28 May 2012


Legal News & Analysis – Asia Pacific – Singapore – Insolvency & Restructuring




1.1 Preliminaries
1.1.1 Corporate debt restructuring in Singapore can take place either with the assistance of the Court or without the assistance of the Court.
1.1.2 Out of court debt restructuring is done by way of bilateral or multilateral restructuring agreements with creditors and usually involve some form of debt compositions or rescheduling.
1.1.3 A Court assisted debt restructuring can be sub-divided into two models: one is the debtor-in-possession model – the scheme of arrangement – and the other is the external administration model – judicial management.
1.1.4 The aim of this article is to examine both models.
2.1 Overview
2.1.1 A scheme of arrangement is an agreement between the company and its creditors under which the creditors agree to forgo all or part of their claim against the company, or simply to reschedule their debts, while allowing the company to continue to trade.  The advantage of a scheme of arrangement is that it allows the company to bind a dissenting minority of up to 25% in value and 50% in number.
2.1.2 The benefit of a scheme of arrangement to the debtor is that its current management remains in place with full powers, subject only in certain cases to oversight by an insolvency professional.  Thus, a scheme of arrangement is the closest restructuring mechanism available under Singapore law to the debtor-in-possession model of reorganisation such as implemented under Chapter 11 of the United States Bankruptcy Code.
2.1.3 Further, proposing and implementing a scheme of arrangement is not perceived to have the same stigma attached to it as a judicial management because proof of actual or impending insolvency is not a necessary prerequisite.
2.1.4 Putting a scheme of arrangement in place is a four-stage process:
i. Preparing the scheme itself;
ii. The first application to Court;
iii. The creditors’ meeting; and
iv. The second application to Court.
2.2 Preparing the Scheme
2.2.1 The legislation does not regulate how the scheme is to be prepared.  While technically it can be done by the debtor company itself, schemes are often prepared with the guidance of an insolvency professional.  This is especially the case if the debtor is multi-banked, as institutional creditors will very likely insist on the comfort of having an independent professional overseeing the preparation of the scheme and the conduct of the debtor’s business in the interim.
2.2.2 This stage will involve meetings between the insolvency professional, the debtor’s management and key creditors to build support for the scheme.  In order to convince creditors that a scheme of arrangement will be of benefit to them, the debtor must convince the creditors that their recovery from allowing the debtor to continue to trade as a going concern is greater than their recovery would be under a break up scenario. 
2.3 First application to Court
2.3.1 The second stage is the application to Court under section 210 of the Companies Act (Cap 50) to get the Court’s permission to convene a meeting of the debtor’s creditors to consider the scheme.  The scheme document must be put before the Court at this application.  It need not be in its final form, but it must be in a form in which it can reasonably be put before creditors.  The Court applies a very loose test at this stage and obtaining the order convening the meeting of creditors is almost always granted.  The only situation in which the Court will refuse to allow the meeting to be convened is if it is clear that the scheme is merely a sham or proposed for an ulterior purpose.
2.4 Creditors’ meeting
2.4.1 The third stage is the meeting of creditors itself, where the scheme is voted
on. In order to be approved, more than 50% in number and 75% in value of the creditors present and voting at the meeting must vote in favour of the scheme.  Thus a minority of up to 25% in value and 50% in number can be crammed down.
2.5 Second application to Court
2.5.1 The fourth stage is a further application to the Court for the Court to sanction the scheme. The Court does have an independent discretionary role in approving a scheme.
2.5.2 The function of the court at this stage is two-fold: firstly, it must ensure that the statutory procedure has been complied with and that the resolutions were passed by the requisite majority in value and in number at meetings duly convened and held; secondly, the court must determine that the scheme is fair and reasonable, particularly as regards the dissenting minority, if any.
2.5.3 In deciding whether the scheme has been properly approved by the requisite majorities, the court may consider whether the creditors have been provided with sufficient information in order for them to make an informed decision. If there is no allegation of procedural irregularity or impropriety in the summoning and holding of the creditors' meetings, the Court will be slow to differ from the wishes of the majority  unless there is some grounds for inferring that there is collusion between the majority and the company or there a dissenting creditor is able to establish that it would suffer unfair prejudice.
2.5.4 The onus is on those who say that the scheme is unfair to establish this.  The votes of those who have collateral motives in voting or divergent interests are of little value in determining whether the scheme is fair and reasonable.  The court's function is to determine whether the scheme is one that a reasonable creditor or member could vote for as being in his interest.  In determining this question, the court should bear in mind the fact that the Act is not meant to allow a majority to expropriate a minority, but is designed to allow a compromise under which all parties may benefit.  A scheme under which some persons give up everything and get nothing in return cannot be said to be reasonable. Needless to say, a scheme of arrangement which is oppressive to some creditors or in disregard of their interests will not be approved.
2.5.5 In addition to commercial considerations, the Court also takes into account questions of public policy. One aspect of public policy is the public interest in upholding standards of commercial morality. A scheme of arrangement will not be sanctioned where its primary purpose is to avoid the investigation of the conduct of the directors and the affairs of the company by an independent and competent third party that would take place in a liquidation or a judicial management.
2.5.6 While the sanction of the Court is no mere formality, the Court in approving the scheme cannot alter the substance of the scheme and impose an arrangement upon the creditors to which they had not agreed.
2.5.7 As long as the requisite majority and the sanction of the Court is obtained, the scheme of arrangement will bind all creditors, including creditors who have voted against the scheme and creditors who were not even aware of the scheme.
2.6 Moratorium
2.6.1 The scheme of arrangement legislation provides that a debtor who has proposed a scheme of arrangement with its creditors may apply to the Court for an order that proceedings pending against the company be stayed.
2.6.2 The moratorium which the legislation provides for actions by creditors is incomplete both in terms of temporal coverage and in terms of scope.
2.6.3 In terms of temporal coverage, a debtor company cannot apply for a court-imposed moratorium on actions until “a compromise or arrangement has been proposed”.  Therefore, the debtor cannot seek protection from creditors before Stage 2 has been reached.  This leaves the debtor vulnerable to legal action during the process of putting together the scheme of arrangement and building consensus in support of it.
2.6.4 In terms of scope, the moratorium which the legislation provides is also incomplete.  First, it is not a blanket moratorium against all actions against the debtor.  Instead, the legislation allows the debtor company only to obtain orders staying actual actions brought by creditors and not potential actions.  This means that the debtor will have to keep returning to Court as more actions are commenced against it.  Second, the moratorium only prevents litigation being continued against the debtor.  It does not prevent creditors from enforcing security outside Court or taking other self-help remedies, such as a bank exercising a right of set off or a hire-purchase creditor exercising a right of repossession.
2.6.5 In short, therefore, a scheme of arrangement is a statutory vehicle which allows a company to implement a restructuring plan with less than 100% agreement by the creditors and while the current management remains in control of the company.
3.1 Introduction
3.1.1 Until 1987, a company that could not pay its debts when they fell due could not prevent its creditors commencing legal proceedings or petitioning for its liquidation.  Often, such an event caused the demise of a company which could otherwise have been nursed back to health.  In order to allow a fundamentally viable company some breathing space in which to reorganise or restructure, the Companies Act was amended in 1987 by incorporating a new Part VIIIA based on the administration provisions of the English Insolvency Act 1986.
3.1.2 Part VIIIA of the Companies Act provides for the appointment of a judicial manager by the court upon a petition presented by the company, its directors, or a creditor if the Court is satisfied that the company is unable to pay its debts and that the appointment would be likely to achieve: (a) the survival of the company or the whole or part of its undertaking as a going concern; (b) the approval of a compromise or arrangement between the company and its creditors; or (c) a more advantageous realisation of the company's assets than could be effected on a winding up.  There is no requirement that the petitioner put forward firm proposals as to how this is to be done.
3.2 The mechanics
3.2.1 After the presentation of a petition for the appointment of a judicial manager, the court has the power under section 227B(10)(b) to appoint an interim judicial manager pending the making of a final judicial management order.  This is to be contrasted with the position under the English provisions where the Court has no such express power and it has been held that the Court has no such implied power.
3.2.2 In the interval between the presentation of a petition and its  final determination, the company may not resolve to wind up voluntarily, nor may a winding up order be made on a winding up petition already presented.
3.2.3 The presentation of a petition for the appointment of a judicial manager gives the company a respite from the attentions of its creditors.  While such a petition is pending, the company has extensive immunity from liquidation and legal proceedings as there is a complete moratorium on all actions against a company without the leave of court.  The moratorium covers the commencement of legal proceedings, the enforcement of security, the repossession of goods on hire purchase or under a chattels leasing agreement or subject to a retention of title agreement, execution of a judgment, and the levying of distress.
3.2.4 A petition for judicial management may therefore be used to stave off a compulsory winding up or to prevent execution being levied against the company's property.  This device is open to abuse.  However, such potential abuse may be controlled by the court.  If the court dismisses the petition and considers that it was presented frivolously and vexatiously, it may make such orders as it thinks just and equitable to redress any injustice that may have been caused.
3.2.5 At the hearing of the petition, the court has full discretion to grant or dismiss the petition or adjourn the hearing and make such interim orders as may be necessary.
3.2.6 The petitioner nominates the judicial manager who must be an approved company auditor and who is also not the auditor of the company. The court has the power to reject the nomination of the applicant and appoint another person in his stead.  
3.2.7 The creditors may oppose the nomination of a person proposed as judicial manager by the petitioner. This may be done by the majority in number and value of the creditors (including contingent or prospective creditors).
3.2.8 Once a judicial management order is made and while it remains in force, all powers conferred and duties imposed on the directors shall be exercised and performed by the judicial manager.  It is for this reason that many companies, especially private limited companies, have great reluctance to resort to this.  The making of a judicial management order has no effect on the rights of owners or shareholders.
3.2.9 When a judicial manager is appointed, he has 60 days (or such longer period as the court may allow) to formulate and lay before the creditors of the company at a meeting called for that purpose a statement of his proposals for the achievement of the purposes for which the order was made.  A creditor is not entitled to vote at the meeting unless he has first lodged a proof of debt.  A creditor may not vote in respect of any unliquidated or contingent debt or any debt the value of which is unascertained.  A secured creditor is not allowed to vote if his security covers the debts owed to him; he may vote if he surrenders the security or if part of the debt owed to him is unsecured.  The proposals may be approved by the majority of the creditors in number and value.  The meeting may propose modifications to the judicial manager's proposals, but they will be effective only if he consents.
3.2.10 If the creditors decline to approve the proposals, the court may order that the judicial management order be discharged.  This is not inevitably the case, as the court has wide powers to adjourn the creditors' meeting and make such interim orders as it thinks fit.
3.2.11 Where the judicial manager's proposals have been approved, he must manage the company in accordance with those proposals.  He may revise the proposals from time to time, but only if those revisions are approved at a creditors' meeting.  The creditors may appoint a committee to supervise the judicial manager.  This committee cannot interfere with the management of the company, but may require the judicial manager to furnish it with such information as it may reasonably require.  The judicial manager takes the place of the board of directors and may exercise all the powers conferred upon the directors by the Act or by the memorandum and articles.
3.2.12 To enable the judicial manager to carry out his duties, the directors of the company and the secretary must submit a statement of affairs to him within 21 days of receiving notice that the judicial management order has been made.
3.2.13 In exercising his powers of management, the judicial manager must ensure that members and creditors are treated fairly.  A member who feels that the affairs of the company have been conducted in a manner which is "unfairly prejudicial" to the members generally or to some part of them may apply to the court for relief.
3.2.14 Unless discharged earlier or extended by the court, a judicial management order remains in force for 180 days.  A judicial management order may be prematurely discharged if the creditors decline to approve the judicial manager's proposals, or if the court so orders by reason of the judicial manager acting in a manner unfairly prejudicial to the creditors or members, or if it appears on the application of the judicial manager that the purposes of the judicial management order cannot be discharged.  When the judicial management order is discharged, the judicial manager automatically vacates office.
3.2.15 A judicial manager is the only administrative entity involved in a judicial management.  He is not subject to the control of the Official Receiver, but is subject to the control of the court and the creditors.
For further information, please contact:
David Chan, Partner, Shook Lin & Bok
Debby Lim, Shook Lin & Bok


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