WhithertheSchemeofArrangementinSingapore:MoreChapter11,LessScheme? ∗
MengSengWEE ∗∗
1. Introduction
OftheformerEnglishcoloniesinAsia,Singapore’scorporateinsolvencylawisoneoftheclosesttothe
English. The provisions on liquidation and scheme of arrangement (henceforth ‘scheme’) in both
jurisdictionsarelargelysimilarandSingapore’sjudicialmanagement1(henceforth‘JM’)wasmodelledon
the administration in the Insolvency Act 1985. Further, there are also important similarities between
SingaporeandEnglandinthelegalandfinancialenvironmentswithinwhichtheirrespectiveinsolvency
laws operate. Their commercial laws are largely similar and both are important financial centres and
arbitrationcentres.Buttherearealsoimportantdifferencesbetweenthetwojurisdictions.Singapore
hasnoequivalenttotheEnglishcompanyvoluntaryarrangement(CVA)andunlikeEnglandadebenture
holderwithaglobalsecuritypackagecontinuestobeentitledtoappointareceiverandmanager.
The similarities and differences go a long way towards explaining the use of the scheme as a debt
restructuringtoolinthetwojurisdictionsoverthelasttwentyyears.Whiletheschemehasbeenused
mainly by large or very large companies in England to restructure financial debts,2in Singapore it has
beenusedwidelybylargeandmediumsizedcompaniestorestructurenotonlyfinancialdebtsbutalso
tradingdebts,becomingthemostpopularcorporaterescuetool.Singaporecourtsplayedaleadingrole
in that development, and developed a body of law which has transformed the scheme into a hybrid
regime where the existing management remains in office, but with insolvency practitioners assuming
keyfunctionsandthecourtexercisingsupervisorypowersandprovidingassistance.Untilveryrecently,
this direction was set to continue. The Singapore Government has accepted broadly the
recommendations from the Insolvency Law Review Committee (ILRC), which rejected adopting a US
Chapter11stylerestructuringbutproposedseveralreformstoscheme.Althoughsomeofthemwere
quiteradical,theycouldstillbeseenasdevelopingtheschemeorganically.
Since then, developments in the latter part of 2016 have rendered the future direction of scheme in
Singapore very uncertain. The same may yet happen in England. Both the Singapore and English
governmentshaveataboutthesametimeproposedadoptingsignificantelementsofChapter11which
would modify their rescue laws, including the law on scheme, directly or indirectly. The Insolvency
Thisdraftispreparedforthe12January2017conferenceonTheSchemeofArrangementasaDebtRestructuring
Tool,whichisjointlyorganisedbytheCommercialLawCentre,HarrisManchesterCollege,UniversityofOxfordand
theCentreforLaw&Business,NationalUniversityofSingapore.Pleasedonotcirculatewithouttheauthor’sprior
consent.
Faculty of Law, Centre for Law & Business, National University of Singapore. I thank Mr Lee Eng Beng SC
(managingpartner,Rajah&Tann)andmycolleaguesHansTjioandUmakanthVarottilfortheirhelpinwritingthis
paper, and for the research assistance rendered by the ever helpful librarians of the C J Koh Law Library. I am
especiallygratefultoAssociateProfessorCharlesQuofCityUforreadingthedrafts,thestimulatingdiscussionand
forsavingmefromseveralerrors.Theusualcaveatsapply.
1
ss227Ato227X.
2
Seeforeg,SarahPaterson,‘RethinkingCorporateBankruptcyTheoryintheTwenty-FirstCentury’(2016)36OJLS
697.
∗
∗∗
1
Servicepublishedadocument,AReviewoftheCorporateInsolvencyFramework,on25May2016,which
forconveniencewillbereferredtoastheEnglishReviewinthispaper.InSingapore,theCommitteeto
Strengthen Singapore as an International Debt Restructuring Centre (henceforth ‘Restructuring
Committee’)publisheditsreporton20April2016.ButwhilstimplementationoftheEnglishReviewhas
been put on hold because of Brexit, Singapore has moved ahead rapidly and is poised to enact the
reformsbythefirstorsecondquarterof2017.
ThestrikingfeatureinboththeEnglishReviewandSingaporereformsisthatwhilstthegovernmentsin
bothjurisdictionsdeclaredthattherestructuringlawsintheirrespectivejurisdictionswereperforming
well,theybelievedthatthelawswouldbeimprovedbyincorporatingsignificantelementsofChapter11.
Due to the significant differences between Chapter 11 and English-inspired insolvency laws, and
differences across a range of other matters such as the taking of securities, judicial attitudes in
insolvencycases,etc,thatinteresttomovetowardsChapter11deservesclosescrutiny.Itmaymarkthe
beginning of some kind of convergence towards Chapter 11 in Singapore and England if most of the
proposalsintheEnglishReviewareimplemented.
This paper has two purposes. It explains the reasons for the scheme’s transformation from a
cumbersome procedure to an efficient and effective debt restructuring tool in Singapore and
Singapore’scontributionstothelawonschemes.Thesecondpurposeistoevaluatetheproposalsto
reform the schemes in two rounds of consultations and the reforms in the draft Companies
(Amendment)Bill2016(henceforth‘AmendmentBill’).Itwillbearguedthatthemeasuresinthedraft
Companies(Amendment)Bill2017wouldmostlikelyusherinaperiodofuncertaintyoreveninstability.
ButitisnotpossibletopredicthowtheChapter11elementswouldtakerootinSingapore.
Thepaperisorganisedasfollows.Thesecondsectionprovidesanoutlineofthehistoryofthescheme
in Singapore from her independence in 1965. The third section explains the distinctive features of
Singapore’slawandpracticeonusingschemeasadebtrestructuringtool.Thefourthtosixthsections
evaluatethereformproposalsinthetworoundsofconsultationexercisesandtheamendmentsinthe
AmendmentBill.Theseventhsectionconcludes.
Unlessotherwisestated,allreferencesofstatutoryprovisionsaretoSingapore’sCompaniesAct(Cap50,
RevEd),andallreferencestotheCompanies(Amendment)Bill2017aretothedraftversionofthebill
publishedon21October2016forpublicconsultation.
2. ThedevelopmentofschemesinSingapore
(a) Thelegislation
TheschemeprovisionsinSingaporearecontainedinsections210to212oftheCompaniesAct.Section
210istheoperativesectiongivingthecourtpowertosummonmeetingsandsanctionschemes,whiles
211 stipulates the information that the company is required to provide to the creditors or members.
Section212givesthecourtpowertograntancillaryorderwheretheschemeisforthereconstructionor
amalgamation of companies. They are largely similar to the English provisions, but the following
differencesshouldbenoted.First,unders210(10)thecourtmay‘restrainfurtherproceedingsinany
actionorproceedingagainstthecompanyexceptbyleaveoftheCourtandsubjecttosuchtermsasthe
2
Courtimposes.’SingaporeadoptedthislimitedstayfromVictoria’sCompaniesAct1961.TheVictorian
stayprovisiontraceditsroottotheNewSouthWales’JointStockCompaniesArrangementAct1891,s3.
This provision was enacted in New South Wales to deal with a banking crisis3and it has a chequered
history.AlthoughitcouldconceivablyhavehelpedtodevelopadebtorinpossessionprocedureinNew
SouthWales,thatdidnothappen.ButinSingaporethestayhasbeenimportantinhelpingcompanies
gainabreathingspacetoproposeaschemeandcontributedtothescheme’spopularity.
Theseconddifferenceisthatunders210(4),thecourtinsanctioningaschememaygrantitsapproval
‘subject to such alterations or conditions as it thinks just’, which has no equivalent in the English
provisions.Thethirdandfourthdifferencescameaboutbecauseofarecentamendinglegislation.4It
providedthatthecourtmayprescribeadifferentmajoritythanamajorityinnumberfortheheadcount
test,althoughitmuststillrepresentthree-fourthsinvalue.5Theamendmentwasmeanttogiveeffectto
the recommendations of a committee appointed to review the company law6that s 210 should be
amendedtoenableholdersofunitsofsharesinacompanytobepartiestoascheme,andtogivethe
court a discretion to prevent a members’ scheme from being defeated by share splitting.7 However,
althoughtheintentionwastoamendonlythelawonmembers’schemes,theamendedprovisionsapply
equally to creditor scheme as well. Whilst there are strong arguments to reform or abolish the
headcounttestincreditorscheme,8thereshouldbedebateandconsultationbeforeadecisionistaken.9
The amending legislation also provided that where a company is in the course of being wound up, a
sanctionedschemewouldbebindingontheliquidatorandcontributoriesofthecompany.10Although
there seems to have been no reported case in Singapore of a company in liquidation entering into a
creditorscheme,itisnotthatuncommoninotherjurisdictions,11especiallyforinsurancecompanies.It
isveryhardtoseeanyreasonforrestrictingcreditorschemestocompaniesnotyetinliquidation.As
such,itseemsthatdraftingerrorcannotberuledout.
(b) Judicialguidance
3
SeeHansardXXX.
Companies(Amendment)Act2014,s135ands136.
5
Companies(Amendment)Act2014,s135,whichbecames210(3AB)(a),(b).
6
See Ministry of Finance, Report of the Steering Committee for the Review of the Companies Act: Consultation
Paper (June 2011), 3-35 to 3-38. See also the explanatory statement to the Companies (Amendment) Bill 2014,
317-318.
7
Ontheuseofsharesplittingordebtassignmenttosupportordefeatascheme,seeJenniferPayne,Schemesof
Arrangement:Theory,Structure&Operation(CUP,2014)64-66.
8
ibid.
9
Thisisnotanargumentagainstthereformoftheheadcounttest.
10
Companies(Amendment)Act2014,s135,whichbecames210(3AA)(a).
11
See for eg, Re Hawk Insurance Co Ltd [2001] EWCA Civ 241, [2001] 2 BCLC 480 (in provisional liquidation); Re
Sovereign Marine & General Insurance Co Ltd [2006] EWHC 1335 (Ch); [2007] 1 BCLC 228 (in provisional
liquidation);ReKempevAmbassadorInsuranceCo[1998]1WLR271.AspointedoutinJenniferPayne,Schemesof
Arrangement: Theory, Structure & Operation (CUP, 2014) 281 it is relatively common for schemes to be used
alongside liquidation, and often the purpose of adding a scheme to liquidation is to depart from the rules that
wouldotherwiseapplyinliquidation.
4
3
Schemes became popular in Singapore from around the mid-1990s. There were a few reasons for its
success.TheJMwasveryunpopular12andtherewasnopre-packJM.Therewasalsonothingsimilarto
theCVA.Ontheotherhand,theschemeofferedcompaniestheopportunitytorestructuretheirdebts
under the protection of a court granted stay. The courts have arguably stretched the limited stay in
some cases to give debtor companies a chance to propose a scheme.13In the early stages, the courts
have been very supportive by allowing meetings to be summoned even though the scheme proposal
was very sketchy. 14 The scheme also offered companies great leeway to negotiate commercially
acceptablesolutionsondebtrestructuring;foreg,theparipassurulewasheldnottoapplyinscheme.15
Directorswerealsoattractedtouseschemes.Notonlywastherenoautomaticdisplacementofexisting
management,theschememaybeusedtowaiveguaranteesthatthedirectorshavegiventothescheme
creditorstosecurethecompany’sdebts.16
Thesuccessofschemeshowsthat,intheabsenceofsuitableprocedures,inparticularpre-packagedJM,
insolvency practitioners and insolvency lawyers, under the guidance and support of the courts, have
beeninnovativeinrespondingtomarketpressuretodevelopaprocedurewhichwaspreviouslyviewed
ascumbersomeandcostlyintoahighlyeffectiveandefficientdebtrestructuringtool.Atthesametime
thecourtshavesoughttoprotectthecreditors,bothbetweenthecreditorsasagroupandthecompany,
and also intra-creditors. The courts have strengthened the role of the scheme manager, which is the
person administering the scheme after it has been sanctioned, given themselves more scope to
intervene even after sanction has been given, and required the provision of sufficient information to
creditors.
The scheme’s success shows the inherent flexibility of Singapore’s corporate insolvency law, the
developmentoftherescuecultureinSingaporeandthepressureofmarketforces.Althoughtheformal
features of Singapore’s corporate insolvency law may be said to be creditor friendly (a more accurate
description is secured creditor friendly),17rescue of viable businesses are possible and have become
12
ForafullaccountofJM’sexperienceinSingapore,seeILRC,FinalReport,82-88.
The wording in s 210(10) suggests strongly that the court may only stay proceedings in an action which has
alreadybeencommencedagainstthecompany,andthatwassoheldinReReidMurrayAcceptanceLtd[1964]VR
82.Itisalsoarguablethatacompanymayonlyapplyforastayatthesametimeasorafterithasappliedtocourt
for an order to convene the creditors’ meeting to vote on the scheme (ie, application for the first hearing). But
Singaporecourtshavegrantedastayofallproceedingsagainstthecompanyinanexpartehearing,andbeforethe
companyhasappliedforthefirsthearing.Fortheformersee,foreg,ReEconCorpLtd[2003]SGHC288,[2004]1
SLR273,[9]whereLaiSiuChiuJsaidthatsuchanorderwasmadewhenKanJorderedthecreditors’meetingtobe
held.Forthelatterandageneraldiscussionofs210(10),seeReConchubarAromaticsLtd[2015]SGHC322.See
generally Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate Rescue Mechanism: The Singapore
Experience’(2009)18InternationalInsolvencyReview37,42-43.
14
FromconversationwithMrLeeEngBeng,SC.
15
HitachiPlantEngineering&ConstructionCoLtdvEltracoInternationalPteLtd[2003]SGCA38,[2003]4SLR384,
[84]-[85].
16
DaewooSingaporePteLtdvCELTractorsPteLtd[2001]4SLR35.
17
UnlikeEngland which hasvirtually abolished the administrative receivership,adebentureholderwith a global
securitypackageisentitledunderSingaporelawtoappointareceiverandmanager,andmayvetoanapplication
tocourtforaJMorder:s227B(5).OntheILRC’srecommendationthisvetopowerwouldberestrictedunderthe
AmendmentBill.SeetexttofnXXX.
13
4
more prevalent. Like England, Singapore has succeeded in striking a fair balance between ‘creditor
friendly’and‘debtorfriendly’approachestorestructuringandinsolvency.
(c) Reviewandreforms
The ILRC was appointed in November 2010 to review Singapore’s existing bankruptcy and corporate
insolvencyregimesgenerallyandtoadviseonmeasurestomoderniseandunifytheregimesinasingle
pieceoflegislation.InreviewingtheJMandthescheme,theILRCconsideredbutintheendrejected
adopting the US Chapter 11 as US laws and conditions were very different. As stated earlier, it
recommendedthattheJMandtheschememaybeimprovedthroughorganicdevelopment,bydrawing
onestablisheddoctrinesandaddressingdeficienciesthathavesurfacedinpractice.
While the Government was drafting a new Insolvency Act to implement the ILRC’s recommendations
which it has largely accepted in May 2014, it appointed the Restructuring Committee in May 2015 to
recommend initiatives and/or legal reforms that should be undertaken to enhance Singapore’s
effectivenessasacentreforinternationaldebtrestructuring.18TheGovernmentwasoftheviewthat
Singapore was well placed to serve the region’s increasing need for the restructuring of cross-border
debts.19 The Restructuring Committee adopted a very different approach to that of the ILRC. It used
Chapter11astheblueprinttorecommendreformstoschemeandtoalesserextent,JM.Althoughthe
reasonsfortheimportationofChapter11aresomewhatdifferentfromthatinEngland,wherebyamain
driver was to improve England’s position in the World Bank’s annual Doing Business Report,20both
governmentsweredrivenbythedeterminationtogrowthedebtrestructuringindustryandtheneedto
keep up with external developments, rather than addressing the weaknesses of their respective debt
restructuringregimes.
3. Ahybridproceeding
(a) Barestatutoryframework
Astrikingfeatureofthelawonschemeisthatitcontainsthebarestminimumofstatutoryprovisions
andnosubsidiarylegislation.First,theprovisionsgiveverylittleguidanceontheextentthatacompany
is required to disclose to the creditors regarding the company and the proposed scheme.21 A critical
feature of the scheme process is its reliance on creditor evaluation and majority consent within each
classasameansofresolvingthecomplexwebofconflictinginterestsandassessmentsofthecompany’s
valueatstake.Itisclearlyinsufficientforthestatutetostipulateonlythatthecompanyisrequiredto
explaintheeffectoftheschemeandtostateanymaterialinterestsofthedirectorsandthetrusteefor
thedebentureholdersthatdifferfromtheothersvotingonthescheme.22
18
ReportoftheRestructuringCommittee,Introduction.
ReportoftheRestructuringCommittee,Chapter2.
20
EnglishReview,[2.3].
21
SeeTraceyEvansChan,‘SchemesofArrangementasaCorporateRescueMechanism:TheSingaporeExperience’
(2009) 18 International Insolvency Review 37, 50-53 for an excellent discussion on the dynamics involved in
disclosure.
22
s211(1),(2).
19
5
Secondly, the provisions make no mention of the financial advisers, accountants or insolvency
practitionerswhowouldusuallyhavetobeengagedbythecompanytoadviseonthedebtrestructuring
andadministertheschemeafterithasobtainedcourtsanction.Thisisagovernanceissue,whichisless
ofaproblemwherethecompanyislargeandthecreditorsarelargefinancialinstitutionsorhedgefunds.
Althoughtheexistingmanagementmayremaininoffice,thecompany’sgovernancewouldhavebeen
subjecttothecontractsbetweenthecompanyandthecreditors,andinanyeventthecreditorsarealso
able to look after their own interests. But where the company is small or relatively small and the
creditorsarenumerousandconsistofsmalltraders,thosefactorswherebythecreditors’interestsare
protected are absent. The risks that the existing management will act in ways detrimental to the
creditors’interestsarefurtherexacerbatedbythestayonproceedingsagainstthecompanyins210(10).
Thirdly,thereisnoruleonhowtheproofofdebtsforthepurposesofvotingontheschemeshouldbe
conducted,eventhoughthequestionofwhethertherequisitemajoritiesinfavouroftheschemehave
beenobtainedrestsonit.
In pointing out the above, this writer is not suggesting that they necessarily represent gaps in the
legislation. If the creditor scheme is used predominantly as providing statutory support to enable a
majority of creditors to bind a minority to a debt restructuring plan,23as in England, it would or may
make sense not to legislate on those things. But when the scheme begins to be used by smaller
companies and takes on more colour as an insolvency proceeding, as has happened in Singapore, the
inadequacies of the legislation become apparent. The different uses of the scheme in England and
Singapore accounted for the different focus of their respective case law on scheme. English law has
tendedtofocusonverytechnicalaspectsoftheschemeprovisions,suchasthemeaningofkeyterms,
the classification of creditors and valuation, and cross-border issues, reflecting London’s role as an
international debt restructuring centre, while governance issues have rarely been raised. In contrast,
governanceissuesinschemehavefeaturedprominentlyinSingaporecaselaw.
FromSingapore’sperspective,therefore,theaboveaspectsoftheschemelegislationrepresentedgaps
inthelegislation.Moreover,theyreinforceeachotherinpracticetherebymagnifyingtheimpactofthe
gaps. Take the case of voting on the scheme, which is the most important element on whether it
becomesbindingonthecompanyandthecreditors.Theoutcomeofvotingdependsonwhichproofof
debts were admitted or rejected. In practice, the company will engage an insolvency practitioner to
adjudicateontheproofs.Itwillbeconvenienttorefertothispersonastheadjudicator,sincethisisthe
termusedintheAmendmentBill.24
The gaps in the legislation mean that there is very little protection of the creditors’ interests in the
voting process. The adjudicator, being appointed by the company, would tend to look after the
company’sinterest.Thelackofrulesontheproofofdebtsgivestheadjudicatorroomtomanipulatein
the company’s interests, by for example being lenient with suspicious proofs submitted by internal
creditors but strict or even harsh with proofs of external creditors. This is compounded by the
23
ThiswashowthecourtconceivedtheschemeinReNorfolkIslandandByronBayWhalingCoLtd(1969)90WN
(Pt1)(NSW)351,354.
24
Proposeds211F(5).
6
legislation’s failure to provide the creditors with any recourse to bring a personal action against the
adjudicatorformisconduct.Thisstateofaffairsisnotconducivetomaintainingthecreditor’strustin
theintegrityofthevotingprocess,andatatimewhentrustintheproceedingiscrucialtothesuccessof
the scheme. The trust deficit, in turn, may cause the creditors to question the adjudicator on his
decisions more aggressively, and to request to see the proofs of debt submitted by internal creditors.
But as the legislation provides so little guidance on what the company is required to disclose to the
creditors, it is an open question whether the adjudicator has to accede to any such request. The
uncertaintyonthelevelofdisclosuremayleadtoagenerallackoftransparency,andadownwardspiral
intherelationshipsbetweenthecompanyanditscreditors.
(b) Measurestoenhancegovernance
Singaporecourtshavedevelopedprinciplesandrulestodealwiththeaforesaidgapsinthelegislation.
SomeofthesehavesinceledtofurtherdevelopmentsasenactedintheAmendmentBill.Forexample,
substantial guidance was given in the first two cases concerning TT International25on the conduct of
proofofdebtsandthedutiesoftheadjudicatorandschememanager.TheILRCdevelopedtheruleson
proofofdebtsfurtheranditsrecommendationshavebeenenactedintheAmendmentBill.26Although
the ILRC did not recommend legislating on the duties of the adjudicator and scheme manager, the
judicialdevelopmentshaveneverthelessfoundtheirwayintotheAmendmentBillwhichacknowledged
the two positions. It defined the adjudicator as the person who is nominated by the company to be
appointed as the chairman of the creditors’ meeting, and who is responsible for adjudicating on the
proofsofdebtsubmittedbythecreditors,27andtheschememanagerasthepersonappointedbythe
companytoadministerthescheme.28
The judicial developments have helped to develop Singapore’s scheme as a hybrid insolvency
proceedinginthreeways:enhancingdisclosureandtransparency,takingnascentstepstocreateanew
office,andstrengtheningcourt’spowersofsupervisionandassistance.
Disclosureandtransparency
InWahYuenElectricalEngineeringvSingaporeCablesManufacturers,29theCourtofAppealheldthat,
asidefromstatutoryauthority,itisanindependentprincipleoflawthatthecreditorsshouldbeputin
possession of such information as is necessary to make a meaningful choice.30In TT International (No
2),31thisbasicprincipleondisclosurewasexpandedslightlysothat
scheme creditors are rightfully entitled to expect to receive accurate information which would
allowthemtomakeaholisticassessmentastowhethertheproposedschememanagerand/or
25
TheRoyalBankofScotlandNVvTTInternationalLtd(No1)[2012]SGCA9,[2012]2SLR213;
SeetexttofnXXX.
27
Proposeds211F(5).
28
Proposeds211J(5).
29
[2003]SGCA23,[2003]3SLR629.
30
ibid,[24].
31
TheRoyalBankofScotlandNVvTTInternationalLtd(No2)[2012]SGCA53,[2012]4SLR1182
26
7
theproposedtermsoftheschemeareappropriatefortheCompanybothintheshortandlong
run.32
Butwhileitisnotdifficulttounderstandthebasicprincipleondisclosure,itisanotherthingapplyingit
where the facts are hotly disputed. It can be seen from the cases where the creditors complained of
insufficient disclosure that creditors evaluating a proposed scheme are usually concerned with two
common issues.33 The first is the evaluation of the company’s business or business with a view to
assessing whether the proposed scheme is in their interests.34 The second is the phenomenon of
woodwork creditors and related party debts. The origin and quantum of the debts might be
unsubstantiated or suspect.35 The difficulty facing the court when the creditors and the company
disagreeonwhetherthecompanyhasprovidedthecreditorswithsufficientinformationonthosetwo
issues is that there is usually no clear yardstick which the court may use to reach a decision. For
example,intheWahYuencase,theopposingcreditorarguedthattheinternalcreditorsshouldnotbe
allowed to vote as it was impossible to verify the extent of their claims or even whether they were
creditorsontheavailableinformation.TheCourtofAppealagreedthattheconcernswerejustified,but
decidednottoruleonit,onthegroundthattherewasifitwereaconditionprecedentthatacompany
hadtosatisfyeachcreditorofthegenesisandextentofallofitsdebtsbeforetheschemecouldbeput
tothevote,theentireprocesswouldbecumbersomeandadministrativelyinconvenient.36Thereason
givenwassomewhatpuzzlingsincetheissuewasnotaboutsatisfyingallcreditorsoftheirdoubtsbut
whethertherewassufficientmeritintheopposingcreditors’challengewhichthecompanyhasfailedto
addressandthusthevotesoftheinternalcreditorsshouldeithernotbecountedinthecomputationof
themajority,orbediscountedbythecourtintheexerciseofitsdiscretion.Nevertheless,itshowsthe
difficultyacourtmayfacewhenaskedtodecidewhethersufficientdisclosurehasbeenmade.
Thecourtshaverespondedtothedifficultyintwoways.First,itdevelopedbrightlineruleswherethe
testsmaybeappliedreadily.Thebestexampleisprobablytherulethatwhereaschemeinvolvesan
insolventcompany,enoughinformationmustbegiventothecreditorsforthemtoassesswhetherthe
returns under the proposed scheme would be greater than what they could expect in an insolvent
liquidation,37or perhaps the rescue procedure the company would enter into if the scheme was not
approved.38TheCourtofAppealinWahYuenarticulatedtheruleandusedittoupholdthetrialjudge’s
refusal to sanction the scheme. Another example is the rule that a contingent liability ‘which would
32
ibid,[21](emphasisoriginal).
Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate Rescue Mechanism: The Singapore Experience’
(2009)18IIR37,50.
34
Foreg,asin Wah Yuen Electrical Engineering v Singapore Cables Manufacturers ]2003] SGCA 23, [2003] 3 SLR
629;ReEconCorpLtd[2003]SGHC288,[2004]1SLR273.
35
Foreg,seeWahYuenElectricalEngineeringvSingaporeCablesManufacturers]2003]SGCA23,[2003]3SLR629,
[15].
36
ibid,[18].
37
WahYuenElectricalEngineeringvSingaporeCablesManufacturers]2003]SGCA23,[2003]3SLR629,[37].
38
ReEconCorpLtd[2003]SGHC288,[2004]1SLR273,[83].
33
8
meaningfullyaffecttheamountthatschemecreditorsboundbytheSchemecouldultimatelyrecover’39
shouldbedisclosed.Thisisderivedfromthebroaderrulethat
“material information” which had to be disclosed connoted information relating to the
commercialviabilityoftheimplementationoftheschemeasawhole,inordertoallowcreditors
to make a holistic assessment as to whether the proposed scheme manager and/or the
proposedtermsoftheschemewereappropriatefortheCompany.40
Butwhilebrightlinerulesdelivercertaintyandpredictability,theylackflexibilityandmayleadtoharsh
or unfair outcomes. In Wah Yuen, the Court of Appeal held that the company’s failure to provide
auditedaccountsmeantthatthecreditorscouldnotassesswhetherthereturnsintheproposedscheme
would be more than the returns in an insolvent liquidation. To require that audited accounts must
alwaysbegiven,regardlessofthesituation,ishowevertoorigid.41
Regardless of broad principle or specific rules, their major drawback is that creditors have to expend
timeandcoststoinvokethem.Theydonotontheirowndeliverconsistentandrealisticprotectionto
the creditors. It has been explained above that the issues arising from the gaps in the legislation are
intimately connected. The crux of the issues is the corporate governance of the company while it is
negotiating a scheme and after the scheme has been sanctioned, its implementation. The company’s
existingmanagementcontinuestomanagethecompany,unlessdisplacedattheinsistenceofpowerful
creditors.Butthemanagementmaybethereasonforthecompany’scurrentdirestate,orcontributed
substantially to it. Creditors who are suspicious of the management’s competence or even good faith
mayratherpreferlettinganinsolvencypractitionermanagethecompany.Practitioner-in-possession,in
anyevent,isthemainstayofSingapore’scorporateinsolvencylaw.Further,thestayins210(10)prefers
theinterestsoftheshareholdersandthemanagementoverthecreditorsasthecreditors’enforcement
rightsaresuspendedwhilethecompanyisenabledtocontinuetradingwhereitotherwisemaynothave
beenabletodoso.
The courts have very recently seized the opportunity to lay the groundwork for a more effective
governancestructuretoprotecttheinterestsofthecreditors.Thisisdoneprimarilybyimposingduties
ontheprofessionalsappointedtoassistthecompany,andbyregulatingthefeestheycharge.
Nascentstepstocreatinganewoffice
Since the scheme legislation does not even acknowledge the existence of the professional advisers,
these appointments are entirely contractual and vary from case to case. The court may conceivably
impose requirements when it hears the company’s application for an order to summon the creditors’
meeting, but it is not known whether that has been done and the extent thereof. It seems the usual
practiceistoappointaninsolvencypractitionertoadjudicateontheproofsofdebt,chairthecreditors’
meeting and implement the scheme after it has been sanctioned, and appoint the person’s firm or
39
TheRoyalBankofScotlandNVvTTInternationalLtd(No2)[2012]SGCA9,[2012]2SLR213,[21].
ibid.
41
Tracey Evans Chan, ‘Schemes of Arrangement as a Corporate Rescue Mechanism: The Singapore Experience’
(2009)18IIR37,51.
40
9
company as the independent financial advisor to formulate the scheme and negotiate with the
creditors.42 This paper will not coin a separate term for the independent financial advisor performing
thosefunctions,butrefersimplytothatastheadjudicatorformulatingthescheme.
In TT International (No 1),43the creditors disputed several of the adjudicator’s decisions on proofs of
debt. In addition to laying down rules governing proofs of debt, the Court of Appeal also took the
opportunity to examine the functions of the professional advisers. The Court held that the duties
evolvedduringthedifferentstagesofthescheme.Theadjudicatorinformulatingtheschemeowesa
dutyofgoodfaithtothecompanyandthebodyofcreditorsasawholeandmustnotmisleadcreditors
or suppress material information from them. They must act fairly and in an independent manner in
dischargingtheirduties,andmustneverfavourtheinterestsoftheirappointersoverthatoftheother
legitimate claimants to the company’s assets.44 Next, the duties are amplified when the adjudicator
adjudicatesontheproofsofdebt.Holdingthatthosefunctionsaresimilartothatoftheliquidatorand
judicialmanager,theCourtheldthatanadjudicatorinthisquasi-judicialroleowesdutiestobeobjective,
independent,fairandimpartial.45Further,againdrawingontheofficeofliquidatorasacomparator,the
Court held that, after the scheme has been sanctioned, ‘the proposed scheme manager’s duties to
administer the approved scheme take on a fiduciary nature upon his appointment as the scheme
manager.’46Finally,theCourtalsoheldthata‘proposedschememanagerisinapositionofconflictof
interest when he without good reason aligns his interests with those of the company’.47Although a
proposed scheme manager is ‘inherently in a position of conflict’,48since his remuneration depends,
inter alia, on successfully resuscitating the company, he must ‘nevertheless, seek to strike the right
balance and manage the competing interests of successfully securing the approval of his proposed
schemeanduncompromisinglyrespectingtheproceduralrightsofallinvolvedintheschemeprocess.’49
The above propositions may be seen as an innovative attempt to create a new office of
adjudicator/schememanager.Wherethecreditorsaretoodispersedandunabletoprotectthemselves,
the duties imposed on the adjudicator/scheme manager would serve to strengthen corporate
governanceinschemeandprotecttheinterestsofthecreditors.Thatsomesuchofficeisrequiredcan
beseenfromthestrongsupportforgreatercreditorprotectioninthefeedbacktotheEnglishReviewon
thestandalonemoratoriumproposal.50
Butwhilethereismarketpressureforthecreationoftheoffice,thedoctrinalfoundationofthreeofthe
propositionstheCourtofAppeallaiddowninTTInternational(No1)areuncertain.TheCourtdidnot
explain the source of the duty of good faith the adjudicator owes to the creditors in formulating the
scheme,orwhytheofficeoftheschememanageris,presumablyvis-à-visthecreditors,afiduciaryone.
42
ThatwaswhattookplaceintheschemeofTTInternational.SeethediscussionintexttofnXXX.
TheRoyalBankofScotlandNVvTTInternationalLtd(No1)[2012]SGCA9,[2012]2SLR213.
44
ibid,[74].
45
ibid,[75].
46
ibid,[76].
47
ibid,[52].
48
ibid,[77].
49
ibid.
50
SeetexttofnXXX.
43
10
Itishardtosupportthepropositionsbyrecoursetoexistingdoctrines.Thedifficultiesinturncastdoubt
onthepropositionsregardingconflictofinterest,sincetherewouldbenoconflictofdutyandinterestif
thebetterviewisthattheadjudicator/schememanagerdoesnotowethedutyofgoodfaithorfiduciary
dutiesasheldbytheCourt.Butthedutyimposedontheadjudicatorwhenadjudicatingproofsofdebt
standsonfirmerground.Sincethefunctionisundoubtedlyquasi-judicial,itwouldfollowfromgeneral
principles that the adjudicator owes a duty to be objective and impartial to the creditors who have
submittedtheirproofsofdebt.
Thecourtshavealsosoughttoexercisecontrolovertheadjudicator/schememanagerbyregulatingthe
feescharged.Itseemsacommonpracticeforthefeestobecomputednotonlyontimecostsbutalso
toincludeavalueaddedfee(VAF)whichisdependent,interalia,ontheamountofdebtsowedtothe
creditorsthatarewaived,extinguishedorconvertedintoequity.51InTheRoyalBankofScotlandNVv
TTInternationalLtd(No2),52thequantumoftheVAFwasestimatedtobeintheregionofsome$15m
to $30m.53It only came to light two years after the sanction of the scheme, because the scheme
manager was an excluded creditor and thus not part of the scheme, and the company refused to
respond to the creditors’ request for information on the fees of the scheme manager. The Court of
Appeal held that the VAF was a contingent liability of the company, and in view of its potentially
enormous impact on the company’s financial position, was material information which should have
been disclosed to the creditors so that they could assess the proposed scheme holistically when
exercisingtheirvotes.Thecompanyandtheschememanagerhavebreachedtheirrespectivedutiesof
disclosure when they failed to disclose its existence. The Court held that it would have set aside the
schemeandorderedafreshvote,butbecausetheschemehasbeenimplementedformorethantwo
years,itwasnotpracticaltosetitasidewithoutcausingmoreharmtothecompanyandthecreditors.54
Hence it ordered that the scheme manager, the company and the monitoring committee of the
creditors should endeavor to reach an agreement as to what ought to be the proper fees due to the
scheme manager, and that if the parties fail to agree, the fees would be assessed by a High Court
judge.55
ThedecisioninTTInternational(No2)raisesdifficultquestionsonthejurisdictionandpowerofacourt
tomakeordersaffectingtheschemeafterithasbeensanctioned,whichwewouldconsidershortly.As
schememanagersareusuallyinsolvencypractitioners,itiseasywhenthetopicoftheirfeescomeupto
compareitwiththefeeschargedbyliquidatorsandjudicialmanagers.Butunlikealiquidatororjudicial
managerwherestatuteortheinherentjurisdictionofthecourtprovidesthebasistoregulatethefees
charged, it is extremely hard to find any basis to regulate the scheme manager’s fee. The Court of
Appealnavigatedaroundtheproblembyeffectivelymandatingthattheschememanager’sfeeshould
51
TheRoyalBankofScotlandNVvTTInternationalLtd(No2)[2012]SGCA9,[2012]2SLR213,[12].
[2012] SGCA 9, [2012] 2 SLR 213. The VAF was payable not to the scheme manager, but rather the company
ownedbytheschememanager,butastheCourtofAppealconsideredthispointtobeirrelevanttoitsdecision(at
[27]),thispaperwillglossoverthedifference.
53
ibid,[6].
54
ibid,[33].
55
[ibid],[34]-[35].
52
11
bedisclosedtothecreditorsandthecourtpriortothesanctionofthescheme,evenwherethescheme
managerisnotapartytothescheme.56
Court’sjurisdictionandpowertosetasideoramendscheme
In The Oriental Insurance Co Ltd v Reliance National Asia Pte Ltd,57the Singapore Court of Appeal
allowedanapplicationbyOrientalInsuranceCoLtd(‘OrientalInsurance’)foranextensionoftimetofile
aproofofdebtunderasanctionedscheme.ThecourtrefusedtofollowthestrictapproachofthePrivy
CouncilinKempevAmbassadorInsuranceCo,58whichreflectedtheEnglishpositionthatitwasstatute,
notacourtorder,whichgavebindingforcetoascheme.Consequently,thecourt’sinherentjurisdiction
toamendaschemewasverylimited.Whileacourtcouldcorrectanobviousmistake,itcouldnotalter
thesubstanceoftheschemeandimposeanarrangementonthecreditorstowhichtheyhadnotagreed.
ThePrivyCouncilinKempeheldthatthetimelimitsintheschemetofileaproofofdebtwereoneof
substance.59 To allow deadlines to be extended would be a material alteration, detracting from the
certaintyandexpeditionwhichwerethechiefobjectsofthescheme.
The approach in Kempe was held to be unnecessarily strict and mechanical in Oriental, which was
concerned that it may lead to unjust results. The Court of Appeal examined Australian cases and
preferredtheirreasoningthataschemeoperatedasanorderofcourtinsteadofastatutorycontract.60
Itcharacterisedanextensionoftimeasaproceduralmatterandexaminehowitsdiscretionshouldbe
exercised.61 On the facts, not only would there be no prejudice to the company or the other scheme
creditorsiftheapplicationwasallowed,butthecompanywouldbeprejudicediftheapplicationwasnot
granted.
The different judicial attitudes in Kempe and Oriental Insurance show that Singapore courts prefer a
moreflexiblejurisdictiontoamendaschemewherethematterisproceduralandwherejusticerequires,
eventhoughthatmayimpingeonthecertaintyandfinalityofschemes.ButinTTInternational(No2),
theCourtofAppealassumedamuchgreaterjurisdictiontoamendaschemewhenitheldthatitwould
havesetasidetheschemeonaccountofthenon-disclosureoftheschememanager’sVAFbutforthe
concernthatdoingsowouldcausemoreharmtothecompanyandthecreditors.InTTInternational(No
3),62anotherdifferentlyconstitutedCourtofAppealrefusedanapplicationtosetasidethedecisionin
TTInternational(No2).ItheldthattheearlierCourtofAppealcouldhaverescindeditssanctionofthe
scheme on the basis of the non-disclosure of the VAF.63 The reason is that ‘should new facts emerge
which cast doubt on the validity of the scheme’s sanction, the court has the authority to determine
whether those new facts should have any effect on the scheme.’64But the Court acknowledged that
56
AsrecognisedinKaoChai-ChauLindavFongWaiLynCarolyn[2015]SGHC260,[2016]1SLR21,[A.35].
[2008]SGCA18,[2008]3SLR121.
58
[1998]1WLR271.
59
ibid,276.
60
TheOrientalInsuranceCoLtdvRelianceNationalAsiaPteLtd[2008]SGCA18,[2008]3SLR121,[61]-[69].
61
ibid,[65].
62
TheRoyalBankofScotlandNVvTTInternationalLtd(No3)[2015]SGCA50,[2015]5SLR1104.
63
ibid,[113].
64
ibid,[112].
57
12
therewasforceincounsel’sargumentthattheeffectoftheorderoftheearlierCourtofAppealthatthe
partiesshouldreachanagreementonthefeefailingwhichitwouldbetaxedamountedtoarewritingof
thesubstanceoftheschemebythecourt,andthatthecorrectordertomakewastorescindthescheme
andleftittotheschemecreditorstovoteonanewscheme.65
TTInternational(No2)andTTInternational(No3)havethepotentialtoimpactonthefinalityofscheme
significantly. It is established law, which was accepted in Oriental Insurance, that once a scheme has
becomeeffectiveandisbindingonthepartiestoit,itcannotafterwardsbealtered,exceptwhereitis
pursuanttoamendmentprovisionswithintheschemeitself,66orwherethecourtexercisesitsinherent
jurisdiction in limited circumstances, for example, if consent to the scheme was obtained by fraud or
where there are obvious mistakes in the documents setting out the scheme.67Although the Court of
Appeal in TT International (No 3) sought to soften the impact by suggesting that the proper order to
makewaslimitedtorescindingthescheme,thisisstillamajorinroadintothefinalityofscheme.
4. FirstroundofproposedreformsfromtheILRC
ILRC recommended several measures to improve the workings of schemes, as part of the efforts to
improve rescue laws. It noted that schemes were used not only by insolvent companies for debt
restructuringbutalsobycompaniesthatwerenotinfinancialdistressforcorporatetransactions.68Thus,
itrecommendedthattheschemesectionsshouldremainintheCompaniesAct,butwherethecompany,
itscreditorsormembersappliedforamoratorium,additionalprovisionsintheproposedInsolvencyAct,
whichwouldhouseindividualbankruptcyandcorporateinsolvencyinoneActforthefirsttime,would
apply.69Notehoweverthatthisisnotacompletestatement,ascramdownandotherrecommendations
wouldalsoapplytoacreditorscheme.Nomentionwasmadeofs210(10),butitwouldbestrangeto
leave this in the Companies Act. Various issues arise from amending the scheme provisions to cater
specificallyforschemeasadebtrestructuringtoolwhichwewillexaminebrieflyunderwelookatthe
AmendmentBilllater.
(a) Moratorium
Unlike England where schemes are used mainly by large companies to restructure financial debts,
schemesareusedinSingaporebylargeandsmallercompaniestorestructurebothfinancialandtrading
debts.70 There is greater need for a moratorium while the company negotiates on the terms of the
65
ibid,[194],[195].
ReCapeplc[2006]EWHC1316(Ch),[2007]2BCLC546,[72]-[73](latersanctioned,[2006]EWHC1446(Ch)).
67
FletchervRoyalAutomobileClubLtd[2000]1BCLC331(fraud);KempevAmbassadorInsuranceCo[1998]1WLR
271,276.
68
ILRC,FinalReport,139-140.
69
ibid,140.
70
See for eg, Wah Yuen Electrical Engineering v Singapore Cable Manufacturers [2003] 3 SLR 629; Hitachi Plant
Engineering v Eltraco International [2003] SGCA 38, [2003] 4 SLR 384; The Royal Bank of Scotland NV v TT
InternationalLtd(No1)[2012]SGCA9,[2012]2SLR213.
66
13
scheme.Drawingontheexperiencegainedfromtheoperationofs210(10),theILRCrecommendedthat
thestayshouldbebroadenedbutthiswouldbebalancedbysafeguardsforcreditors.71
TheILRCrecommendedthatthereshouldbeabroadermoratorium,notnarrowerthanthemoratorium
intheJM,whichthecourtwouldhavediscretiontoalterineachcaseaccordingtothecircumstances.
Further,unliketheexistinglawwhereanapplicationforastaymayonlybemadewhereascheme‘has
beenproposedbetweenthecompanyanditscreditorsoranyclassofsuchcreditors’,72anapplication
foramoratoriummaybemadewhenthecompanyhasanintentiontoproposeascheme.73Inarriving
atthoserecommendations,theILRCconsideredbutultimatelyrejectedtheoptionofanautomaticstay
arising on filing and appointing a supervisory trustee, similar to the position under Chapter 11, to
protect the interests of the creditors. It distinguished between the moratorium in JM and the
moratoriuminschemes.Thereisnodisplacementofmanagementinschemes,unlikeJM.Allowinga
moratoriumtoariseautomaticallywillbeunfairtocreditorsandpotentiallyleadtoabuse.Indeed,the
ILRCalsorecommendedincreasingcreditorprotectionduringtheinterimperiodbetweenanapplication
foraJMorderandthemakingoftheorderwhenaninitialmoratoriumisinplace.74
Toprotectcreditorsfrompossibleabuseofmoratorium,theILRCrecommendedtwosafeguards:75time
should stop to run with regards the application of avoidance provisions once any application for a
schemehasbeenfiledincourt,andacreditormayapplytocourttorestrictanydispositionofproperty
bythecompanyand/oranyactivitythatisnotcarriedoutintheusualcourseofbusiness.
(b) Measurestofillthegapsinthestatutoryframework
TheILRCrecommendedseveralmeasurestofillthegapsinthestatutoryframeworkonschemes.First,
itdevelopedtheruleslaiddowninTTInternational(No1)ontheproofofdebtsandrecommendedthat
legislationshouldbeenactedonthefiling,adjudicationandinspectionofproofsofdebts,whichwould
help to streamline the processes and promote transparency and fairness. Secondly, it recommended
that a statutory right should be given to the company, its creditors and scheme manager to apply to
courtfordirectionsonproceduralandimplementationissues,butnotsubstantiveorcommercialterms
ofthescheme.Thirdly,itrecommendedthatthecourtshouldbegivenapowertoorderare-vote.
ThefirstandthirdrecommendationshavebeenenactedintheAmendmentBillandtheywillbecomess
211Fand211GoftheCompaniesActrespectively.Butwithregardstothesecondrecommendation,the
scopeofs211Jismuchmorelimitedthanthatrecommended.Itappliesonlytoanapplicationtocourt
toreviewactsoromissionscommittedaftertheschemehasbeensanctioned.
Theaboverecommendationswereorganicdevelopmentsofthescheme.Buttherecommendationon
cram down was different. It was based on Chapter 11 and controversial. The ILRC decided against
71
ILRCFinalReport,140-143.
s210(10).
73
ILRCFinalReport,142.
74
ILRC,FinalReport,103-105.
75
ibid.
72
14
introducing a Chapter 11 style debtor-in-possession model in Singapore, but recommended adopting
someofitsfeatures.
(c) Powerofcourttocramdownadissentingclass
In view of modern reservations about the correctness of Re Tea Corporation,76which held that the
companymaycramdownaclasswhichhasvotedagainstthescheme,thepracticeinEnglandhasbeen
totwinaschemewithanadministrationinordertoovercomeobjectionsfromaclassofcreditorsthat
are out of the money.77 Although schemes have been proposed and sanctioned in JM,78 cramming
down a class of out of money creditors did not seem to be a reason for using that combination of
procedures. The status of the Re Tea Corp principle in Singapore is not clear. But the issue of
overcomingobjectionsfromoutofmoneycreditorswasnotlistedasoneoftheproblemsordrawbacks
ofschemes.
The main reasons given by the ILRC, when it recommended by a majority to legislate for a power to
cram down a class of dissenting creditors, were that this would reduce the excessive emphasis on
classification, and that it was needed to deal with creditors who were placed in a different class and
wereunreasonablyusingthistobargainformorerights.79Themajoritywasawarethatthiswouldraise
issues of valuation, and thought that if necessary, the court should be allowed to appoint a court
assessor or expert to assist in the matter. The Minority was concerned that, unlike the US which has
very developed methodologies for valuation, and is a large and developed economy which allows for
better comparative analysis, Singapore’s smaller economy may not allow for the same comparative
analysistobemade.
The reasons given by the majority are not convincing. It fails to take into account the developments
since the restatement of the test on classification in Re Hawk Insurance Co Ltd, 80 which has deemphasisedtheuseofclasstoprotecttheinterestsofcreditorswithnominallydifferentrights.81Butif
creditorsarestillplacedinadifferentclassundertheHawktest,itcouldhardlybesaidthattheabsence
of the power to cram down would allow ‘a minority of creditors to hold out for better returns by
threateningtovetoaschememerelybecausetheyformaseparateclass.’82EnglishlawandSingapore
lawhavedevelopeddifferentmethodologiesfromChapter11toachievefairnesstodifferentgroupof
creditors.WewillreturntothismatteragainwhenconsideringtheprovisionsintheAmendmentBill
whichhaveimplementedthisrecommendation.
76
[1904]1Ch12.
See for eg, Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [2010] 1 BCLC 338. For a fuller description, see Sarah
Paterson,‘BargaininginFinancialRestructuring:MarketNorms,LegalRulesandRegulatoryStandards’(2014)JSCLS
33
78
For an eg, seeHitachi Plant Engineering & Construction Co Ltd v Eltraco International Pte Ltd [2003] SGCA 38,
[2003]4SLR384;ChewEuHockConstructionvCPFBoard[2003]SGHC199,[2003]4SLR137.
79
ILRC,FinalReport,154-156.
80
[2001]EWCACiv241,[2001]2BCLC480,[23]-[52].
81
Gabriel Moss, ‘Hawk Triumphant: A Vindication of the Modern Approach to Classes in Section 425 Schemes’
(2002)15InsolvencyIntelligence41.
82
ILRC,FinalReport,156.
77
15
(d) Super-priorityforrescuefinance
The next feature of Chapter 11 that the ILRC recommended adopting was the grant of priority and
super-priority for rescue finance, but not super-priority lien. Priority and super-priority for rescue
financemeansthattherescueloanwouldrankaswhattheAmericanshavetermedanadministrative
expenseclaimandthetop-rankedclaimoftheadministrativeexpenseclaims,respectively.Thedoctrine
of administrative expense claims is the functional equivalent of the doctrines of liquidation expenses
and JM expenses. Super-priority lien means a security granted to the provider of rescue finance that
ranksequallyoraboveanexistingsecurityontheassetsofthecompany.
The ILRC noted that financing is often essential to the rehabilitation of a company, and ‘may in many
casesbeevenmoreessentialthanothertradedebtsorotherpost-commencementcontractsthatthe
insolvent company may enter into’.83 At the same time, it also noted that this may lead to costly
disputes,thatcourtsmayfacedifficultydecidingwhethertheproposedrescuefundingwouldbelikely
toaidthebodyofcreditorsratherthanprejudicethem,thattradeorothercreditorsmaybecomemore
waryofdealingwiththecompany,andthatSingaporedoesnothavethevolumeofcasestowarrantthe
establishment of debtor-in-possession financing departments within banks and financial institutions.
Balancingtheconflictingconsiderations,theILRCdecidedthatallowingsuper-priorityforrescuefunding
inschemesandJMwouldenhancetherescueoptionsavailabletothecompany.However,itdecided
against allowing super-priority liens. It is surprising that in recommending rejection the ILRC did not
expressanyconcernthattheavailabilityofsuper-prioritylienswouldimpactadverselyonthevalueof
security,andmaycausebankstoreducelendingandraisethecostofloans.
Although not entirely satisfactory, the ILRC’s recommendations may still be seen as an incremental
developmentbyrankingnewcreditaboveotherdebtsorclaimsincurredinJMorwhilethecompanyis
negotiatingascheme.Butthestepisbiggerinschemeasthereisnodoctrineofschemeexpensesto
beginwith.UnlikeEnglishlaw,thereisnostatutoryrankingofthevariousitemsconstitutingthecosts
andexpensesofliquidationorJM.ButtheRestructuringCommitteedisagreedandrecommendedthe
introduction of super-priority lien, which has been enacted in the Amendment Bill and which we will
examineshortly.
5. SecondroundofproposedreformsbytheRestructuringCommittee
TheRestructuringCommitteewassetuptoconsiderwaystostrengthenSingaporeasaninternational
debt restructuring centre. The influence of Chapter 11 on the deliberations of the Restructuring
Committeewassubstantial.Unfortunately,aswillbeseenshortly,therewaslittleconsiderationofhow
Chapter 11 would interact with the existing restructuring procedures, the broader commercial law,
lendingpractices,andjudicialapproachestoinsolvencyandcommercialdisputes.
Withregardstoschemes,theRestructuringCommitteerecommendedanautomaticmoratorium,superpriorityliensandpre-packagedschemes.Theseareverysignificantreforms,buttheyarenotall.The
Restructuring Committee also recommended a slew of other measures. Some relate to cross-border
83
ILRC,FinalReport,109.
16
insolvencies, such as adopting the UNCITRAL Model Law on Cross-border Insolvency and empowering
Singaporecourtstograntinpersonamworldwideinjunctiverelief.Othernotablemeasuressoughtto
enhancecasemanagement,dedicateabenchofSpecialistJudgestohearanddeterminerestructuring
cases, appoint international restructuring experts to augment the pool of local Specialist Judges, and
exhortingtheSpecialistJudgestotakeajudge-ledapproachtomanagingrestructuringcases.
6. AmendmentBill2017
Asmentionedearlier,theSingaporeGovernmentisintheprocessofdraftinganInsolvencyActtobring
together corporate insolvency and individual bankruptcy in one statute for the first time. As that is a
massive project requiring some time to complete, and the Government would like the ‘legislative
amendmentswhicharekeytoenhancingSingapore’scorporaterescueandrestructuringframework’84
tobeimplementedquickly,itdecidedtogoaheadwiththelatterwhiletheformerwasstillpending.A
draft bill, the Companies (Amendment) Bill 2017 was published on 21 October 2016 for public
consultation.ItisanamendmenttothecurrentCompaniesAct,asSingaporecurrentlyhasnodedicated
legislationforcorporateinsolvencies.
(a) Add-onsectionsforcreditorscheme–aninsolvencyproceeding?
Schemesmaybeusedformanypurposesbesidesdebtrestructuring.Thereisnoinsolvencyrequirement
andthishasbeenregardedasoneoftheattractionsofusingaschemetorestructurethedebtsofan
insolventcompany.Thereisnocleardistinctionbetweenmembers’schemesandcreditorschemesin
the legislative sections. The English Review adopted a ‘single gateway’, ‘standalone moratorium’ and
‘restructuring plan’ approach to reform England’s debt restructuring laws. On the manner of
implementing the restructuring plan, there was considerable support in the feedback to keep it as a
standalonetool,separatefromschemeandCVA.85Theissueofhowreformstodebtrestructuringlaws,
inparticular,schemes,shouldbecarriedoutisnotanacademicquestion.Ithasimplicationsonstigma,
cross-borderrecognition,existingstructuresandprocesses,etc.
Singapore’sapproachisdifferentfromthatinEngland.Asexplainedabove,theILRCrecommendedthat
thereformstoschemetoenhanceitseffectivenessasadebtrestructuringtoolshouldbebroughtinas
anadd-ontothetraditionalschemesections,andshouldbecontainedintheproposedInsolvencyAct.
Thus, s 211A(1) of the Amendment Bill stipulates that the new sections apply where the scheme
between the company and its creditors or any class of them ‘will, if it takes effect, compromise the
rightsofthecreditorsorclassofcreditors,asthecasemaybe.’Butsomeofthedifficultissuesfacedby
English law reformers apply to Singapore as well, but unfortunately the rushed consultation and
implementationhavenotallowedtheissuestobeairedsufficiently.
84
MinistryofLaw,‘PublicConsultationonProposedAmendmentstotheCompaniesActtoStrengthenSingapore
as an International Centre for Debt Restructuring’ (21 Oct 2016) (available at
https://www.mlaw.gov.sg/content/minlaw/en/news/public-consultations/public-consultation-on-proposedamendments-to-the-companies-act-.html,lastaccessed8January2017).
85
Seeeg,feedbackfromInsolvencyLawyers’AssociationTechnicalCommittee,SarahPaterson,Allen&Overy,R3,
Chanceryjudges,PWC.
17
The Amendment Bill has three parts. The first part is concerned with improving the attractiveness of
schemesasadebtrestructuringdevice.Thesecondpartrelatestojudicialmanagement.Thethirdpart
isconcernedwithvariousreformstofacilitatetheresolutionofcross-borderinsolvencies.Thispaperis
concernedonlywiththereformstoscheme.
(b) Moratorium
The Bill provided that a company may, instead of applying for a stay of proceedings under s 210(10),
applytocourtforabroadmoratoriumundertheproposeds211B.Thecompanymayapplyforthisat
thesametimeasitappliestocourtforthefirsthearingorfortheapprovalofapre-packagedscheme,
orwhenitintendstomakesuchanapplicationassoonaspracticable,andnoorderhasbeenmadeor
resolutionpassedforthewindingupofthecompany.UnliketheEnglishproposalonmoratorium,86a
pendingwindingupapplicationdoesnotdisqualifythecompanyfromapplyingformoratorium.
Onceanapplicationforamoratoriumismade,aninitialmoratoriumwhichisasbroadaswhatthecourt
maygrantafterhearingtheapplicationcomesintobeingforaperiodof30days.87Duringthisperiod,
the company cannot be wound up and no receiver or manager may be appointed.88 Further, except
with leave of the court, no proceedings other than scheme proceedings or execution or other legal
process may be commenced or continued against the company, no step may be taken to enforce
securityortorepossessgoodsunderanyhire-purchaseortitleretentionagreement,andnorightofreentryorforfeitureunderanyleasemaybeenforced.89
To apply for a moratorium, the company is required to file with the court certain documents (details
below),90togivepublicnoticeoftheapplication,andtonotifyeverycreditorsoughttobeboundbythe
proposedschemeandwhoisknowntothecompanyandanypersonwhohasappointedorisormaybe
entitledtoappointaglobalreceiverandmanager(followingEnglishusageforeaseofreference,holder
of qualifying floating charge, ‘HQFC’) of the application.91Although a HQFC will thus be notified of a
moratorium application, it cannot prevent the moratorium from arising. But if it has appointed a
receiver and manager, it does not seem that the moratorium can take effect. There is no provision
requiringthereceiverandmanager,orindeedanyreceiver,tovacateoffice.
Under the proposed s 211B(3), the company is required to file evidence of support for the proposed
schemefromcreditors,alistofthe20largestunsecuredcreditorswhoarenotrelatedtothecompany,
andwheretheapplicationisnotpartoftheapplicationforthefirsthearing,abriefdescriptionofthe
proposedschemewithsufficientparticularstoenablethecourttoassessthattheproposedschemeis
feasibleandmeritsdueconsiderationbythecreditors.Onwhatwouldconstituteevidenceofsupport
fromthecreditors,thedraftcontainedtworequirements:supportfromcreditorsrepresentingnotless
thanone-thirdinvalueofthecreditorssoughttobeboundbytheproposedscheme,orcreditorswhose
86
EnglishReview,[7.20].
Proposeds211B(8).
88
Proposeds211B(8)(a),(b).
89
Proposeds211B(8)(c),(d),(e),(f).
90
Proposeds211B(4).
91
Proposeds211B(3).
87
18
support would be important for the success of the proposed scheme. The Government sought input
specifically on whether the two requirements are feasible, and if both are feasible, whether the
companyshouldcomplywithbothoronlyoneoftherequirements.
Thesecondrequirementlackscertaintyandsoshouldberejected.Butthefirstrequirementisalsonot
freeofdifficulty.First,itdoesnotdistinguishbetweenthedifferenttypesofcreditors.Wheresecured
creditorsarefullysecured,theirconsenttothemoratoriummaynotoffersufficientprotectionforthe
unsecured creditors. Secondly, as there will be no supervisor or monitor of any sort, there is no
independent third party to verify the companies’ claims that the conditions for the moratorium have
beenfulfilled,ortoensurethatthemoratoriumisnotabusedinthe30dayperiod.Therightgivento
creditorstoapplytocourttochallengethemoratorium,92ortorestrainthecompany’sacts,93doesnot
offeranyrealisticprotection.Thirdly,inanyeventitmaybehardforthecompanytoobtainthatlevel
ofsupportfromthecreditorsearlyinthenegotiations.
Moving beyond the technical details, the initial moratorium raises important policy questions. As
mentioned earlier, the ILRC was concerned that allowing a moratorium to arise automatically in a
scheme, which is effectively a debtor-in-possession procedure, would pose too much risk to the
creditorsofthecompany.ButtheRestructuringCommitteewasmotivatedbydifferentconsiderations
when it recommended that theinitial moratorium should arise automatically. It was attracted by the
Chapter 11 moratorium which arises automatically when a Chapter 11 petition is filed and has extraterritorialworldwideeffect.ItpointedoutthatbecauseofthatandtheglobaleconomicreachoftheUS,
foreign creditors can ill-afford to ignore US bankruptcy proceedings, except where their assets or
connectionsintheUSarecompletelynon-existent.94Tosafeguardagainstabuseofthemoratorium,the
Committeerecommendedthatcertainconditionsshouldbesatisfiedwhichwerelargelyfollowedinthe
AmendmentBill.
TheRestructuringCommittee,withrespect,shouldhavegivengreaterweighttotheconcernsexpressed
bytheILRContheneedtoprotectcreditors’interestinamoratorium.Similarconcernswereexpressed
in the feedback95to the English Review which proposed allowing a standalone moratorium to arise
automatically for a period of three months, which may be extended by the court, when the company
has met the eligibility requirements and satisfied two conditions by filing certain requisite documents
withthecourt.96Thetwoconditionswerethatthedirectorsbelievedthatthecompanywouldbeable
topayitsdebtsduringthemoratoriumandhadareasonableprospectofrestructuringitsdebts.97The
company would also have to appoint a supervisor who is required to report to court if the conditions
ceased to be satisfied, and whose consent to a transaction which is out of the ordinary course of the
92
Proposeds211B(9).
Proposeds211D.
94
ReportoftheRestructuringCommittee,[3.7].
95
Seeforeg,feedbackofAllen&Overy,R3,Chanceryjudges,ICAEW,CMSCameronMcKennaLLP,Federationof
SmallBusinesses,CityofLondonLawSociety,KPMG,PWC.
96
EnglishReview,[7.7],[7.16]-[7.17].
97
EnglishReview,[7.22]-[7.23].
93
19
company’sbusinessisrequired.98Thereisstrongsupportinthefeedbackcallingforstrongercreditor
protection,principallybyreducingtheperiodoftheinitialmoratoriumto21or28days,andincreased
monitoringfromthesupervisor.
The automatic initial moratorium is unlikely to inspire confidence and may bring about unintended
consequences. First, a secured creditor that lacks confidence in the company’s management may
decidetoactbyappointingareceiver,andifaHQFCappointsaglobalreceiverandmanager,therewill
benoschemeunlessthecompanymanagestoobtainaJMorderandthejudicialmanagerdecidesto
promoteascheme.UndercurrentlawthecourtcannotmadeaJMorderifitisopposedbyaHQFC,but
pursuant to the ILRC’s recommendation, it seems that the Amendment Bill would allow the court to
makeaJMorderunlessthecourtissatisfiedthemakingoftheorderwouldcauseprejudicetotheHQFC
thatisdisproportionatelygreaterthantheprejudicethatwouldbecausedtotheunsecuredcreditorsif
the JM order is not made. 99 In this regard Singapore is more pro-secured creditor than England.
Secondly,unsecuredcreditorsmayalsoreactbywithholdingorcuttingcreditatthefirstsignoftrouble.
Itisenvisagedthatthecourtwillheartheapplicationformoratoriumbeforetheexpiryofthe30day
period.Ifitapprovestheapplication,theBillallowsthecourttochoosefromamenuofoptions.Thisis
asensiblearrangement.Butthereisverylittleprotectionofcreditors’rightsunderthecourt-ordered
moratorium,whichmaylastfromafewmonthstomorethanayear.Thelengthofthemoratoriumand
subsequentextensionisentirelyuptothecourt’sdiscretion.Itisnotclearwhynotimelimitisimposed.
When making the moratorium order, the court is bound to order the company to submit financial
informationofthecompanyasmaybeadequatetoenablethecreditorstoassessthefeasibilityofthe
proposedscheme.Itisverydoubtfulthatthiswillofferanyrealprotection.Thepurposeofgivingthe
information is not to enable the creditors to monitor the moratorium, and in any event is wholly
inadequate.Asinthecaseoftheinitialmoratorium,asupervisoristhebarestminimumtoprotectthe
creditors’legitimateinterests.
Inadditiontotheaboveproblems,thesectionisalsobadlydrafted.Theheadingtos211Breads‘Power
of Court to restrain proceedings, etc. against company’. This is very misleading when one of its subsection, sub-section (4), confers an automatic moratorium. The sub-section should be a new section
withaheadingthatdescribesitseffectaccurately.
Asubsidiaryofacompanywhichhasbeengrantedamoratoriumbythecourtmay,eventhoughitisnot
proposing to enter into a scheme, apply for a similar moratorium provided certain conditions are
satisfied. 100 The Restructuring Committee thought that this was needed as many businesses are
organisedincorporategroupsand‘arestructuringcanpotentiallybefrustratedifcreditorsareableto
takeactionagainstrelatedcorporateentitiesthatareanecessaryandintegralpartoftherestructuring
98
EnglishReview,[7.43].
ThereasonforthedoubtisthattheAmendmentBilldoesnotabolishs227B(5)(a)whichprovidesthatthecourt
shall dismiss an application for a JM order if it is satisfied that a receiver and manager has been or will be
appointedbyaHQFC.Thismustbeanomissionastheintention.
100
Proposeds211C.
99
20
plan.’101The Amendment Bill limited the scope of the extension of moratorium to subsidiaries of the
companyproposingascheme.Nevertheless,itisnotclearwhyasubsidiarywhichrequiresprotection
from its creditors should not be required to propose a scheme itself. Large corporate groups have
entered into linked schemes involving many companies without any particular difficulty. Although a
condition for extending the moratorium is that the court has to be satisfied that the creditors of the
subsidiarywouldnotbeunfairlyprejudicedbythemoratorium,102thisishardlysatisfactoryprotection
oftheseverecurtailmentofthecreditors’enforcementrights.Thisisyetanotherexampleofthesharp
move to a pro debtor rescue law, but it seems with insufficient consideration of its impact on the
legitimateinterestsofcreditors.
(c) Cramdownofdissentingclass
This was recommended by the ILRC, as explained above, but with few details. Under the proposed s
211H(2), the court may cram down a dissenting class of creditors if the three conditions set out in s
211H(3) are satisfied. They are (i) a majority in number of the creditors sought to be bound by the
schemewhowerepresentandvotingeitherinpersonorbyproxyatthemeetingorderedbythecourt
unders210(1);(ii)themajorityrepresentsthree-fourthsinvalueofthecreditors;and(iii)thecourtis
satisfiedthattheschemedoesnotdiscriminateunfairlybetweentwoormoreclassesofcreditors,andis
far and equitable in respect of each dissenting class. The meaning of ‘fair and equitable’ will be
discussedlater.
Themannerinwhichthetwoconditionsaredraftedisawkward.Theintentionisclearlythatasufficient
majority of all the creditors whose debts that the company would like to restructure approves the
restructuring, ignoring the fact that they have been put into different classes to vote on the
restructuring. But the provisions refer to the creditor voting at ‘the relevant meeting’, which is the
meetingofthatclassofcreditors.Thisisnotonlyadraftingerror,butitalsorevealsthatthedraftersof
the scheme sections did not have Chapter 11 style cram down in mind. A scheme is not a collective
procedure, and the meeting envisaged in s 210(1) is a single meeting of all the creditors or a class of
creditors. This also explains Chadwick LJ’s restatement of the test in Re Hawk Insurance Co Ltd,103ie,
whethertheschemeisasinglearrangementoranumberoflinkedarrangements.Anotherissueisthat
thecramdownappliestocreditorclaimsonly.Itisnotclearwhythepowertocramdownadissenting
classofshareholders(orequityinterests)isnotincluded.
Themeaningof‘fairandequitable’isexplainedintheproposeds211H(4).Itbringsinmodifiedversions
ofwhattheAmericanstermedthe‘bestinterestsofcreditorstest’andthe‘absolutepriorityrule’.How
the courts would interpret and apply the ‘fair and equitable’ standard lies at the heart of how the
cramdown power in s 211H would be exercised. As Parliament’s intention of engrafting elements of
Chapter11ontoschemeistoattractrestructuringworktoSingapore,therewouldbepressuretofollow
UScaselawcloselysothatthefamiliaritywillimproveefficiencyandreducecosts.Butthedifferences
betweenschemeandChapter11maymeanthatisnotpossible.
101
ReportoftheRestructuringCommittee,[3.15].
Proposeds211C(2)(d).
103
[2001]EWCACiv241,[2001]2BCLC480,[23]-[52].
102
21
Thepowertocramdownisintimatelylinkedtotheclassificationofcreditorsandsanctionofschemes.
Becauseofthepowertocramdown,thedynamicsofclassificationofcreditorclaimsandequityinterests
inChapter11areverydifferentfromandmuchmorecomplicatedthaninscheme.Themostobviousis
that unlike the scheme where the incentive for the company is to put all the creditors whose debts
wouldbecompromisedinonesingleclassorasfewclassesaspossible,underChapter11theincentive
movesindifferentdirectionsdependingonthefactsofthecase.Forexample,inatypicalSAREcase,
whichistheacronymforsingleassetrealestatecase,therewillbeaunder-securedmortgageclaimwith
averylargeunsecuredportionwhichwilloutvoteotherunsecuredclaimsiftheyaregroupedtogether.
By classifying the claims separately, the debtor can count on the unsecured trade creditors to vote in
favour of the plan. The support of this slightly impaired class of claims will enable the court to cram
downthemortgagelender’sobjection.AlthoughSAREcasesdonotrepresentthemajorityofChapter
11 cases, they serve to illustrate the complex interaction between classification and cramdown in
Chapter11.
WhileitisnotpossibletotellwhethersomethingsimilartothemanoeuvringsinSAREcasesmayalso
happen to the Singapore scheme, it isalmost certain that the absolute priority rule would reduce the
flexibility that the scheme enjoys and renders it much more complex. The scheme of Garuda airline
forced finance creditors to take a haircut, but excluded some trade creditors, including the engine
manufacturers whose continued support was essential for the continued operation of Garuda.
Nevertheless,theEnglishCourtofAppealaffirmedthetrialjudge’sdecision104sanctioningthescheme
that different groups of unsecured creditors may be dealt with differently if that is commercially
rational.105Singaporecourtshaveheldthattheparipassuruledoesnotapplyinschemes.106Thehard
edgesoftheabsolutepriorityrulewouldnotpermitthatflexibility.Next,disputesovervaluation,which
liesattheheartoftheabsolutepriorityrule,willmaketheprocessverycomplicatedandcostly.Warren
has stated bluntly that ‘[i]n practice, no problem in bankruptcy is more vexing than the problem of
valuation.’107TheILRCsuggestedthatifnecessary,thecourtshouldbefreetoappointacourtassessor
or expert to assist in the valuation.108 But under s 211H(5), the court is given power only to appoint
‘any person of suitable knowledge, qualification or experience to assist the Court to estimate the
amountthatacreditorisexpectedtoreceiveintheeventthatthecompanyiswoundup.’Itisnotclear
why the assistance is limited to providing a liquidation analysis. The draftsman may have been
influencedbythereportoftheILRC,whichinitsdiscussiononvaluationincramdownreferredonlyto
comparativevaluationsbetweenliquidationandrescue.109ThisunderstandingofChapter11ishowever
erroneous.ThecomparisoninChapter11valuationisnotbetweenliquidationandrescue,whichevenin
England has been heavily criticised. It is more complicated than the more nuanced counter-factual
104
RePerusahaanPerseroan(Persero)PTPersusahaanPenerbangaanGarudaIndonesia[2001]AllER(D)53(Oct).
SEAAssetsLtdvPerusahaanPerseroan(Persero)PTPersusahaanPenerbangaanGarudaIndonesia[2001]EWCA
Civ1696,[23],[31].
106
HitachiPlantEngineering&ConstructionCoLtdvEltracoInternationalPteLtd[2003]SGCA38,[2003]4SLR384,
[84]-[85].
107
ElizabethWarren‘ATheoryofAbsolutePriority’[1991]AnnualSurveyofAmericanLaw9at13.
108
ILRC,FinalReport,156.
109
ILRC,FinalReport,155-156.
105
22
approach which has been applied in English courts. 110 The valuation process is something that
sophisticated Chapter 11 participants avidly desire to avoid. By compromise and settlement, secured
creditors can avoid the risks inherent in a valuation of the collateral and a court-imposed interest or
discount rate while unsecured creditors and shareholders can avoid the risk presented to them by a
valuationofthe‘new’company.’111TheapproachusedinChapter11hasthusbeenreferredtoasthe
‘bargainingandlitigation’approach.Ifthecourtsdecidedtoadoptthisapproach,s211H(5)wouldbe
inapplicable.
The Restructuring Committee has called for Singapore courts to be much more involved in managing
restructuring cases, citing with approval the ‘proactive approach to case management’ 112 of US
bankruptcy courts, in particular the US Bankruptcy Court for the Southern District of New York. This
developmentisprobablyinevitableasSingapore’sschemebecomemorelikeChapter11,butaspointed
out by the Chancery bench in their response to the English Review, greater court involvement would
lead to greater expense and delay, and involving judges to make commercial decisions ‘may not be
consistent with the accepted role of the English judge in resolving legal disputes’.113 This comment
applies to Singapore as well. A judge-led approach is also at odds with the established practice of
leaving ‘commercial judgments on how best to rescue companies or their businesses to insolvency
practitioners who are qualified and experienced enough to make them’, 114 and the Restructuring
Committee’sownrecommendationthatthemoratoriumshouldariseautomaticallyonfilingwithoutthe
needforacourthearing.
(d) Super-priorityrescuefinancing
ImplementingILRC’srecommendations
UnlikeliquidationandJMwhichareinsolvencyprocedureswiththeirrespectivedoctrinesofliquidation
expenses and JM expenses, there is no equivalent for scheme as it is not an insolvency procedure.
Hence, to implement the ILRC’s recommendations, the Amendment Bill has to create a functional
equivalenttogiverescuefinancingpriority.Thisisachievedbyprovidingthatthecourtmayorderthat,
in the event of the winding up of the company, ‘any debt arising from any credit obtained or to be
obtainedbythecompany’115toenablethebusinessofthecompanytocontinueasagoingconcern(for
ease of reference, ‘rescue finance’) ‘is to be treated as if it were a cost or an expense of the winding
up’.116Foreaseofreference,thiskindofprioritywouldbereferredtoas‘deemedliquidationexpense
priority’.
110
ReBluebrookLtd[2009]EWHC2114(Ch),[2010]1BCLC338,352.
GerardMcCormack,CorporateRescueLaw–AnAnglo-AmericanPerspective(2008)266.
112
ReportoftheRestructuringCommittee,[3.50].
113
FeedbackoftheChanceryjudgestotheEnglishReview,[2d].
114
Feedback of the Chancery judges to the English Reivew, [2d]. Similar comments have been made in the
feedbacktotheEnglishReview.Seeforeg,CMSCameronMcKennaLLP,
115
Proposeds211E(1)(a).
116
ibid.
111
23
Thistechniqueofdeemingrescuefinanceasaliquidationexpensewouldensurethatiftheschemefails,
anyrescuefinancewhichhasnotbeenrepaidinfullwouldenjoypriorityoverallotherdebtsincurredby
the company while the scheme was being negotiated or implemented. Further, although the rescue
financeisapre-liquidationdebtwhichwouldordinarilyrankaftertheliquidationexpenses,preferential
debts and floating charge debts, by deeming it a liquidation expense it becomes entitled to the same
rankingastheactualcostsandexpensesthatwouldbeincurredinthewindingup.117Butitisnotclear
iftheliquidatormaychooseorbecompelledtopaythiswhiletheliquidationisongoing,insteadofat
thecompletionoftheliquidationwhentheremaynotevenbeenoughassetstopayalltheliquidation
expenses.
The ILRC has also recommended that rescue finance may enjoy super-priority if the court thinks that
wouldbeappropriate.118TheAmendmentBilldoesnotgivethecourtabroad-baseddiscretiononthis
issue,butimposesahardrulethatsuper-prioritymaybegivenifthecompanyisunabletoobtainthe
rescuefinancefromanypersonunlesssuper-priorityisgiven.119This‘otherwisenorescuefinance’test
isborrowedfromChapter11,andaswillbeseenshortly,appliesalsotothegrantofsecurityandsuperprioritylien.Thedeemedliquidationexpensetechniquewouldprovidethebasistograntsuper-priority.
All that needs to be done is tostipulate that, if the ‘otherwise no rescue finance’ test is satisfied, the
rescuefinanceistobepaidaheadofallothercostsandexpensesofliquidation.ButtheAmendment
Billdidsomethingratherdifferent.Itdidnotusethedeemedliquidationexpensetechnique.Instead,it
providedthatifthe‘otherwisenorescuefinance’testissatisfied,therescuefinanceistoenjoy‘priority
over all the preferential debts specified in section 328(1) in the event of a winding up of the
company.’120Foreaseofreference,thiswillbereferredtoas‘liquidationsuper-priority’.Probablyina
caseofbeltandbraces,theAmendmentBillfurtherdevotedanadditionalsub-sectionontherankingof
liquidation super-priority,121which with all respect is unnecessary. But there are bigger problems with
thewordingofliquidationsuper-priority.
ThetermpreferentialdebtsisunderstoodinmostjurisdictionsderivedfromEnglishlawtomeancertain
debtsincurredbythecompanybeforeitgoesintoliquidationthatarenotsubjecttotheparipassurule
andgivenpriority,andisclearlydistinguishedfromliquidationexpenses.Unfortunatelythesituationin
Singaporeisnotsoclear.Theterm‘preferentialdebt’isnotdefinedintheCompaniesAct,andthereare
provisions in the Act that treat liquidation expenses as a category of preferential debts. 122 That
treatment is a recipe for confusion, and it is unfortunate that the Amendment Bill has adopted that
treatment.ThereisnodoubtthatParliament’sintentionisthatsuper-priorityforrescuefinancemeans
notonlypriorityoverpreferentialdebts,butalsooveralltheotherliquidationexpenses.Thedeemed
liquidationexpensetechniqueistheobviouswaytoimplementthatintention.
117
s328(1)(a).
ILRC,FinalReport,112.
119
Proposeds211E(1)(b).
120
Proposeds211E(1)(b)(ii).
121
Proposeds211E(3).
122
Seeforeg,s328(5).
118
24
Inadditiontotheabovemeasures,rescuefinancewouldalsoenjoypriorityifitisasecureddebt.Ifthe
companystillhasanyunencumberedasset,aproviderofrescuefinancemaycertainlybargainwiththe
companytotakesecurityinit.Asubordinatesecuritymayalsobetakeninanencumberedasset,butas
invariablytherewouldbeanegativepledgeclauseprohibitingthecompanyfromcreatingasecurityin
theasset,theconsentofthesecurityholdertothecreationofthesubordinatesecuritywouldhaveto
beobtained.Theaforesaidkindofprioritywillbereferredtoas‘securitypriority’inthispaper.
UndercurrentSingaporelaw,thecompanyisnotrequiredtoobtaintheconsentofthecourttoborrow
onsecuredterms.TheAmendmentBillgivesthecourtpowertograntsecuritypriority,butinviewof
thefacilitativelanguageused,itwouldseemthatacompanycontinuestoenjoytheabilityatcommon
lawtogiveasecuritywithoutcourtconsent.Butthecourtpowerisusefulifanexistingsecuredcreditor
refusestocountenanceasubordinatesecurity.Itwouldalsoprovidesomeprotectiontothecreditors,
sinceitwouldbethecompany’smanagementthatwouldbemakingthedecisiontogivesecurity,unlike
inJMwherethedecisionwouldbetakenbythejudicialmanager.Theconditionforgrantingsecurity
priority is similar to that for granting liquidation super-priority, ie, satisfying the ‘otherwise no rescue
finance’test.123
ImplementingRestructuringCommittee’srecommendations
Thecourtmayalsograntasecuritythatisequaltoorranksaboveanexistingsecurity(ie,super-priority
lien) if the ‘otherwise no rescue finance’ test 124 and a further condition, that ‘there is adequate
protectionoftheinterestoftheholderoftheexistingsecurityinterestintheproperty’125onwhichthe
super-priority lien is proposed to be granted, are satisfied. The term ‘adequate protection’ is not
defined,buts211E(5)offersthreenon-exclusivemethodsofprovidingadequateprotection.Thefirstis
a cash payment or periodic cash payment to the extent that the grant of the super-priority lien
decreasesthevalueofthesecuredcreditor’sinterestinthesecuredproperty.Thesecondisbasedon
thesameidea,butinsteadofcashthecompanyprovidesanadditionalorreplacementlien.Thethirdis
suchotherrelief,otherthanentitlingtheexistingsecurityholdertocompensation,thatwillresultinthe
realisation by the holder of the indubitable equivalent of the holder’s existing security interest in the
property.
Doctrinally and theoretically, the twin tests of super-priority lien, that the rescue finance cannot be
obtainedwithoutthesuper-prioritylienandthattheexistingsecuredcreditorisadequatelyprotected,
areintension.‘Considerhowthesetwintestsareintension.Ifadebtorcannotgetmoneyfromanyone
withoutinterferingwiththepriorityrightsofasecuredcreditor,theremaybegoodreasontobelieve
that the debtor cannot adequately protect the creditor. The debtor's inability to borrow money from
anyoneelse,usingthesamepackageitoffersthesecuredcreditorasadequateprotection,providesat
123
Proposeds211E(1)(c)(ii).
Proposeds211E(1)(d)(ii).
125
Proposeds211E(1)(d)(iii).
124
25
least some evidence that the debtor's prospects are not as bright as the debtor might suggest to the
court.’126
TheaboveshowsthatitisimportanttodifferentiatethedifferenttypesofprioritywhendiscussingDIP
financing. Super-priority lien trumps the property rights of a secured creditor, while security priority
trumps the contractual right of a secured creditor with a negative pledge clause but not its property
rights.Thedeemedliquidationexpensepriorityandliquidationsuper-priorityenjoypriorityoverdebts
securedbyafloatingcharge.ButsinceliquidationexpensesandJMexpensesenjoythesamepriority,
this is a ‘natural’ consequence of effectively making creditor schemes insolvency proceedings.
Therefore, while the other three kinds of priority for rescue funding may impact on existing practices
with regards to lending and the extension of credit, they are far less disruptive compared to superprioritylien.
Issuesarisingfromsuper-prioritylienanditsavailability
TheRestructuringCommitteedidnotadduceanyevidencethatthelackofsuper-prioritylienhascaused
the rescue of viable companies or businesses in Singapore or the region to fail, or that lenders have
been unwilling to lend to viable companies or businesses. The reasons given for disagreeing with the
ILRC’sdecisionnottorecommendsuper-prioritylienwerearguablybasedmoreonhopethanfactson
theground,andthedesiretoattract‘establishedplayersintheUSDIPFinancingindustry’,127including
US distressed debt funds, to use Singapore as a base to provide DIP financing in Singapore and the
region.
The Restructuring Committee acknowledged that the interests of existing secured creditors should be
safeguarded, and recommended that court approval is required to create a super-priority lien,128but
justliketheILRC,therewasnodiscussionofhowitsavailabilitymayaffectthevalueofsecurityandthus
theavailabilityandcostsofbankloanstocompaniesinSingapore.Theomissionofbothcommitteesto
discuss this matter is in stark contrast to the attention devoted to it in the English Review129and the
feedback.
Itisbecauseofthepotentialofsuper-prioritylientoreducethevalueofsecuritythatmuchconcernand
opposition have been expressed in the feedback to the English Review on rescue finance. Two major
reasonshavebeengiven.ThefirstisthattheprovisionoffinanceintheUKandsecurityrightsarenot
conducivetotheapproachadoptedinproceduresliketheChapter11.Aspointedoutinthefeedbackof
AlixPartnersUKLLP,asubsidiaryofaleadingUSturnaroundfirm,
thecustomaryUKuseoffloatingchargeswhichcoverallorsignificantlyalloftheassetsofthe
companyinhibittheseekingofrescuefinanceforatroubledbusiness.Inpractice,companies
whoareinapositiontorequireamoratoriumhavefewifanyunpledgedassets,andthevalue
126
th
Addler,Barid&Jackson,Cases,Problems&MaterialsonBankruptcy(4 ed,2007,FoundationPress,NewYork)
476.
127
ReportoftheRestructuringCommittee,[4.5].
128
ibid,[4.6].
129
EnglishReview,[10.11]-[10.14].
26
ofthepledgedsecurityisfrequentlyapproachedorevenexceededbyborrowingsagainstthose
assets.130
Thisultimatelyraisestheissueoftheefficiency,fairnessandaccountabilityofthefloatingchargeasa
security, which is a topic for another occasion. But it may be noted in passing, quoting again from
AlixPartners,that
[a]lthoughanegativepledgeclausemayinhibitfurtherlendinginsomecases,inpracticemost
lenderswhoholdafloatingchargelendtoagreaterdegreethanwouldotherwisebethecase.
There is a real risk that should lenders believe that the assets backing their lending may be
primed by rescue finance providers, they may factor this into their calculations when making
finance available to companies. Consequently there may be a knock on reduction in lending
facilities,whichmaydomoreharmtotroubledbusinesses.
Secondly,‘Therisksoflegislatingforsuper-priorityrescuefundingcouldbeveryserious.Anysignificant
change in lending behaviour generally which might be triggered by such a change, whether as to the
availability,orthecost,oflendingcouldhaveamaterialeffectontheeconomy.’131
Since the law on security and quasi-security and lending practices in Singapore are very similar to
England, the above reasons for concern would apply to Singapore similarly. It is unfortunate that the
Singapore government did not consult more widely before deciding to bring in super-priority lien.
England’s experience on this is instructive. Before the English Review, the English government has
consulted on whether to give rescue financing super-priority in 2001132and 2009.133 The former was
part of the exercise which led to the Enterprise Act 2002, and the government concluded that ‘the
matter was one of too great complexity which required a wider consultation, particularly if it were
intendedthattheUKcourtswouldhavearoleinapprovingthegrantofsuper-priorityfundingonacase
bycasebasis’.134TheRestructuringCommitteehasrecommendedappointingforeignjudgesrenowned
for managing insolvency and restructuring cases to the Singapore International Commercial Court
(SICC).135Americanbankruptcyjudgeswouldbethemostnaturalcandidatesforthatpurpose.Butthe
concern is that the jurisprudence developed in the SICC, which may not pay enough attention to
Singapore’s existing law and practices, would nevertheless be highly relevant to the domestic courts.
ThechallengesfacingtheSingaporecourtsarecomplexandonerous.
(e) Pre-packagedscheme
The Restructuring Committee’s discussion of this topic, perhaps more than any other, showed that it
was using the Chapter 11 as its blueprint. It explained a pre-packaged restructuring, which it called a
130
FeedbackofAlixPartnersUKLLPtotheEnglishReview,XXX.
ResponseofPWCtotheEnglishReview.
132
Insolvency Service, A Review of Company Rescue and Business Reconstruction Mechanisms: Report by the
ReviewGroup(May2000)[122]-[139].
133
‘EncouragingCompanyRescue–aconsultation’(2009)
134
ChrisMallon,FinancinginInsolvencyProceedings(INSOLInternational).
135
ReportoftheRestructuringCommittee,[3.46]-[3.47],recommendation3.5.
131
27
Pre-Pack, as involving a plan that was pre-negotiated and agreed between the debtor and its major
creditorsbeforeformalcourtproceedingscommence,whereuponthePre-Pack‘isthenpresentedtothe
courtforapproval’.136Thisnotionofpre-packistheChapter11pre-pack.Itisverydifferentfromthe
Englishpre-packagedadministrationwhichdoesnotrequirecourtapproval,unlessitistwinnedwitha
schemeofarrangement.
The Restructuring Committee gave two reasons for favouring the US approach to Pre-Pack over the
English approach. 137 The first was that the US approach offered greater flexibility in designing a
restructuringplan,unliketheEnglishwhichrequiredthesaleofthedebtor’sbusiness,whichmaynotbe
possibleinsomerestructurings.Thesecondwasthatitvaluedtherequirementforcourtapprovalinthe
USapproach,whichitthoughtwould‘ensurethattheminoritydissentingcreditorsaretreatedfairlyand
serves as a good safeguard against potential abuse.’138 It thus recommended that ‘a Pre-Pack regime
that is essentially similar to the US regime can be effected in Singapore by amending the existing
schemes of arrangement regime’139to enable the court to approve a scheme even where not all the
proceduralrequirementscurrentlyfoundintheschemesectionshavebeensatisfied.
The difficulty with the Restructuring Committee’s reasoning is that it was, with respect, comparing
appleswithoranges.ThetypicalEnglishpre-packusesthedeviceofadministrationtoconcludeasaleof
thecompany’sbusiness.Thecompany’sdebtsarenotrestructured.Ifadebtrestructuringisdesired
but it could not be achieved consensually, the company would have to twin an administration with a
scheme,140inwhichcasecourtapprovalisrequired.DuetothestructuraldifferencesbetweenEnglish
andUSlaws,itisnotpossibletoconductasimple,directcomparisonbetweenanEnglishpre-packanda
USpre-packwithoutfallingintoerror.
TheAmendmentBillempoweredacourt,onacompany’sapplication,toapproveaschemeeventhough
no court order that one or more creditors’ meeting be heldhas been made and no such meeting has
beenheld,providedthatthecompanyhasgiventherequisiteinformationtoeachcreditorsoughttobe
boundbythescheme(‘relevantcreditor’);141notifiedeachrelevantcreditoroftheapplicationandgiven
publicityoftheapplication;142andthecourtissatisfiedthathadthemeetingoftherelevantcreditors
been summoned, the requisite majorities approving the meeting would have been satisfied.143 Cram
downofadissentingclassisthusnotavailabletoapre-packscheme.
The information to be given to each relevant creditor in a pre-pack scheme is obviously of critical
importance.TheAmendmentBillstipulatedthatinadditiontotheinformationwhichisrequiredtobe
given in the explanatory statement accompanying the notice summoning the meeting in a scheme,144
136
ibid,[3.32].
ibid,[3.40].
138
ibid,[3.40(b)].
139
ibid,[3.41]
140
Seeforeg,ReBluebrookLtd[2009]EWHC2114(Ch),[2010]1BCLC338.
141
Proposeds211I(2)(a).
142
Proposeds211I(2)(b),(c).
143
Proposeds211I(2)(d).
144
Proposeds211I(3)(a).
137
28
the company must give information concerning itself, for eg, its business, financial condition and
prospects, how the scheme will affect the rights of the creditor, and whatever information as is
necessaryforthecreditortomakeaninformeddecisioninrelationtothescheme.145
As the legislation is silent on what will constitute satisfactory evidence that the requisite majorities
wouldhavebeenobtainedhadthemeetingbeenheld,thecourtswouldhavetodeveloptheprinciples.
Butitwouldbeerroneoustothinkthatistheonlymatterthatacourtneedstotakeintoaccount.Itis
established law that the court may refuse to sanction a scheme even where the requisite majorities
haveapprovedit.Theabsenceofameetingmeansthatthecourtwillbedeprivedofinformationsuchas
thescaleoftheoppositiontotheschemeandthediscussionsatthemeeting,whichmayberelevantto
the court’s exercise of discretion. The interests of the dissenting minority may thus be prejudiced.
Moreover, the hoped for efficiency and cost saving that a pre-pack scheme would bring may not
materialise all the time. The requisite majorities in a scheme are counted based on the creditors
presentandvotingeitherinpersonorbyproxyatthemeeting,butinapre-packthatwouldhavetobe
countedagainstallthecreditorssoughttobeboundbytheschemesincethereisnomeeting.Thisis
lessofaproblemifthe schemeisconcernedtorestructurefinancialdebtsoflargecompanies,butas
schemesareusedinSingaporetorestructuretradingdebtsaswell,gettingthatlevelofmajoritymaybe
difficultinpractice.
7. Conclusion
The shortcomings of creditor schemes as they currently exist in England, Singapore and other
jurisdictionsarewelldiscussedandreformproposalshavebeensuggested.146TheIRLCrecommended
that the scheme should remain a model ‘based on concepts and principles which are familiar to the
commercial and financial sector in Singapore as well as those familiar with legal systems based on
English law.’147 Although the ILRC did not adhere to this policy strictly, aswhen it recommended that
the power of cram down be adopted, the enactment of its recommendations would not cause the
scheme to lose its character of a hybrid proceeding and become an off-shoot of Chapter 11. The
Restructuring Committee, on the other hand, used Chapter 11 as its blueprint and adopted several
elements from it, but with little discussion of how those elements would fit into the existing very
differentframework.
ThereseemstobearushinbothEnglandandSingaporetoadoptasmuchofChapter11aspossibleto
maketheirrestructuringlawsmoredebtor-friendly.ButitisimportantnottolosesightthatChapter11
hasitsowndifficulties,148andmoreimportantlythatChapter11maynotbeappropriateforEnglandor
145
Proposeds211I(3)(b).
See for eg, Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation (CUP, 2014) 263-267;
CharlesZhenQu,‘SanctioningSchemesofArrangement:TheNeedforGrantingtheCourtaCurativePower’(2016)
JBL 13; Jennifer Payne, ‘Debt Restructuring in English Law: Lessons from The United States and the Need for
Reform’(2014)130LQR282;CharlesQu,‘TowardsanEffectiveScheme-BasedCorporateRescueSystemforHong
Kong’(2012)12JCLS85.
147
ILRC,FinalReport,139.
148
Seeforeg,DouglasBairdandRobertRasmussen,‘TheEndofBankruptcy’55StanfordLawReview751(2002);
DouglasBairdandRobertRasmussen,‘Chapter11atTwilight’56StanfordLawReview673(2003);DouglasBaird
146
29
Singapore.Ironically,atleastinEngland,asignificantsegmentoftheentitiesforwhichthatmovement
wassupposedtobenefitdidnotagreethatwasthedirectionthelawshouldbemoving.Initsfeedback
totheEnglishReview,theFederationofSmallBusinesses,whichisthelargestorganisationrepresenting
smallandmediumsizedbusinessesintheUK,statedthattheproposalswouldnotenhancetheexisting
frameworkinthewaysthatitneededtobeimproved,andthatabalanceneedtobestruckbetween
facilitatingthewindingupofbusinessesthatarenolongerviablewiththepotentialbenefitsthatmight
accrue from trying to rescue viable businesses.149 Similar comments that not all insolvent companies
deservedtoberescuedweremadebyotherswithextensiveexperienceofrestructuringwork.150From
thesimilarityoftheinsolvencylegalsystemsinbothjurisdictions,thedeliberationsoftheILRC,andthe
lack of clamouring from trade or industrial associations, business or professional representative
organisations or professional firms to reform the law to be more debtor-friendly, it would seem that
thosecommentstotheEnglishReviewareappositetoSingaporeaswell.
It is not possible to predict how the Chapter 11 elements would take root in Singapore. Legal
transplantsarecomplexbusinesses,andinthiscasethecomplexityismadeworsebecauseChapter11is
extremelycomplicatedandSingaporeisengraftingsomemodifiedelementsofChapter11ontoavery
establishedframework.EnglandhassomeexperienceofChapter11,morethanSingapore,butevenso
Peter Bloxham in his feedback to the English Review commented that the proposals were based on a
‘superficial understanding of US practice.’151 Singapore judges have their work cut out for them to
ensurethattheChapter11elementsworkseamlesslywiththeexistingframework.
and Robert Rasmussen, ‘Antibankruptcy’ 119 Yale Law Journal 648 (2010). For a contrary view, see Elizabeth
WarrenandJayWestbrook,‘TheSuccessofChapter11:AChallengetotheCritics’107MichiganLawReview603
(2009).
149
FeedbackoftheFederationofSmallBusinessestotheEnglishReview,XXX.
150
Foreg,R3,Chanceryjudges,InsolvencyPractitionersAssociation,KPMG,DeloitteLLP,PWC.
151
FeedbackofPeterBloxamtotheEnglishReview.
30