THE COURT OF APPEAL S LANDMARK DECISION ON SCHEMES OF ARRANGEMENT

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1 FEBRUARY THE COURT OF APPEAL S LANDMARK DECISION ON SCHEMES OF ARRANGEMENT The Singapore Court of Appeal recently issued a landmark decision on schemes of arrangement in the case of The Royal Bank of Scotland NV & Ors v TT International Limited [2012] SGCA 9. The judgement discussed a range of important issues and provides judicial guidance on the mechanics of the implementation of schemes of arrangement under section 210 of the Companies Act ( Act ). Facts Successful application for a scheme meeting The respondent, TT International Limited, ( Scheme Company ), was significantly affected by the global credit crunch in 2008, and faced severe cash flow problems as a result. Accordingly, on 29 January 2009, it applied for and received approval from the High Court to summon a meeting of its creditors (the Scheme Creditors ) to propose a scheme of arrangement ( Scheme ) pursuant to section 210(1) of the Act. The effect of a section 210 scheme of arrangement This section allows a company to agree a compromise or arrangement with its creditors as to the payment of its debts to them. The advantage is that a scheme under section 210 requires that only a majority in number representing three-quarters in value of the creditors or class of creditors present and voting to agree to the proposed scheme. Once their approval has been obtained, the scheme must be sanctioned by the courts. Once a scheme has achieved the necessary percentage of creditor approvals and obtained court sanction, it will bind all the company s creditors including those who dissent to the scheme. Bank creditors objected and appealed In this case, the creditors meeting to approve the Scheme was duly held and the requisite percentage of approvals was obtained. The Scheme then received the sanction of the High Court. Nevertheless, a group of bank creditors, including the appellants, opposed the Scheme and took their objections on appeal to the Court of Appeal. Decision of the Court of Appeal Held that meetings not properly constituted The Court of Appeal found in favour of the appellants, holding that the Scheme did not have the requisite majority of creditors voting at meetings properly constituted. As a result, the High Court had

2 FEBRUARY no jurisdiction to sanction it. The Court of Appeal there fore set aside the sanction of the Scheme, and ordered that a further meeting of the Scheme Creditors be called and, subject to the directions of the Court of Appeal as to voting, for the same Scheme to be put to a re-vote. Scheme reapproved at second meeting In the event, at this second meeting, the Scheme was re - approved. A majority in number representing 76.34% in value of the Scheme Creditors in the general class of unsecured creditors voted for the Scheme, and all of the Scheme Creditors in the other class of creditors (comprising the related and subordinated creditors) also voted in favour. The decision of the Court is significant as it sets out clear judicial guidance on the precise mechanics of implementation of schemes of arrangement under section 210 of the Act. As noted by the Court, there was a paucity of such judicial guidance prior to this decision. Three stages in obtaining sanction The Court discussed the three stages leading up to the sanction of a scheme and considered the conduct of each stage: First Stage: formal steps towards the scheme creditors meeting; Second stage: the conduct of the scheme creditors meeting; and Third stage: seeking the court s approval. The Court also considered the duties of a scheme manager and the process by which proofs of debt should be accepted. First Stage: Formal Steps Towards the Scheme Creditors Meeting The first formal step towards obtaining approval for a scheme of arrangement is for the subject company to apply to court for a meeting of all creditors, or meetings of all classes of creditors to approve the scheme. Important for creditors to be properly classified The Court of Appeal noted that it was key for the scheme creditors to be classified according to their separate interests, if not, the scheme creditors meetings would not be properly conducted, and the court would have no jurisdiction to sanction the proposed scheme. In this regard, the Court stated that it is the applicant s responsibility to determine whether more than one meeting of creditors is required by the scheme. It must also raise any issues relating to creditors to the court for its directions. The court would consider whether more than one meeting of creditors is required and, if so, the appropriate composition of those meetings.

3 FEBRUARY Principal of dissimilarity to be applied As regards the principles to be applied when determining the proper classification of scheme creditors, the Court stated that the starting principle was that creditors whose rights are so dissimilar to each other s that they cannot sensibly consult together with a view to their common interest must vote in different classes. This principle of dissimilarity must be applied by comparing the relative rights of the creditors (among each other) under the scheme and their relative rights (among each other) in the alternative scenario that faced the company in the absence of the scheme. In such a comparison, if a creditor s (or a group of creditors) position will improve or decline to such a different extent vis-a-vis other creditors simply because of the terms of the scheme (and not because of its own unique circumstances, i.e., its private interests ), then that creditor (or group of creditors) should be placed in a different voting class from the others. Related and subordinated creditors should have voted separately In the present case, this appropriate alternative scenario was liquidation. However, the Court noted that the appropriate alternative scenario would depend on the facts of each case. Here, when applying the principle of dissimilarity to the facts of the Scheme Company, the Court ordered that certain related and subordinated creditors should vote in a different class from that of the general creditors. Guidance on procedures to be adopted The following additional observations of the Court as to the process of the application to summon a meeting of creditors are noteworthy: All scheme related matters (including appeals therefrom) should be heard on an expedited basis. The applicant s solicitors should unreservedly disclose all material information to the court to assist it in arriving at a properly considered determination on how the scheme creditors meeting is to be conducted. Any issues in relation to a possible need for separate meetings for different classes of creditors ought to be unambiguously brought to the attention of the court hearing the application. The court should not consider the merits and fairness of the scheme at this stage. Where there is no realistic prospect of a scheme receiving the requisite approval, the court should not act in vain in granting the application for meetings to be convened. The failure of the applicant s solicitors and proposed scheme manager to take such prospects into account prior to making the application for leave to convene a scheme creditors meeting may result in adverse cost orders.

4 FEBRUARY Second Stage: The Conduct of the Scheme Creditors Meetings Submitting the proofs of debt Once court approval to summon a meeting of creditors is obtained, the applicant is required under section 211 of the Act to send notices summoning the meeting accompanied by a statement which clearly explains the scheme. Following this, the creditors will submit their proof of debt. The entire process of proof, admission, or rejection of debts is ordinarily completed before the scheme creditors meetings are held. Reasonable or just estimate to be made In considering the proofs of debt, the Court stated that when deciding which proportion of a creditor s claim to admit, the chairman (who is usually the proposed scheme manager) need only make a reasonable estimate or just estimate of the claim in question by doing his best with the factual material furnished by the creditor, without undertaking any detailed inquiry. If it is impossible to ascribe any sensible value to the claim, the chairman should attribute a nil value to it and the claim should be rejected. Creditor may appeal decision on his proof If a creditor did not accept the chairman s decision on admitting or rejecting his proof, the Court clarified that creditors could appeal against the decision, noting that this was permitted in liquidation and judicial management. In considering any such appeal or challenge, however, the court should be slow in overriding the professional judgment of the chairman, unless it was affected by bad faith, a mistake as to the facts, an erroneous approach to the law, or an error of principle. The court s role is not to engage in its own valuation of a claim. Creditor may also challenge another creditor s proofs The Court further stated that a scheme creditor may challenge the admission or rejection of proofs of debt submitted by other scheme creditors. In obtaining access to such proofs, however, the Court noted that access to other creditors proofs of debt can only be justified if the creditor seeking access may have his voting rights affected. Accordingly, a creditor is entitled to access only if he can show some evidence of impropriety in the admission or rejection of such proofs of debt. List of creditors and debts should be posted Once the list of admissible proofs has been determined, it is usual practice for the chairman to post a list of the creditors and corresponding amounts of their admitted claims (for the purposes of voting) at the meeting venue prior to the meeting. In this regard, the Court noted that this practice ought to be adopted and a proposed scheme manager who cannot comply with this prior to the scheme creditors meeting should act prudently and seek leave from court to defer the meeting until after adjudication is complete.

5 FEBRUARY Results of votes should be immediately announced Disclosure of material information about the scheme or the company s affairs ought not to be deliberately withheld until the meeting so as to influence its outcome. After the creditors cast their votes, the chairman should immediately thereafter tabulate the results and announce them by the end of the meeting. Second appellant s proof should have been accepted In this case, the Court considered the second appellant s challenge to the scheme manager s rejection of its proof of debt. The Court agreed that the second appellant s loss of profits claim should have been admitted for a reasonable amount but that its claim for damages for its subcontractors and/or suppliers could not be ascribed a sensible amount. Accordingly, the Court provided directions to estimate the second appellant s loss of profits claim for the purpose of voting. Votes of related party creditors to be discounted The Court also considered a number of other claims of specific creditors, and provided directions accordingly for their treatment. Among other things, the Court endorsed the view that it is the norm for the votes of related party creditors to be discounted in light of their special interests to support a proposed scheme by virtue of their relationship to the company. It accordingly gave directions to discount the votes of certain related party creditors at the further meeting of Scheme Creditors. Third Stage: Seeking the Court s Approval Considerations for sanctioning a scheme The court must be satisfied of three matters before it sanctions a scheme: The statutory provisions must have been complied with; Those who attended the meeting were fairly representative of the class of creditors or members and that the statutory majority did not coerce the minority to vote in their favour; and That the scheme is one which a man of business or an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, would reasonably approve. Duties of a Proposed Scheme Manager As noted above, the Court also elaborated on the duties of a scheme manager. It noted that prior to the sanction of a scheme, the proposed scheme manager only has a good faith obligation to the company and the body of creditors as a whole.

6 FEBRUARY Scheme manager to be impartial His duties are amplified when he assumes the quasi-judicial role of adjudicating on the admission and rejection of the proofs of debt. A proposed scheme manager owes duties to be objective, independent, fair and impartial, and never favour the interests of his appointers over that of other legitimate claimants to the company s assets. Upon his appointment as scheme manager, similar to a liquidator, he would owe fiduciary duties to the company, its creditors, and contributories. Scheme manager should not have taken on dual role In this case, the proposed scheme manager had also concurrently been a nominee for the Scheme Company s Chief Executive Officer and Chairman, and its Executive Director in respect of their proposed individual voluntary arrangements with their creditors under the Bankruptcy Act. The Court held that he should elect to act as scheme manager in the scheme of arrangement or as nominee in the individual voluntary arrangements. He was in an unavoidable conflict of interest when holding both positions. Comment The Court of Appeal s judgment provides clear parameters on and clarifies various issues concerning the conduct of schemes of arrangements, which has proven to be a workable consensual restructuring option in Singapore. This judgment would also be of assistance to insolvency practitioners with regards to their role and responsibilities as a scheme manager, which is not actually a role defined in the Act.

7 FEBRUARY If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners: Chou Sean Yu Head Banking & Financial Disputes Practice Joint Head Restructuring & Insolvency Practice DID: Chan Hock Keng Head Commercial & Corporate Disputes Practice DID: Manoj Pillay Sandrasegara Joint Head Restructuring & Insolvency Practice DID: CONTACT DETAILS Singapore One George Street #20-01 Singapore Tel: Fax: China Beijing Representative Office Unit 3111 China World Office 2 1 Jianguomenwai Avenue, Chaoyang District Beijing , PRC Tel: Fax: Middle East Abu Dhabi Branch Al Bateen Towers Building C3 Office (P1) P.O. Box No Abu Dhabi, UAE Tel: Fax: contactus@wongpartnership.com 63 Market Street #02-01 Singapore Tel: Fax: Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai , PRC Tel: Fax: Licensed by the QFCA Office Amwal Tower, West Bay P.O. Box No Doha, Qatar Tel: Fax: wongpartnership.com