Singapore’s First “Pre-Packaged” Scheme of Arrangement
By Debby Lim (BlackOak LLC)
On 22 January 2018, the Singapore High Court (“Court”) sanctioned the first “pre-packaged” scheme of arrangement under Singapore’s new restructuring and insolvency regime that was unveiled in 2017. These ground-breaking amendments have taken the existing scheme of arrangement mechanism in Singapore and engrafted new features adapted from Chapter 11 of the US Bankruptcy Code. This update sets out some of the key take-away points and practical considerations.
Introduction
The amendments to the Singapore’s Companies Act (“Companies Act”), which came into force on 23 May 2017, introduced the new mechanism known as a “pre-packaged” scheme of arrangement by way of Section 211I of the Companies Act then (now Section 71 of the Insolvency, Restructuring and Dissolution Act 2018). This process allows the applicant company to dispense with both the court hearing to convene a meeting of creditors and the meeting itself, thereby truncating the normal scheme of arrangement process.
The “pre-packaged” scheme in the present case was proposed by the applicant company, a Singapore incorporated company listed on the mainboard of the Singapore Stock Exchange (“Scheme”).
Notice to the creditors
The Scheme document dated 17 November 2017 was despatched together with the explanatory statement, ballot form and the proof of debt form to the Scheme creditors. The deadline for the Scheme creditors to submit their ballot forms was 7 December 2017, and the Scheme was approved by the requisite majority, representing three- fourths in value of each class of Scheme creditors, casting their votes through the ballot forms.
It should be noted that this is in line with guidelines set out in the United States for pre-packaged Chapter 11 proceedings, which is similar to the pre-packaged scheme regime introduced in Singapore. While these guidelines have not been adopted in Singapore and are not binding, they are still a useful indicator nonetheless.
Rule 3018(b) of the Federal Rules of Bankruptcy Procedure (a set of rules promulgated by the Supreme Court of the United States, governing the procedures of bankruptcy proceedings) requires the court to consider whether "an unreasonably short" time was prescribed for creditors and equity security holders to accept or reject the plan. The guidelines in the United States provide that for publicly-traded securities, a 21 days voting period is acceptable, while for securities which are not publicly traded, a 14 days period is acceptable, measured from the date of commencement of mailing (Procedural Guidelines for Prepackaged Chapter 11 Cases in the United States for the Southern District of New York). That said, the guidelines state that nothing therein is intended to preclude a shorter voting period if it is justified in a particular case.
Classification of creditors
For the purposes of determining whether the requisite statutory majority of the Scheme creditors had been achieved in each class of Scheme creditors, there were two classes of scheme creditors for the purposes of voting in the present case:
(a) secured creditors for the value of the restructured debts (“Secured Creditors”); and
(b) unsecured creditors for the value of the remaining debts (“Unsecured Creditors”).
For the class comprising of the Secured Creditors, the value of the debt was based on the value of the restructured debts. For the class comprising of the Unsecured Creditors, the value of the debt was based on the value of the remaining debts, which comprised of the remaining debts of the Secured Creditors not included in the restructured debts and the debts of the unsecured Scheme creditors. There were seven creditors in total, five in support of the Scheme and two opposing creditors.
Issues for the Court
In the present case, the Court had to determine the following issues:
(a) whether the statutory requirements of Section 211I of the Companies Act had been complied with;
(b) whether adequate notice was provided to the Scheme creditors; and
(c) whether the Scheme creditors were properly classified for the purpose of voting.
The following submissions were made by the applicant company to the Court, that the statutory requirements of Section 211I of the Companies Act had been complied with.
One key procedural safeguard built into Section 211I of the Companies Act, is whether the court is satisfied that, had a meeting been called, the scheme would have been approved by the requisite majorities. Section 211I does not expressly indicate how a court is to be satisfied on this point. In this case, the applicant company submitted evidence of creditor-support by way of signed ballots forms. These ballot forms were adapted from the Prepackaged Chapter 11 Case Ballot Form attached to the Procedural Guidelines for Prepackaged Chapter 11 Cases in the United States for the Southern District of New York.
Following the guidelines set out in the United States for pre-packaged Chapter 11 proceedings, a sufficient 21-days period including the date of commencement of mailing of the Scheme Documents up till 5pm on 7 December 2017 was given to the Scheme creditors to consider whether to vote for or against the Scheme.
In the Scheme documents, all material information relating to the Scheme which would allow the Scheme creditors to exercise their voting rights meaningfully were disclosed.
While some Secured Creditors were classified together with the Unsecured Creditors in respect of the unsecured portion of their debt, it was submitted that the legal rights of the Secured Creditors and Unsecured Creditors were the same as against the company in respect of their respective values of the remaining debts of the Secured Creditors. The Secured Creditors had no additional interest or incentives in relation to their unsecured claims as against the applicant company as compared to the Unsecured Creditors. Further, the Scheme further did not favour nor prejudice any particular group of the Unsecured Creditors in respect of the remaining debts. This is different from how the remaining debts would be treated in a liquidation, given that all the remaining debts are similarly unsecured. As such, the rights of the Secured Creditors were “sufficiently similar” to the Unsecured Creditors in respect of their respective values of the remaining debts that they be put in the same class for the purpose of voting on the remaining debts.
Having heard the oral submissions of the applicant company, the Court sanctioned the Scheme on 22 January 2018.
Commentary
Section 211I of the Companies Act is modelled on the provisions in the United States under Chapter 11, rather than the “pre-packaged” administration that is common in the United Kingdom. The Chapter 11 “pre-packaged” process involved the broad parameters of a restructuring plan being negotiated amongst the debtor’s stakeholders in advance of the Chapter 11 filing. The fact that ultimately the plan has to be approved by a court provides some protection for dissenting creditors. In contrast, the United Kingdom’s pre-packaged administration, has less procedural safeguards, in that the procedure may not necessarily come before any court for approval. Essentially, the company arranges to sell all or some of its assets to a buyer before appointing an administrator to facilitate the sale.
The present case highlights a “pre-packaged” scheme can approved by the court as swiftly as two months of the scheme documents being despatched to the scheme creditors. This is clearly a game changer as companies in financial distress can seek an urgent respite via a pre-negotiated Scheme within an accelerated timeframe.
The most important advantages of a “pre-packaged” scheme are the cost and time savings, compared to the regular scheme process which requires two court applications and a meeting of creditors to be conducted. Another benefit is that a “pre-packaged” scheme minimises damage to public image and a loss of goodwill that could result from a more drawn-out and potentially contentious normal scheme process. This benefit is especially important for public listed companies.
Ideal candidates for a “pre-packaged” scheme are distressed companies with a relatively smaller pool of creditors. It is important for the debtor company to start adumbrating and negotiating the plan with its creditors early, in order to socialise the said plan.
Potential debtors that have a large number of contingent or unliquidated liabilities are not good candidates. Also, unlike in the United States, the “cram-down” provisions in the Companies Act do not apply to “pre-packaged” schemes. This means that the requisite threshold of creditor-support has to be obtained for each class of creditors. Potentially, there could be challenges by disgruntled creditors on the issue of the classification of creditors.
Also a “lock-up” or “creditor-support agreement” is not strictly necessary. In this case, ballot forms were used in order to simplify the process further.
Postscript
Since this deal, a few debtor companies including iflix and PT MNC Investama Tbk have also utilised the “pre-packaged” mechanism. This is certainly a testament to the advantages of this truncated scheme process, which include the savings of time and costs. It is also noteworthy that the Simplified Insolvency Programme (the “SIP”) also utilises the “pre-packaged” scheme of arrangement, coupled with lowered requirements for approval by creditors, for the purpose of simplified debt restructuring. The aim of the SIP is to assist micro and small companies that require support to restructure their debts to rehabilitate the business.
(*) This post is a modified version of a previous article published by the author. The author would like to disclose that she was involved in the transaction, acting for the applicant company.