Case Update: Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd [2019] SGCA 29 – Necessary Disclosure for Leave for Creditors’ Meeting for Scheme of Arrangement

Significance: Singapore Court of Appeal sets out principles on reasonably necessary disclosure required for court to grant leave for calling a creditors’ meeting to consider a proposed scheme of arrangement. Court holds that applicant did not provide necessary financial disclosure required and refused to grant leave.

Relevant extracts from judgment (per Menon CJ) as follows:

27 A scheme of arrangement is a statutory mechanism for the implementation of a transaction between a company and its members or creditors. In recent years, for various reasons, it has become an increasingly popular tool for companies seeking to effect a debt restructuring. These reasons include the fact that it permits the debtor to remain in control of the company, and further permits a statutory majority of the company’s creditors to impose their views even over the objections of a minority group of dissentients. For the same reasons, safeguards to protect the interests of the minority creditors, and of the creditors as a whole, are especially important.

28 In Singapore, the regime for schemes of arrangement is provided for in Part VII of the CA. Significant changes have been introduced to this regime with the recent amendments to the CA in 2017, and more changes are afoot with the Insolvency, Restructuring and Dissolution Act 2018 expected to come into effect in due course. So far as the present application is concerned, it is filed pursuant to s 210(1) of the CA, the material part of which reads as follows:

Where a compromise or an arrangement is proposed between – (a) a company and its creditors or any class of them; … the Court may, on the application in a summary way of any person referred to in subsection (2), order a meeting of the creditors … or a class of such persons, to be summoned in such manner as the Court directs.

The term “person” is defined in s 210(2) as including the applicant-company under s 210(1) of the CA.

29 The principles and considerations underlying the court’s decision on whether to grant leave to convene a creditors’ meeting pursuant to s 210(1) are not prescribed by statute and have largely been developed by case law. From the case law as it stands, the following propositions may be gleaned:

(a) At the leave stage, the company should present a restructuring proposal “not necessarily ready for presenting to the creditors to be voted upon but with sufficient particulars to enable the court to assess that it is feasible and merits due consideration by the creditors when it is eventually placed before them in detailed form” (Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180 at 182).

(b) Issues that will be considered at the leave stage generally relate to the court’s jurisdiction (see The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213 (“TT 1”) at [57]–[67]). However, other matters that will lead the court to subsequently refuse to sanction a scheme should also be brought to the court’s attention (see Re T&N Ltd and others (No 3) [2007] 1 BCLC 563 (“T&N 3”) at [19]). Therefore, issues that should be raised and considered at the leave stage include:

(i) Classification of creditors, and in this regard, “[a]ny 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” (TT 1 at [62]).

(ii) Whether there is a realistic prospect of the proposed scheme receiving the requisite approval of the creditors, as the court “should not act in vain in granting the application for meetings to be convened” (TT 1 at [64]).

(iii) Any allegation of an abuse of process by the applicant company: “…given the inherent jurisdiction of the court to ensure that its processes are not improperly invoked, an order under s 210(1) would be refused if it is shown that the application amounts to an abuse of process” (Re Punj Lloyd Pte Ltd and another matter [2015] SGHC 321 at [26]).

(c) Importantly, the company bears a duty of disclosure at the leave stage, in that, amongst other things, it must “unreservedly disclose all material information” to assist the court in determining how the creditors’ meeting is to be conducted (TT 1 at [62]).

(d) Other aspects of the court’s inquiry at the leave stage include:

(i) that the court should generally not consider the merits and reasonableness of the proposed scheme, as these are issues that should be left for the creditors to decide (TT 1 at [63]); and

(ii) that as time is ordinarily of the essence in restructuring matters, the leave application “should be heard on an expedited basis” (TT 1 at [62]).

30 Assuming that leave is granted and the creditors’ meeting is duly convened, under the present s 210(3AA) read with s 210(3AB) of the CA, a proposed scheme is binding on the company and its creditors if the following conjunctive requirements are satisfied:

(a) unless the court orders otherwise, more than 50% in number of the creditors present and voting either in person or by proxy at the creditors’ meeting agree to the proposed scheme;

(b) more than 75% in value of the creditors present and voting either in person or by proxy agree to the proposed scheme; and

(c) the proposed scheme is approved by the court.

47 Therefore, the standard of disclosure that is required of an applicant-company must be determined by reference to the relevant case law. Insofar as the sanction stage is concerned, we recently affirmed the long-standing position that the company must demonstrate that it has disclosed, by the time of the creditors’ meeting, sufficient information to ensure that the creditors are able to “exercise their voting rights meaningfully” (SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] 2 SLR 898 at [88]; Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] 3 SLR(R) 629 (“Wah Yuen”) at [24]; The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT international Ltd and another appeal [2012] 4 SLR 1182 at [16]).

48 We accept as a general proposition that a less onerous standard of disclosure is required of the applicant-company at the leave stage than at the sanction stage. This proposition is well established in case law and the parties do not seem to disagree, even though in their submissions they have emphasised different aspects of the standard to suit their respective positions. One illustrative authority is Re Attilan Group Ltd [2018] 3 SLR 898, where the High Court explained that two distinct standards of disclosure exist and should not be confused (at [38]):

The requirements imposed by the courts for all material information to be given by the applicant at the calling of meeting stage is intended to ensure that there is sufficient material before the courts for an informed decision to be made as to how the creditors’ meeting is to be conducted: see TT International at [62]. … This, however, is not to be confused with the sufficiency of information that must be disclosed under s 211 of the CA, after the leave to convene the creditors’ meeting is granted. At this latter stage, more detailed information is required to ensure that the creditors will be able to “exercise their voting rights meaningfully” …

49 A less onerous requirement of disclosure at the leave stage is also consistent with the recognition that matters are usually in a greater state of flux at this relatively early stage in the restructuring process. Thus, for instance, courts will not require a finalised restructuring plan at the leave stage and the company need only present a proposal with “sufficient particulars” (see [29(a)] above). Further, given that a creditors’ meeting will subsequently be convened at which time the views and votes of the creditors will be taken, the sufficiency of financial disclosure may, within limits, be seen as a matter of commercial risk for the creditors to weigh, and an overly-restrictive approach taken by the court might prematurely deprive the creditors of an opportunity to evaluate the quality or sufficiency of the disclosure and the viability of the proposed scheme for themselves.

50 However, we must emphasise that even this less onerous standard of disclosure at the leave stage is not wholly without bite, and there remains a minimal standard of disclosure that a company must satisfy before leave will be granted under s 210(1) of the CA. As we have noted above (see [29]), existing jurisprudence makes clear that at the leave stage, the company bears a duty of unreserved disclosure to assist the court in determining whether and how the creditors’ meeting is to be conducted. This must be taken to require at least such disclosure as would enable the court to determine the issues that it must properly consider at this stage, such as the classification of creditors, the proposal’s realistic prospects of success, and any allegation of abuse of process.

51 In our judgment, the balance between the company’s desire to table a proposal, the creditors’ right to consider such a proposal, and the court’s overriding duty to ensure the proper exercise of its statutory powers, is correctly struck by the requiring, in addition, that the company provide such financial disclosure by the leave stage in such manner and to such extent as is reasonably necessary for the court to be satisfied that fair conduct of the creditors’ meeting is possible.

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