Singapore’s First Reported Decision on Pre-packaged Schemes of Arrangement

By Debby Lim (BlackOak LLC)

Introduction

In Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 (“Re DSG”), the Singapore Court dismissed an application to approve a pre-packaged scheme due to the lack of full and frank disclosure by the debtor in providing its creditors with all necessary information to enable them to make an informed decision on whether to vote for the scheme. As this is the first reported decision on pre-packaged schemes in Singapore, any guiding principles laid down by the Court are worth examining. We note that the High Court decision is being appealed to the Court of Appeal. This brief case note examines the two key issues of material non-disclosure and creditor classification that arose in this case.

First, the Court’s concern arose in respect of the assignment of debt that was owed by the company to related entities. Prior to the scheme this debt was assigned to a third party known as Allington, who was a potential investor. The creditors had requested disclosure of the terms and purchase price in respect of the debt assignment, as they were concerned that the sale was not on an arm’s length basis and was contrived to circumvent the voting requirements under the scheme of arrangement[1]. The Court held that the failure to disclose the purchase price meant that the debtor company had fallen short of the disclosure requirements encapsulated in section 71(3)(a) of the IRDA in respect of pre-packaged schemes of arrangements.

Second, the Court considered Allington’s interest as a potential investor and found that its rights under the Term Sheet affected its classification.[2] In other words, the scheme would have failed because the classes of creditors were incorrectly constituted and hence the scheme did not satisfy the statutory voting threshold. The putative investment which is Allington’s acquisition of the listed entity as a clean shell listed on the mainboard of the SGX-ST, was effectively conditional on the scheme being approved and implemented[3]. The investment was highly unlikely to proceed otherwise. Thus, Allington’s interest as a potential investor was relevant to classification. It was also significant enough to render Allington unable to consult with the other unsecured creditors with a view to their common interest.

Commentary

At paragraph 27 of the decision, the Court set out its general observations on the nature of pre-packaged schemes: “So the expedition and procedural simplicity granted by the s 71 framework should generally be used only for clear cases of agreement to pre-arranged schemes. Where a major creditor objects or the scheme company has difficulty providing information, that is a strong signal that the s 71 process should not be utilised and is probably unavailable. In that situation, the company should use the normal procedure in s 210 of the Companies Act and have matters resolved through actual meetings and voting by creditors.”

With respect, where there is a major dissenting creditor, this may not necessarily mean that the debtor should not avail itself of the pre-packaged mechanism. The situation could be such that the restructuring could have proceeded as an out-of-court workout save for a couple of holdout creditors[4]. Furthermore, if there is a holdout creditor with an effective veto, even getting creditor approval via the conventional scheme process would be problematic.

In any case, it is important for the debtor company to start socialising its proposed plan with its creditors early on. It is important for the debtor and the advisors to lay the groundwork by reaching out to the creditors and seeking to iron out any issues that may arise[5]. By way of this consensus-building process, the debtor can then determine whether a pre-packaged scheme is possible or if the conventional route should be pursued. If it is the latter, holding a meeting may not be a panacea for creditor disquiet over major issues if these have not been addressed earlier on. Regardless of the size of the company using this restructuring mechanism, a pre-packaged scheme will generally tend to be more suitable for companies with concentrated debt structures and a small number of creditors[6].

This decision also highlights the importance of full and proper disclosure where a scheme is to be undertaken on a pre-packaged basis. In this case, the Court found that the purchase price was information necessary to enable creditors to make an informed decision whether to agree to the scheme[7]. For creditors to be able to make an informed decision whether to agree to a scheme, they would need to be furnished information that enables them to assess whether the allocation of loss and the division of benefits is fair and in their commercial interests[8]. In fact, considerations of confidentiality should not override the disclosure of material information and the appropriate non-disclosure agreements could have been entered into with the creditors.

This disclosure requirement for the purpose of obtaining Court sanction is equally applicable to both conventional and pre-packaged schemes of arrangement. Essentially, a scheme company must disclose all material information to the scheme creditors to enable them to make informed decisions on whether to support the scheme. Generally, a less onerous standard of disclosure was required of the applicant at the leave stage where it sought leave to convene a creditors’ meeting to vote on the proposed scheme, as compared to the sanction stage where court approval was sought of a scheme passed by the requisite majority of creditors[9]. This distinction is of course not applicable to a pre-packaged scheme process since the leave stage is obviated.

In respect of classification, the Court found that Allington’s rights that it would receive as an investor in the ultimate holding company in the DSG Group gave it an additional non-private interest to vote for the New Scheme. Thus, the notional voting outcomes did not satisfy the statutory majority requirements because Allington should not have been placed in the same class as the other creditors.

The Court set out the analytical framework[10] for classification of creditors in respect of pre-packaged schemes:

(a)    In classifying the creditors to determine whether the notional voting outcomes would have satisfied the statutory majority requirements, the court considers the creditors’ rights.

(b)    If the statutory majority requirements would have been satisfied, the court in deciding whether to approve the scheme must be satisfied, among other things, that the creditors whose votes were solicited for the purpose of the notional voting outcomes were fairly representative of the class of creditors to which they belong. The creditors’ private interests are indeed relevant to this inquiry.

The analytical framework is correct as a matter of principle. However, the Court did not go into detail as to how these private interests are subsequently dealt with. The Court stated that the private interests of related party creditors do not warrant placing them in a separate class but generally warrant attributing less weight to their votes[11]. This suggests a partial discount to the votes of such creditors. It is noteworthy that the Court did not cite SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] 2 SLR 898; [2017] SGCA 51 at [67] where the Court of Appeal, albeit by way of obiter dicta, took the view that the votes of related party creditors should be wholly discounted[12]. In the Court of Appeal’s view, this was because the exercise of determining an appropriate partial discount is inevitably arbitrary and subjective, and not amenable to definitive guidance. It therefore remains to be seen whether the Court of Appeal will relook the issue of whether there can be a partial discount to votes where there are private interests in play. Where the Court deems the creditors to be improperly classified, it then refuses to sanction the scheme. However, if their private interests do not warrant certain creditors being placed into a separate class, how then are their votes dealt with? In its final analysis, it does appear that the Court in Re DSG concluded that the statutory majority requirements were not satisfied had the creditors been classified properly[13]. In other words, Allington should have been placed into a separate class because of its private interests.

Conclusion

Even though the Court in Re DSG refused to sanction the scheme, it is unlikely that this decision will result in a negative perception of the pre-packaged scheme process in Singapore. In fact it fortifies the view that Singapore Courts will not allow the integrity of this highly effective restructuring mechanism to be compromised. Indeed, the quid pro quo for invoking the court’s scheme jurisdiction is nothing less than utmost candour[14].