Justice Aedit Abdullah: Speech to the Indonesian Judiciary on The Challenges of Cross-Border Insolvency and Restructuring

SPEECH TO THE INDONESIAN JUDICIARY
“The Challenges of Cross-Border Insolvency and Restructuring”

Tuesday, 7 November 2023

Justice Aedit Abdullah
Supreme Court of Singapore

Leadership of the Supreme Court of the Republic of Indonesia
Head of the Judicial Research, Development and Training Agency, Judge Bambang Hery Mulyono
Ladies and gentlemen

Introduction

1         Cross-border transactions are a ubiquitous and accepted part of life now, even increasingly now for the average consumer. The law has to address and facilitate such activity. For restructuring and insolvency, there are two broad aspects.

2         Firstly, as in many other areas of law, there has been tension between different legal approaches to cross-border matters: at the one end insolvency and restructuring is seen as territorial in nature; at the other, a universalist one, that a single jurisdiction should take precedence and all others should defer to it. What has developed in the form of the UNCITRAL Model Law is a growing worldwide acceptance of a middle approach, modified universalism, which balances cooperation with protection for overriding interests. In ASEAN, the Model Law has been enacted in the Philippines, Singapore and Myanmar. We would respectfully suggest that other jurisdictions in ASEAN should consider its implementation.

3         Secondly, even aside from the Model Law, there is room for bilateral and multilateral cooperation. Corporate failure and financial difficulties pose major challenges even when they occur solely within a single country; cross-border issues bring even more complication. Given the ever-increasing levels of investment and commerce multilaterally within ASEAN, and between Indonesia and Singapore, it is inevitable that cross-border insolvency and restructuring cases will increase. Without better cooperation, investors, creditors and employees of companies will have to engage in a race for assets when corporations get into problems; that will be to no one’s benefit and to everyone’s detriment. This paper thus proposes greater cooperation between Indonesia and Singapore specifically, and within ASEAN in general, in cross-border insolvency and restructuring of corporations.

Insolvency and Restructuring in the Region
4         In 2019, foreign direct investment (“FDI”) into ASEAN stood at US$182 billion; even in the midst of the COVID pandemic in 2020, FDI stood at US$137 billion⁽¹⁾. Singapore’s investment in Indonesia stood at US$9.8 billion, or 34.1% of Indonesia’s total FDI in 2020⁽²⁾. Bilateral merchandise trade totalled some S$59.1 billion in 2021⁽³⁾. These statistics show that cross-border commercial activity continues to thrive and expand within Asia and beyond, despite the challenges posed by the global epidemic, inflation and geopolitical issues. Against that backdrop of prosperity, there will of course always remain challenges for investors and financiers. Markets will go through cycles, and companies may not be able to keep abreast of changes. Companies may fail and need to exit: sometimes they may need to be restructured and sometimes they need to be wound up.

5         If successful, restructuring, in which companies change their financial or operational structure, allows companies to overcome difficulties, shedding bad debt, unprofitable operations and refocusing on promising areas. In Singapore, restructuring may be done outside the court system, through consensual arrangements with creditors, or through applications to the court, in the form of schemes of arrangement, which would usually require some form of voting or approval to be given by the creditors⁽⁴⁾. Such schemes would generally involve some form of delay in repayment to creditors, together with infusion of money from an investor in return for equity, or from completion of projects or sales of assets.

6         Insolvency of companies would entail the dissolution of the companies, and disposal of assets, for the benefit of the creditors and other stakeholders such as employees and shareholders. While unfortunate, such dissolution would often be unavoidable, and the primary objective would be orderliness, and avoidance of unnecessary conflict or litigation, as well as the pooling of assets, and clawback of assets that may have been unfairly or illegally dissipated previously.

7         The evolving challenge in our region is that such restructuring and winding up will often involve groups of related companies straddling borders. Much inward investment into the region in various areas such as oil exploration, logistics, agriculture & processing, refining, or power generation, will entail the establishment of regional headquarters or holding companies, with operational subsidiaries established in separate jurisdictions to facilitate the economic activity. For instance, a PRC holding company may need to establish a manufacturing company in Indonesia, with a separate servicing company established in Malaysia, and some backroom operations through yet another associated company in Singapore. The restructuring of the group will require legal proceedings in multiple jurisdictions⁽⁵⁾. Coordination and cooperation between courts will be essential to ensuring an efficient and effective outcome. An uncoordinated approach, with each jurisdiction operating separately, not knowing exactly what is happening in the other jurisdictions, will likely result in conflicting and clashing orders, leading to legal complications, and probably engendering unnecessary litigation.

8         Even the insolvency and restructuring of single companies will require cooperation where operations and assets are held in various jurisdictions. For example, a Singapore company may operate through branch offices in Vietnam and Brunei, possibly holding bank accounts, and various assets such as machinery in locations in the two countries. The winding up of the Singapore company will require Singapore insolvency officers to seek the assistance of the courts in the two countries in respect of the recovery of assets in each location. If there is no coordination of legal proceedings, and no cooperation, it is likely that each jurisdiction may only pay regard to the needs of the creditors in its own jurisdiction, thereby creating a race to liquidate, getting hold of assets, and preventing the most efficient winding up possible. What is probably the most principled approach, would be, as noted by our Chief Justice, in his speech at the International Insolvency Institute’s Conference in 2018, modified universalism, that is, balancing cooperation across borders with a respect of national public policy considerations such as protection of classes of persons, such as employees⁽⁶⁾. This modified universalism requires close cooperation and communication between jurisdictions.

9         An immediate topical example is the restructuring of cryptocurrency companies in Singapore and the region because of the disruption within the cryptocurrency industry, with frozen or dissipated cryptocurrency holdings creating knock-on effects. In these cases⁽⁷⁾, the account-holders number in their thousands, and are located in various countries. Remote hearings have had to be held to cater for large numbers seeking to follow the proceedings in Singapore⁽⁸⁾. While restructuring has been pursued in Singapore, cooperation and coordination would have been useful in dealing with the interests of the account holders in their home jurisdictions.

10         It is noteworthy that cross-border insolvency and restructuring work is likely to increase in the region. This has led Singapore to expand the jurisdiction of the Singapore International Commercial Court to take in international insolvency and restructuring matters, through the Singapore International Commercial Court (Amendment No. 2 Rules 2022) and the Legal Profession (Representation in Singapore International Commercial Court) Amendment No. 2) Rules 2022. In essence, in international insolvency cases in the SICC, foreign counsel may readily appear alongside Singapore counsel: each set of counsel will address the court on their respective areas of expertise.

Cooperation through Memoranda of Understanding

11         Given the challenges and opportunities in restructuring, as well as the close economic relationship between the Republic of Indonesia and Singapore, and heavy presence of corporate entities in the respective jurisdictions, it is suggested that deepening cooperation in insolvency and restructuring will benefit investors, financiers and the general public in both jurisdictions. Singapore has signed memoranda on restructuring and insolvency with the judiciaries of South Korea, Malaysia, Delaware, and the Southern District of New York. These memoranda generally specify that the purpose is to improve efficiency and effectiveness of restructuring and insolvency proceedings through cooperation, and that the memoranda will be implemented on the basis of mutual understanding and respect. The cooperation between the jurisdictions will include communication and coordination in cases as well as assistance to improve mutual understanding. The memoranda do not have any binding legal effect, not being treaties.

12         If a similar restructuring and insolvency memorandum, building upon the Memorandum on Judicial Cooperation, could be agreed between the judiciaries of Indonesia and Singapore, this will give assurance to investors and their legal advisors that restructuring and insolvency matters will be handled efficiently and cooperatively by the courts in both Indonesia and Singapore. We note that there has been at least one instance of an Indonesian court recognising a Singapore restructuring moratorium⁽⁹⁾. Thus, when there is a group insolvency or group restructuring affecting related companies both in Indonesia and Singapore, the parties involved will have certainty that they will be able to work out arrangements and conduct proceedings expeditiously, with the courts in the two countries being able to work out issues directly with each other, reducing the amount of time required and the transaction costs.

13         If for instance, an Indonesian company is to be wound up in Indonesia, but with assets in Singapore such as funds in bank accounts, or real property, or machinery, the memorandum will be useful because it will provide a framework for the Indonesian Courts to communicate and coordinate with the Singapore courts in dealing with those assets. It should be noted that Singapore will generally recognise foreign insolvency proceedings regardless whether the foreign country has adopted the UNCITRAL Model Law on Cross-Border Insolvency.

The UNCITRAL Model Law

14         The UNCITRAL Model Law was made part of Singapore law as part of an integrated framework intended to ensure that Singapore provides efficient and fair processes in insolvency and restructuring, not just domestically but within the wider region. This is not a multi-national treaty as such, but in common with much of UNCITRAL work, including the New York Convention on Arbitration, is in the form of a draft law that countries are encouraged to adopt in their domestic law. The Model Law promotes greater certainty and reduces any rush for assets of a company in difficulties by identifying the centre of main interest (COMI) of a corporation. Insolvency or restructuring proceedings occurring in the COMI are given most assistance by other courts. That said, proceedings in other jurisdictions can still obtain some assistance regardless. Through this mechanism, the Model Law ensures that cross-border proceedings are orderly and any competition for assets is minimized. It does require the jurisdictions to subscribe to modified universalism, i.e. that courts should cooperate and assist each other. The use of the UNCITRAL model law gives certainty to investors and their advisors, as it provides a clearly understood and accepted framework for cross-border insolvency. The broad acceptance of the Model Law in jurisdictions the world over has bred familiarity and acceptance. There is a considerable amount of commentary as well as case law decisions from the world over, including the US, Europe, the UK and Australia, as well as Singapore.

15         Two other model laws relating to insolvency and restructuring have also been developed by UNCITRAL. These are the Model Law on Enterprise Group Insolvency and the Model Law on Recognition and Enforcement of Insolvency-Related Judgments. Singapore is studying and considering the implementation of these additional model laws.

16         The wide adoption of the Model Law facilitates further cooperation particularly through the fostering of better communication and relations. A grouping of judges supporting this is the Judicial Insolvency Network (“JIN”). Singapore is a founding member of this network, which brings together insolvency and restructuring judges from various commercial, mostly Model Law jurisdictions around the world, such as the Southern District of New York, Ontario, Cayman, Brazil, South Korea, England and New South Wales. The JIN issued guidelines governing court to court communications, which aim to specify and make certain how courts will conduct communications with each other. This provides certainty and assurance to legal practitioners and parties, that such communications can be carried out in a transparent manner. This was subsequently followed up by an additional document, the JIN Modalities, which governs the mechanics of initiating, receiving and engaging in such communication. In addition, the Network is working on developing common frameworks or approaches in various other areas of insolvency and restructuring. On-going projects include management of maritime secured rights, and a structure for the use of alternative dispute resolution in insolvency proceedings. The JIN Guidelines and Modalities are the basis of the protocol laid down by the Courts in New York, Singapore and the BVI in respect of the insolvency of Three Arrows Capital, a cryptocurrency fund. This protocol will help ensure an orderly winding up within the three jurisdictions.

17         JIN membership acts as an additional layer of cooperation on top of the memorandum of cooperation that Singapore has with the various other courts. In addition, JIN gives a much wider reach than the cooperation memoranda; the personal interaction between members also helps promote greater confidence and trust in the course of work. It really does help when the foreign judges requesting assistance are known to you and you have met them and interacted with them.

Other Measures

18         Other measures promoting cross-border cooperation include the work of the various organisations active in the area, including the World Bank, INSOL International and the International Insolvency Institute (or ‘III’). III will be holding its conference in Singapore in June next year. Our Judge of the Appellate Division Kannan Ramesh is the current chairperson. As the conference is open to non-members, we hope to see Indonesian judges attend.

19         There is also much to be gained through combined insolvency and restructuring training, to familiarise judges from both sides, and to aid in cooperation and coordination. As a start, the Singapore judiciary, would be happy to present our approaches in insolvency and restructuring, including our implementation of the UNCITRAL Model Law, and our decided cases. We would also be happy to host visiting judges to observe our insolvency and restructuring cases, and to discuss other issues of interest in the area, including if desired, some coverage of US Chapter 11 law, as many international restructurings are done through US bankruptcy courts.

Conclusion

20         In conclusion, cross-border insolvency and restructuring often throw up challenging issues, calling for close cooperation between national courts to avoid a free for all rush for assets. It is to be hoped that within ASEAN and between Singapore and Indonesia, we can explore together ways and means to promote close cooperation and assistance for the benefit of both our countries.

Aedit Abdullah
Judge of the High Court of Singapore