Cramdown Powers under Singapore’s Scheme of Arrangement

By Terry Xu Hongli (Student, Singapore Management University)

Introduction

Many countries and regions around the world, including Singapore, the United Kingdom and the European Union, have recently amended their restructuring framework with the purpose of adopting several provisions of the US Bankruptcy Code (Gurrea-Martinez, 2020). Among others, all of these jurisdictions have adopted a cramdown provision. Therefore, they allow the imposition of a restructuring plan on dissenting classes of creditors provided that certain requirements are met.

This post seeks to analyse the requirements for the approval of scheme of arrangement in Singapore. To this end, this post will explore the requirements existing prior to the 2017 reform, before concluding with the analysis of the current provisions allowing the imposition of a restructuring plan on dissenting classes of creditors.

The old regime

Prior to the Companies (Amendment) Act 2017 (‘2017 Amendments’) and the Insolvency, Restructuring and Dissolution Act (‘IRDA’), a scheme of arrangement under Singapore law required the approval of all classes of creditors to be bound by the scheme. For each class of creditors, however, the debtors only needed the support of a qualified majority of creditors. Under ss 210(3AA) and (3AB) of the Companies Act, this majority requirement comprises more than 50% in the number of creditors within each class and such majority in number also has to represent at least 75% in value of the claims within that class.  Therefore, this meant that the plan could be imposed on dissenting creditors existing within a class. As a result, it only allowed a type of intra-class cramdown, very different from the inter-class or cross-class cramdown existing in the US Chapter 11. 

This approach presents several limitations that are detrimental to reaching a compromise. First, the holdout problem is prevalent, where creditors choose to take a hard-line stance in pursuit of their self-interests with the knowledge that the plan cannot proceed as long as a single class of creditors does not agree with the plan. Second, time and costs spent on extended periods of negotiation are of concern since other issues such as classification of creditors are also often disputed apart from the distribution of returns. For that reason, changes were made as part of the new “enhanced” scheme of arrangement, following the recommendations of the Insolvency Law Review Committee and the Committee to Strengthen Singapore as an International Centre for Debt Restructuring.  

Cramdown powers under Singapore’s new restructuring framework

In 2017, Singapore implemented a major reform to the Companies Act. Among the provisions adopted in the 2017 Amendments which were subsequently included in the IRDA, Singapore adopted the feature of a cramdown that was adapted from the US Chapter 11. The Singapore court’s power to cramdown was first introduced under s 211H of the Companies Act. While the s 211 provisions have been repealed following the commencement of the IRDA on 30 July 2020, the relevant provision can now be found under s 70 IRDA. 

This newly introduced power to cramdown now refers to an inter-class or cross-class cramdown (similar to that under the US Chapter 11), which enables the court to impose an arrangement on dissenting classes of creditors. With this new development, a scheme of arrangement under Singapore law no longer requires the approval of all classes of creditors. Instead, where the requirements discussed hereinafter are satisfied, the plan can be imposed on all classes notwithstanding classes that comprise a majority of dissenting creditors. This is in stark contrast to the old regime which would only apply to minority dissenting creditors within each class. 

However, with the need to also protect creditors’ rights and limit any harmful ex ante effects potentially associated with the adoption of this rule (e.g., an undesirable increase in the cost of debt as a result of creditors’ reluctance to cramdown provisions), a reorganization plan can only be imposed on dissenting classes of creditors if various conditions are met. First, the plan needs to be approved by a qualified majority (a majority in number of creditors and super majority in value of claims). Second, the plan cannot discrimination unfairly. Finally, the plan needs to be “fair and equitable”.

(1)    Majority requirement

Sections 70(3)(a) and (b) IRDA introduces a majority requirement. For the court to exercise its powers of cramdown on dissenting classes, more than 50% of the total number of creditors who were present and voting must have agreed to the plan and such majority in number must represent at least 75% in value of total claims.

(2)    Non-discrimination rule

Secondly, the plan cannot discriminate unfairly between two or more classes of creditors. See Section 70(3)(c) IRDA. While this is commonly understood to be equal pay-outs to similarly situated classes, it is unclear at present what this requirement entails under Singapore law.

Reference to the US approach might be relevant given the direct adoption of the phrase from s 1129(b)(1) of the US Chapter 11. In a recent Third Circuit ruling in In re Tribune Co., 972 F.3d 228 (3d Cir. 2020), the US Court of Appeals suggested that the requirement is not a strict prohibition of discrimination between similarly situated classes of creditors. Instead, a fact-centric approach would be taken and discrimination that is supported by reasonable justification would be permitted.

(3)    “Fair and equitable” 

Finally, the plan also needs to be ‘fair and equitable’; see s 70(3)(c) IRDA. When read with s 70(4) IRDA, Singapore law appears to have adopted features of creditor protection similar to the US Chapter 11. These two features include the best interest of creditors test and the absolute priority rule. It is worth noting that unlike the US Chapter 11, Singapore’s adaptation subsumes the best interest of creditors test under the ‘fair and equitable’ requirement. 

First, the best interest of creditors test is found under s 70(4)(a) IRDA where no creditor in the dissenting class is to receive an amount that is lower than what the creditor is estimated by the Court to receive in the most likely scenario if the compromise or arrangement does not become binding. However, unlike s 1129(a)(7)(A)(ii) of the US Chapter 11 which provides for the comparator to be the liquidation scenario under US Chapter 7, Singapore law provides for the “most likely scenario”. At present, it is unclear how this will be applied in practice in Singapore.

Reference can be made to the UK approach, where cross-class cramdown has been introduced in its new restructuring plan under the UK Corporate Insolvency and Governance Act 2020. Under the new UK regime, the chosen comparator is a “relevant alternative”. In the recent case of Re DeepOcean 1 UK Ltd [2020] EWHC 3549 (Ch), the court approved a restructuring plan with only a 4% increase for the dissenting class when compared to the relevant alternative, which the court accepted to be administration or liquidation of the companies.

Notably, yet another formulation of this test (which has fuelled much academic debate; eg, see Seymour & Schwarcz and Axel Krohn) surfaced in the new 2019 EU Restructuring Directive – using the “next-best-alternative scenario” as a comparator. However, no case law has since surfaced to provide guidance for the EU formulation.

Second, s 70(4)(b) establishes a priority rule that also needs to be satisfied. Under s 70(4)(b)(i) IRDA, the value of security held by secured creditors are safeguarded. The plan to be imposed on a dissenting class of secured creditors has to provide for repayment in one of three statutorily stipulated forms in order to satisfy the “fair and equitable” requirement. Payment in the form of deferred cash payments totalling the secured amount, a charge over the proceeds of the realized security or the indubitable equivalent of that security. Further, where the dissenting class comprises unsecured creditors, 70(4)(b)(ii) IRDA requires that no creditor with a claim that is subordinate to a creditor in the dissenting class is to receive any payment or retain any property, unless provision has been made for the claim of each creditor in the dissenting class to be fully repaid.

Notably, an important clarification has been made to the wording of s 211H of the Companies Act following the transition to the IRDA. Section 70(4)(b)(ii)(B) IRDA now clarifies that shareholders are no longer required to divest their shares before the cramdown can be imposed; the plan “must not provide for… any member…[to] retain any property of the company” (emphasis added). This is a crucial clarification for two reasons. First, unlike the Bankruptcy Code in the US, Singapore does not have the statutory mechanism to compulsorily divest shareholders of their shareholdings. Second, this ensures that unsecured creditors receive “true” protection under the absolute priority rule. Prior to this, satisfying the requirement was contingent on shareholders’ voluntary cooperation.

Thus, in order for the court to exercise the power of cramdown on dissenting classes of creditors, the debtor company has to ensure that the plan satisfies all the above requirements.

Moving forward                 

While there has yet to be any case law on the application of the new cramdown powers, this presents a significant development in Singapore law amidst the fast-changing legal landscape globally that has recently been further catalysed by the impact of Covid-19. This is an important feature of restructuring procedures, since it can avoid the holdout problem, reduce negotiation costs and facilitate the quick approval of a desirable restructuring plan. Further, with the necessary safeguards in place, this can be achieved without harming creditors. On a broader picture, this represents one of many attractive new developments that helps to bring Singapore a step closer to becoming a world renown debt restructuring hub. With the confidence instilled by the sophistication of Singapore’s judiciary and the insolvency industry, the practical implementation of cramdown amongst the other new features is certainly an exciting prospect.