With cheap capital, low-interest rates, and government support all coming to an end, insolvency cases are expected to increase in the next few months. As the restructuring process offers Asian corporates the ideal outcomes for creditors and debtors, lawyers in the space expect to have their hands full for some time. 

The post-pandemic bounce – fuelled by low-interest rates and government spending – appears to be over. Thanks to growing inflation, supply chain disruptions, rising interest rates, and other factors, the Asian region is seeing an uptick in a corporate restructuring that is expected to carry on into 2023.

Some of the causes are sectoral. In Asia’s fast-growing technology sector, investors are increasingly beginning to demand to see a return on their investments. Then there is stress in the cryptocurrency ecosystem, as well as turbulence in the real estate sector in China.

As we see a deepening “crypto winter,” companies in the space are struggling. FTX, which operated one of the biggest global cryptocurrency exchanges and crypto hedge funds, filed for bankruptcy this year. In June, Three Arrows Capital, a Singapore-based cryptocurrency hedge fund, was ordered to liquidate by a court in the British Virgin Islands. Many other large companies in the ecosystem are either under liquidation or are considering how to manage debtors and investors, given the drastic fall in their valuations.

Meanwhile, real estate in China, which has been considered a safe bet for decades, is under stress. Many realty companies have started facing pressure to restructure some of their existing debt even as banks and traditional lenders pull back. “The largest volume of Asian restructurings in the recent year has come from the China market, specifically real estate companies,” says Alexander Aitken, a Hong Kong-based partner at Herbert Smith Freehills.

As a result, there is increased restructuring action in the region’s two legal hubs: Singapore and Hong Kong.

“The insolvency legal regime in Asian jurisdictions whose roots are substantively founded on English legal principles, such as Hong Kong and Singapore, provides a good framework for debt restructurings. These laws are well-developed and clear, thereby offering more certainty and transparency during the restructuring process,” said Made-line Leong, partner and head of the Asia assets and structured finance group, Watson Farley & Williams.

DIFFERING COURT APPROACHES

Even though Singapore and Hong Kong are both common-law jurisdictions with a number of other similarities, there are differences when it comes to how their courts approach restructuring.

For Singapore the key element of the restructuring processes under the Insolvency, Restructuring, and Dissolution Act 2018, is the moratorium protection provided to debtor entities.

“The moratorium was initially perceived by some creditors as too debtor friendly however, the judiciary has increasingly played a key gatekeeper role in its application, balancing debtor and creditor rights in curtailing the moratorium protection where necessary, and also in some cases, rejecting the application for the moratorium or subsequent application for a scheme where a restructuring was not feasible, say legal experts,” says Rishi Hindocha, a counsel at Allen & Overy.

Lawyers say that Hong Kong has always been viewed as the more creditor-friendly jurisdiction and has shown great flexibility in facilitating cross-border restructurings without any formal res-cue regime. On the other hand, Singapore continues to develop its status as a debtor-friendly hub for restructurings in the region.

This divergence is expected to continue, with the Hong Kong judiciary clamping down on offshore processes to restructure Hong Kong-based companies. At the same time, Singapore is attempting to demonstrate its flexibility for companies to deliver complex cross-border restructurings under the protection of its debtor-in-possession regime.

“Singapore continues to evolve its debtor-led restructuring regime towards greater flexibility, with several decisions bringing welcome clarity to practitioners and participants,” says Rob Child, a partner at Ashurst.

Compared to Singapore, the courts have been active and influential in Hong Kong, considering no formal restructuring regime exists in the SAR or special administrative regions in China.

“The pendulum continues to swing against offshore restructurings and towards a focus on local solutions. No longer can ‘soft-touch’ provisional liquidators expect an easy ride in the companies’ court, with both Justice Chan and Justice Harris clamping down on hopeless debtor-led restructurings, even going so far as castigating the liquidators themselves,” notes Child.

“I fear Asia will not completely avoid the effects of global slowdowns and inflation, and we are certain to see some increase in distress in the region. The effects of any global slowdown will play out differently across this region. In some markets, it could compound already difficult trading environments, whereas others may benefit from completed structural reform and deleveraging.”

— Alexander Aitken, Herbert Smith Freehills

The situation in Hong Kong could become more complicated due to offshore investors. “Hong Kong contract law works well, and our commercial disputes environment remains strong, but our insolvency law lacks the features to deal with the rehabilitation of over-indebted companies that are seen across the rest of the developed legal world,” says Aitken.

“This is why we see many Hong Kong-listed companies, whose centre of business is undoubtedly here in Hong Kong, being restructured using the laws of other jurisdictions, most often that of their Caribbean jurisdiction of incorporation,” he adds.

FUTURE TRENDS

Lawyers focusing on restructuring matters expect to see the trend continue next year, as macroeconomic trends combined with some sectoral pressure would mean more distress in the system and companies rushing to manage their debt.

“I fear Asia will not completely avoid the effects of global slowdowns and inflation, and we are certain to see some increase in distress in the region,” says Aitken of HSF. “The effects of any global slowdown will play out differently across this region. In some markets, it could compound already difficult trading environments, whereas others may benefit from completed structural reform and deleveraging.”

Ashurst’s Child says the market can expect an uptick in restructuring work starting from Q1 2023. “The impact of interest rate rises both globally and regionally remains to be seen, but anecdotally these are beginning to impact the real-world economy,” he notes. “As a result, we may see thinly capitalised businesses, particularly in the tech and retail sectors, start to feel the pinch. The era of cheap money is coming to an end, and businesses that have relied on cash flows from generous sponsors may be brought back to earth with a bump.”