10 January, 2016
In Re Conchubar Aromatics Ltd [2015] SGHC 322, the Singapore High Court allowed the application by the three applicant companies (who were incorporated overseas) for restraint orders on proceedings against them before those companies applied under section 210(1) of the Companies Act for leave to convene a creditors’ meeting for the purpose of considering a scheme of arrangement.
Apart from being the first written decision handed down by the Singapore Courts affirming that parties are able to obtain a restraint order before applying to convene a creditors’ meeting under section 210(1), this decision is significant as it indicates the Singapore Courts’ willingness to assist companies that are genuine in their efforts to restructure their business and liabilities, by taking the following approach:
Companies are able to apply for a restraint order, even on an ex-parte basis, before formulating a complete proposal for a compromise or arrangement; it is only necessary that the proposal be detailed enough to allow the Court to consider its feasibility. This has been done in previous cases (for example, in the restructuring of PT Bumi Resources Tbk.), but this decision sets out the level of detail needed for a proposal for a compromise or arrangement in the initial stages.
Creditor protection is afforded by the Courts’ willingness to monitor and hold the applicant accountable for the duration of the restraint order by having status conference hearings.
Additionally, in cases of ex parte applications, creditors are also protected by appropriate setting aside hearings.
This decision will greatly assist companies facing financial difficulties, as they may avail themselves of the restraint order under section 210(10) at a much earlier stage. This decision should also be welcomed by investors as the availability of a restraint order at an early stage means that creditors can avoid incurring unnecessary time and costs in individually enforcing their remedy against the company as well as having the comfort of knowing that other creditors won’t steal a march on them.
This Update takes a look at the decision.
Facts
The three applicant companies, Shefford Investments Holding Limited, UVM Investment Corporation, and Conchubar Aromatics Limited (collectively, the “Applicants”), were shareholders in Jurong Aromatics Corporation Pte Ltd (“JAC”). These shareholdings, as well as shareholdings in SK E&C Jurong Investment Pte Ltd, were the primary assets of the applicants.
JAC ran into difficulties, eventually being put into receivership in September 2015. The Applicants themselves were similarly in some financial distress. While JAC and the Applicants faced difficulties, the Applicants hoped that a restructuring proposal would rehabilitate their position. As matters were still being negotiated and discussed among various parties, a moratorium was necessary to protect the Applicants’ ability to continue their efforts at restructuring their liabilities and investment in JAC.
The Applicants argued that a restraint order under section 210(10) of the Companies Act could be granted independent of the calling of a meeting under section 210(1) as long as there was a proposal before the Court which gave more than a general layout of the scheme, and the applicant was acting bona fide. The Applicants also argued that such a restraint order could be granted notwithstanding that they were foreign companies, as they had sufficient nexus to Singapore for the purpose of being wound up by the Singapore High Court.
The High Court’s Decision
The High Court granted the restraint order in respect of each of the three applications, operative for 10 weeks, unless discharged earlier, with a status conference fixed for an update on the situation. The High Court found that, as a matter of law, a restraint order could be granted under section 210(10) even if no application had yet been made under section 210(1), provided there was a proposal sufficiently detailed as to indicate that there was something definitive that could be put to the creditors shortly, and the application was made bona fides.
The High Court held that the wording of section 210(10) of the Companies Act did not expressly require that there be any application under section 210(1), as it only refers to the proposal of a compromise or an arrangement, not the actual presentation of that arrangement, or its approval, at a meeting of creditors convened pursuant to section 210(1). Hence, there is nothing in the language of section 210(1) and section 210(10) which indicates that section 210(10) is to be dependent or contingent on section 210(1). What each section does require is that there be a proposal of a compromise or arrangement only. The High Court also noted that this position was the same as that of the Malaysian Court in Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180 (“Re KL Industries”).
On the issue of the particularity of the proposal, the High Court found that it was only necessary that the proposal be detailed enough to allow the Court to consider its feasibility. Completeness was not required as it was to be expected that refinements and modifications would be needed before leave was sought to convene the creditors’ meeting for considering and adopting the scheme proper. Further, it was not necessary for the Court to conclusively determine whether the proposal was feasible, as close scrutiny of the merits of the proposal or its viability and likely acceptance by the creditors should not be carried out at this stage. Instead, what the Court needed to assess was whether, on the face of the proposal, the Court could conclude that there was a reasonable prospect of the eventual scheme succeeding and being acceptable to the general run of creditors. So long as the Court could make this broad brush assessment, sufficient particularity would have been given.
The High Court also emphasised that the Courts should be careful to ensure that there was no attempt to “game the system” by seeking the benefit of section 210(10) restraint orders without putting forward a serious proposal. Bona fides is not mentioned in section 210(10), but ensuring the applicant is seeking a stay to genuinely attempt a restructuring, as opposed to simply keeping its creditors at bay and tying their hands, is an integral part of the Court’s inherent jurisdiction to prevent abuses of its processes.
As regards the issue of whether foreign companies could avail themselves of the restraint order under section 210(10), the High Court held that the protection of section 210(10) of the Companies Act and indeed, the whole of section 210, could be obtained by companies incorporated overseas if they were liable to be wound up under the Companies Act, as the definition of “companies” in section 210 (as set out in section 210(11)), includes any corporation or society liable to be wound up under the Companies Act.
Finally, the High Court made certain observations on the relevant procedure for parties intending to apply for a restraint order before applying to convene a creditors’ meeting under section 210(1):
An application under section 210(1) should be made shortly thereafter and if not, a sufficient explanation and proposed
timelines should be given.
An application for a restraint order could be made ex parte in certain appropriate circumstances. It may be that the best forum to hear a restraint order was the one hearing an ongoing proceeding, but in other situations, especially when there were many creditors and proceedings or potential creditors and potential proceedings, an ex parte application followed by appropriate setting aside hearings before a single judge also exercising case management functions may be the best way to deal with a complex situation.
The need for proper case management would also be a matter that would influence the Court’s determination of whether there were terms that should be further imposed. In appropriate situations the Court may possibly take proactive measures for better case management and coordination, either under section 210(10) or any of the other possible orders under section 210(1) or section 210(3) read with section 210(4).
Our Comments / Analysis
This decision is significant as it is the first written decision handed down by the Singapore Courts affirming that parties are able to obtain a restraint order before applying to convene a creditors’ meeting under section 210(1). While such orders have been obtained in the past, they were made without the benefit of any written grounds of decision and there was uncertainty as to the factors the Court would consider in determining whether to exercise its jurisdiction in this manner.
This decision sets out clearly the considerations that the Court will take into account in determining whether a restraint order should be granted. This will greatly assist parties in determining whether an application for a restraint order at a particular point in time or at a particular point of negotiations is appropriate. As the effect of such an order infringes on the rights of creditors, the ability to seek the same without first obtaining leave to convene a scheme meeting indicates the Courts’ willingness to assist companies that are genuine in their efforts to restructure their business and liabilities. Creditor protection is afforded by the Courts’ willingness to monitor and hold the applicant accountable for the duration of the restraint order by having status conference hearings. It would ease creditor concerns if, as proposed by the applicants in this case, companies volunteered to provide regular updates to the Court and creditors during this period. Additionally, in cases of ex parte applications, the creditors are also protected by appropriate setting aside hearings.
The High Court’s emphasis on case management procedure and the possibility of applying ex parte for a restraint order is to be welcomed, as it highlights the Singapore Courts’ sensitivity to commercial considerations, both by the applicant company and by its creditors.
For further information, please contact:
Chua Sui Tong , Partner, WongParntership
suitong.chua@wongpartnership.com
