Singapore’s Insolvency, Restructuring and Dissolution Act: What does this mean for legal finance?

The much-anticipated Insolvency, Restructuring and Dissolution Act (IRDA) came into effect on 30 July 2020. As an omnibus Act, the IRDA collates and consolidates Singapore’s insolvency regime—previously instructed by the Companies Act and Bankruptcy Act among other legislative instruments—into one single piece of legislation.

The IRDA introduces a number of significant reforms designed to simplify and modernize Singapore’s insolvency framework including a new licensing and regulatory regime for insolvency practitioners, a restriction on the use of “ipso facto clauses” and a new provision on wrongful trading, amongst other changes.

It also clarifies the ability of insolvency practitioners to enter into legal financing arrangements in an insolvency context. Under the new rules, a liquidator or judicial manager has the right to assign the proceeds of an action arising under various insolvency offenses to a third-party funder. These offenses are transactions at undervalue (section 224), unfair preferences (section 225), extortionate credit transactions (section 228), fraudulent trading (section 238), wrongful trading (section 239) and damages against delinquent officers (section 240).

The inclusion of these provisions in the IRDA is much welcome. Legal claims require significant financial resources to investigate and pursue. Meritorious high-value claims can be amongst an insolvent company’s most valuable assets, but if the liquidator or judicial manager lacks the funds to pursue a cause of action, potential claims may be abandoned. If a company’s books and records are poorly kept, the liquidator or judicial manager may not be able to ascertain the merits or quantum of a claim without further investigation, which can be costly—particularly where the claims stretch back years.

This is where commercial legal finance is an important resource, enabling insolvency practitioners to pursue valuable claims that would have otherwise been abandoned and to maximize recoveries for creditors. The ability to assign the proceeds of an action would allow the assets recovered to be shared with parties financing the litigation and is therefore an essential component of the funding arrangement. The IRDA has now codified some of the principles under case law relating to third-party funding.

The IRDA is an important development intended to make Singapore an international center for debt restructuring and is of particular significance at a time of prolonged economic uncertainty.