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What is Judicial Management and How It Works in Singapore
What is Judicial Management?
Judicial management is a method of debt restructuring where an independent judicial manager is appointed to manage the affairs, business and property of a company under financial distress.
The company is also temporarily shielded from legal proceedings by third parties, giving it the opportunity to rehabilitate.
This article will cover:
Why Might a Company Wish to Undergo Judicial Management?
Judicial management is a process designed to allow the rehabilitation of a financially distressed company, or to realise its assets in a more advantageous way than if the company were to be wound up.
A good example would be a company which is temporarily insolvent, but which is expected to receive a very substantial cash inflow from an ongoing project. In such cases, the company could be put under judicial management to shield it temporarily from third-party creditors whilst it works towards realising the potential cash inflow.
On the other hand, if a company were to be wound up, it is unlikely to receive cash flow from the upcoming contracts, as the company will be dissolved.
Judicial management is also often compared with a scheme of arrangement, which is a similar statutory tool designed to allow the rehabilitation of financially distressed companies.
However, the key difference between them is that a scheme of arrangement operates under the supervision of the company’s management, while judicial management is supervised by an external judicial manager instead.
This means that judicial management may be more useful in cases where the creditors consider the company management to be untrustworthy (i.e. there are suspicions of embezzling of corporate funds) and thus wish to have a judicial manager investigate instead.
How Can a Company be Put Under Judicial Management in Singapore?
Under the Insolvency, Restructuring and Dissolution Act 2018, there are two main ways to put a company under judicial management. These are:
Method 1: Applying to court
The first method of putting a company into judicial management is by applying to court. The company and/or at least one of its creditors may make such an application by originating summons, supported by an affidavit stating the grounds for the application.
In the application, the applicant has to nominate a judicial manager. The nominee must be a licensed insolvency practitioner who is not the auditor of the company.
However, the court has the right to reject the applicant’s nomination and appoint another person, who may not necessarily be a licensed insolvency practitioner, as judicial manager instead. The Minister for Finance may also nominate a person to act as the company’s judicial manager if the Minister thinks this is necessary in the public interest.
The court may make an order for judicial management if:
It is satisfied that the company is or is likely to become unable to pay its debts; and
It considers that placing the company under judicial management would be likely to achieve at least one of the following purposes:
The company’s survival, or its undertaking as a going concern (whether in whole or in part);
The approval of a scheme of arrangement; or
The more effective use of the company’s assets to satisfy creditors’ claims, compared to if the company was wound up.
However even if these requirements have been satisfied, the court can still refuse to grant the judicial management order if it thinks this is necessary. In exercising its discretion, the court may consider factors such as:
Creditors’ interests (such as whether minority creditor interests are disregarded);
Creditors’ opposition to the granting of a judicial management order;
Likelihood of the company’s successful rehabilitation; and/or
Suitability of judicial management against other regimes, such as winding up.
Finally, there is one situation where the court must dismiss an application for a judicial management order. This is when:
A floating charge holder (i.e. a creditor who holds a secured charge on certain assets of the company) opposes the making of the order; and
The court is satisfied that the prejudice caused to the floating charge holder if the order was granted would disproportionately outweigh the prejudice caused to the company’s unsecured creditors if the application for judicial management was dismissed instead.
Method 2: Passing a creditors’ resolution
The second method of putting a company into judicial management is by a creditors’ resolution.
The requirements for such a method are similar to those for a court-ordered judicial management, with the main difference being that the judicial management is commenced through a creditors’ resolution by a majority in value (of the total amount of the creditors’ claims) and in number of creditors present and voting rather than just by a single creditor (which is possible for a court application for judicial management).
A further difference is that an interim judicial manager must be appointed before the creditors meet to vote on the resolution for a formal judicial manager.
The interim judicial manager is appointed by filing either a shareholder’s resolution or board resolution for the appointment, and lodging statutory declarations with the Official Receiver and ACRA stating the interim judicial manager’s consent to be appointed as such, and that the company intends to undergo judicial management.
After the appointment, the company then also has to lodge a notice of appointment with the Official Receiver and ACRA, and publish the notice in the Government Gazette and in an English local daily newspaper.
It should however be noted that a company cannot be put into judicial management via creditor’s resolution if there is already a pending court application for a judicial management order which has not yet been withdrawn or decided by the court.
Interim moratorium
To protect the company from creditors in the period before formal judicial management begins, the Insolvency, Restructuring and Dissolution Act 2018 provides for an interim moratorium (i.e. a temporary suspension of a certain activity) to restrain certain actions from being taken against the company.
These actions include the starting of lawsuits against the company or proceedings to wind up the company, and the enforcement of charges on, or security over, the company’s property.
An interim moratorium will operate for the following periods:
For judicial management commenced by court order: from the making of the application to the time when the court makes its decision on whether to grant the order.
For judicial management commenced by creditors’ resolution: starting once a written notice of appointment for an interim judicial manager has been lodged and ending when either a formal judicial manager has been appointed, the interim judicial manager’s term has ended or when the creditors reject the resolution for judicial management.
In the case of judicial management by court order, any creditor of the company can also apply to court whilst the application is still pending for an order to restrain the company from disposing of its property or altering shareholdings or shareholder rights.
What Happens During Judicial Management?
Regardless of which method judicial management is commenced by, the general process is the same afterwards. Once judicial management has commenced, the appointed judicial manager has 90 days to prepare a statement of his proposals on how he intends to achieve the purpose(s) for which the judicial management order was made.
The judicial manager then summons a creditor’s meeting for the creditors to decide whether to approve the proposals. If more than 50% in number and value of creditors approve, the judicial manager is obliged to manage the company’s affairs, business and property in accordance with the proposals.
At the same time, the judicial manager will take control of the company’s property. For the entire period of the judicial management, all the powers normally possessed and exercised by the company’s directors will be exercised instead by the judicial manager, who can do anything necessary for the management of the company’s affairs, business and property. Some of these powers include:
Power to sell, dispose of or grant security over the company’s property
Power to bring or defend legal actions on behalf of the company
Power to use the company seal
Power to carry on the company’s business
Power to make any arrangement or compromise on behalf of the company
Throughout the judicial management process, the judicial manager is expected to be honest, impartial and to avoid conflicts of interest. The company’s directors and officers are also obliged to give the judicial manager a statement of affairs within the prescribed time containing information on the company and its assets, debts, liabilities and creditors.
Moratorium
While the company is undergoing judicial management, there will be a temporary moratorium on certain activities such as the:
Appointment of receivers and/or managers over any company property or undertaking;
Starting or continuing of any lawsuits against the company (except with the judicial manager’s consent, or with the court’s permission and subject to any of its terms);
Enforcement of any security over the company’s property (except with the judicial manager’s consent, or with the court’s permission and subject to any of its terms); and
Re-entry of, or forfeiture of the company’s leases over, any premises (except with the judicial manager’s consent, or with the court’s permission and subject to any of its terms).
When and How Does Judicial Management End?
Judicial management will automatically end after 180 days from the date of the judicial management court order, or of the approval of the judicial management’s appointment by creditors by way of a creditors’ resolution, unless that order or resolution provides otherwise.
However, the judicial manager may apply for an extension of time from the court or creditors where necessary.
Furthermore, judicial management can also end where the judicial manager applies to court to be discharged, either because he has achieved his purposes or because he believes that the purposes can no longer be achieved.
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Judicial management is only one of the three main kinds of debt restructuring processes in Singapore. It is most often used in cases where there is a need for an independent third-party to oversee the restructuring of the company, such as where the financial distress of the company is due to the directors’ mismanagement or poor-management of the company.
If you need legal advice on whether your company will benefit from being placed under judicial management, feel free to get in touch with one of our corporate and commercial lawyers.
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