Patterns emerging in the APAC and UK restructuring markets

Our latest briefing compares recent developments in the APAC restructuring market with those in the UK. Despite APAC's and the UK's divergent monetary policy and growth forecasts, we find that restructuring markets in both regions are seeing very similar themes:

• Increasing stress in commercial real estate;
• Increasing focus on winding-up (and the use of arbitration to avoid it);
• Increasing focus on breaches of directors' duties; and
• Increasing focus on restructuring tools.

We believe that there is much to be learned from the fact the two regions face similar challenges.

Increasing stress in commercial real estate

Higher interest rates, declining office demand, challenged retail trading and CMBS downgrades are leading to increasing stress in UK commercial real estate. At the same time, stress among Chinese property developers is a major theme in the APAC restructuring market.

China Evergrande is the most well-known collapse, having been placed into liquidation in early 2024, but it is just one of dozens of developers facing restructuring. This wave of distress has thrust Hong Kong's restructuring regime sharply into the spotlight. Despite a statutory corporate rescue regime having been discussed since at least 1999, and with the Special Administrative Regime government even trailing a new corporate rescue bill, the long-awaited 'provisional supervision' regime has yet to materialise. This leaves unsecured creditors in Hong Kong with limited room to manoeuvre if consensual negotiations break down, with the threat of winding up often being the only leverage available.

Time will tell how the absence of a formal corporate rescue regime will impact resolution solutions in Hong Kong, and whilst there have been some notable success stories, there are still a large number of situations that remain unresolved three years after the wave of property developer distress began.

Increasing focus on winding-up (and the use of arbitration to avoid it)

Winding-up petitions continue to climb in the UK in 2024, having fully recovered from the record low numbers during the pandemic. While not as stark, insolvencies are also increasing in APAC. And in places like Hong Kong, where winding-up is one of the few restructuring levers, we have seen an increase in the incidence of companies using arbitration to avoid winding-up.

In a financing context the tension between winding-up and arbitration arises in a situation where (i) parties enter into a loan agreement, choosing arbitration as their dispute resolution method; (ii) the borrower defaults on its payment obligations; (iii) the lender issues a winding-up petition against the borrower on the basis of the unpaid debt; and (iv) the borrower argues that the debt is disputed, the arbitration clause is binding and ousts the court's jurisdiction to grant the winding-up order, causing the first party to lose its leverage to force the other to the restructuring table whilst the arbitration plays out.

Whilst there was typically a divergence between Singapore and Hong Kong in terms of how this tension was resolved by the courts, the position has recently become more aligned: essentially, the courts in both jurisdictions will give primacy to party autonomy and respect that an arbitration clause has been included to settle any party disputes. However, a problem for creditors arises because the Singapore and Hong Kong courts will generally only consider whether a debt is prima facie subject to a dispute and that such dispute is not frivolous and/or being raised in an abuse of the court's process. This is a pretty low bar – some creditors have taken the view that some unscrupulous debtors may seek to take advantage of the low threshold to drag out proceedings where, in reality, there should be no dispute.

Elsewhere in the world, the Privy Counsel recently adopted a higher threshold on this issue in the Sian v Halimeda case, which originated from the BVI. In that case, the Privy Counsel required there to be a "genuine and substantial" dispute before the arbitration clause is allowed to trump the winding-up power.

It remains to be seen if the Sian v Halimeda decision, while not binding, will be persuasive in APAC jurisdictions. In the meantime, market participants in Hong Kong and Singapore should be aware of the relatively low threshold for debtors to invoke arbitration (or exclusive jurisdiction) clauses to frustrate a winding-up petition.

Increasing focus on breaches of directors' duties

In England and Wales, directors' duties and the creditors' interest duty have been a hot topic in the wake of the Supreme Court's judgment in BTI v Sequana and, more recently, in the High Court's judgment relating to the former directors of BHS. The creditors' interest duty is the duty on directors to take into account the interests of creditors as part of their fiduciary duty to promote the success of the company, when (i) a company is insolvent; (ii) a company is bordering on insolvency; or (iii) insolvent administration or liquidation is probable.

Many common law countries have followed the Sequana decision or regard it as persuasive, and Singapore is no exception. When the Singapore Court of Appeal handed down its decision in the case of Foo Kian Beng v OP3 earlier this year, it was described in the legal press as a "lodestar" decision. It provides that directors should view their duties on a sliding scale, with greater primacy given to creditors' interests the more inevitable insolvency becomes. In short:

• when solvent, shareholder interests are paramount;
• when in a state of distress but not imminent insolvency, the creditor duty is engaged, but the interests of both shareholders and creditors are relevant: creditor interests are not to be treated as the exclusive or primary factor in decision-making; and
• when insolvency is inevitable, creditor interests become paramount.

Increasing focus on restructuring tools

In the wake of the EU Restructuring Directive, which sought to introduce harmonised European restructuring processes across EU member states, we have seen an increasing focus in the UK and Europe on restructuring tools. Recent cases such as McDermott provide an interesting insight into how the interaction of restructuring tools in two different jurisdictions can impact the outcome of negotiations between cross-border stakeholders.

Interestingly, despite the huge numbers of Chinese property developer restructurings, none of them have tried to use the Singapore restructuring tools that are available. Instead, they have been relying in Singapore upon informal moratoriums and out-of-court negotiations to deliver restructurings via exchange offers, consent solicitations or schemes of arrangement (albeit this strategy is clearly not without risk, as not all borrowers have been successful in avoiding a winding-up).

In Singapore, there are three key scheme-related restructuring tools:

• The moratorium: arguably the most popular and successful of the three tools. It's available to companies that either have or intend to propose a scheme of arrangement, is a fully debtor-in-possession process with a broad scope, allows for an automatic (local) moratorium of 30 days upon filing, and the court can subsequently grant an initial moratorium with worldwide effect. Its duration is not fixed, but between three to four (or up to six) months is common, and this can be extended further by the court. It can also be accessed by foreign as well as local companies, which has proven popular with regional businesses in need of protection from hostile creditor action.
• The pre-pack scheme: this is growing in popularity. It is essentially a standard scheme without the requirement for holding either a convening hearing or creditors' meetings, which instead relies on creditors' votes being recorded e.g. through a restructuring support agreement. Vietnamese property developer No Va Land Investment Group Corporation recently used this to deliver a scheme of arrangement in around two weeks.
• Cross-class cram down tool: like England and Wales, Singapore courts have the ability to impose a cross-class cram down on dissenting creditors (in this case, in a scheme of arrangement). The test is based on that used in a US Chapter 11 process, albeit without the strict application of the absolute priority rule. In direct contrast to England and Wales, however, the cram-down power has not been used in Singapore since it was introduced in 2017.

Rob Child, Partner and Head of Restructuring and Special Situations in Singapore, says:

"It will be interesting to see how creditors react when the cross-class cram down tool is utilised in Singapore for the first time, given that the Singapore position is very clear that equity can remain whole whilst creditors are crammed down by the court."

For further information on:

• the English Supreme Court's decision in Sequana, see our article here; and
• the Singapore Court of Appeal's decision in Foo Kian Beng v OP3, see our article here.
• the impact of different restructuring tools on stakeholder negotiations, see our article on the McDermott restructuring here ( McDermott Plan Sanctioned: Lessons for Opposing Creditors (ashurst.com))

Authors: Rob Child, Partner; Inga West, Counsel; Jake Overend, Senior Associate; Rachel Tan, Associate