Singapore – Schemes Of Arrangement Under The Insolvency, Restructuring And Dissolution Act.

On 30 July 2020, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) came into operation. The IRDA is an omnibus legislation housing all of Singapore’s insolvency and restructuring laws in one single piece of legislation.
 

The general framework of the IRDA has been discussed in the first article in our series of articles covering the various aspects of IRDA and can be found here.
 

In this article, which is the second article in our series, we will touch upon the Scheme of Arrangement provisions contained in the IRDA, including an overview of a Scheme of Arrangement and its features, significant amendments to the Scheme of Arrangement regime that were implemented in 2017 and relevant modifications made to the regime in the IRDA.
 

Introduction
 

Schemes of Arrangement have been a part of Singapore’s restructuring and insolvency landscape since 1967. Prior to the IRDA, the procedures for a Scheme of Arrangement were set out in Section 210 and 211 of the Companies Act (Cap. 50). In 2017, the Companies Act was amended to significantly enhance the Scheme of Arrangement regime, introducing improved statutory moratoriums and pre-pack schemes, amongst other innovations. The existing statutory regime for Schemes, as amended in 2017, have been largely transplanted into the IRDA, with minor modifications.
 

What is a Scheme of Arrangement?
 

Simply put, a Scheme of Arrangement is an agreement between the company and its creditors, containing terms that allow the company to restructure and meet its debt obligations. A Scheme (unlike other forms of restructuring) is primarily a “debtor-in-possession” rehabilitation process, where the company’s existing management is not displaced in favour of a court-appointed officer. Schemes are fundamentally contractual in nature, being grounded in the Scheme document, which has the character of a contract between the company and its creditors. However, where a Scheme differs from a contract is that it can, in certain circumstances, bind even dissenting creditors. Therefore, to prevent abuse, there is also an element of Court supervision over the process. 
 

Briefly, a Scheme of Arrangement will become binding on a company’s creditors after the following three steps are completed:
 

1. The company must apply to the Court for leave to convene a creditors’ meeting, the purpose of which is to consider and if thought fit, to approve the proposed Scheme of Arrangement. To give itself temporary respite and time to convene the meeting, the company may also seek a moratorium on further proceedings in any action or proceeding against the company;

2. At the creditors’ meeting, the proposed Scheme of Arrangement must be approved by a majority of the creditors present and voting in each class (i.e. more than 50%) and this majority must represent 75% in value of the voting class. Once the requisite majority is achieved, the dissenting minority will also be bound by the Scheme. This “cram down” effect on the dissenting minority is unique to Schemes of Arrangement and represents a significant departure from usual contractual principles – a party can become bound to the terms of the Scheme even if it did not consent to the same; and

3. Lastly, the company will need to apply to obtain the Court’s sanction of the Scheme. This step is necessary because of the potential for a Scheme to bind even a non-consenting creditor, to prevent abuse. Once the Court has sanctioned the Scheme, it will become binding on all creditors upon the lodgement of the Court order sanctioning the Scheme with the Registrar of Companies.
    

2017 Amendments to the Companies Act
 

Prior to the IRDA, the legislative framework for Schemes of Arrangement was set out in Part VII of the Companies Act. Part VII of the Companies Act was amended in 2017 by the Companies (Amendment) Act 2017 (the “2017 Amendments”).

The 2017 Amendments saw the introduction of sections 211A to 211J, which set out an enhanced framework for Schemes of Arrangement in Singapore.  The most significant amendments implemented in 2017 are set out below.
 

1. Access to Scheme of Arrangement regime for foreign companies
    

Where previously, only Singapore-incorporated companies could undergo a Scheme of Arrangement in Singapore, the 2017 Amendments gave foreign companies doing business in Singapore access to the Scheme of Arrangement regime.[1] Amongst other things, the foreign company had to be able to show that it had a “substantial connection with Singapore”,[2] for e.g. (a) it had assets located in Singapore; (b) it had substantial business in Singapore; (c) Singapore law had been used as the governing law for its business transactions; (d) the foreign company had submitted to the jurisdiction of the Singapore courts for the resolution of disputes relating to its business transactions; and/or (e) Singapore was the company’s centre of main interests.[3]
 

2. Expanded moratorium
    

A moratorium is a stay on proceedings against the company. In a restructuring context, a moratorium gives the company some respite from proceedings against it and allows the company to have the time and space to focus on restructuring its liabilities.
 

Prior to the 2017 Amendments, a company could only apply for a moratorium[4] if it had already made a Scheme proposal. In practice, this meant that the company had to cobble together a Scheme proposal, make an application for leave to convene a creditors’ meeting,[5] and concurrently, apply for a moratorium. This requirement was viewed by the Insolvency Law Review Committee as being “counterproductive” as in some cases, the moratorium is needed precisely because the company needs time to work out a scheme to propose to its creditors.
 

The 2017 Amendments therefore introduced a new section, Section 211B, which allowed for an automatic moratorium of 30 days upon the filing of the application for a moratorium.[6] Further, such an application could be made as long as the company intended to propose a Scheme. Upon the application being heard, the Court had the power to grant a longer moratorium as may be appropriate in the circumstances, which would give the company time to properly formulate the proposed Scheme and place it before the creditors. 
 

The Court was further empowered to grant moratoriums on the application of a subject company’s holding company or subsidiary, which facilitated group-wide restructurings.[7] Moratoriums in relation to a subject company and/or its related companies could also be ordered to apply to extraterritorial acts so long as the creditor was in Singapore or within the jurisdiction of the Court.[8]
 

Since its introduction in the 2017 Amendments, Section 211B proved to be a useful (and popular) tool for distressed companies.[9]
 

The workings of Section 211B were considered in detail by the Singapore High Court in Re IM Skaugen SE and other matters [2019] 3 SLR 979 (“Re IM Skaugen”). IMSPL Pte Ltd (“IMSPL”), an entity in the Skaugen Group of companies, filed an application for a moratorium order pursuant to Section 211B of the Companies Act. At the time, IMSPL had yet to propose a scheme to its creditors, but had stated its intention to do so. MAN Energy Solutions SE (“MAN SE”) opposed the moratorium application.  One of the stated basis for its opposition was that any scheme to be proposed was doomed to fail, given that MAN SE held an arbitration award against IMSPL, which constituted to 76% of IMSPL’s unsecured debt.
 

The Court ultimately decided to grant IMSPL’s moratorium application. In coming to this decision, the Court was mindful of the overall restructuring efforts of the whole Skaugen group and took into account the fact that the group’s largest creditors did not object to IMSPL’s application. The Court also held that MAN SE’s objections were not fatal to the moratorium application because a scheme had yet to be proposed, and before it was, its terms could be crafted so as to address MAN SE’s concerns. The Court held that the test was “that of whether on a broad assessment, there was sufficient evidence for the court to determine that there was a reasonable prospect of the compromise or arrangement working and being acceptable to the general run of creditors.”[10] The Re IM Skaugen decision clarified the threshold required for companies to apply for a Section 211B moratorium and has been applied on a number of occasions since.
 

3. Super priority for rescue financing
    

Rescue financing generally refers to financing (for e.g. loans) provided to troubled companies for the purpose of restructuring.
 

Understandably, lenders were reluctant to provide such rescue financing in case the restructuring failed, putting them in line together with other creditors of the company. However, the 2017 Amendments gave the Court power to order a “super priority” for debts incurred by the company in respect of rescue financing.[11]
 

In this regard, Section 211E of the Companies Act provided that the Court can grant such super priority if:[12]
 

• The funds provided are necessary for the company’s survival or for the whole or any part of the undertaking of that company to remain as a going concern; or
   

• The funds provided are necessary to achieve a more advantageous realisation of the company’s assets of a company than on a winding up of that company.
   

Section 211E was considered by the High Court in Re Attilan [2018] 3 SLR 898, in which the applicant company sought leave to convene a creditors’ meeting to consider a Scheme and for super priority to be granted to proposed financing from a potential investor under section 211E of the Companies Act. The Court ultimately declined to exercise its discretion to grant super priority to the proposed financing from the investor, finding that the applicant had not taken reasonable efforts to obtain financing from alternative sources (that did not require super priority).
 

4. Cross-class cram down
    

The 2017 Amendments introduced a cross-class cram down mechanism for Schemes of Arrangement. Pursuant to Section 211H of the Companies Act, the Court could approve a Scheme even if there was a class of creditors which did not approve the proposed Scheme, as long as the below set out conditions were met:[13]
 

• A majority in number of the creditors meant to be bound by the arrangement, who voted at the creditors’ meeting, have agreed to the arrangement;

• The majority in number of creditors mentioned above represents three‑fourths in value of the creditors meant to be bound by arrangement; and

• The Court is satisfied that the compromise or arrangement does not discriminate unfairly between 2 or more classes of creditors, and is fair and equitable to each dissenting class.
   

In considering what is “fair and equitable”, the Court would focus on whether the dissenting creditor would receive, under the proposed Scheme, an amount less than what such a creditor would receive if the proposed Scheme was not approved.[14]  
 

Section 211H also provided for additional safeguards against abuse in respect of cross-class cram downs, by expressly requiring that junior claims (i.e. claims that are subordinated to the claim of a creditor in the dissenting class) to not retain any property unless the more senior claims are paid in full. This was referred to as the “absolute priority rule”. In practice, this meant that shareholders (as junior claimants) could not retain their shares unless the unsecured creditors (as the more senior claimants) were paid in full.
 

5. “Pre-Packed” Schemes of Arrangement
    

The 2017 Amendments also introduced section 211I, which allowed the Court to approve a proposed Scheme of Arrangement without the need for a creditors’ meeting – a so-called “pre-packed” Scheme. To succeed in an application under section 211I, the company must satisfy the Court that had a creditors’ meeting been summoned, the proposed Scheme would have been approved by the statutory majority.[15] Hoe Leong Corporation was one of the first few companies to make an application under section 211I (judgment unreported).
 

6. Proof of Debt procedure for Schemes
    

The 2017 Amendment also introduced section 211F of the Companies Act, which put in place a formal procedure for creditors who wished to attend and vote at the creditors’ meeting to file their proofs of debt.[16] The amendments set out provisions for the filing of the proof of debt, inspection of another creditor’s proof of debt, [17]adjudication of the proof of debts by the Chairman of the meeting,[18] and for how objections from creditors were to be made and resolved.[19]
 

Schemes of Arrangement in the IRDA
 

With the commencement of the IRDA, the sections in the Companies Act dealing with Schemes of Arrangement have been repealed and largely ported over into Part V of the IRDA. With most of the significant amendments to the Scheme regime having already taken place in the 2017 Amendments, no major amendments were made in the IRDA. However, there are two sets of modifications in the IRDA that are worth highlighting.    
 

Moratorium in Schemes of Arrangement
 

Section 64 of the IRDA re-enacted Section 211B of the Companies Act, with one crucial difference contained in sub-section 12(b), which provides that neither an order of Court to restrain proceedings against a company in a scheme of arrangement or the automatic moratorium will affect the commencement or continuation of any proceedings that may be prescribed by regulations.
 

Based on the second reading speech on the Insolvency, Restructuring and Dissolution Bill, the intention is for subsection 12(b) to apply in particular to writs for an action in rem against a vessel. However, although Section 64(12)(b) makes it clear that the filing of an in rem writ is not prohibited, a person will still need to obtain leave of Court under Section 64(1)(c) or 64(8)(c) to be able to continue with such proceedings.
 

Modification to the cross-class cram down

As highlighted above, the 2017 Amendments introduced cross-class cram downs in Section 211H. The Court had the power to sanction a proposed Scheme of Arrangement, even if there were dissenting classes of creditors, where the Scheme did not discriminate unfairly between two or more classes of creditors and was fair and equitable to the dissenting classes and subject to the absolute priority rule.
 

In practice however, the absolute priority rule created practical difficulties because Singapore lacked a statutory mechanism to compulsorily divest shareholders of their shares in the company. The cross- class cram down was therefore dependent on the shareholders’ voluntary cooperation, which was unlikely to be forthcoming in practice.
 

Therefore, in the new Section 70 of the IRDA, the relevant section has been clarified with the following language:[20]
 

“where the creditors in the dissenting class are unsecured creditors, the terms of the compromise or arrangement must not provide for any creditor with a claim that is subordinate to the claim of a creditor in the dissenting class, or any member, to receive or retain any property of the company on account of the subordinate claim or the member’s interest”
 

The abovementioned amendment was made to clarify that shareholders do not need to divest their shares before a cram down can be made.
 

Conclusion
 

The present Scheme of Arrangement regime contained in the IRDA is not too different from that which was put in place after the 2017 Amendments, prior to the IRDA’s commencement. However, in recent years, Schemes of Arrangement and their associated moratoriums have been an increasingly popular tool used by companies attempting to restructuring, and it will be interesting to see how the law surrounding the various provisions are developed and refined in the coming months.
 

If you are interested in finding out more about the IRDA, you are most welcome to approach us.
 

 

For further information, please contact:

 

Prakash Pillai, Partner, Clyde & Co

prakash.pillai@clydeco.com