When a debtor becomes insolvent, how will its creditors (persons who are owed money by the debtor) be paid out from the available assets of the debtor? What are subordinated debts?
Significance: Singapore Court of Appeal reverses the High Court decision’s to sanction a scheme of arrangement on the basis that certain majority creditors owed genuine debts to the companies in question, and found that the High Court should not have sanctioned the schemes without proof of authenticity of those debts. The Court also found that there was material non-disclosure of the rejection of a restructuring proposal. The Court of Appeal also considered factors to consider in determining whether a creditor is a related
The Court of Appeal also considered factors to consider in determining whether a creditor is a related creditor to the company (at ):-
(a) The scheme company controls the creditor or vice versa. Alternatively, the scheme company and the creditor have a common controlling shareholder, ie, a shareholder who owns (directly or indirectly) 50% or more of the shares in each of these companies.
(b) The creditor and the scheme company have common shareholder(s) who hold a less than 50% but more than de minimis stake in both companies. In this regard, what would be considered de minimis would depend on the facts; for instance, the threshold would be higher in the case of a public listed company as opposed to a private company.
(c) The creditor and the scheme company have common director(s), in particular, director(s) who propose or support the scheme.
(d) The scheme company and the creditor do not have any common shareholder(s), but their controlling shareholder(s) are either:
(i) related by blood, adoption or marriage; or
(ii) where the controlling shareholder(s) are corporate entities, in turn controlled by individual(s) who are related by blood, adoption or marriage.
(e) The creditor is related by blood, adoption or marriage to the controlling shareholder(s) or director(s) of the scheme company.
The Companies (Amendment) Bill was introduced in Parliament yesterday (28 February 2017) to amend the Companies Act (the Act) on several significant matters.
The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal  4 SLR 1182;  SGCA 53 – disclosure of professional fee arrangements to scheme creditors and the court
Significance: entities who act as Scheme Managers should take note of the duties and principles involved in implementing a Scheme as laid down by the SGCA in both judgments of RBS v TT International; the breach of duties may result in the Scheme being set aside and costs of the Scheme manager being forfeited.
- The company entered into an agreement with an entity owned by the scheme manager of the Scheme of Arrangement where the company was to pay the entity a success-based fee for professional services rendered upon successful implementation of the Scheme. However, this agreement was not disclosed to the scheme creditors and to the Court prior to the sanction of the Scheme.
- The Court of Appeal in this decision held that the agreement should have been disclosed so that scheme creditors could make an informed decision on whether to support the Scheme given the potentially large amount involved that could affect their financial interests: at .
- The Court held that a company to be subject to a Scheme had an obligation to disclose all material information to the scheme creditors, including contingent liabilities, and not use the device of ‘excluded creditors’ in a Scheme to keep actual or contingent liabilities hidden from other creditors: at -.
- The Scheme Manager likewise had an obligation to act in good faith to the scheme creditors and not mislead or suppress material information from them. He also has an obligation to not place himself in conflict of interest; where there is conflict, informed consent of the scheme creditors is required: at -.
- The Court emphasised the need for companies proposing schemes of arrangement and proposed scheme managers to be mindful of the interests of the creditors in discharging their duties, and to have “transparency … be the guiding principle of all corporate actions when creditors’ interests are affected, as is the case in a scheme of arrangement”: at -, .
- Generally, where there is a breach of duty to disclose material information by the company and the Scheme Manager, it would result in the Scheme being set aside and put to a fresh vote; the Scheme Manager would also have been deprived of his costs: at , .
- On the facts of this case, however, the Court decided not to set aside the Scheme because it had already been implemented for more than two (2) years and it was not practical to set it aside without causing more harm to the company and the creditors; instead, the parties are directed to reach an agreement on the appropriate amount of professional fees awarded for the Scheme Manager: at -.
- The Court further stated as obiter that “a commercial practice [in this case of the Scheme Managers disclosing success-based fee arrangements to scheme creditors or to the courts], no matter how widespread, does not have the force of law by dint of accident of vintage or absence of protest if it is contrary to legal principle”: at .