law in the commercial setting. It is also a pleasant place to live, and is generally adept at attracting skilled global talent.

3. Singapore Government-Backed Financing Schemes

Many companies seeking to put themselves in a better capital position to weather the COVID-19 pandemic may also turn to Singapore government-back loan schemes.

Most significant of the government-backed loan schemes is the Temporary Bridging Loan Programme to provide working capital for business needs. The interest rate capped at 5% p.a. and to encourage lending, the government will take a 90% risk-share with the financer on new loans until 31 March 2021. Eligible enterprises may also apply for up to 1 year deferral of principal repayment to help manage debt. A number of financial institutions are participating in the scheme, including the local Big 3 banks, HSBC, Standard Chartered and a number of other lenders.

Another useful group of schemes are the Enterprise Financing Schemes. This scheme is designed to support companies with developing new capabilities, creating new products or expanding their business footprint overseas. Examples include financing asset investments domestically or overseas, overseas projects and M&A to acquire targets outside Singapore. The government generally takes a 50% risk-share with the financer on new loans, although the government may take a greater risk-share for young companies less than 5 years old or S&P rated below BBB-.

Unlike similar government-backed schemes in the US or other countries, the Singapore schemes are administered directly by the financial institutions themselves. As such, conditions imposed on the borrower tend to be in line with prevailing market standards in the credit market, and do not often contain additional conditions imposed specifically by the government. Administering the loan is also generally less cumbersome as the borrower will deal directly with the financers themselves, and the arrangements between the financer and the government are attended to in a separate arrangement that sits behind the borrower-financer loan agreement.

4. Conclusion

Ultimately, it is important for companies and stakeholders to understand the various restructuring options available, so that it can reduce costs and optimise its business operations. These options are particularly important where a company is experiencing financial difficulties so as to stave off potential insolvency proceedings and tide it through periods of financial hardships, such as during the COVID-19 pandemic.

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please note that the information in this article is accurate as at 1 July 2020. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.

[1] Section 78A of the Companies Act (Cap. 50 of Singapore)

[2] Section 78G of the Companies Act (Cap. 50 of Singapore)

[3] Section 78B and 78C of the Companies Act (Cap. 50 of Singapore)

[4] The Tripartite Partners consists of the MOM, the National Trade Union Congress (NTUC) and the Singapore National Employers Federation (SNEF), which reflect the collaboration among unions, employers and the Singapore Government.