Company Law Debt Restructuring Schemes of Arrangement Singapore

Part 1: Building “Brand Singapore”​ as an International Hub for Debt Restructuring (Part 1) [Insolvency & Restructuring Law]

Introduction

The landmark decision of the Singapore High Court inRe Pacific Andes Resources Development Ltd and other matters [2016] SGHC 210 (“Re PARD” or the “Judgment“) is demonstrative of the present attitude and policy objectives of the Singapore Courts towards creating an environment conducive to cross-border restructuring. A link to a soft copy of the Judgment, published on Singapore Law Watch, is available here.

Whilst the Judgment provides much welcomed clarification on the scope and ambit of relief granted under Section 210(10) of the Companies Act (Cap. 50), the consequences of the Judgment in Re PARD are not free from difficulty.

This article provides a summary of the ratio decidendi in Re PARD, and concludes by suggesting that in the context of an insolvency company, the wishes and interests of creditors should remain (as they always have) the primary concern. This ought to be the case whether in the context of an application to seek leave to convene a meeting of creditors (pursuant to Section 210(1)) or in an application for a “moratorium” under Section 210(10).

For convenience, references to “Sections” refer to sections of the Companies Act (Cap. 50) unless otherwise stated.

Ratio Decidendi

(A) Jurisdiction

At the outset, there has always been some debate concerning the Court’s jurisdiction as opposed to its discretion to make orders under Section 210 vis-a-vis foreign companies (i.e., companies not incorporated in Singapore).

It had been previously thought that the Singapore Courts had no jurisdiction to make orders under Section 210 – and any of its subsections – unless the applicant foreign company could demonstrate that it had locus standi to invoke the jurisdiction of the Singapore Court: see Re Projector SA [2009] 2 SLR(R) 151 at [26] per Tan Lee Meng J.

In order to invoke this jurisdiction, the applicant foreign company had to prove that it had either (a) assets in Singapore; or (b) a sufficient nexus or connection with Singapore. In the absence of satisfying this test, it was thought that the Singapore Courts would not have jurisdiction to make any orders under Section 210.

This is no longer the case.

The learned Judicial Commissioner (the “Judge“) considered Section 210(11), which defines “company” – for the purposes of Section 210 – as “any corporation or society liable to be wound up under [the Companies Act]”. In this case, the use of the term “corporation” is expansive, as it includes “any body corporate formed or incorporated or existing in Singapore or outside Singapore and includes any foreign company...”

Therefore, and so long as the foreign company is “liable to be wound up” by the Singapore Courts, the Court would have the necessary jurisdiction under Section 210. In this respect, the Judge endorsed the position adopted by the English Courts, in particular the erudite judgment of Mr Justice Lawrence Collins (as his Lordship then was) in Re Drax Holdings Ltd [2003] EWHC 2743 (“Re Drax).

InRe Drax, Mr Justice Collins considered Section 425(1) of the Companies Act 1985 (which is in pari materia with Section 210(1)) and held that the issue was one of discretion rather than jurisdiction, and highlighted three salient factors to be considered in determining whether the Court ought or not to exercise its discretion, namely:-

(1) there must be a sufficient connection with England which may, but does not necessarily have to, consist of assets within the jurisdiction;

(2) there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order; and

(3) one or more persons interested in the distribution of assets of the company must be persons over whom the court can j exercise jurisdiction.”

These were not considered pre-conditions to the exercise of the Court’s jurisdiction, but – where established – would be more effective in persuading the English Court that it ought to exercise its discretion under Section 425(1) of the UK Companies Act.

The Singapore Courts have now appeared to adopt a “light touch” approach to jurisdiction in this respect (having followed the English position).

And although there is some doubt as to whether this is fundamentally correct as a matter of law, this author respectfully submits that the question is a moot one as the factors considered by the Court in determining whether it has jurisdiction are similar to those which are considered when determining whether to exercise discretion, i.e. in either circumstance the outcome is likely to be identical.

(B)The Statutory Moratorium

The difference between Singapore and English legislation dealing with schemes of arrangements is that English legislation does not give the English Courts the statutory power to order what is ordinarily referred to as a moratorium on claims against the applicant company.

Singapore’s Companies Act does however have this provision, and Section 210(10) provides:-

“Where no order has been made or resolution passed for the winding up of a company and any such compromise or arrangement has been proposed between the company and its creditors or any class of such creditors, the Court may, in addition to any of its powers, on the application in a summary way of the company or of any member, creditor or holder of units of shares of the company restrain further proceedings in any action or proceeding against the company except by leave of the Court and subject to such terms as the Court imposes.

This makes Singapore an extremely attractive destination for foreign companies which have assets and/or which are facing claims here as an order under Section 210(10) (the “Order“) effectively stays those claims or enforcement proceedings except with the leave of Court.

One fundamental question answered in the Judgment was the scope of Section 210(10). There was some uncertainty as to whether an order made under Section 210(10) had extra-territorial effect, i.e. that it would bind creditors having notice of the Order from commencing legal or enforcement proceedings against the foreign company in other jurisdictions.

The Honourable Judge held that any order made under Section 210(10) did not have such extra-territorial effect and, with respect, this author agrees with the Honourable Judge’s reasons.

[C] Creditor Opposition

The final aspect of the Judgment which merits attention is the Court’s willingness to grant relief under Section 210(10) before a Section 210(1) proposal has been put forward. It is not in dispute that the Court may make such an Order without there being an Section 210(1) pending before it, but it also settled law that where a Section 210(1) application is made, the Court will not grant leave to the Company to convene a meeting of its creditors if it is clear that more than 25% of the creditors (or creditors in each class) oppose the scheme since this would be an exercise in futility: see Re Ng Huat Foundations Pte Ltd [2006] SGHC 112

In this case, the Court distinguished the principle in Re Ng Huat Foundations Pte Ltd [2006] SGHC 112 holding instead:-

It would be apparent from my remarks on the Particularity Issue that I do not believe that it would be appropriate or indeed correct to apply Re Ng Huat to a s 210(10) application. It seems self-evident that if the plan that is before the Court for the purpose of a s 210(10) application is liable to or capable of evolution and change because it is nascent and subject to discussion and negotiation, taking a straw poll of creditors at that stage would not be justified. Conchubar (at [12]) has warned against this, suggesting that a close scrutiny of the likely acceptance of the plan by creditors ought to be avoided when the Court makes the broad assessment. It is a matter of common logic that as the plan evolves, creditors are prone to change their position based on their commercial motivations. Indeed, I note that one creditor, UOB, has changed its position from unequivocal opposition to neutrality. Accordingly, to make an assessment of creditor support at the stage of a s 210(10) application is premature.”

Respectfully, the learned author disagrees with this particular holding of the Honourable Judge, as the creditors’ wishes are – and should almost always be – paramount save in exceptional circumstances.

Notwithstanding that a Section 210(1) application may not be before the Court, this does not mean that the Court’s view on whether an eventual plan will pass muster should override overwhelming creditor opposition to a Section 210(10) Order.

[D] Concluding Remarks

The Judgment is of great assistance to insolvency and advisory professionals alike, and clarifies several issues which had previously been left unanswered.

What is apparent – in this author’s view at least – is that the Judgment, read together with other decisions of the Singapore High Court issued throughout 2016 concerning cross-border insolvency, is that the Singapore Courts are increasingly adopting a friendlier and more facilitative approach to applications under Section 210(1) and/or 210(10).

There are both pros and cons to this. Whilst this may assist in building Singapore as a restructuring hub for the region, it also invites negative forum shopping in the case of foreign companies with no hope of salvation invoking the scheme of arrangement provisions simply to buy time.

This author nonetheless trusts that the Singapore Courts are more than alive to this concern, and would certainly weed out such frivolous applications.

January 2017

Mr Thio Shen Yi, S.C. represented the Bank of America N.A. (an opposing creditor) in this decision and was assisted by a team of counsel from TSMP, including the author. All views, errors and/or omissions in the article are the author’s alone.

________________________________________________________

*The contents of this article represent the views of the author alone from a Singapore law perspective and are subject to copyright protection under the laws of the Republic of Singapore (as may from time to time be amended). No part of this article may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed and/or broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of the author.

Please note that whilst the information in this article is correct to the best of the author’s knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for and/or in respect of any particular course of action as such information may not suit your specific business, operational and/or commercial requirements. You are therefore urged to seek legal advice for your specific situation. All the author’s rights are expressly reserved and nothing herein shall be construed as a waiver thereof.

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