Pre-pack Schemes: Singapore Perspective - Lessons after 5 Years
By David Chew (Partner, DHC Capital)
What is a pre-pack?
A pre-pack generally refers to a restructuring that is pre-agreed between debtors and creditors and then implemented through a court insolvency process. Nonetheless, there are many forms of pre-packs around the world: from the pre-packaged reorganisation (or bankruptcy) existing in the United States to the pre-packaged administration (or sale of assets) found in the United Kingdom. Other countries, such as India, have also adopted other forms of pre-packs. The pre-pack should also be distinguished from a pre-negotiated reorganisation, where debtors do not formally solicit approval from the creditors before subjecting the plan to court approval.
Singapore context
Singapore introduced major reforms to its debt restructuring regime through the Companies (Amendment) Act 2017 which came into effect on 23 May 2017. These reforms, which were based on the US Chapter 11 regime, were introduced to support debtor-led restructurings through a “turbo charged” scheme of arrangement regime which included a pre-pack scheme mechanism that bypasses the requirement for scheme meetings to save time and costs (under Section 211I of the Companies Act (“CA”)).
The Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”), which was passed by the Singapore Parliament on 1 October 2018 and came into effect on 30 July 2020, is the latest major phase of reforms to carry to fruition Singapore’s ambition to become an international debt restructuring hub.
The IRDA consolidates Singapore’s insolvency laws for both personal bankruptcy and corporate insolvency under a single piece of “omnibus” legislation and incorporates the reforms that came into effect in May 2017, including the provisions relating to pre-pack schemes (under Section 71 IRDA).
The Pre-pack Scheme Provisions – Section 71
The pre-pack scheme provisions under Section 71(1) IRDA allows the Court to sanction a scheme of arrangement even though no meeting of creditors has been ordered by the Court (i.e. instead of two applications to Court, only one application for sanction).
The legal requirements for sanction of a pre-pack scheme are set out below:
• Information: Provide each creditor meant to be bound by the arrangement with a statement setting out information for the creditors to make an informed decision (Sections 71(3a) and 71(6) IRDA). Information to be provided includes:
- Information concerning the company’s property, assets, business activities, financial condition and prospects
- Information on the manner in which the terms of the arrangement will, if it takes effect, affect the rights of the creditor
- Such other information as is necessary to enable the creditor to make an informed decision whether to agree to the arrangement
- Any material interests of the directors of the company
- The effect that the compromise or arrangement has on those interests, insofar as that effect is different from the effect that the arrangement has on the like interests of other persons
• Notice: Publish a notice of application for pre-pack scheme in the Gazette, at least one English local daily newspaper and send a copy of the notice to the Registrar of Companies and to each creditor meant to be bound by the arrangement (Sections 71(3b) and 71(3c) IRDA)
• Creditor support: Court must be satisfied that had a meeting of the creditors been convened, a majority of the creditors, representing no less than three-quarters in value of debts owed, would have approved the scheme (Section 71(3d) IRDA read with Sections 210(3AB)(a) and (b) of CA)
Evolution of pre-pack schemes in Singapore – Case summary and key transaction features
Hoe Leong Corporation Ltd (SGX: H20) – January 2018
The pre-pack scheme was the first case under the CA and involved a moratorium application and terms which (i) restructured part of the bank debt, which was maintained on balance sheet and (ii) residual bank debt and shareholder debt converted to equity.
iflix Pte Ltd – January 2021
The pre-pack scheme was the first case under IRDA. The pre-pack scheme was unique in that a new Board was put in place with specialist Directors appointed to evaluate, execute and complete a distressed M&A transaction with a major Chinese tech company pre-launch of the scheme. This injection of funds from the sale and proceeds from other asset recoveries provided the basis for the cash distribution under the scheme terms.
The pre-pack scheme was accompanied by a parallel corporate voluntary arrangement (CVA) in Malaysia as part of a broader restructuring of the iflix Group.
PT MNC Investama Tbk (IDX: BHIT) – January 2021
The pre-pack scheme involved a moratorium application with substantial connection established via the US$231 million Notes listed on SGX. The scheme terms involved an exchange of Notes into new shares of BHIT or new Notes.
Viking Offshore & Marine Ltd (SGX: 1Y1) – May 2021
The pre-pack scheme involved a moratorium application and a recapitalisation and restructuring of 1Y1. The restructuring and recapitalisation involved (i) a new white knight equity investor, (ii) senior lender debt settlement and (iii) cash distribution and new shares of 1Y1.
Capital World Ltd (SGX: 1D5) – June 2021
The pre-pack scheme involved a moratorium application and terms which resulted in a full debt for equity conversion.
PT Modernland Realty Tbk (IDX: MDLN) – August 2021
The pre-pack scheme involved a moratorium application with substantial connection established via the Notes listed on SGX. The scheme terms restructured New York law governed Notes.
PT Pan Brothers Tbk (IDX: PBRX) – January 2022
The pre-pack scheme involved a moratorium in Singapore. The Indonesian Courts rejected the PKPU application filed by bank. The scheme obtained US Chapter 15 recognition.
Brightoil Petroleum (S’pore) Pte Ltd – February 2022
The pre-pack scheme involved a moratorium application and use of lock up agreement. This was the first case using a lock up agreement and the Court determined that use of lock up agreement does not fracture creditor class provided (i) the benefit must not be so sizeable, (ii) must be made available to all creditors and (iii) done bona fide.
Alpha DX Group Ltd (SGX: VVL) – October 2022
The pre-pack scheme involved a (i) cash distribution over 5 tranches and (ii) conversion of debt to new shares of VVL.
Lessons learned
We summarise the key lessons learned:
Speed and certainty
A pre-pack scheme saves time and costs (21 days to submit claims; no scheme meeting; 3 months overall timeframe). This preserves the going concern value of the debtor company by minimizing the time that the debtor company is under a formal scheme process.
A pre-pack scheme provides investors and other key stakeholders with certainty of completion via creditor lock up agreements (Brightoil case) or use of ballot forms.
Moratorium and recognition
A pre-pack scheme can be used in conjunction with a moratorium application to provide “breathing space” for the debtor company. Under IRDA, the moratorium has enhanced features including (i) extension of the moratorium to include both holding company and related / subsidiary companies, (ii) “in-personam” extra-territorial effect and (iii) applicable to foreign companies with “substantial connection” (MNC and Modernland cases).
The moratorium has cross-border standing with foreign acknowledgement of the Singapore moratorium (Pan Brothers case) and recognition of sanction order (Pan Brothers Chapter 15).
Flexible tool
A pre-pack scheme is a flexible tool that can accommodate multiple circumstances and situations. Deals can be structured in combination with other corporate actions – senior debt restructuring (Viking case), equity capital raise (Viking case), distressed M&A (iflix case), new Board / CRO / Interim management appointments (iflix case), parallel procedures in overseas jurisdictions (iflix case), super priority rescue financing and litigation funding.
Creditor support
Creditor support to demonstrate that had a meeting of the creditors been convened, a majority of the creditors, representing no less than three-quarters in value of debts owed, would have approved the scheme is an essential element to pass a pre-pack scheme.
The use of informal and formal creditor discussions / meetings to solicit creditor support and use of ballot forms has been used to demonstrate to the Court creditor support and engagement.
Possible alternatives to demonstrate creditor support include lock up agreements or restructuring support agreements.
Disclosure requirements
The provision of information to creditors is an essential element to pass a pre-pack scheme.
The Court in Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 observed that “material information” is required to be disclosed. The Court observed that “material information” is information that enables creditors to assess “whether the allocation of loss and the division of benefits is fair and in their commercial interests”.
Managing the delicate balance of sufficient information to assess and evaluate the scheme proposal versus disclosing commercially sensitive information will need to be carefully managed.
Proper creditor classification
The Court in Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 set out the factors to be considered in classifying creditors include (i) creditors rights and (ii) if the statutory thresholds are met, whether the creditors whose votes were solicited were fairly representative of the class of creditors taking into regard the creditors’ private interests.
Bona fides and deed poll
The Court in Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 set out that (i) pre-pack scheme be made bona fide and not to skirt around opposition and (ii) use of deed poll structure to consolidate or pool liabilities into one entity in a pre-pack scheme was acceptable if commercially necessary (Gategroup structure)
Limitations on use of cram downs
The cross-class cram down provisions under Section 70 IRDA are not available in a pre-pack scheme under Section 71 IRDA.