The requirement of “feasibility” for moratorium applications under the new Insolvency, Restructuring and Dissolution Act

18 March 2021

A moratorium under section 64 of the new Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) is a form of insolvency protection for a debtor company which has proposed or intends to propose a compromise or arrangement with its creditors. An applicant for a moratorium has to provide, inter alia, (i) evidence of sufficient creditor support for the intended or proposed compromise or arrangement, and (ii) where no compromise or arrangement has been proposed but is intended to be proposed, sufficient particulars to enable the court to assess whether the intended compromise or arrangement is feasible and merits consideration by the company’s creditors.

In a recent unreported Singapore High Court decision (there is no judgment at the time of writing), for the first time, the court made its decision, inter alia, on the basis of whether the intended compromise was feasible.

In Re Kobian Pte Ltd (OS 1269 / 2020 in the Singapore High Court), Kobian Pte Ltd (“Kobian”) applied for a moratorium on the basis that it intended to propose a compromise or arrangement with its creditors. The application was dismissed by the learned Justice Vinodh Coomaraswamy on 12 January 2021. The court found that there was insufficient creditor support and insufficient particulars for the intended compromise or arrangement. More interestingly, the court also dismissed Kobian’s application on the ground that the intended compromise or arrangement was not “feasible”.

Allen & Gledhill Partner Tay Yong Seng acted for Maersk Trade Finance, a substantial creditor of Kobian, in successfully resisting Kobian’s moratorium application based on the “feasibilty” argument.

Background

Kobian is a Singapore company in the business of manufacturing, distributing and trading computer peripherals and consumer electronics globally. Kobian owed over US$250 million to various bank and trading creditors, and applied for a moratorium for breathing space to collect its trade receivables (allegedly worth over US$300 million).

Kobian claimed that there was creditor support for its intended moratorium, including from its largest unsecured and unrelated creditor, who was owed about US$21.52 million.

The Singapore High Court dismissed the moratorium application on several grounds.

First, the court noted the opposition from a substantial number of creditors, including several banks and Maersk Trade Finance.

The court also found that Kobian’s intended scheme lacked sufficient particulars, and was in fact more akin to a “boilerplate” proposal.

Separately, the court also found that Kobian’s proposal was not feasible. Although Kobian had run into financial difficulties in January 2020, it did not apply for a moratorium application until December 2020. By the time the application was heard in January 2021, Kobian’s financing banks had already terminated their banking lines. By making the moratorium application at such a late juncture, its financial position had deteriorated to such an extent that its intended proposal was not feasible.

There is no appeal from this decision.

Practical implications

This case is an example of the robust approach which a court may take when considering a moratorium application. Creditor support and particulars of the intended compromise and arrangement alone may not be sufficient.

This case indicates that, even at the relatively early stage of a moratorium application, the court can consider the feasibility of the intended compromise and arrangement. In considering feasibility, the court can take into account the debtor company’s delay in making the moratorium application. If such delay has caused the intended scheme to no longer be feasible, the court can dismiss the moratorium application. This has the practical effect of terminating the intended compromise and arrangement even before it is proposed to creditors. Put another way, the timing of a moratorium application can be a barrier to success.