Revisiting Singapore's Corporate Restructuring and Insolvency Regime: Cross-Class Cramdown in Schemes of Arrangement

Existing R&I Framework on Cross-Class Cramdowns 

Under Singapore's existing cross-class cramdown regime, the Singapore court has the power to approve a compromise or scheme of arrangement despite a dissenting class of creditors provided that: 

• A majority in number of creditors meant to be bound by the compromise or arrangement, who were present and voting at the relevant meeting, have agreed to the compromise or arrangement; 
• The majority in number of creditors mentioned above represents three-fourths in value of the creditors meant to be bound by the compromise or arrangement, and who were present and voting at the relevant meeting; and 
• The court is satisfied that the arrangement does not discriminate unfairly between two or more classes of creditors and is fair and equitable to each dissenting class. 

Proposed Changes 

We note that, notwithstanding the introduction of the cross-class cramdown regime in Singapore pursuant to the IRDA, there has been no reported case to date where the cross-class cramdown has been utilized. This may be attributable in part to the (relatively) high thresholds to utilize the cross-class cramdown regime in Singapore, which were originally put in place due to a lack of developed valuation methodologies when the cross-class cramdown regime was first adopted in Singapore. 

To further enhance the cross-class cramdown mechanism in Singapore, the Committee recommends the following revisions: 

• Removing the requirement for the majority in number of creditors to vote in favor of the restructuring plan; and
• Expanding the scope of cramdown provisions to include shareholders. 

The proposed changes are driven by two key factors. First, the existing high threshold requirements discourage the use of the cross-class cramdown. This contrasts with more lenient threshold requirements in key restructuring jurisdictions such as the United Kingdom and the United States. Second, the IRDA lacks provisions for shareholder cramdowns, even though shareholder approval may be required for certain restructuring plans. The Committee's proposed changes are intended to further improve upon Singapore's existing R&I framework to increase the attractiveness of Singapore as a debt restructuring hub. 

Comparison with the United Kingdom, Netherlands, and the United States 

UK law provides for "Restructuring Plans," by which a company's capital structure may be reorganized. Restructuring Plans may restructure a company's balance sheet on a holistic basis or they may target specific debts or liabilities. Cross-class cramdown is permitted; the court may sanction a Restructuring Plan involving a cross-class cramdown if: 

• None of the members of the dissenting class would be any worse off under the restructuring plan than they would be in the event of the "relevant alternative"; and
• At least one class of creditors or members who would receive payment, or have a genuine economic interest in the company, in the event of "the relevant alternative" has voted in favor of the restructuring plan. 

Moreover, the UK regime does not include a headcount requirement for creditors (the approval threshold is just 75% in value of creditors who actually voted in each class), and a Restructuring Plan is able to vary shareholders' rights. Indeed, UK law does not necessarily require the debtor to solicit votes from out-of-the-money stakeholders, whether shareholders or creditors, in connection with seeking court approval of a proposed Restructuring Plan.  

In 2021, the Netherlands implemented a new restructuring law—the "WHOA" (wet homologatie onderhands akkoord)—which has features similar to the UK and U.S. restructuring regimes. As part of the court-supervised WHOA proceeding, a debtor can achieve deleveraging and bind holdout creditors and shareholders. Similar to the UK law, the WHOA can facilitate a cross-class cramdown if, among other things: 

• At least one class of impaired creditors who would at least be partially in the money in a liquidation proceeding accepts the restructuring plan; 
• The debtor's enterprise value post-restructuring is distributed in accordance with the statutory and contractual rankings (absent reasonable exceptions), at least in respect of the non-consenting classes; and
• The debtor establishes that the dissenting creditors are receiving at least as much as they would have received if the debtor were liquidated through a liquidation proceeding (and with a $0 liquidation value, then no compensation is required). 

Unlike the United Kingdom and United States, however, all creditors and shareholders whose rights will be affected by the restructuring plan are entitled to vote (i.e., there's no mechanism to leave out-of-the money creditors or classes out of the WHOA voting process). With a WHOA proceeding, the debtor may also choose to target specific debt—the proceeding does not necessarily have to involve the debtor's entire capital structure. A WHOA proceeding, similar to the UK regime, does not have a headcount vote requirement and, unlike in the United Kingdom, the WHOA threshold for acceptance of a restructuring plan is two-thirds in value of those creditors voting in the relevant class. While out-of-the-money shareholders are entitled to vote under the WHOA, such shareholders can be the subject of a cramdown if the above requirements are met. 

Under U.S. law, a restructuring plan involving a cross-class cramdown may be sanctioned if: 

• At least one class of impaired creditors accepts the plan, determined without counting insider votes; and
• The plan is fair and equitable to each class of claims or interests that is impaired under, and has not accepted, the plan (i.e., the "absolute priority rule," discussed below), and does not unfairly discriminate between classes of similarly situated creditors. 

For a class of creditors to accept a proposed restructuring plan, the U.S. regime requires two-thirds in value and one-half of the number of creditors voting in each class to accept the plan. Notably, out-of-the-money creditors in classes that are not entitled to value or distributions under the proposed restructuring plan are "deemed to reject" the plan, and no votes are solicited from such class(es). In many instances, shareholders fit into such category, and their rights are crammed down under the restructuring plan as a result of the absolute priority rule—i.e., holders of junior claims or interests cannot receive value until senior claims and/or interests are paid in full.