MinLaw consults on proposed prescribed eligible financial contracts to be exempted from restriction on operation of ipso facto clauses under the Insolvency, Restructuring and Dissolution Act

1 April 2020

From 23 March 2020 until 13 April 2020, the Ministry of Law (“MinLaw”) is seeking feedback on the draft Insolvency, Restructuring and Dissolution (Prescribed Contracts under section 440) Regulations 2020 (“draft Regulations”) which exempt prescribed eligible financial contracts from the restriction in section 440(1) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) on the operation of certain types of ipso facto clauses.

Section 440(1) and ipso facto clauses

Very broadly, ipso facto clauses entitle an innocent party to terminate a contract and/or exercise certain remedies upon the occurrence of certain contractually stipulated events. Section 440(1) provides that no person may, during a stipulated period, (a) terminate or amend, or claim an accelerated payment or forfeiture of the term under, any agreement (including a security agreement) with the company; or (b) terminate or modify any right or obligation under any agreement (including a security agreement) with the company, by reason only that the proceedings are commenced or that the company is insolvent. The stipulated period is any time after the commencement and before the conclusion of the stipulated proceedings (scheme of arrangement or judicial management) by the company.

Essentially, section 440(1) prohibits a party from terminating a contract with an insolvent company, or to take certain actions (by relying on a contractual provision) by reason of the company’s insolvency or commencement of scheme of arrangement or judicial management proceedings. This is thus an inroad to the important contractual rights of a party.

However this provision is necessary so as to preserve valuable contracts, which the insolvent company may lose simply by commencing judicial management or scheme of arrangement proceedings when it is insolvent. As safeguards, section 440 provides for certain carve-outs from the application of section 440(1) of the IRDA. Such exemptions include any eligible financial contract as may be prescribed, any commercial charter of a ship, or any contract that is likely to affect the national interest, or economic interest of Singapore, as may be prescribed.

The current public consultation concerns the carve-out relating to prescribed eligible financial contracts.

Proposed prescribed eligible financial contracts

In summary, set out below are the proposed prescribed financial contracts under the draft Regulations:

1. Business rules of an approved exchange, a licensed trade repository or an approved clearing house, which have effect as a contract by virtue of section 24, 46R or 67, respectively, of the Securities and Futures Act (“SFA”); 
2. Business rules of a licensed foreign trade repository, recognised clearing house or recognised market operator which operate as a contract (i) between the licensed foreign trade repository and its participants, and between each participant and each other participant; (ii) or between the recognised clearing house or recognised market operator and its members, and between each member and each other member; 
3. Any contract between a recognised clearing house or recognised market operator and its members, or any contract between a licensed foreign trade repository and its participants, containing or incorporating by reference the business rules of the recognised clearing house, recognised market operator or licensed foreign trade repository, as the case may be;
4. The depository rules (as may be amended from time to time) in relation to the operation of the Central Depository System, which have the same force and effect as if made by an approved exchange under section 81ST of the SFA, and have effect as a contract by virtue of section 24 of the SFA;
5. Any contract between the operator of a designated system and a participant of the designated system containing or incorporating by reference the designated system operating rules of the designated system;
6. Any derivatives contract, [securities contract,] master netting agreement, securities lending or repurchase agreement, commodities lending or borrowing contract, margin lending agreement or spot contract, that contains a netting arrangement or set-off arrangement;
7. Any contract that creates a mortgage, charge, pledge, lien or other type of security interest that is recognised by law, being a mortgage, charge, pledge, lien or other security interest that secures an obligation under a contract or an agreement mentioned in paragraph (6) above;
8. [any security contract];
9. Any contract or agreement that is (i) a covered bond; or (ii) directly connected with a covered bond or the issuing of a covered bond;
10. Any contract or agreement that is, or that [governs] [is directly connected with], a bond.

According to MinLaw, the references to “securities contract” mentioned in 6 and 8 above are alternatives. MinLaw seeks feedback on whether the proposed exclusion of securities contracts should be general and unqualified as provided for in paragraph 8, or qualified as provided for in paragraph 6.

Similarly, the phrases “governs” and “is directly connected with” mentioned in 10 above, are alternatives to each other. MinLaw is seeking reasoned opinions as to the more appropriate phrase, and alternatives may also be proposed.

By way of background, the Insolvency, Restructuring and Dissolution Bill was passed in Parliament on 1 October 2018. The IRDA was gazetted on 7 November 2018 and shall come into operation on a date to be appointed by notification in the Government Gazette.

Submission of feedback

In providing feedback, respondents may wish to consider whether all or any of the proposed exempted eligible financial contracts are suitable for exemption, whether there are other financial contacts which should also be exempted and if so why, whether any related contracts should also be exempted and whether the terms of the proposed exemptions are sufficiently clear in providing the safe harbour required.

If you have any queries or require any assistance with the submission of feedback, the Contact Partners listed below would be happy to assist. Please note that the deadline for providing feedback to MinLaw is 13 April 2020.