1 Whither the Scheme of Arrangement in Singapore: More Chapter 11, Less Scheme? ∗ Meng Seng WEE ∗∗ 1. Introduction Of the former English colonies in Asia, Singapore’s corporate insolvency law is one of the closest to the English. The provisions on liquidation and scheme of arrangement (henceforth ‘scheme’) in both jurisdictions are largely similar and Singapore’s judicial management 1 (henceforth ‘JM’) was modelled on the administration in the Insolvency Act 1985. Further, there are also important similarities between Singapore and England in the legal and financial environments within which their respective insolvency laws operate. Their commercial laws are largely similar and both are important financial centres and arbitration centres. But there are also important differences between the two jurisdictions. Singapore has no equivalent to the English company voluntary arrangement (CVA) and unlike England a debenture holder with a global security package continues to be entitled to appoint a receiver and manager. The similarities and differences go a long way towards explaining the use of the scheme as a debt restructuring tool in the two jurisdictions over the last twenty years. While the scheme has been used mainly by large or very large companies in England to restructure financial debts, 2 in Singapore it has been used widely by large and medium sized companies to restructure not only financial debts but also trading debts, becoming the most popular corporate rescue tool. Singapore courts played a leading role in that development, and developed a body of law which has transformed the scheme into a hybrid regime where the existing management remains in office, but with insolvency practitioners assuming key functions and the court exercising supervisory powers and providing assistance. Until very recently, this direction was set to continue. The Singapore Government has accepted broadly the recommendations from the Insolvency Law Review Committee (ILRC), which rejected adopting a US Chapter 11 style restructuring but proposed several reforms to scheme. Although some of them were quite radical, they could still be seen as developing the scheme organically. Since then, developments in the latter part of 2016 have rendered the future direction of scheme in Singapore very uncertain. The same may yet happen in England. Both the Singapore and English governments have at about the same time proposed adopting significant elements of Chapter 11 which would modify their rescue laws, including the law on scheme, directly or indirectly. The Insolvency ∗ This draft is prepared for the 12 January 2017 conference on The Scheme of Arrangement as a Debt Restructuring Tool, which is jointly organised by the Commercial Law Centre, Harris Manchester College, University of Oxford and the Centre for Law & Business, National University of Singapore. Please do not circulate without the author’s prior consent. ∗∗ Faculty of Law, Centre for Law & Business, National University of Singapore. I thank Mr Lee Eng Beng SC (managing partner, Rajah & Tann) and my colleagues Hans Tjio and Umakanth Varottil for their help in writing this paper, and for the research assistance rendered by the ever helpful librarians of the C J Koh Law Library. I am especially grateful to Associate Professor Charles Qu of CityU for reading the drafts, the stimulating discussion and for saving me from several errors. The usual caveats apply. 1 ss 227A to 227X. 2 See for eg, Sarah Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-First Century’ (2016) 36 OJLS 697.
OftheformerEnglishcoloniesinAsia,Singapore’scorporateinsolvencylawisoneoftheclosesttotheEnglish. The provisions on liquidation and scheme of arrangement (henceforth ‘scheme’) in bothjurisdictionsarelargelysimilarandSingapore’sjudicialmanagement1(henceforth‘JM’)wasmodelledontheadministration in the InsolvencyAct1985. Further, therearealso important similaritiesbetweenSingaporeandEnglandinthelegalandfinancialenvironmentswithinwhichtheirrespectiveinsolvencylawsoperate. Their commercial lawsare largely similarandbothare important financial centresandarbitrationcentres.Buttherearealsoimportantdifferencesbetweenthetwojurisdictions.SingaporehasnoequivalenttotheEnglishcompanyvoluntaryarrangement(CVA)andunlikeEnglandadebentureholderwithaglobalsecuritypackagecontinuestobeentitledtoappointareceiverandmanager.
The similarities and differences go a long way towards explaining the use of the scheme as a debtrestructuringtoolinthetwojurisdictionsoverthelasttwentyyears.Whiletheschemehasbeenusedmainlyby largeor very large companies inEngland to restructure financialdebts,2in Singapore ithasbeenusedwidelybylargeandmediumsizedcompaniestorestructurenotonlyfinancialdebtsbutalsotradingdebts,becomingthemostpopularcorporaterescuetool.Singaporecourtsplayedaleadingrolein that development, and developed a body of lawwhich has transformed the scheme into a hybridregimewhere the existingmanagement remains in office, butwith insolvency practitioners assumingkeyfunctionsandthecourtexercisingsupervisorypowersandprovidingassistance.Untilveryrecently,this direction was set to continue. The Singapore Government has accepted broadly therecommendations from the Insolvency Law Review Committee (ILRC), which rejected adopting a USChapter11stylerestructuringbutproposedseveralreformstoscheme.Althoughsomeofthemwerequiteradical,theycouldstillbeseenasdevelopingtheschemeorganically.
Since then, developments in the latter part of 2016have rendered the future directionof scheme inSingapore very uncertain. The same may yet happen in England. Both the Singapore and EnglishgovernmentshaveataboutthesametimeproposedadoptingsignificantelementsofChapter11whichwould modify their rescue laws, including the law on scheme, directly or indirectly. The Insolvency
∗Thisdraftispreparedforthe12January2017conferenceonTheSchemeofArrangementasaDebtRestructuringTool,whichisjointlyorganisedbytheCommercialLawCentre,HarrisManchesterCollege,UniversityofOxfordandtheCentreforLaw&Business,NationalUniversityofSingapore.Pleasedonotcirculatewithouttheauthor’spriorconsent.∗∗ Faculty of Law, Centre for Law & Business, National University of Singapore. I thank Mr Lee Eng Beng SC(managingpartner,Rajah&Tann)andmycolleaguesHansTjioandUmakanthVarottilfortheirhelpinwritingthispaper, and for the research assistance rendered by the ever helpful librarians of the C J Koh Law Library. I amespeciallygratefultoAssociateProfessorCharlesQuofCityUforreadingthedrafts,thestimulatingdiscussionandforsavingmefromseveralerrors.Theusualcaveatsapply.1ss227Ato227X.2Seeforeg,SarahPaterson,‘RethinkingCorporateBankruptcyTheoryintheTwenty-FirstCentury’(2016)36OJLS697.
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Servicepublishedadocument,AReviewoftheCorporateInsolvencyFramework,on25May2016,whichforconveniencewillbereferredtoastheEnglishReviewinthispaper.InSingapore,theCommitteetoStrengthen Singapore as an International Debt Restructuring Centre (henceforth ‘RestructuringCommittee’)publisheditsreporton20April2016.ButwhilstimplementationoftheEnglishReviewhasbeen put on hold because of Brexit, Singapore hasmoved ahead rapidly and is poised to enact thereformsbythefirstorsecondquarterof2017.
ThestrikingfeatureinboththeEnglishReviewandSingaporereformsisthatwhilstthegovernmentsinbothjurisdictionsdeclaredthattherestructuringlawsintheirrespectivejurisdictionswereperformingwell,theybelievedthatthelawswouldbeimprovedbyincorporatingsignificantelementsofChapter11.Due to the significant differences between Chapter 11 and English-inspired insolvency laws, anddifferences across a range of other matters such as the taking of securities, judicial attitudes ininsolvencycases,etc,thatinteresttomovetowardsChapter11deservesclosescrutiny.Itmaymarkthebeginning of some kind of convergence towards Chapter 11 in Singapore and England ifmost of theproposalsintheEnglishReviewareimplemented.
This paper has two purposes. It explains the reasons for the scheme’s transformation from acumbersome procedure to an efficient and effective debt restructuring tool in Singapore andSingapore’scontributionstothe lawonschemes. Thesecondpurpose is toevaluatetheproposals toreform the schemes in two rounds of consultations and the reforms in the draft Companies(Amendment)Bill2016(henceforth‘AmendmentBill’).ItwillbearguedthatthemeasuresinthedraftCompanies(Amendment)Bill2017wouldmostlikelyusherinaperiodofuncertaintyoreveninstability.ButitisnotpossibletopredicthowtheChapter11elementswouldtakerootinSingapore.
Thepaperisorganisedasfollows.Thesecondsectionprovidesanoutlineofthehistoryoftheschemein Singapore from her independence in 1965. The third section explains the distinctive features ofSingapore’slawandpracticeonusingschemeasadebtrestructuringtool.ThefourthtosixthsectionsevaluatethereformproposalsinthetworoundsofconsultationexercisesandtheamendmentsintheAmendmentBill.Theseventhsectionconcludes.
TheschemeprovisionsinSingaporearecontainedinsections210to212oftheCompaniesAct.Section210istheoperativesectiongivingthecourtpowertosummonmeetingsandsanctionschemes,whiles211 stipulates the information that the company is required toprovide to the creditors ormembers.Section212givesthecourtpowertograntancillaryorderwheretheschemeisforthereconstructionoramalgamation of companies. They are largely similar to the English provisions, but the followingdifferencesshouldbenoted. First,unders210(10)thecourtmay‘restrainfurtherproceedings inanyactionorproceedingagainstthecompanyexceptbyleaveoftheCourtandsubjecttosuchtermsasthe
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Courtimposes.’SingaporeadoptedthislimitedstayfromVictoria’sCompaniesAct1961.TheVictorianstayprovisiontraceditsroottotheNewSouthWales’JointStockCompaniesArrangementAct1891,s3.This provisionwasenacted inNewSouthWales todealwith abanking crisis3and it has a chequeredhistory.AlthoughitcouldconceivablyhavehelpedtodevelopadebtorinpossessionprocedureinNewSouthWales,thatdidnothappen.ButinSingaporethestayhasbeenimportantinhelpingcompaniesgainabreathingspacetoproposeaschemeandcontributedtothescheme’spopularity.
Theseconddifferenceisthatunders210(4),thecourtinsanctioningaschememaygrantitsapproval‘subject to such alterations or conditions as it thinks just’, which has no equivalent in the Englishprovisions. Thethirdandfourthdifferencescameaboutbecauseofarecentamendinglegislation.4 Itprovidedthatthecourtmayprescribeadifferentmajoritythanamajorityinnumberfortheheadcounttest,althoughitmuststillrepresentthree-fourthsinvalue.5Theamendmentwasmeanttogiveeffecttothe recommendations of a committee appointed to review the company law6that s 210 should beamendedtoenableholdersofunitsofsharesinacompanytobepartiestoascheme,andtogivethecourt a discretion to prevent amembers’ scheme frombeing defeated by share splitting.7 However,althoughtheintentionwastoamendonlythelawonmembers’schemes,theamendedprovisionsapplyequally to creditor scheme as well. Whilst there are strong arguments to reform or abolish theheadcounttestincreditorscheme,8thereshouldbedebateandconsultationbeforeadecisionistaken.9The amending legislation also provided thatwhere a company is in the course of beingwoundup, asanctionedschemewouldbebindingontheliquidatorandcontributoriesofthecompany.10Althoughthere seems to havebeenno reported case in Singaporeof a company in liquidation entering into acreditorscheme,itisnotthatuncommoninotherjurisdictions,11especiallyforinsurancecompanies.Itisveryhardtoseeanyreasonforrestrictingcreditorschemestocompaniesnotyet in liquidation. Assuch,itseemsthatdraftingerrorcannotberuledout.
(b) Judicialguidance
3SeeHansardXXX.4Companies(Amendment)Act2014,s135ands136.5Companies(Amendment)Act2014,s135,whichbecames210(3AB)(a),(b).6SeeMinistry of Finance,Report of the Steering Committee for the Review of the Companies Act: ConsultationPaper (June2011), 3-35 to3-38. See also theexplanatory statement to theCompanies (Amendment)Bill 2014,317-318.7Ontheuseofsharesplittingordebtassignmenttosupportordefeatascheme,seeJenniferPayne,SchemesofArrangement:Theory,Structure&Operation(CUP,2014)64-66.8ibid.9Thisisnotanargumentagainstthereformoftheheadcounttest.10Companies(Amendment)Act2014,s135,whichbecames210(3AA)(a).11See foreg,ReHawk InsuranceCoLtd [2001]EWCACiv241, [2001]2BCLC480 (inprovisional liquidation);ReSovereign Marine & General Insurance Co Ltd [2006] EWHC 1335 (Ch); [2007] 1 BCLC 228 (in provisionalliquidation);ReKempevAmbassadorInsuranceCo[1998]1WLR271.AspointedoutinJenniferPayne,SchemesofArrangement: Theory, Structure & Operation (CUP, 2014) 281 it is relatively common for schemes to be usedalongside liquidation, andoften thepurposeof adding a scheme to liquidation is to depart from the rules thatwouldotherwiseapplyinliquidation.
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Schemesbecamepopular inSingapore fromaround themid-1990s. Therewerea fewreasons for itssuccess.TheJMwasveryunpopular12andtherewasnopre-packJM.TherewasalsonothingsimilartotheCVA.Ontheotherhand,theschemeofferedcompaniestheopportunitytorestructuretheirdebtsunder theprotectionof a court granted stay. The courts have arguably stretched the limited stay insomecases togivedebtor companiesa chance toproposea scheme.13In theearly stages, thecourtshavebeen very supportive by allowingmeetings to be summonedeven though the schemeproposalwas very sketchy.14 The scheme also offered companies great leeway to negotiate commerciallyacceptablesolutionsondebtrestructuring;foreg,theparipassurulewasheldnottoapplyinscheme.15Directorswerealsoattractedtouseschemes.Notonlywastherenoautomaticdisplacementofexistingmanagement,theschememaybeusedtowaiveguaranteesthatthedirectorshavegiventotheschemecreditorstosecurethecompany’sdebts.16
Thesuccessofschemeshowsthat,intheabsenceofsuitableprocedures,inparticularpre-packagedJM,insolvency practitioners and insolvency lawyers, under the guidance and support of the courts, havebeeninnovativeinrespondingtomarketpressuretodevelopaprocedurewhichwaspreviouslyviewedascumbersomeandcostlyintoahighlyeffectiveandefficientdebtrestructuringtool.Atthesametimethecourtshavesoughttoprotectthecreditors,bothbetweenthecreditorsasagroupandthecompany,andalso intra-creditors. Thecourtshavestrengthened the roleof theschememanager,which is theperson administering the scheme after it has been sanctioned, given themselves more scope tointervene even after sanction has been given, and required the provision of sufficient information tocreditors.
The scheme’s success shows the inherent flexibility of Singapore’s corporate insolvency law, thedevelopmentoftherescuecultureinSingaporeandthepressureofmarketforces.AlthoughtheformalfeaturesofSingapore’scorporate insolvency lawmaybesaid tobecreditor friendly (amoreaccuratedescription is secured creditor friendly),17rescue of viable businesses are possible and have become
12ForafullaccountofJM’sexperienceinSingapore,seeILRC,FinalReport,82-88.13Thewording in s 210(10) suggests strongly that the courtmay only stay proceedings in an actionwhich hasalreadybeencommencedagainstthecompany,andthatwassoheldinReReidMurrayAcceptanceLtd[1964]VR82.Itisalsoarguablethatacompanymayonlyapplyforastayatthesametimeasorafterithasappliedtocourtforanorder toconvene thecreditors’meeting tovoteon thescheme (ie,application for the firsthearing).ButSingaporecourtshavegrantedastayofallproceedingsagainstthecompanyinanexpartehearing,andbeforethecompanyhasappliedforthefirsthearing.Fortheformersee,foreg,ReEconCorpLtd[2003]SGHC288,[2004]1SLR273,[9]whereLaiSiuChiuJsaidthatsuchanorderwasmadewhenKanJorderedthecreditors’meetingtobeheld.Forthelatterandageneraldiscussionofs210(10),seeReConchubarAromaticsLtd [2015]SGHC322.Seegenerally Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate Rescue Mechanism: The SingaporeExperience’(2009)18InternationalInsolvencyReview37,42-43.14FromconversationwithMrLeeEngBeng,SC.15HitachiPlantEngineering&ConstructionCoLtdvEltracoInternationalPteLtd[2003]SGCA38,[2003]4SLR384,[84]-[85].16DaewooSingaporePteLtdvCELTractorsPteLtd[2001]4SLR35.17UnlikeEnglandwhichhasvirtuallyabolishedtheadministrativereceivership,adebentureholderwithaglobalsecuritypackageisentitledunderSingaporelawtoappointareceiverandmanager,andmayvetoanapplicationtocourtforaJMorder:s227B(5).OntheILRC’srecommendationthisvetopowerwouldberestrictedundertheAmendmentBill.SeetexttofnXXX.
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more prevalent. Like England, Singapore has succeeded in striking a fair balance between ‘creditorfriendly’and‘debtorfriendly’approachestorestructuringandinsolvency.
(c) Reviewandreforms
The ILRCwas appointed in November 2010 to review Singapore’s existing bankruptcy and corporateinsolvencyregimesgenerallyandtoadviseonmeasurestomoderniseandunifytheregimesinasinglepieceof legislation. InreviewingtheJMandthescheme,the ILRCconsideredbut intheendrejectedadopting the US Chapter 11 as US laws and conditions were very different. As stated earlier, itrecommendedthattheJMandtheschememaybeimprovedthroughorganicdevelopment,bydrawingonestablisheddoctrinesandaddressingdeficienciesthathavesurfacedinpractice.
While theGovernmentwas drafting a new InsolvencyAct to implement the ILRC’s recommendationswhich ithas largelyaccepted inMay2014, it appointed theRestructuringCommittee inMay2015 torecommend initiatives and/or legal reforms that should be undertaken to enhance Singapore’seffectivenessasacentre for internationaldebtrestructuring.18TheGovernmentwasof theviewthatSingaporewaswell placed to serve the region’s increasing need for the restructuring of cross-borderdebts.19 TheRestructuring Committee adopted a very different approach to that of the ILRC. It usedChapter11astheblueprinttorecommendreformstoschemeandtoalesserextent,JM.AlthoughthereasonsfortheimportationofChapter11aresomewhatdifferentfromthatinEngland,wherebyamaindriver was to improve England’s position in the World Bank’s annual Doing Business Report,20bothgovernmentsweredrivenbythedeterminationtogrowthedebtrestructuringindustryandtheneedtokeepupwith external developments, rather than addressing theweaknessesof their respectivedebtrestructuringregimes.
3. Ahybridproceeding(a) Barestatutoryframework
Astrikingfeatureofthe lawonscheme is that itcontainsthebarestminimumofstatutoryprovisionsandnosubsidiarylegislation.First,theprovisionsgiveverylittleguidanceontheextentthatacompanyis required to disclose to the creditors regarding the company and theproposed scheme.21 A criticalfeatureof the schemeprocess is its relianceon creditorevaluationandmajority consentwithineachclassasameansofresolvingthecomplexwebofconflictinginterestsandassessmentsofthecompany’svalueatstake.Itisclearlyinsufficientforthestatutetostipulateonlythatthecompanyisrequiredtoexplaintheeffectoftheschemeandtostateanymaterialinterestsofthedirectorsandthetrusteeforthedebentureholdersthatdifferfromtheothersvotingonthescheme.22
18ReportoftheRestructuringCommittee,Introduction.19ReportoftheRestructuringCommittee,Chapter2.20EnglishReview,[2.3].21SeeTraceyEvansChan,‘SchemesofArrangementasaCorporateRescueMechanism:TheSingaporeExperience’(2009) 18 International Insolvency Review 37, 50-53 for an excellent discussion on the dynamics involved indisclosure.22s211(1),(2).
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Secondly, the provisions make no mention of the financial advisers, accountants or insolvencypractitionerswhowouldusuallyhavetobeengagedbythecompanytoadviseonthedebtrestructuringandadministertheschemeafterithasobtainedcourtsanction.Thisisagovernanceissue,whichislessofaproblemwherethecompanyislargeandthecreditorsarelargefinancialinstitutionsorhedgefunds.Althoughtheexistingmanagementmayremain inoffice,thecompany’sgovernancewouldhavebeensubjecttothecontractsbetweenthecompanyandthecreditors,andinanyeventthecreditorsarealsoable to look after their own interests. But where the company is small or relatively small and thecreditorsarenumerousandconsistofsmalltraders,thosefactorswherebythecreditors’ interestsareprotected are absent. The risks that the existing management will act in ways detrimental to thecreditors’interestsarefurtherexacerbatedbythestayonproceedingsagainstthecompanyins210(10).
In pointing out the above, this writer is not suggesting that they necessarily represent gaps in thelegislation. If the creditor scheme is used predominantly as providing statutory support to enable amajority of creditors tobind aminority to adebt restructuringplan,23as in England, itwouldormaymake sense not to legislate on those things. But when the scheme begins to be used by smallercompaniesand takesonmorecolourasan insolvencyproceeding,ashashappened inSingapore, theinadequacies of the legislation become apparent. The different uses of the scheme in England andSingapore accounted for the different focus of their respective case law on scheme. English law hastendedtofocusonverytechnicalaspectsoftheschemeprovisions,suchasthemeaningofkeyterms,the classification of creditors and valuation, and cross-border issues, reflecting London’s role as aninternational debt restructuring centre,while governance issues have rarely been raised. In contrast,governanceissuesinschemehavefeaturedprominentlyinSingaporecaselaw.
FromSingapore’sperspective,therefore,theaboveaspectsoftheschemelegislationrepresentedgapsinthelegislation.Moreover,theyreinforceeachotherinpracticetherebymagnifyingtheimpactofthegaps. Take the case of voting on the scheme, which is the most important element on whether itbecomesbindingonthecompanyandthecreditors.Theoutcomeofvotingdependsonwhichproofofdebtswere admitted or rejected. In practice, the companywill engage an insolvency practitioner toadjudicateontheproofs.Itwillbeconvenienttorefertothispersonastheadjudicator,sincethisisthetermusedintheAmendmentBill.24
The gaps in the legislationmean that there is very little protection of the creditors’ interests in thevoting process. The adjudicator, being appointed by the company, would tend to look after thecompany’sinterest.Thelackofrulesontheproofofdebtsgivestheadjudicatorroomtomanipulateinthe company’s interests, by for example being lenient with suspicious proofs submitted by internalcreditors but strict or even harsh with proofs of external creditors. This is compounded by the23ThiswashowthecourtconceivedtheschemeinReNorfolkIslandandByronBayWhalingCoLtd(1969)90WN(Pt1)(NSW)351,354.24Proposeds211F(5).
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legislation’s failure to provide the creditors with any recourse to bring a personal action against theadjudicatorformisconduct. Thisstateofaffairs isnotconducivetomaintainingthecreditor’strust intheintegrityofthevotingprocess,andatatimewhentrustintheproceedingiscrucialtothesuccessofthe scheme. The trust deficit, in turn, may cause the creditors to question the adjudicator on hisdecisionsmoreaggressively,andtorequest toseetheproofsofdebtsubmittedby internalcreditors.But as the legislation provides so little guidance onwhat the company is required to disclose to thecreditors, it is an open question whether the adjudicator has to accede to any such request. Theuncertaintyonthelevelofdisclosuremayleadtoagenerallackoftransparency,andadownwardspiralintherelationshipsbetweenthecompanyanditscreditors.
(b) Measurestoenhancegovernance
Singaporecourtshavedevelopedprinciplesandrulestodealwiththeaforesaidgapsinthelegislation.SomeofthesehavesinceledtofurtherdevelopmentsasenactedintheAmendmentBill.Forexample,substantial guidancewas given in the first two cases concerning TT International25on the conduct ofproofofdebtsandthedutiesoftheadjudicatorandschememanager.TheILRCdevelopedtherulesonproofofdebtsfurtheranditsrecommendationshavebeenenactedintheAmendmentBill.26Althoughthe ILRC did not recommend legislating on the duties of the adjudicator and scheme manager, thejudicialdevelopmentshaveneverthelessfoundtheirwayintotheAmendmentBillwhichacknowledgedthe two positions. It defined the adjudicator as the personwho is nominated by the company to beappointed as the chairman of the creditors’meeting, andwho is responsible for adjudicating on theproofsofdebtsubmittedbythecreditors,27andtheschememanageras thepersonappointedbythecompanytoadministerthescheme.28
The judicial developments have helped to develop Singapore’s scheme as a hybrid insolvencyproceedinginthreeways:enhancingdisclosureandtransparency,takingnascentstepstocreateanewoffice,andstrengtheningcourt’spowersofsupervisionandassistance.
Disclosureandtransparency
InWahYuenElectricalEngineeringvSingaporeCablesManufacturers,29theCourtofAppealheldthat,asidefromstatutoryauthority,itisanindependentprincipleoflawthatthecreditorsshouldbeputinpossessionof such informationas isnecessary tomakeameaningful choice.30InTT International (No2),31thisbasicprincipleondisclosurewasexpandedslightlysothat
scheme creditors are rightfully entitled to expect to receiveaccurate informationwhichwouldallowthemtomakeaholisticassessmentastowhethertheproposedschememanagerand/or
Butwhileitisnotdifficulttounderstandthebasicprincipleondisclosure,itisanotherthingapplyingitwhere the factsarehotlydisputed. It canbeseen fromthecaseswhere thecreditorscomplainedofinsufficient disclosure that creditors evaluating a proposed scheme are usually concerned with twocommon issues.33 The first is the evaluation of the company’s business or business with a view toassessing whether the proposed scheme is in their interests.34 The second is the phenomenon ofwoodwork creditors and related party debts. The origin and quantum of the debts might beunsubstantiated or suspect.35 The difficulty facing the court when the creditors and the companydisagreeonwhetherthecompanyhasprovidedthecreditorswithsufficientinformationonthosetwoissues is that there is usually no clear yardstick which the court may use to reach a decision. Forexample,intheWahYuencase,theopposingcreditorarguedthattheinternalcreditorsshouldnotbeallowed to vote as it was impossible to verify the extent of their claims or evenwhether theywerecreditorsontheavailableinformation.TheCourtofAppealagreedthattheconcernswerejustified,butdecidednottoruleonit,onthegroundthattherewasifitwereaconditionprecedentthatacompanyhadtosatisfyeachcreditorofthegenesisandextentofallofitsdebtsbeforetheschemecouldbeputtothevote,theentireprocesswouldbecumbersomeandadministrativelyinconvenient.36Thereasongivenwassomewhatpuzzlingsincethe issuewasnotaboutsatisfyingallcreditorsof theirdoubtsbutwhethertherewassufficientmeritintheopposingcreditors’challengewhichthecompanyhasfailedtoaddressandthusthevotesoftheinternalcreditorsshouldeithernotbecountedinthecomputationofthemajority,orbediscountedbythecourtintheexerciseofitsdiscretion.Nevertheless,itshowsthedifficultyacourtmayfacewhenaskedtodecidewhethersufficientdisclosurehasbeenmade.
Thecourtshaverespondedtothedifficultyintwoways.First,itdevelopedbrightlineruleswherethetestsmaybeappliedreadily. Thebestexample isprobably therulethatwhereascheme involvesaninsolventcompany,enoughinformationmustbegiventothecreditorsforthemtoassesswhetherthereturns under the proposed scheme would be greater than what they could expect in an insolventliquidation,37or perhaps the rescue procedure the companywould enter into if the schemewas notapproved.38TheCourtofAppealinWahYuenarticulatedtheruleandusedittoupholdthetrialjudge’srefusal to sanction the scheme. Another example is the rule that a contingent liability ‘whichwould
32ibid,[21](emphasisoriginal).33Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate RescueMechanism: The Singapore Experience’(2009)18IIR37,50.34Foreg,as inWahYuenElectricalEngineeringvSingaporeCablesManufacturers ]2003]SGCA23, [2003]3SLR629;ReEconCorpLtd[2003]SGHC288,[2004]1SLR273.35Foreg,seeWahYuenElectricalEngineeringvSingaporeCablesManufacturers]2003]SGCA23,[2003]3SLR629,[15].36ibid,[18].37WahYuenElectricalEngineeringvSingaporeCablesManufacturers]2003]SGCA23,[2003]3SLR629,[37].38ReEconCorpLtd[2003]SGHC288,[2004]1SLR273,[83].
“material information” which had to be disclosed connoted information relating to thecommercialviabilityoftheimplementationoftheschemeasawhole,inordertoallowcreditorsto make a holistic assessment as to whether the proposed scheme manager and/or theproposedtermsoftheschemewereappropriatefortheCompany.40
Butwhilebrightlinerulesdelivercertaintyandpredictability,theylackflexibilityandmayleadtoharshor unfair outcomes. InWah Yuen, the Court of Appeal held that the company’s failure to provideauditedaccountsmeantthatthecreditorscouldnotassesswhetherthereturnsintheproposedschemewould bemore than the returns in an insolvent liquidation. To require that audited accountsmustalwaysbegiven,regardlessofthesituation,ishowevertoorigid.41
Regardless of broadprinciple or specific rules, theirmajor drawback is that creditors have to expendtimeandcoststoinvokethem.Theydonotontheirowndeliverconsistentandrealisticprotectiontothecreditors. Ithasbeenexplainedabove that the issuesarising fromthegaps in the legislationareintimately connected. The crux of the issues is the corporate governance of the companywhile it isnegotiating a schemeand after the schemehas been sanctioned, its implementation. The company’sexistingmanagementcontinuestomanagethecompany,unlessdisplacedattheinsistenceofpowerfulcreditors.Butthemanagementmaybethereasonforthecompany’scurrentdirestate,orcontributedsubstantially to it.Creditorswhoare suspiciousof themanagement’s competenceorevengood faithmayratherpreferlettinganinsolvencypractitionermanagethecompany.Practitioner-in-possession,inanyevent,isthemainstayofSingapore’scorporateinsolvencylaw.Further,thestayins210(10)preferstheinterestsoftheshareholdersandthemanagementoverthecreditorsasthecreditors’enforcementrightsaresuspendedwhilethecompanyisenabledtocontinuetradingwhereitotherwisemaynothavebeenabletodoso.
The courts have very recently seized the opportunity to lay the groundwork for a more effectivegovernancestructuretoprotecttheinterestsofthecreditors.Thisisdoneprimarilybyimposingdutiesontheprofessionalsappointedtoassistthecompany,andbyregulatingthefeestheycharge.
Nascentstepstocreatinganewoffice
Since the scheme legislation does not even acknowledge the existence of the professional advisers,these appointments are entirely contractual and vary from case to case. The courtmay conceivablyimpose requirementswhen ithears thecompany’sapplication foranorder to summon thecreditors’meeting,but it isnotknownwhether thathasbeendoneandtheextent thereof. It seemstheusualpracticeistoappointaninsolvencypractitionertoadjudicateontheproofsofdebt,chairthecreditors’meeting and implement the scheme after it has been sanctioned, and appoint the person’s firm or39TheRoyalBankofScotlandNVvTTInternationalLtd(No2)[2012]SGCA9,[2012]2SLR213,[21].40ibid.41Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate RescueMechanism: The Singapore Experience’(2009)18IIR37,51.
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company as the independent financial advisor to formulate the scheme and negotiate with thecreditors.42Thispaperwillnotcoina separate term for the independent financialadvisorperformingthosefunctions,butrefersimplytothatastheadjudicatorformulatingthescheme.
InTT International (No 1),43the creditors disputed several of the adjudicator’s decisions on proofs ofdebt. In addition to laying down rules governing proofs of debt, the Court of Appeal also took theopportunity to examine the functions of the professional advisers. The Court held that the dutiesevolvedduringthedifferentstagesofthescheme. Theadjudicator informulatingtheschemeowesadutyofgoodfaithtothecompanyandthebodyofcreditorsasawholeandmustnotmisleadcreditorsor suppressmaterial information from them. Theymust act fairly and in an independentmanner indischargingtheirduties,andmustneverfavourtheinterestsoftheirappointersoverthatoftheotherlegitimate claimants to the company’s assets.44 Next, the duties are amplified when the adjudicatoradjudicatesontheproofsofdebt.Holdingthatthosefunctionsaresimilartothatoftheliquidatorandjudicialmanager,theCourtheldthatanadjudicatorinthisquasi-judicialroleowesdutiestobeobjective,independent,fairandimpartial.45Further,againdrawingontheofficeofliquidatorasacomparator,theCourt held that, after the scheme has been sanctioned, ‘the proposed scheme manager’s duties toadminister the approved scheme take on a fiduciary nature upon his appointment as the schememanager.’46Finally,theCourtalsoheldthata‘proposedschememanager is inapositionofconflictofinterest when he without good reason aligns his interests with those of the company’.47Although aproposed schememanager is ‘inherently in a position of conflict’,48since his remuneration depends,inter alia, on successfully resuscitating the company, he must ‘nevertheless, seek to strike the rightbalance and manage the competing interests of successfully securing the approval of his proposedschemeanduncompromisinglyrespectingtheproceduralrightsofallinvolvedintheschemeprocess.’49
The above propositions may be seen as an innovative attempt to create a new office ofadjudicator/schememanager.Wherethecreditorsaretoodispersedandunabletoprotectthemselves,the duties imposed on the adjudicator/scheme manager would serve to strengthen corporategovernanceinschemeandprotecttheinterestsofthecreditors.ThatsomesuchofficeisrequiredcanbeseenfromthestrongsupportforgreatercreditorprotectioninthefeedbacktotheEnglishReviewonthestandalonemoratoriumproposal.50
Butwhilethereismarketpressureforthecreationoftheoffice,thedoctrinalfoundationofthreeofthepropositionstheCourtofAppeallaiddowninTTInternational(No1)areuncertain.TheCourtdidnotexplain the sourceof thedutyof good faith the adjudicatorowes to the creditors in formulating thescheme,orwhytheofficeoftheschememanageris,presumablyvis-à-visthecreditors,afiduciaryone.42ThatwaswhattookplaceintheschemeofTTInternational.SeethediscussionintexttofnXXX.43TheRoyalBankofScotlandNVvTTInternationalLtd(No1)[2012]SGCA9,[2012]2SLR213.44ibid,[74].45ibid,[75].46ibid,[76].47ibid,[52].48ibid,[77].49ibid.50SeetexttofnXXX.
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Itishardtosupportthepropositionsbyrecoursetoexistingdoctrines.Thedifficultiesinturncastdoubtonthepropositionsregardingconflictofinterest,sincetherewouldbenoconflictofdutyandinterestifthebetterviewisthattheadjudicator/schememanagerdoesnotowethedutyofgoodfaithorfiduciarydutiesasheldbytheCourt.Butthedutyimposedontheadjudicatorwhenadjudicatingproofsofdebtstandsonfirmerground.Sincethefunctionisundoubtedlyquasi-judicial,itwouldfollowfromgeneralprinciples that the adjudicator owes a duty to be objective and impartial to the creditors who havesubmittedtheirproofsofdebt.
Thecourtshavealsosoughttoexercisecontrolovertheadjudicator/schememanagerbyregulatingthefeescharged.Itseemsacommonpracticeforthefeestobecomputednotonlyontimecostsbutalsotoincludeavalueaddedfee(VAF)whichisdependent,interalia,ontheamountofdebtsowedtothecreditorsthatarewaived,extinguishedorconvertedintoequity.51 InTheRoyalBankofScotlandNVvTTInternationalLtd(No2),52thequantumoftheVAFwasestimatedtobeintheregionofsome$15mto $30m.53It only came to light two years after the sanction of the scheme, because the schememanager was an excluded creditor and thus not part of the scheme, and the company refused torespond to the creditors’ request for information on the fees of the schememanager. The Court ofAppeal held that the VAF was a contingent liability of the company, and in view of its potentiallyenormous impact on the company’s financial position, was material information which should havebeen disclosed to the creditors so that they could assess the proposed scheme holistically whenexercisingtheirvotes.Thecompanyandtheschememanagerhavebreachedtheirrespectivedutiesofdisclosurewhen they failed todisclose itsexistence. TheCourtheld that itwouldhave setaside theschemeandordereda freshvote,butbecausetheschemehasbeen implementedformorethantwoyears,itwasnotpracticaltosetitasidewithoutcausingmoreharmtothecompanyandthecreditors.54Hence it ordered that the scheme manager, the company and the monitoring committee of thecreditors shouldendeavor to reachanagreementas towhatought tobe theproper feesdue to thescheme manager, and that if the parties fail to agree, the fees would be assessed by a High Courtjudge.55
ThedecisioninTTInternational(No2)raisesdifficultquestionsonthejurisdictionandpowerofacourttomakeordersaffectingtheschemeafterithasbeensanctioned,whichwewouldconsidershortly.Asschememanagersareusuallyinsolvencypractitioners,itiseasywhenthetopicoftheirfeescomeuptocompareitwiththefeeschargedbyliquidatorsandjudicialmanagers.Butunlikealiquidatororjudicialmanagerwherestatuteortheinherentjurisdictionofthecourtprovidesthebasistoregulatethefeescharged, it is extremely hard to find any basis to regulate the scheme manager’s fee. The Court ofAppealnavigatedaroundtheproblembyeffectivelymandatingthattheschememanager’sfeeshould
51TheRoyalBankofScotlandNVvTTInternationalLtd(No2)[2012]SGCA9,[2012]2SLR213,[12].52[2012] SGCA9, [2012]2 SLR213. TheVAFwaspayablenot to the schememanager,but rather the companyownedbytheschememanager,butastheCourtofAppealconsideredthispointtobeirrelevanttoitsdecision(at[27]),thispaperwillglossoverthedifference.53ibid,[6].54ibid,[33].55[ibid],[34]-[35].
In The Oriental Insurance Co Ltd v Reliance National Asia Pte Ltd,57the Singapore Court of AppealallowedanapplicationbyOrientalInsuranceCoLtd(‘OrientalInsurance’)foranextensionoftimetofileaproofofdebtunderasanctionedscheme.ThecourtrefusedtofollowthestrictapproachofthePrivyCouncilinKempevAmbassadorInsuranceCo,58whichreflectedtheEnglishpositionthatitwasstatute,notacourtorder,whichgavebindingforcetoascheme.Consequently,thecourt’sinherentjurisdictiontoamendaschemewasverylimited.Whileacourtcouldcorrectanobviousmistake,itcouldnotalterthesubstanceoftheschemeandimposeanarrangementonthecreditorstowhichtheyhadnotagreed.ThePrivyCouncil inKempeheldthatthetimelimits intheschemetofileaproofofdebtwereoneofsubstance.59 To allow deadlines to be extended would be amaterial alteration, detracting from thecertaintyandexpeditionwhichwerethechiefobjectsofthescheme.
The approach in Kempe was held to be unnecessarily strict and mechanical in Oriental, which wasconcerned that it may lead to unjust results. The Court of Appeal examined Australian cases andpreferredtheirreasoningthataschemeoperatedasanorderofcourtinsteadofastatutorycontract.60Itcharacterisedanextensionoftimeasaproceduralmatterandexaminehowitsdiscretionshouldbeexercised.61On the facts,notonlywould therebenoprejudice to thecompanyor theother schemecreditorsiftheapplicationwasallowed,butthecompanywouldbeprejudicediftheapplicationwasnotgranted.
The different judicial attitudes inKempe andOriental Insurance show that Singapore courts prefer amoreflexiblejurisdictiontoamendaschemewherethematterisproceduralandwherejusticerequires,eventhoughthatmayimpingeonthecertaintyandfinalityofschemes.ButinTTInternational(No2),theCourtofAppealassumedamuchgreaterjurisdictiontoamendaschemewhenitheldthatitwouldhavesetasidetheschemeonaccountofthenon-disclosureoftheschememanager’sVAFbutfortheconcernthatdoingsowouldcausemoreharmtothecompanyandthecreditors.InTTInternational(No3),62anotherdifferentlyconstitutedCourtofAppealrefusedanapplicationtosetasidethedecisioninTTInternational(No2).ItheldthattheearlierCourtofAppealcouldhaverescindeditssanctionoftheschemeon thebasisof thenon-disclosureof theVAF.63The reason is that ‘shouldnew factsemergewhich cast doubt on the validity of the scheme’s sanction, the court has the authority to determinewhether those new facts should have any effect on the scheme.’64But the Court acknowledged that
TTInternational(No2)andTTInternational(No3)havethepotentialtoimpactonthefinalityofschemesignificantly. It is established law,whichwasaccepted inOriental Insurance, thatoncea schemehasbecomeeffectiveandisbindingonthepartiestoit,itcannotafterwardsbealtered,exceptwhereitispursuanttoamendmentprovisionswithintheschemeitself,66orwherethecourtexercisesitsinherentjurisdiction in limited circumstances, for example, if consent to the schemewasobtainedby fraudorwhere there are obviousmistakes in the documents setting out the scheme.67Although the Court ofAppeal inTT International (No3) sought to soften the impactby suggesting that theproperorder tomakewaslimitedtorescindingthescheme,thisisstillamajorinroadintothefinalityofscheme.
4. FirstroundofproposedreformsfromtheILRC
ILRC recommended several measures to improve the workings of schemes, as part of the efforts toimprove rescue laws. It noted that schemes were used not only by insolvent companies for debtrestructuringbutalsobycompaniesthatwerenotinfinancialdistressforcorporatetransactions.68Thus,itrecommendedthattheschemesectionsshouldremainintheCompaniesAct,butwherethecompany,itscreditorsormembersappliedforamoratorium,additionalprovisionsintheproposedInsolvencyAct,whichwouldhouseindividualbankruptcyandcorporateinsolvencyinoneActforthefirsttime,wouldapply.69Notehoweverthatthisisnotacompletestatement,ascramdownandotherrecommendationswouldalsoapplytoacreditorscheme.Nomentionwasmadeofs210(10),butitwouldbestrangetoleave this in the CompaniesAct. Various issues arise fromamending the schemeprovisions to caterspecificallyforschemeasadebtrestructuringtoolwhichwewillexaminebrieflyunderwelookattheAmendmentBilllater.
(a) Moratorium
Unlike England where schemes are used mainly by large companies to restructure financial debts,schemesareusedinSingaporebylargeandsmallercompaniestorestructurebothfinancialandtradingdebts.70 There is greater need for amoratoriumwhile the company negotiates on the terms of the
65ibid,[194],[195].66ReCapeplc[2006]EWHC1316(Ch),[2007]2BCLC546,[72]-[73](latersanctioned,[2006]EWHC1446(Ch)).67FletchervRoyalAutomobileClubLtd[2000]1BCLC331(fraud);KempevAmbassadorInsuranceCo[1998]1WLR271,276.68ILRC,FinalReport,139-140.69ibid,140.70See for eg,WahYuenElectrical Engineering v SingaporeCableManufacturers [2003] 3 SLR629;Hitachi PlantEngineering v Eltraco International [2003] SGCA 38, [2003] 4 SLR 384; The Royal Bank of Scotland NV v TTInternationalLtd(No1)[2012]SGCA9,[2012]2SLR213.
TheILRCrecommendedthatthereshouldbeabroadermoratorium,notnarrowerthanthemoratoriumintheJM,whichthecourtwouldhavediscretiontoalter ineachcaseaccordingtothecircumstances.Further,unliketheexistinglawwhereanapplicationforastaymayonlybemadewhereascheme‘hasbeenproposedbetweenthecompanyand itscreditorsoranyclassofsuchcreditors’,72anapplicationforamoratoriummaybemadewhenthecompanyhasanintentiontoproposeascheme.73Inarrivingatthoserecommendations,theILRCconsideredbutultimatelyrejectedtheoptionofanautomaticstayarising on filing and appointing a supervisory trustee, similar to the position under Chapter 11, toprotect the interests of the creditors. It distinguished between the moratorium in JM and themoratoriuminschemes. There isnodisplacementofmanagement inschemes,unlike JM. Allowingamoratoriumtoariseautomaticallywillbeunfairtocreditorsandpotentiallyleadtoabuse.Indeed,theILRCalsorecommendedincreasingcreditorprotectionduringtheinterimperiodbetweenanapplicationforaJMorderandthemakingoftheorderwhenaninitialmoratoriumisinplace.74
Toprotectcreditorsfrompossibleabuseofmoratorium,theILRCrecommendedtwosafeguards:75timeshould stop to run with regards the application of avoidance provisions once any application for aschemehasbeenfiledincourt,andacreditormayapplytocourttorestrictanydispositionofpropertybythecompanyand/oranyactivitythatisnotcarriedoutintheusualcourseofbusiness.
(b) Measurestofillthegapsinthestatutoryframework
TheILRCrecommendedseveralmeasurestofillthegapsinthestatutoryframeworkonschemes.First,itdevelopedtheruleslaiddowninTTInternational(No1)ontheproofofdebtsandrecommendedthatlegislationshouldbeenactedonthefiling,adjudicationandinspectionofproofsofdebts,whichwouldhelp to streamline theprocesses andpromote transparencyand fairness. Secondly, it recommendedthat a statutory right shouldbe given to the company, its creditors and schememanager to apply tocourtfordirectionsonproceduralandimplementationissues,butnotsubstantiveorcommercialtermsofthescheme.Thirdly,itrecommendedthatthecourtshouldbegivenapowertoorderare-vote.
Theaboverecommendationswereorganicdevelopmentsofthescheme.Buttherecommendationoncram downwas different. It was based on Chapter 11 and controversial. The ILRC decided against
introducing a Chapter 11 style debtor-in-possessionmodel in Singapore, but recommended adoptingsomeofitsfeatures.
(c) Powerofcourttocramdownadissentingclass
In view of modern reservations about the correctness of Re Tea Corporation,76which held that thecompanymaycramdownaclasswhichhasvotedagainstthescheme,thepracticeinEnglandhasbeentotwinaschemewithanadministrationinordertoovercomeobjectionsfromaclassofcreditorsthatare out of the money.77 Although schemes have been proposed and sanctioned in JM,78 crammingdown a class of out of money creditors did not seem to be a reason for using that combination ofprocedures. The status of the Re Tea Corp principle in Singapore is not clear. But the issue ofovercomingobjectionsfromoutofmoneycreditorswasnotlistedasoneoftheproblemsordrawbacksofschemes.
Themain reasons givenby the ILRC,when it recommendedby amajority to legislate for a power tocram down a class of dissenting creditors, were that this would reduce the excessive emphasis onclassification, and that itwasneeded todealwith creditorswhowereplaced in a different class andwereunreasonablyusingthistobargainformorerights.79Themajoritywasawarethatthiswouldraiseissues of valuation, and thought that if necessary, the court should be allowed to appoint a courtassessororexpert toassist in thematter. TheMinoritywasconcernedthat,unlike theUSwhichhasverydevelopedmethodologies for valuation, and is a large anddevelopedeconomywhich allows forbetter comparative analysis, Singapore’s smaller economy may not allow for the same comparativeanalysistobemade.
The reasons givenby themajority arenot convincing. It fails to take intoaccount thedevelopmentssince the restatement of the test on classification in Re Hawk Insurance Co Ltd,80which has de-emphasisedtheuseofclasstoprotecttheinterestsofcreditorswithnominallydifferentrights.81ButifcreditorsarestillplacedinadifferentclassundertheHawktest,itcouldhardlybesaidthattheabsenceof the power to cram down would allow ‘a minority of creditors to hold out for better returns bythreateningtovetoaschememerelybecausetheyformaseparateclass.’82EnglishlawandSingaporelawhavedevelopeddifferentmethodologiesfromChapter11toachievefairnesstodifferentgroupofcreditors. Wewill returntothismatteragainwhenconsideringtheprovisions in theAmendmentBillwhichhaveimplementedthisrecommendation.
76[1904]1Ch12.77See for eg,Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [2010] 1 BCLC 338. For a fuller description, see SarahPaterson,‘BargaininginFinancialRestructuring:MarketNorms,LegalRulesandRegulatoryStandards’(2014)JSCLS3378Foraneg,seeHitachiPlantEngineering&ConstructionCoLtdvEltraco InternationalPteLtd [2003]SGCA38,[2003]4SLR384;ChewEuHockConstructionvCPFBoard[2003]SGHC199,[2003]4SLR137.79ILRC,FinalReport,154-156.80[2001]EWCACiv241,[2001]2BCLC480,[23]-[52].81GabrielMoss, ‘Hawk Triumphant: A Vindication of theModern Approach to Classes in Section 425 Schemes’(2002)15InsolvencyIntelligence41.82ILRC,FinalReport,156.
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(d) Super-priorityforrescuefinance
The next feature of Chapter 11 that the ILRC recommended adopting was the grant of priority andsuper-priority for rescue finance, but not super-priority lien. Priority and super-priority for rescuefinancemeansthattherescue loanwouldrankaswhattheAmericanshavetermedanadministrativeexpenseclaimandthetop-rankedclaimoftheadministrativeexpenseclaims,respectively.Thedoctrineof administrative expense claims is the functional equivalent of the doctrines of liquidation expensesand JMexpenses. Super-priority lienmeansa securitygranted to theproviderof rescue finance thatranksequallyoraboveanexistingsecurityontheassetsofthecompany.
The ILRCnoted that financing isoftenessential to the rehabilitationofacompany,and ‘may inmanycasesbeevenmoreessential thanothertradedebtsorotherpost-commencementcontractsthattheinsolvent company may enter into’.83 At the same time, it also noted that this may lead to costlydisputes,thatcourtsmayfacedifficultydecidingwhethertheproposedrescuefundingwouldbelikelytoaidthebodyofcreditorsratherthanprejudicethem,thattradeorothercreditorsmaybecomemorewaryofdealingwiththecompany,andthatSingaporedoesnothavethevolumeofcasestowarranttheestablishment of debtor-in-possession financing departments within banks and financial institutions.Balancingtheconflictingconsiderations,theILRCdecidedthatallowingsuper-priorityforrescuefundinginschemesandJMwouldenhancetherescueoptionsavailabletothecompany. However, itdecidedagainst allowing super-priority liens. It is surprising that in recommending rejection the ILRC did notexpressanyconcernthattheavailabilityofsuper-prioritylienswouldimpactadverselyonthevalueofsecurity,andmaycausebankstoreducelendingandraisethecostofloans.
Although not entirely satisfactory, the ILRC’s recommendations may still be seen as an incrementaldevelopmentbyrankingnewcreditaboveotherdebtsorclaimsincurredinJMorwhilethecompanyisnegotiatingascheme. Butthestepisbigger inschemeasthereisnodoctrineofschemeexpensestobeginwith.UnlikeEnglishlaw,thereisnostatutoryrankingofthevariousitemsconstitutingthecostsandexpensesofliquidationorJM.ButtheRestructuringCommitteedisagreedandrecommendedtheintroductionof super-priority lien,whichhasbeenenacted in theAmendmentBill andwhichwewillexamineshortly.
TheRestructuringCommitteewassetuptoconsiderwaystostrengthenSingaporeasaninternationaldebt restructuring centre. The influence of Chapter 11 on the deliberations of the RestructuringCommitteewassubstantial.Unfortunately,aswillbeseenshortly,therewaslittleconsiderationofhowChapter 11 would interact with the existing restructuring procedures, the broader commercial law,lendingpractices,andjudicialapproachestoinsolvencyandcommercialdisputes.
Withregardstoschemes,theRestructuringCommitteerecommendedanautomaticmoratorium,super-priority liensandpre-packagedschemes. Theseareverysignificantreforms,buttheyarenotall. TheRestructuring Committee also recommended a slew of othermeasures. Some relate to cross-border
83ILRC,FinalReport,109.
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insolvencies, suchasadopting theUNCITRALModel LawonCross-border InsolvencyandempoweringSingaporecourtstogrant inpersonamworldwide injunctiverelief. Othernotablemeasuressoughttoenhancecasemanagement,dedicateabenchofSpecialistJudgestohearanddeterminerestructuringcases, appoint international restructuring experts to augment the pool of local Specialist Judges, andexhortingtheSpecialistJudgestotakeajudge-ledapproachtomanagingrestructuringcases.
6. AmendmentBill2017
Asmentionedearlier,theSingaporeGovernmentisintheprocessofdraftinganInsolvencyActtobringtogethercorporate insolvencyand individualbankruptcy inonestatute for the first time. As that isamassive project requiring some time to complete, and the Government would like the ‘legislativeamendmentswhicharekeytoenhancingSingapore’scorporaterescueandrestructuringframework’84tobeimplementedquickly,itdecidedtogoaheadwiththelatterwhiletheformerwasstillpending.Adraft bill, the Companies (Amendment) Bill 2017 was published on 21 October 2016 for publicconsultation.ItisanamendmenttothecurrentCompaniesAct,asSingaporecurrentlyhasnodedicatedlegislationforcorporateinsolvencies.
Schemesmaybeusedformanypurposesbesidesdebtrestructuring.Thereisnoinsolvencyrequirementandthishasbeenregardedasoneoftheattractionsofusingaschemetorestructurethedebtsofaninsolventcompany. There isnocleardistinctionbetweenmembers’schemesandcreditorschemesinthe legislative sections. TheEnglishReviewadopteda ‘singlegateway’, ‘standalonemoratorium’and‘restructuring plan’ approach to reform England’s debt restructuring laws. On the manner ofimplementing the restructuring plan, therewas considerable support in the feedback to keep it as astandalonetool,separatefromschemeandCVA.85Theissueofhowreformstodebtrestructuringlaws,inparticular,schemes,shouldbecarriedoutisnotanacademicquestion.Ithasimplicationsonstigma,cross-borderrecognition,existingstructuresandprocesses,etc.
Singapore’sapproachisdifferentfromthatinEngland.Asexplainedabove,theILRCrecommendedthatthereformstoschemetoenhanceitseffectivenessasadebtrestructuringtoolshouldbebroughtinasanadd-ontothetraditionalschemesections,andshouldbecontainedintheproposedInsolvencyAct.Thus, s 211A(1) of the Amendment Bill stipulates that the new sections apply where the schemebetween the company and its creditors or any class of them ‘will, if it takes effect, compromise therightsofthecreditorsorclassofcreditors,asthecasemaybe.’ButsomeofthedifficultissuesfacedbyEnglish law reformers apply to Singapore as well, but unfortunately the rushed consultation andimplementationhavenotallowedtheissuestobeairedsufficiently.
84MinistryofLaw,‘PublicConsultationonProposedAmendmentstotheCompaniesActtoStrengthenSingaporeas an International Centre for Debt Restructuring’ (21 Oct 2016) (available athttps://www.mlaw.gov.sg/content/minlaw/en/news/public-consultations/public-consultation-on-proposed-amendments-to-the-companies-act-.html,lastaccessed8January2017).85Seeeg,feedbackfromInsolvencyLawyers’AssociationTechnicalCommittee,SarahPaterson,Allen&Overy,R3,Chanceryjudges,PWC.
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TheAmendmentBillhas threeparts. The firstpart is concernedwith improving theattractivenessofschemesasadebtrestructuringdevice.Thesecondpartrelatestojudicialmanagement.Thethirdpartisconcernedwithvariousreformstofacilitatetheresolutionofcross-borderinsolvencies.Thispaperisconcernedonlywiththereformstoscheme.
(b) Moratorium
TheBill provided thata companymay, insteadof applying for a stayofproceedingsunder s210(10),applytocourtforabroadmoratoriumundertheproposeds211B.Thecompanymayapplyforthisatthesametimeasitappliestocourtforthefirsthearingorfortheapprovalofapre-packagedscheme,orwhenitintendstomakesuchanapplicationassoonaspracticable,andnoorderhasbeenmadeorresolutionpassedforthewindingupofthecompany. UnliketheEnglishproposalonmoratorium,86apendingwindingupapplicationdoesnotdisqualifythecompanyfromapplyingformoratorium.
Onceanapplicationforamoratoriumismade,aninitialmoratoriumwhichisasbroadaswhatthecourtmaygrantafterhearingtheapplicationcomesintobeingforaperiodof30days.87Duringthisperiod,the company cannot bewound up and no receiver ormanagermay be appointed.88 Further, exceptwith leave of the court, no proceedings other than scheme proceedings or execution or other legalprocess may be commenced or continued against the company, no step may be taken to enforcesecurityortorepossessgoodsunderanyhire-purchaseortitleretentionagreement,andnorightofre-entryorforfeitureunderanyleasemaybeenforced.89
Toapply for amoratorium, the company is required to filewith the court certaindocuments (detailsbelow),90togivepublicnoticeoftheapplication,andtonotifyeverycreditorsoughttobeboundbytheproposedschemeandwhoisknowntothecompanyandanypersonwhohasappointedorisormaybeentitledtoappointaglobalreceiverandmanager(followingEnglishusageforeaseofreference,holderof qualifying floating charge, ‘HQFC’) of the application.91Although a HQFCwill thus be notified of amoratorium application, it cannot prevent the moratorium from arising. But if it has appointed areceiver andmanager, it does not seem that themoratorium can take effect. There is no provisionrequiringthereceiverandmanager,orindeedanyreceiver,tovacateoffice.
Under theproposed s 211B(3), the company is required to file evidenceof support for theproposedschemefromcreditors,alistofthe20largestunsecuredcreditorswhoarenotrelatedtothecompany,andwheretheapplication isnotpartoftheapplicationforthefirsthearing,abriefdescriptionoftheproposedschemewithsufficientparticularstoenablethecourttoassessthattheproposedschemeisfeasibleandmeritsdueconsiderationbythecreditors.Onwhatwouldconstituteevidenceofsupportfromthecreditors,thedraftcontainedtworequirements:supportfromcreditorsrepresentingnotlessthanone-thirdinvalueofthecreditorssoughttobeboundbytheproposedscheme,orcreditorswhose86EnglishReview,[7.20].87Proposeds211B(8).88Proposeds211B(8)(a),(b).89Proposeds211B(8)(c),(d),(e),(f).90Proposeds211B(4).91Proposeds211B(3).
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supportwouldbe important for the successof theproposed scheme. TheGovernment sought inputspecifically on whether the two requirements are feasible, and if both are feasible, whether thecompanyshouldcomplywithbothoronlyoneoftherequirements.
Thesecondrequirementlackscertaintyandsoshouldberejected.Butthefirstrequirementisalsonotfreeofdifficulty.First,itdoesnotdistinguishbetweenthedifferenttypesofcreditors.Wheresecuredcreditorsarefullysecured,theirconsenttothemoratoriummaynotoffersufficientprotectionfortheunsecured creditors. Secondly, as there will be no supervisor or monitor of any sort, there is noindependent thirdparty to verify the companies’ claims that the conditions for themoratoriumhavebeenfulfilled,ortoensurethatthemoratoriumisnotabusedinthe30dayperiod.Therightgiventocreditorstoapplytocourttochallengethemoratorium,92ortorestrainthecompany’sacts,93doesnotofferanyrealisticprotection.Thirdly,inanyeventitmaybehardforthecompanytoobtainthatlevelofsupportfromthecreditorsearlyinthenegotiations.
Moving beyond the technical details, the initial moratorium raises important policy questions. Asmentioned earlier, the ILRC was concerned that allowing a moratorium to arise automatically in ascheme, which is effectively a debtor-in-possession procedure, would pose too much risk to thecreditorsofthecompany.ButtheRestructuringCommitteewasmotivatedbydifferentconsiderationswhen it recommendedthat the initialmoratoriumshouldariseautomatically. Itwasattractedby theChapter 11moratoriumwhich arises automaticallywhenaChapter 11petition is filed andhas extra-territorialworldwideeffect.ItpointedoutthatbecauseofthatandtheglobaleconomicreachoftheUS,foreign creditors can ill-afford to ignore US bankruptcy proceedings, except where their assets orconnectionsintheUSarecompletelynon-existent.94Tosafeguardagainstabuseofthemoratorium,theCommitteerecommendedthatcertainconditionsshouldbesatisfiedwhichwerelargelyfollowedintheAmendmentBill.
TheRestructuringCommittee,withrespect,shouldhavegivengreaterweighttotheconcernsexpressedbytheILRContheneedtoprotectcreditors’interestinamoratorium.Similarconcernswereexpressedin the feedback95to the English Review which proposed allowing a standalone moratorium to ariseautomatically foraperiodof threemonths,whichmaybeextendedby thecourt,when thecompanyhasmet theeligibility requirementsandsatisfied twoconditionsby filingcertain requisitedocumentswiththecourt.96Thetwoconditionswerethatthedirectorsbelievedthatthecompanywouldbeabletopayitsdebtsduringthemoratoriumandhadareasonableprospectofrestructuringitsdebts.97Thecompanywouldalsohave toappointasupervisorwho is required to report tocourt if theconditionsceased tobesatisfied,andwhoseconsent toa transactionwhich isoutof theordinarycourseof the
company’sbusiness is required.98There isstrongsupport inthefeedbackcalling forstrongercreditorprotection,principallybyreducingtheperiodoftheinitialmoratoriumto21or28days,andincreasedmonitoringfromthesupervisor.
The automatic initial moratorium is unlikely to inspire confidence and may bring about unintendedconsequences. First, a secured creditor that lacks confidence in the company’s management maydecidetoactbyappointingareceiver,andifaHQFCappointsaglobalreceiverandmanager,therewillbenoschemeunlessthecompanymanagestoobtainaJMorderandthe judicialmanagerdecidestopromoteascheme.UndercurrentlawthecourtcannotmadeaJMorderifitisopposedbyaHQFC,butpursuant to the ILRC’s recommendation, it seems that the Amendment Billwould allow the court tomakeaJMorderunlessthecourtissatisfiedthemakingoftheorderwouldcauseprejudicetotheHQFCthatisdisproportionatelygreaterthantheprejudicethatwouldbecausedtotheunsecuredcreditorsifthe JM order is not made.99 In this regard Singapore is more pro-secured creditor than England.Secondly,unsecuredcreditorsmayalsoreactbywithholdingorcuttingcreditatthefirstsignoftrouble.
It isenvisagedthatthecourtwillheartheapplicationformoratoriumbeforetheexpiryofthe30dayperiod.Ifitapprovestheapplication,theBillallowsthecourttochoosefromamenuofoptions.Thisisasensiblearrangement. Butthereisvery littleprotectionofcreditors’rightsunderthecourt-orderedmoratorium,whichmaylastfromafewmonthstomorethanayear.Thelengthofthemoratoriumandsubsequentextensionisentirelyuptothecourt’sdiscretion.Itisnotclearwhynotimelimitisimposed.When making the moratorium order, the court is bound to order the company to submit financialinformationofthecompanyasmaybeadequatetoenablethecreditorstoassessthefeasibilityoftheproposedscheme.Itisverydoubtfulthatthiswillofferanyrealprotection.Thepurposeofgivingtheinformation is not to enable the creditors to monitor the moratorium, and in any event is whollyinadequate.Asinthecaseoftheinitialmoratorium,asupervisoristhebarestminimumtoprotectthecreditors’legitimateinterests.
Inadditiontotheaboveproblems,thesectionisalsobadlydrafted.Theheadingtos211Breads‘PowerofCourt to restrainproceedings, etc. against company’. This is verymisleadingwhenoneof its sub-section, sub-section (4), confers an automaticmoratorium. The sub-section should be a new sectionwithaheadingthatdescribesitseffectaccurately.
Asubsidiaryofacompanywhichhasbeengrantedamoratoriumbythecourtmay,eventhoughitisnotproposing to enter into a scheme, apply for a similar moratorium provided certain conditions aresatisfied.100 The Restructuring Committee thought that this was needed as many businesses areorganisedincorporategroupsand‘arestructuringcanpotentiallybefrustratedifcreditorsareabletotakeactionagainstrelatedcorporateentitiesthatareanecessaryandintegralpartoftherestructuring
98EnglishReview,[7.43].99ThereasonforthedoubtisthattheAmendmentBilldoesnotabolishs227B(5)(a)whichprovidesthatthecourtshall dismiss an application for a JM order if it is satisfied that a receiver and manager has been or will beappointedbyaHQFC.Thismustbeanomissionastheintention.100Proposeds211C.
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plan.’101TheAmendment Bill limited the scope of the extension ofmoratorium to subsidiaries of thecompanyproposingascheme.Nevertheless, it isnotclearwhyasubsidiarywhichrequiresprotectionfrom its creditors should not be required to propose a scheme itself. Large corporate groups haveentered into linked schemes involvingmany companieswithout any particular difficulty. Although acondition for extending themoratorium is that the court has tobe satisfied that the creditors of thesubsidiarywouldnotbeunfairlyprejudicedbythemoratorium,102this ishardlysatisfactoryprotectionoftheseverecurtailmentofthecreditors’enforcementrights.Thisisyetanotherexampleofthesharpmove to a pro debtor rescue law, but it seems with insufficient consideration of its impact on thelegitimateinterestsofcreditors.
(c) Cramdownofdissentingclass
Thiswas recommendedby the ILRC,asexplainedabove,butwith fewdetails. Under theproposed s211H(2), the courtmay cramdown a dissenting class of creditors if the three conditions set out in s211H(3) are satisfied. They are (i) amajority in number of the creditors sought to be bound by theschemewhowerepresentandvotingeitherinpersonorbyproxyatthemeetingorderedbythecourtunders210(1);(ii)themajorityrepresentsthree-fourths invalueofthecreditors;and(iii)thecourt issatisfiedthattheschemedoesnotdiscriminateunfairlybetweentwoormoreclassesofcreditors,andisfar and equitable in respect of each dissenting class. The meaning of ‘fair and equitable’ will bediscussedlater.
Themannerinwhichthetwoconditionsaredraftedisawkward.Theintentionisclearlythatasufficientmajority of all the creditors whose debts that the company would like to restructure approves therestructuring, ignoring the fact that they have been put into different classes to vote on therestructuring. But the provisions refer to the creditor voting at ‘the relevantmeeting’, which is themeetingofthatclassofcreditors.Thisisnotonlyadraftingerror,butitalsorevealsthatthedraftersofthe scheme sectionsdidnothaveChapter11 style cramdown inmind. A scheme isnot a collectiveprocedure,and themeetingenvisaged in s210(1) isa singlemeetingofall thecreditorsora classofcreditors. ThisalsoexplainsChadwickLJ’s restatementof the test inReHawk InsuranceCoLtd,103ie,whethertheschemeisasinglearrangementoranumberoflinkedarrangements.Anotherissueisthatthecramdownappliestocreditorclaimsonly.It isnotclearwhythepowertocramdownadissentingclassofshareholders(orequityinterests)isnotincluded.
Themeaningof‘fairandequitable’isexplainedintheproposeds211H(4).ItbringsinmodifiedversionsofwhattheAmericanstermedthe‘bestinterestsofcreditorstest’andthe‘absolutepriorityrule’.Howthe courts would interpret and apply the ‘fair and equitable’ standard lies at the heart of how thecramdownpower in s 211Hwould be exercised. As Parliament’s intention of engrafting elements ofChapter11ontoschemeistoattractrestructuringworktoSingapore,therewouldbepressuretofollowUScaselawcloselysothatthefamiliaritywill improveefficiencyandreducecosts.ButthedifferencesbetweenschemeandChapter11maymeanthatisnotpossible.101ReportoftheRestructuringCommittee,[3.15].102Proposeds211C(2)(d).103[2001]EWCACiv241,[2001]2BCLC480,[23]-[52].
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Thepowertocramdownisintimatelylinkedtotheclassificationofcreditorsandsanctionofschemes.Becauseofthepowertocramdown,thedynamicsofclassificationofcreditorclaimsandequityinterestsinChapter11areverydifferentfromandmuchmorecomplicatedthaninscheme.Themostobviousisthat unlike the schemewhere the incentive for the company is to put all the creditorswhose debtswouldbecompromisedinonesingleclassorasfewclassesaspossible,underChapter11theincentivemoves indifferentdirectionsdependingonthefactsofthecase. Forexample, inatypicalSAREcase,whichistheacronymforsingleassetrealestatecase,therewillbeaunder-securedmortgageclaimwithaverylargeunsecuredportionwhichwilloutvoteotherunsecuredclaimsiftheyaregroupedtogether.Byclassifying theclaimsseparately, thedebtorcancounton theunsecured tradecreditors tovote infavour of the plan. The support of this slightly impaired class of claimswill enable the court to cramdownthemortgagelender’sobjection.AlthoughSAREcasesdonotrepresentthemajorityofChapter11 cases, they serve to illustrate the complex interaction between classification and cramdown inChapter11.
While it isnotpossibletotellwhethersomethingsimilartothemanoeuvrings inSAREcasesmayalsohappento theSingaporescheme, it isalmostcertain that theabsolutepriority rulewould reduce theflexibility that the scheme enjoys and renders itmuchmore complex. The schemeofGaruda airlineforced finance creditors to take a haircut, but excluded some trade creditors, including the enginemanufacturers whose continued support was essential for the continued operation of Garuda.Nevertheless, theEnglishCourtofAppealaffirmedthetrial judge’sdecision104sanctioningtheschemethat different groups of unsecured creditors may be dealt with differently if that is commerciallyrational.105Singaporecourtshaveheldthattheparipassuruledoesnotapplyinschemes.106Thehardedgesoftheabsolutepriorityrulewouldnotpermitthatflexibility.Next,disputesovervaluation,whichliesattheheartoftheabsolutepriorityrule,willmaketheprocessverycomplicatedandcostly.Warrenhas stated bluntly that ‘[i]n practice, no problem in bankruptcy is more vexing than the problem ofvaluation.’107TheILRCsuggestedthatifnecessary,thecourtshouldbefreetoappointacourtassessororexpert toassist in thevaluation.108 Butunders211H(5), thecourt isgivenpoweronly toappoint‘any person of suitable knowledge, qualification or experience to assist the Court to estimate theamountthatacreditorisexpectedtoreceiveintheeventthatthecompanyiswoundup.’Itisnotclearwhy the assistance is limited to providing a liquidation analysis. The draftsman may have beeninfluencedbythereportoftheILRC,whichinitsdiscussiononvaluationincramdownreferredonlytocomparativevaluationsbetweenliquidationandrescue.109ThisunderstandingofChapter11ishowevererroneous.ThecomparisoninChapter11valuationisnotbetweenliquidationandrescue,whicheveninEngland has been heavily criticised. It is more complicated than the more nuanced counter-factual
approach which has been applied in English courts. 110 The valuation process is something thatsophisticatedChapter11participantsavidlydesire toavoid. By compromiseand settlement, securedcreditors can avoid the risks inherent in a valuation of the collateral and a court-imposed interest ordiscount ratewhile unsecured creditors and shareholders can avoid the risk presented to them by avaluationofthe‘new’company.’111Theapproachused inChapter11hasthusbeenreferredtoasthe‘bargainingandlitigation’approach. Ifthecourtsdecidedtoadoptthisapproach,s211H(5)wouldbeinapplicable.
TheRestructuring Committee has called for Singapore courts to bemuchmore involved inmanagingrestructuring cases, citing with approval the ‘proactive approach to case management’ 112 of USbankruptcy courts, in particular theUSBankruptcyCourt for the SouthernDistrict ofNewYork. ThisdevelopmentisprobablyinevitableasSingapore’sschemebecomemorelikeChapter11,butaspointedoutby theChancerybench in their response to theEnglishReview, greater court involvementwouldlead to greater expense and delay, and involving judges to make commercial decisions ‘may not beconsistent with the accepted role of the English judge in resolving legal disputes’.113 This commentapplies to Singapore as well. A judge-led approach is also at odds with the established practice ofleaving ‘commercial judgments on how best to rescue companies or their businesses to insolvencypractitioners who are qualified and experienced enough to make them’,114and the RestructuringCommittee’sownrecommendationthatthemoratoriumshouldariseautomaticallyonfilingwithouttheneedforacourthearing.
(d) Super-priorityrescuefinancing
ImplementingILRC’srecommendations
UnlikeliquidationandJMwhichareinsolvencyprocedureswiththeirrespectivedoctrinesofliquidationexpenses and JM expenses, there is no equivalent for scheme as it is not an insolvency procedure.Hence, to implement the ILRC’s recommendations, the Amendment Bill has to create a functionalequivalenttogiverescuefinancingpriority.Thisisachievedbyprovidingthatthecourtmayorderthat,in the event of thewinding up of the company, ‘any debt arising from any credit obtained or to beobtainedbythecompany’115toenablethebusinessofthecompanytocontinueasagoingconcern(foreaseof reference, ‘rescue finance’) ‘is tobe treatedas if itwereacostoranexpenseof thewindingup’.116Foreaseofreference,thiskindofprioritywouldbereferredtoas‘deemedliquidationexpensepriority’.
110ReBluebrookLtd[2009]EWHC2114(Ch),[2010]1BCLC338,352.111GerardMcCormack,CorporateRescueLaw–AnAnglo-AmericanPerspective(2008)266.112ReportoftheRestructuringCommittee,[3.50].113FeedbackoftheChanceryjudgestotheEnglishReview,[2d].114Feedback of the Chancery judges to the English Reivew, [2d]. Similar comments have been made in thefeedbacktotheEnglishReview.Seeforeg,CMSCameronMcKennaLLP,115Proposeds211E(1)(a).116ibid.
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Thistechniqueofdeemingrescuefinanceasaliquidationexpensewouldensurethatiftheschemefails,anyrescuefinancewhichhasnotbeenrepaidinfullwouldenjoypriorityoverallotherdebtsincurredbythe companywhile the schemewas being negotiated or implemented. Further, although the rescuefinanceisapre-liquidationdebtwhichwouldordinarilyrankaftertheliquidationexpenses,preferentialdebtsand floatingchargedebts,bydeeming ita liquidationexpense itbecomesentitled to the samerankingastheactualcostsandexpensesthatwouldbeincurredinthewindingup.117Butitisnotcleariftheliquidatormaychooseorbecompelledtopaythiswhiletheliquidationisongoing, insteadofatthecompletionoftheliquidationwhentheremaynotevenbeenoughassetstopayalltheliquidationexpenses.
The ILRChas also recommended that rescue financemayenjoy super-priority if the court thinks thatwouldbeappropriate.118TheAmendmentBilldoesnotgivethecourtabroad-baseddiscretiononthisissue,but imposesahardrulethatsuper-prioritymaybegivenifthecompanyisunabletoobtaintherescuefinancefromanypersonunlesssuper-priorityisgiven.119This‘otherwisenorescuefinance’testisborrowedfromChapter11,andaswillbeseenshortly,appliesalsotothegrantofsecurityandsuper-prioritylien.Thedeemedliquidationexpensetechniquewouldprovidethebasistograntsuper-priority.All thatneeds tobedone is tostipulate that, if the ‘otherwisenorescue finance’ test is satisfied, therescuefinanceistobepaidaheadofallothercostsandexpensesof liquidation. ButtheAmendmentBilldidsomethingratherdifferent.Itdidnotusethedeemedliquidationexpensetechnique.Instead,itprovidedthatifthe‘otherwisenorescuefinance’testissatisfied,therescuefinanceistoenjoy‘priorityover all the preferential debts specified in section 328(1) in the event of a winding up of thecompany.’120Foreaseofreference,thiswillbereferredtoas‘liquidationsuper-priority’.Probablyinacaseofbeltandbraces,theAmendmentBillfurtherdevotedanadditionalsub-sectionontherankingofliquidationsuper-priority,121whichwithall respect isunnecessary.But therearebiggerproblemswiththewordingofliquidationsuper-priority.
ThetermpreferentialdebtsisunderstoodinmostjurisdictionsderivedfromEnglishlawtomeancertaindebtsincurredbythecompanybeforeitgoesintoliquidationthatarenotsubjecttotheparipassuruleandgivenpriority,andisclearlydistinguishedfromliquidationexpenses.UnfortunatelythesituationinSingaporeisnotsoclear.Theterm‘preferentialdebt’isnotdefinedintheCompaniesAct,andthereareprovisions in the Act that treat liquidation expenses as a category of preferential debts. 122 Thattreatment is a recipe for confusion, and it is unfortunate that the Amendment Bill has adopted thattreatment.ThereisnodoubtthatParliament’sintentionisthatsuper-priorityforrescuefinancemeansnotonlypriorityoverpreferentialdebts,butalsooveralltheotherliquidationexpenses.Thedeemedliquidationexpensetechniqueistheobviouswaytoimplementthatintention.
UndercurrentSingaporelaw,thecompanyisnotrequiredtoobtaintheconsentofthecourttoborrowonsecuredterms.TheAmendmentBillgivesthecourtpowertograntsecuritypriority,butinviewofthefacilitativelanguageused,itwouldseemthatacompanycontinuestoenjoytheabilityatcommonlawtogiveasecuritywithoutcourtconsent.Butthecourtpowerisusefulifanexistingsecuredcreditorrefusestocountenanceasubordinatesecurity.Itwouldalsoprovidesomeprotectiontothecreditors,sinceitwouldbethecompany’smanagementthatwouldbemakingthedecisiontogivesecurity,unlikeinJMwherethedecisionwouldbetakenbythe judicialmanager. Theconditionforgrantingsecuritypriority is similar to that for granting liquidation super-priority, ie, satisfying the ‘otherwiseno rescuefinance’test.123
Thecourtmayalsograntasecuritythatisequaltoorranksaboveanexistingsecurity(ie,super-prioritylien) if the ‘otherwise no rescue finance’ test124and a further condition, that ‘there is adequateprotectionoftheinterestoftheholderoftheexistingsecurityinterestintheproperty’125onwhichthesuper-priority lien is proposed to be granted, are satisfied. The term ‘adequate protection’ is notdefined,buts211E(5)offersthreenon-exclusivemethodsofprovidingadequateprotection.Thefirstisa cash payment or periodic cash payment to the extent that the grant of the super-priority liendecreasesthevalueofthesecuredcreditor’sinterestinthesecuredproperty.Thesecondisbasedonthesameidea,butinsteadofcashthecompanyprovidesanadditionalorreplacementlien.Thethirdissuchotherrelief,otherthanentitlingtheexistingsecurityholdertocompensation,thatwillresultintherealisationby theholderof the indubitableequivalentof theholder’s existing security interest in theproperty.
Doctrinally and theoretically, the twin tests of super-priority lien, that the rescue finance cannot beobtainedwithoutthesuper-prioritylienandthattheexistingsecuredcreditorisadequatelyprotected,areintension.‘Considerhowthesetwintestsareintension.Ifadebtorcannotgetmoneyfromanyonewithout interferingwiththepriorityrightsofasecuredcreditor, theremaybegoodreasontobelievethat thedebtor cannot adequatelyprotect the creditor. Thedebtor's inability toborrowmoney fromanyoneelse,usingthesamepackageitoffersthesecuredcreditorasadequateprotection,providesat
least someevidence that thedebtor'sprospectsarenotasbrightas thedebtormight suggest to thecourt.’126
TheaboveshowsthatitisimportanttodifferentiatethedifferenttypesofprioritywhendiscussingDIPfinancing. Super-priority lien trumps theproperty rights of a secured creditor,while security prioritytrumps the contractual right of a secured creditorwith a negative pledge clause but not its propertyrights.Thedeemedliquidationexpensepriorityandliquidationsuper-priorityenjoypriorityoverdebtssecuredbyafloatingcharge.ButsinceliquidationexpensesandJMexpensesenjoythesamepriority,this is a ‘natural’ consequence of effectively making creditor schemes insolvency proceedings.Therefore,while theother threekindsofpriority for rescue fundingmay impactonexistingpracticeswith regards to lending and the extension of credit, they are far less disruptive compared to super-prioritylien.
TheRestructuringCommitteedidnotadduceanyevidencethatthelackofsuper-prioritylienhascausedthe rescue of viable companies or businesses in Singapore or the region to fail, or that lenders havebeenunwilling to lendtoviablecompaniesorbusinesses. Thereasonsgiven fordisagreeingwith theILRC’sdecisionnottorecommendsuper-prioritylienwerearguablybasedmoreonhopethanfactsontheground,andthedesiretoattract‘establishedplayersintheUSDIPFinancingindustry’,127includingUS distressed debt funds, to use Singapore as a base to provide DIP financing in Singapore and theregion.
TheRestructuringCommitteeacknowledged that the interestsofexisting securedcreditors shouldbesafeguarded, and recommended that court approval is required to create a super-priority lien,128butjustliketheILRC,therewasnodiscussionofhowitsavailabilitymayaffectthevalueofsecurityandthustheavailabilityandcostsofbankloanstocompaniesinSingapore.Theomissionofbothcommitteestodiscuss thismatter is in stark contrast to the attentiondevoted to it in the EnglishReview129and thefeedback.
Itisbecauseofthepotentialofsuper-prioritylientoreducethevalueofsecuritythatmuchconcernandoppositionhavebeenexpressed in the feedback to theEnglishReviewonrescue finance. Twomajorreasonshavebeengiven.ThefirstisthattheprovisionoffinanceintheUKandsecurityrightsarenotconducivetotheapproachadoptedinproceduresliketheChapter11.AspointedoutinthefeedbackofAlixPartnersUKLLP,asubsidiaryofaleadingUSturnaroundfirm,
Thisultimatelyraisesthe issueoftheefficiency, fairnessandaccountabilityofthefloatingchargeasasecurity, which is a topic for another occasion. But it may be noted in passing, quoting again fromAlixPartners,that
[a]lthoughanegativepledgeclausemayinhibitfurtherlendinginsomecases,inpracticemostlenderswhoholdafloatingchargelendtoagreaterdegreethanwouldotherwisebethecase.There is a real risk that should lenders believe that the assets backing their lendingmay beprimedby rescue finance providers, theymay factor this into their calculationswhenmakingfinance available to companies. Consequently theremay be a knock on reduction in lendingfacilities,whichmaydomoreharmtotroubledbusinesses.
Secondly,‘Therisksoflegislatingforsuper-priorityrescuefundingcouldbeveryserious.Anysignificantchange in lendingbehaviour generallywhichmightbe triggeredby sucha change,whether as to theavailability,orthecost,oflendingcouldhaveamaterialeffectontheeconomy.’131
Since the law on security and quasi-security and lending practices in Singapore are very similar toEngland, theabovereasons forconcernwouldapply toSingaporesimilarly. It isunfortunatethat theSingapore government did not consult more widely before deciding to bring in super-priority lien.England’s experience on this is instructive. Before the English Review, the English government hasconsulted onwhether to give rescue financing super-priority in 2001132and 2009.133 The formerwaspart of the exercise which led to the Enterprise Act 2002, and the government concluded that ‘thematter was one of too great complexity which required a wider consultation, particularly if it wereintendedthattheUKcourtswouldhavearoleinapprovingthegrantofsuper-priorityfundingonacasebycasebasis’.134TheRestructuringCommitteehasrecommendedappointingforeignjudgesrenownedfor managing insolvency and restructuring cases to the Singapore International Commercial Court(SICC).135Americanbankruptcyjudgeswouldbethemostnaturalcandidatesforthatpurpose.Buttheconcern is that the jurisprudence developed in the SICC, which may not pay enough attention toSingapore’s existing law and practices,would nevertheless be highly relevant to the domestic courts.ThechallengesfacingtheSingaporecourtsarecomplexandonerous.
(e) Pre-packagedscheme
TheRestructuringCommittee’s discussionof this topic, perhapsmore than anyother, showed that itwasusingtheChapter11as itsblueprint. Itexplainedapre-packagedrestructuring,which itcalleda
130FeedbackofAlixPartnersUKLLPtotheEnglishReview,XXX.131ResponseofPWCtotheEnglishReview.132Insolvency Service, A Review of Company Rescue and Business Reconstruction Mechanisms: Report by theReviewGroup(May2000)[122]-[139].133‘EncouragingCompanyRescue–aconsultation’(2009)134ChrisMallon,FinancinginInsolvencyProceedings(INSOLInternational).135ReportoftheRestructuringCommittee,[3.46]-[3.47],recommendation3.5.
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Pre-Pack, as involving a plan that was pre-negotiated and agreed between the debtor and itsmajorcreditorsbeforeformalcourtproceedingscommence,whereuponthePre-Pack‘isthenpresentedtothecourtforapproval’.136Thisnotionofpre-packistheChapter11pre-pack.It isverydifferentfromtheEnglishpre-packagedadministrationwhichdoesnotrequirecourtapproval,unlessit istwinnedwithaschemeofarrangement.
The Restructuring Committee gave two reasons for favouring the US approach to Pre-Pack over theEnglish approach.137 The first was that the US approach offered greater flexibility in designing arestructuringplan,unliketheEnglishwhichrequiredthesaleofthedebtor’sbusiness,whichmaynotbepossibleinsomerestructurings.ThesecondwasthatitvaluedtherequirementforcourtapprovalintheUSapproach,whichitthoughtwould‘ensurethattheminoritydissentingcreditorsaretreatedfairlyandservesasa good safeguardagainstpotential abuse.’138 It thus recommended that ‘aPre-Pack regimethat is essentially similar to the US regime can be effected in Singapore by amending the existingschemes of arrangement regime’139to enable the court to approve a scheme evenwhere not all theproceduralrequirementscurrentlyfoundintheschemesectionshavebeensatisfied.
The difficulty with the Restructuring Committee’s reasoning is that it was, with respect, comparingappleswithoranges.ThetypicalEnglishpre-packusesthedeviceofadministrationtoconcludeasaleofthecompany’sbusiness. Thecompany’sdebtsarenotrestructured. Ifadebtrestructuring isdesiredbut it couldnotbeachieved consensually, the companywouldhave to twinanadministrationwithascheme,140inwhichcasecourtapprovalisrequired.DuetothestructuraldifferencesbetweenEnglishandUSlaws,itisnotpossibletoconductasimple,directcomparisonbetweenanEnglishpre-packandaUSpre-packwithoutfallingintoerror.
TheAmendmentBillempoweredacourt,onacompany’sapplication,toapproveaschemeeventhoughnocourtorder thatoneormorecreditors’meetingbeheldhasbeenmadeandnosuchmeetinghasbeenheld,providedthatthecompanyhasgiventherequisiteinformationtoeachcreditorsoughttobeboundbythescheme(‘relevantcreditor’);141notifiedeachrelevantcreditoroftheapplicationandgivenpublicityof theapplication;142andthecourt issatisfiedthathadthemeetingof therelevantcreditorsbeen summoned, the requisitemajorities approving themeetingwould have been satisfied.143 Cramdownofadissentingclassisthusnotavailabletoapre-packscheme.
The information to be given to each relevant creditor in a pre-pack scheme is obviously of criticalimportance.TheAmendmentBillstipulatedthatinadditiontotheinformationwhichisrequiredtobegiven in theexplanatory statementaccompanying thenotice summoning themeeting ina scheme,144
the company must give information concerning itself, for eg, its business, financial condition andprospects, how the scheme will affect the rights of the creditor, and whatever information as isnecessaryforthecreditortomakeaninformeddecisioninrelationtothescheme.145
As the legislation is silent on what will constitute satisfactory evidence that the requisite majoritieswouldhavebeenobtainedhadthemeetingbeenheld,thecourtswouldhavetodeveloptheprinciples.Butitwouldbeerroneoustothinkthatistheonlymatterthatacourtneedstotakeintoaccount.Itisestablished law that the courtmay refuse to sanction a scheme evenwhere the requisitemajoritieshaveapprovedit.Theabsenceofameetingmeansthatthecourtwillbedeprivedofinformationsuchasthescaleoftheoppositiontotheschemeandthediscussionsatthemeeting,whichmayberelevanttothe court’s exercise of discretion. The interests of the dissenting minority may thus be prejudiced.Moreover, the hoped for efficiency and cost saving that a pre-pack scheme would bring may notmaterialise all the time. The requisite majorities in a scheme are counted based on the creditorspresentandvotingeitherinpersonorbyproxyatthemeeting,butinapre-packthatwouldhavetobecountedagainstallthecreditorssoughttobeboundbytheschemesincethereisnomeeting. This islessofaproblem if thescheme isconcernedtorestructure financialdebtsof largecompanies,butasschemesareusedinSingaporetorestructuretradingdebtsaswell,gettingthatlevelofmajoritymaybedifficultinpractice.
7. Conclusion
The shortcomings of creditor schemes as they currently exist in England, Singapore and otherjurisdictionsarewelldiscussedandreformproposalshavebeensuggested.146TheIRLCrecommendedthat the scheme should remain amodel ‘based on concepts and principleswhich are familiar to thecommercial and financial sector in Singapore as well as those familiar with legal systems based onEnglish law.’147Althoughthe ILRCdidnotadhereto thispolicystrictly,aswhen it recommendedthatthe power of cram down be adopted, the enactment of its recommendations would not cause thescheme to lose its character of a hybrid proceeding and become an off-shoot of Chapter 11. TheRestructuring Committee, on the other hand, used Chapter 11 as its blueprint and adopted severalelements from it, but with little discussion of how those elements would fit into the existing verydifferentframework.
145Proposeds211I(3)(b).146See for eg, Jennifer Payne, Schemes of Arrangement: Theory, Structure andOperation (CUP, 2014) 263-267;CharlesZhenQu,‘SanctioningSchemesofArrangement:TheNeedforGrantingtheCourtaCurativePower’(2016)JBL 13; Jennifer Payne, ‘Debt Restructuring in English Law: Lessons from The United States and the Need forReform’(2014)130LQR282;CharlesQu,‘TowardsanEffectiveScheme-BasedCorporateRescueSystemforHongKong’(2012)12JCLS85.147ILRC,FinalReport,139.148Seeforeg,DouglasBairdandRobertRasmussen,‘TheEndofBankruptcy’55StanfordLawReview751(2002);DouglasBairdandRobertRasmussen,‘Chapter11atTwilight’56StanfordLawReview673(2003);DouglasBaird
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Singapore.Ironically,atleastinEngland,asignificantsegmentoftheentitiesforwhichthatmovementwassupposedtobenefitdidnotagreethatwasthedirectionthelawshouldbemoving.InitsfeedbacktotheEnglishReview,theFederationofSmallBusinesses,whichisthelargestorganisationrepresentingsmallandmediumsizedbusinessesintheUK,statedthattheproposalswouldnotenhancetheexistingframework in thewaysthat itneededtobe improved,andthatabalanceneedtobestruckbetweenfacilitatingthewindingupofbusinessesthatarenolongerviablewiththepotentialbenefitsthatmightaccrue from trying to rescue viable businesses.149 Similar comments that not all insolvent companiesdeservedtoberescuedweremadebyotherswithextensiveexperienceofrestructuringwork.150Fromthesimilarityoftheinsolvencylegalsystemsinbothjurisdictions,thedeliberationsoftheILRC,andthelack of clamouring from trade or industrial associations, business or professional representativeorganisations or professional firms to reform the law to bemoredebtor-friendly, itwould seem thatthosecommentstotheEnglishReviewareappositetoSingaporeaswell.
It is not possible to predict how the Chapter 11 elements would take root in Singapore. Legaltransplantsarecomplexbusinesses,andinthiscasethecomplexityismadeworsebecauseChapter11isextremelycomplicatedandSingaporeisengraftingsomemodifiedelementsofChapter11ontoaveryestablishedframework.EnglandhassomeexperienceofChapter11,morethanSingapore,butevensoPeterBloxham inhis feedback to theEnglishReviewcommented that theproposalswerebasedona‘superficial understanding of US practice.’151 Singapore judges have their work cut out for them toensurethattheChapter11elementsworkseamlesslywiththeexistingframework.
and Robert Rasmussen, ‘Antibankruptcy’ 119 Yale Law Journal 648 (2010). For a contrary view, see ElizabethWarrenandJayWestbrook,‘TheSuccessofChapter11:AChallengetotheCritics’107MichiganLawReview603(2009).149FeedbackoftheFederationofSmallBusinessestotheEnglishReview,XXX.150Foreg,R3,Chanceryjudges,InsolvencyPractitionersAssociation,KPMG,DeloitteLLP,PWC.151FeedbackofPeterBloxamtotheEnglishReview.
