Oon & Bazul’s Restructuring & Insolvency Practice contributed a chapter titled “Recent Developments in Singapore’s Restructuring Regime” to Asia-Pacific Restructuring Review 2021. The article is as follows:
The economic uncertainty and financial distress brought by the covid-19 pandemic have not spared Singapore. While the unprecedented amount of government stimulus and emergency (but temporary) legislative measures have salved the damage in the short term, the general sense is that many companies will require some form of debt restructuring in the months to come.
We have already seen a few high-profile restructurings involving mainly commodity trading companies, including Agritrade International, Hin Leong Trading and ZenRock Commodities Trading. While these cases involve allegations of financial impropriety, the unfavourable economic environment undoubtedly played a role in pushing these companies into formal restructuring processes.
The Insolvency, Restructuring and Dissolution Act (IRDA) also came into force on 30 July 2020. The IRDA consolidates Singapore’s personal and corporate insolvency and debt restructuring laws into a single piece of legislation and is intended to be the centrepiece legislation dealing with restructuring, insolvency and bankruptcy matters.
Against the above backdrop, the development of Singapore’s jurisprudence continues apace. In this chapter, we will discuss a number of recent developments and issues that have emerged in Singapore’s fast-developing debt restructuring regime, namely:
- the issue of related party creditor voting in a scheme meeting and how and to what extent those votes should be discounted;
- recent case law on the substantial connection test for foreign companies looking to apply for a section 211B moratorium in Singapore; and
- recent case law on super priority rescue financing under section 211E of the Singapore Companies Act (Cap 50).
These issues are likely to gain significant prominence as companies and businesses in Singapore continue to grapple with the impact of the covid-19 pandemic in the months to come.
Related creditors’ voting regulation in section 210(1) scheme of arrangement
Under section 210 of the Companies Act (Cap 50) (the Companies Act), a proposed creditors’ scheme of arrangement is considered approved if more than 50 per cent of the scheme creditors or class of scheme creditors (present and voting) holding at least 75 per cent in value of debt claims agree to the proposed scheme.
After the voting thresholds have been met, the court will still need to be satisfied, among other things, that those who attended the meeting were fairly representative of the class of creditors and that the majority did not coerce the minority to promote interests adverse to those of the class whom the majority is purported to represent.
Where there are related-party creditors, the question arises in respect of how their votes should be treated. The development of the jurisprudence in this area will have a real impact on the susceptibility of a scheme being challenged at the sanction stage.
The test for establishing related creditors
The starting point is that the courts will generally attribute less weight to the votes of related-party creditors. In Wah Yuen Electrical Engineering Pte ltd v Singapore Cables Manufacturers Pte Ltd  3 SLR(R) 629, the Singapore Court of Appeal explained that this is because ‘the related party may have been motivated by personal or special interests to disregard the interest of the class as such and vote in a self-centred manner’.
It is understood that such personal and special interests would arise by virtue of the related party creditors’ relationship to the applicant company. What, then, are the guidelines for determining whether a scheme creditor is related to the scheme company?
This issue was more recently revisited by the Court of Appeal in SK Engineering Construction Co Ltd v Conchubar Aromatics Ltd and another appeal  SGCA 51 (SK Engineering). In that case, the Court declined to definitively set out what constitutes a related creditor as the ‘objectivity of a creditor can be undermined in a variety of ways’. Nevertheless, the Court observed that the presence of one or more of the following (non-exhaustive) factors could point towards the existence of a relationship between a creditor and a scheme company:
- the scheme company controls the creditor or vice versa, or they share a common controlling shareholder;
- the creditor and the scheme company have common shareholders who hold less than 50 per cent but more than de minimis stake in both companies;
- the creditor and the scheme company have common directors, in particular, directors who propose or support the scheme;
- the scheme company and the creditor do not have any common shareholders, but their controlling shareholders are either: (i) related by blood, adoption or marriage, or (ii) where the controlling shareholders are corporate entities, in turn controlled by individuals who are related by blood, adoption or marriage; and
- the creditor is related by blood, adoption or marriage to the controlling shareholders or directors of the scheme company.
The above factors are helpful in identifying related party creditors. Further guidance can also be gleaned from other jurisdictions, such as the United States and Canada, where the relevant statutes deal directly with the definition of related creditors.
Related parties are defined under the relevant Canadian legislation. Such related parties may only vote against, and not for, a compromise or arrangement relating to the scheme company. This effectively wholly discounts the votes of parties found to be related to the scheme company.
Of particular interest is section 4(2)(c) of the Canadian Bankruptcy and Insolvency Act, which lists situations in which two entities will be considered related to each other. Some of these situations were not enumerated by the Court in SK Engineering and include scenarios where:
- one of the entities is controlled by one person and that person is related to each member of an unrelated group that controls the other entity;
- one of the entities is controlled by a related group of which a member is related to each member of an unrelated group that controls the other entity; or
- both entities are controlled by different unrelated groups, and each member of one of the groups is related to at least one member of the other group.
In the United States, related creditors refer to both statutory insiders and non-statutory insiders. As explained by the United States Court of Appeals, Ninth Circuit, in US Bank NA, Trustee v Village at Lakeridge, LLC (9th Cir 2016) 814 F3d 993 (Lakeridge), statutory insiders have ‘a sufficiently close relationship with a debtor to warrant special treatment’, and are persons explicitly described in section 101(31) of the US Bankruptcy Code (the Bankruptcy Code). For a scheme (referred to as ‘plan’ in the United States) to be confirmed, section 1129(a)(10) states that there must be at least one class of creditors exclusive of insiders that votes to accept the plan.
As in Canada, some of the situations listed in section 101(31) have yet to be considered by the Singapore courts; for instance, a partnership in which the debtor company is a partner and a general partner of the debtor would also be considered as ‘insiders’ and related party creditors under section 101(31).
Section 101(31) of the Bankruptcy Code is not an exhaustive list. The courts in the United States have recognised some persons not on that list as insiders – commonly known as ‘non-statutory insiders’. In this respect, the court in Lakeridge held that a creditor is a non-statutory insider if (i) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in section 101(31), and (ii) the relevant transaction is negotiated at less than arm’s length.
The relationship must be close enough to gain an advantage attributable simply to affinity rather than to the ordinary course of business dealings between the parties. Further, a showing of actual control of the debtor is not necessary to render a creditor a non-statutory insider.
In Singapore, ultimately, the issue of whether a particular creditor is related to the scheme company involves a fact-sensitive and fact-intensive analysis. The court in SK Engineering shed light on what exactly a related party creditor would entail by providing a list of factors indicating a relationship between a creditor and the scheme company. Importantly, the court recognised that this list of factors is non-exhaustive, and there can be other situations in which related party creditor issues would arise. It remains to be seen how the Singapore courts will deal with other fact situations in the future.
Applicability of discounts on the votes of related creditors
Prior to SK Engineering, the court in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal  2 SLR 213 held that wholly owned subsidiaries of a scheme company should have their votes discounted to zero, and effectively be classified separately from the general class of unsecured creditors. This is because wholly owned subsidiaries are entirely controlled by their parent company and can be seen as ‘extensions’ of the scheme company itself.
It was also held that other related party creditors, apart from wholly owned subsidiaries, should generally have their votes discounted by the value of their interest in the company (ie, a partial discount).
The application of a partial discount to the votes of related creditors has subsequently been criticised for being too arbitrary and subjective, leading the court in SK Engineering to suggest, in obiter, that a more principled approach would be to wholly discount the votes of the creditor once it is found to be related to the scheme company.
There is, however, a real risk that an approach that wholly discounts related party creditors’ votes purely because of their relationship to the company may end up impeding effective restructurings.
An illustration of this would be the restructuring of honestbee Pte Ltd (honestbee) in Singapore. The online grocery and food delivery business honestbee ran into financial difficulties and commenced restructuring proceedings. The three largest creditors, one of which also held a floating charge over all the assets of honestbee, collectively holding approximately 89.8 per cent of the debt continued to finance the business of honestbee while it worked on the restructuring. One of the three largest creditors, an individual, was also the general partner in one of these creditors and a director in the other creditor. He was also for a short period of time the interim CEO and a director of honestbee after the previous management was removed. He also held 0.96 per cent of the shares of honestbee. In the proposed restructuring, all the scheme creditors were unsecured creditors to be placed in one class, and entitled to the same recovery under the scheme. The opposing creditor (to the scheme) (holding 1.65 per cent of the debt) argued that the votes of these three largest creditors should be wholly discounted as they were related creditors of honestbee.
Applying the court’s obiter dicta approach in SK Engineering, those related creditors would have their votes discounted to zero, effectively giving the opposing creditors a veto right. This is notwithstanding the fact that the individual related creditor only held a de minimis shareholding stake and was not entitled to vote on general matters of honestbee, other than as provided for in the Companies Act. Further, despite his investments in honestbee, and his role in the other two largest creditors and honestbee, there was no evidence that he or the other two largest creditors had any special interest that might have motivated them to act differently.
Although honestbee’s application for leave to convene a scheme meeting under section 210 of the Companies Act did not proceed, and the related party creditor issues were never decided, this case highlights the pitfalls of wholly discounting related party creditors’ votes purely on the basis of their relationship to the scheme company. Such an approach could inadvertently complicate the genuine efforts of a scheme company and deter creditors (especially those found to be related to the scheme company) from supporting and investing in the company’s restructuring efforts.
Other jurisdictions, such the United Kingdom and Hong Kong, have instead taken a more nuanced approach to the discounting of related creditors’ votes.
In the United Kingdom, related party creditors, or creditors with ‘special interests’, do not have their votes discounted merely because they are related to the scheme company. Instead, the focus is on whether the classes were ‘fairly represented’. Therefore, the creditors whose votes are to be discounted must have an interest adverse or contrary to the interests of the class of creditors as a whole. There must also be a strong and direct causative link between the creditor’s decision to support the scheme and the creditor’s adverse interest such that the creditor’s voting decision was driven by the adverse interest.
In this regard, the court in Apcoa Parking Holdings GmbH & Ors  EWCA 3849 laid down the ‘but for’ test, namely that the person challenging the relevant vote must show that an intelligent and honest member of the class without those collateral interests would not have voted in the way he or she did. In that case, the court did not find that the senior lenders had a collateral interest and did not discount their votes. In Re Apcoa, the senior lenders had provided a bridging loan, but the court noted that the bridging loan was relatively small. The court also accepted evidence from the senior lenders that they were motivated to approve the scheme not because of the bridging loan, but because of their interest in protecting their creditor position.
In Re Lehman Brothers, a certain creditor group (the Wentworth Group) with senior claims had entered into a joint venture with a creditor with a subordinated debt that entitled them to a proportion of the recoveries of that creditors’ subordinated debt. The opposing creditors argued that the Wentworth Group had voted in favour of the scheme to enhance payments to the subordinated member rather than to further its own interests as creditors within that class. The court held that a special interest that merely provides an additional reason for a creditor to support the scheme does not undermine the representative nature of the vote. Instead, it must be demonstrated that there was a strong direct and causative link between the adverse creditor’s interest and the creditor’s decision to support the scheme. In that case, the court noted that the special interest identified was ‘adverse’ to the interests of the rest of the class. However, the court declined to accept that this was a dominant or causative reason for their support of the scheme. The court further noted that even after excluding the Wentworth Group, 93.9 per cent in number and 62.2 per cent in value of the creditors had voted in favour of the scheme. This supported the view that the dominant reason for the Wentworth Group to support the scheme was the principal objectives of the scheme as a whole instead of the special interest.
Hong Kong position
Similar to the position in the United Kingdom, the courts in Hong Kong have declined to discount the votes of related creditors purely by reason of relation. As Lord Millett explained in UDL Argos Engineering & Heavy Industries Co Ltd & Ors v Li Oi Lin & Ors  3 HKLRD 634, the court will discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.
In determining whether the related creditors were motivated by interests other than those to which an intelligent and honest person, acting in the interests of the class as a whole, might have regard, the commerciality of the proposed scheme would be a significant consideration.
In our view, a focus on whether the classes of creditors are fairly represented should be preferred to a strict discounting of related party creditors’ votes purely on the basis of these creditors’ relationships to the scheme company. Significantly, the approach adopted in the UK and Hong Kong courts would reduce the likelihood of holdouts by minority creditors that will hinder effective restructurings.
Substantial connection test for a scheme moratorium
The Singapore High Court, in Re PT MNC Investama TBK  SGHC 149 (Re PT MNC), recently addressed the question of whether a foreign company has the requisite standing to apply for a section 211B moratorium under the Singapore Companies Act.
Re PT MNC is the first known application by an Indonesian company to the Singapore Court for moratorium relief, and provides useful insights on the factors taken into account in determining whether a company has a substantial connection with Singapore under section 351(2A) of the Singapore Companies Act.
In particular, this case clarifies that section 351(2A) is not an exhaustive list, and having company securities traded on a Singapore exchange is a strong indicator of a substantial connection with Singapore.
The applicant in Re PT MNC was an investment company listed on the Indonesia Stock Exchange that held interests in various industries, including media, financial services, lifestyle property and energy. In 2018, it had issued US$213 million worth of 9 per cent senior secured notes (the Notes), which were listed on the Singapore Stock Exchange (SGX).
The applicant encountered financial difficulties because of the covid-19 pandemic and sought moratorium relief under section 211B(1) of the Companies Act so that it could engage in negotiations with the holders of the Notes.
Substantial connection with Singapore
The court noted that under Singapore law, a foreign company would only have legal standing to make an application under section 211B if it had a ‘substantial connection’ with Singapore, and was thus liable to be wound up in Singapore.
Section 351(2A) of the Companies Act provides a non-exhaustive list of factors that might support a determination of ‘substantial connection’. These include:
- Singapore being the centre of the company’s main interests;
- the company carrying on business in Singapore or having a place of business in Singapore;
- the company being a foreign company that is registered under Division 2 of Part XI of the Act;
- the company having substantial assets in Singapore;
- the company having chosen Singapore law as the law governing a loan or other transaction, or the law governing the resolution of one or more disputes arising out of or in connection with a loan or other transaction; and
- the company having submitted to the jurisdiction of the court for the resolution of one or more disputes relating to a loan or other transaction.
However, in Re PT MNC, the applicant could invoke none of the statutorily enumerated factors. Nevertheless, the court confirmed that these enumerated factors were not an exhaustive and definite list and, applying the ejusdem generis approach to statutory interpretation, rationalised that the presence of business activity, control and assets in Singapore with some degree of permanence would generally satisfy the ‘substantial connection’ test.
On the facts, the court found that having company securities traded on the SGX would have required the company to subject itself to Singapore regulations and laws on the listing of securities and was akin to having business activity in Singapore of some degree of permanence. Thus, the court held that the fact that the Notes were being traded on the SGX was in and of itself sufficient to establish substantial connection.
Can other factors also establish substantial connection?
The Singapore High Court’s decision in PT MNC follows an earlier 2019 unreported decision of China Sport International Limited, which was the first foreign-incorporated company to enter into judicial management in Singapore following the wide-ranging 2017 legislative amendments to the Singapore Companies Act. In that case, the court also found that the company’s listing on the SGX, and the fact that it was subject to the requirements for financial reporting, accounting standards and audit under the Companies Act were factors that established Singapore as the company’s centre of main interest and thereby its substantial connection to Singapore.
The PT MNC case is also interesting as the applicant there had also pointed to other factors – such as the situation of its debt service account in Singapore, the fact that the Notes were arranged by Singapore-based banks, and that the account charge over the debt service account is governed by Singapore law – as also buttressing its argument that the substantial connection test was satisfied.
Given its finding that having securities traded on the SGX satisfied the ‘substantial connection’ test, the court declined to make any findings on these other factors. It is fair to say, however, that the decision leaves the door open for foreign companies to argue in future cases that the ‘substantial connection’ test is satisfied based on many of the other criteria used in other jurisdictions, in particular the United States (where payment of a retainer to a US law firm is considered sufficient).
A wider jurisdictional ambit for foreign companies to avail themselves of the court-supervised restructuring regime in Singapore would accord with Singapore’s stated goal of becoming a restructuring hub. Nevertheless, it would appear that the Singapore Court will still require, at minimum, companies to be involved in activities of some degree of permanence in Singapore.
Super-priority rescue financing: debt roll-ups
On 28 May 2020, in an application by Design Studio Group Ltd (Design Studio) and five of its subsidiaries, the Singapore High Court granted approval for S$62 million super-priority rescue financing with a debt roll-up pursuant to section 211E(1)(b) of the Companies Act.
The Design Studio group of companies are collectively involved in the construction, upgrading and interior fit-out industries. They had experienced liquidity issues owing to competition in the industry and initiated formal restructuring proceedings in the Singapore High Court.
Design Studio sought rescue financing from its existing creditors, HSBC (Singapore branch) (HSBC) and Design Studio’s controlling shareholder, Depa United Group (DEPA), both of which sought super-priority (ie, priority over all preferential and unsecured debt) over both the new monies provided. What sets this case apart is that part of the new monies was to be used to pay off existing prepetition debt owed to HSBC and DEPA. This effectively ‘rolls up’ the prepetition debt into the super-priority post-petition debt and is known as a debt roll-up.
The Court considered two main issues:
- whether the proposed financing constituted rescue financing under section 211E(9); and
- whether it was appropriate for the Court to exercise its discretion in favour of the application.
The proposed financing constituted rescue financing
The Court concluded that debt roll-ups were permissible under section 211E and would constitute rescue financing if it ultimately created some new value for the company and supported its restructuring. The Court added that roll-ups that involved new funds used largely to repay old debts would not be regarded as rescue financing. It also qualified that this issue would have to be scrutinised on a case-by-case basis.
The Court found that the proposed financing constituted rescue financing under section 211E(9) as it would enable Design Studio to continue performing project contracts and result in better recovery to creditors than in a liquidation scenario. Out of the S$62.08 million extended by DEPA and HSBC in the proposed financing, S$2.7 million was allocated as fresh working capital and S$30 million was allocated to issue and renew performance bonds and guarantees for existing and new construction projects. The Court also accepted the analysis of the chief restructuring officer (CRO) that creditors would receive zero to 3.94 cents to the dollar in a liquidation scenario in at least two years, whereas they would receive up to 8.12 cents to the dollar by the third quarter of 2020 in a scheme scenario enabled by the proposed financing.
The court should exercise its discretion to grant super-priority
Drawing guidance from parliamentary debates, committee reports and US cases, the Court arrived at four main factors to guide its exercise of discretion in granting super-priority:
- alternative financing: whether better financing proposals are available and if the applicant had made reasonable efforts to procure those offers;
- terms of proposed financing: whether the terms were made in good faith and for a proper purpose, as well as were reasonable and adequate;
- viability of restructuring: on an assessment on how the rescue finances are to be used, whether restructuring is likely to succeed; and
- creditors’ interests: whether the interests of other creditors would be unfairly prejudiced by the arrangement.
The Court then reviewed foreign literature on roll-ups and noted the concern of unequal treatment of creditors in roll-ups. It added that in considering a roll-up, the court should ‘especially consider’ the extent to which other unsecured creditors are likely to benefit or be prejudiced, and give special note to creditors whose priorities would be lowered.
The Court was satisfied that there was a bona fide attempt in obtaining alternative funding. Design Studio had engaged ‘a reputable independent global financial services firm’ to seek potential lenders. While five financiers expressed interest, none were able to match the much lower interest rates and fees of HSBC and DEPA.
Terms of proposed financing
The Court was satisfied that the proposed financing was in the exercise of sound and reasonable judgment. In reaching this, the Court considered the dearth of willing financiers, the industry need for performance guarantees and that a majority of the proposed financing was to constitute new funding to create new value as opposed to being used to repay prepetition debt.
Viability of restructuring
The Court was satisfied that the proposed financing would allow Design Studio to take up new projects and keep the group as a going concern, which would result in a more advantageous realisation of assets than in a winding-up.
The Court was satisfied that the proposed financing was in the creditors’ best interests. Their likely recovery in a scheme was much more advantageous than in a liquidation scenario, and it was telling that none of the creditors opposed the proposed financing. Further, HSBC was already the sole secured creditor, and the roll-up did not serve to allow it to jump ahead of the other creditors.
The provisions on super-priority rescue financing had been imported into Singapore in 2017, from the US debtor-in-possession financing provisions, to aid and enhance the rescue options available to distressed companies. Super-priority gives security to the investor by giving him or her the first cut from the assets of the company if the restructuring fails. Debt roll-ups make the deal even more attractive by allowing the investor-creditor’s prepetition debt to be rolled up into the super-priority rescue financing.
Before this case, super-priority orders had only been granted in two other instances: the restructurings of Asiatravel.com Holdings Ltd and Swee Hong Limited. Re Design Studios is the first case involving a debt roll-up and is a timely and welcome development, particularly given the current economic climate resulting from the covid-19 pandemic.
This decision also leaves the door open for cross-collateralisation in Singapore. In Re Design Studio, arguments on cross-collateralisation were raised, but the Court did not make any ruling on them since those issues did not arise on the facts. Cross-collateralisations are similar to debt roll-ups in that they both result in elevating the priority of prepetition debts.
However, instead of granting super-priority to prepetition debt, cross-collateralisation involves the debtor granting a prepetition lender a security interest in assets to secure both prepetition and post-petition debt. Similar to debt roll-ups, cross-collateralisations are highly controversial as they disrupt the pari passu principle. Yet, the availability of cross-collaterisation may help convince an investor to inject new monies in circumstances where the investor would otherwise be unwilling or unable to invest. Based on the previous approaches taken by the Singapore Court, the Court is likely to very closely scrutinise any claims that rescue financing will otherwise not be available unless cross-collaterisation is given.
The development in Singapore case law on rescue financing thus far has shown that the Singapore Court is flexible and open to different forms of rescue financing, provided that the process is not abused. This bodes well for the creation of a more vibrant distressed financing and secondary debt market, which is an important element of any debt restructuring regime.