Case Update: SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] SGCA 51 – Court of Appeal reverses sanction of scheme of arrangement

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 [41]):-

(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.

Case Update: Re Conchubar Aromatics Ltd [2015] SGHC 322 – Scheme of Arrangement, Restraint Order

Significance: High Court holds that an order restraining further proceedings in any action or proceeding against a company may be granted under s 210(10) even if no application had yet been made under s 210(1) for a meeting of creditors or members, provided there was a proposal of a compromise or arrangement sufficiently detailed as to indicate that was something definitive that could be put to the creditors shortly, and the application was made bona fides.

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Case Update: The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal

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; [2012] SGCA 9classification of creditors in scheme of arrangement and principles on implementation of Schemes of Arrangement

 

  1. The Court of Appeal in this case laid down several principles on how schemes of arrangement are to be implemented.[1] Preliminarily, issues of creditors’ classification should be considered by a court when it first hears the application for creditors’ meetings.

 

  • (a) A proposed scheme manager must act transparently and objectively and should not be in a position of conflict of interest (ie, if he aligns his interests without good reason with those of the company) (at [71]-[73]). In this case, the proposed scheme manager was conflicted because he was also the nominee for the individual voluntary arrangements filed by the chairman and an executive director (who was also the chairman’s wife) of the respondent (at [74]-[78]).

 

  • (b) Scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors in respect of a proposed scheme (at [79]-[93]).

 

  • (c) A scheme creditor should be notified of the proposed scheme manager’s decisions to admit or reject its own and other creditors’ proofs of debt before the votes are cast at the creditors’ meeting. In this case, the proposed scheme manager should have completed adjudicating all the proofs of debt submitted (and notified all scheme creditors of the admitted proofs) prior to the Scheme Meeting (at [94]-[99]).

 

  • (d) A scheme creditor may appeal the proposed scheme manager’s decisions to admit or reject its own and other creditors’ proofs of debt for the purposes of voting. In this case, some of those decisions to admit or reject certain proofs of debt were held to be incorrect (at [100]-[110]).

 

  • (e) Scheme creditors should be classified differently for voting purposes when their rights are so dissimilar to each other’s that they cannot sensibly consult together with a view to their common interest. In other words, if a creditor’s position will improve or decline to such a different extent vis-à-vis other creditors simply because of the terms of the scheme assessed against the most likely scenario in the absence of scheme approval, then it should be classified differently. In this case, while the contingent creditors’ claims need not have been classified separately, the claims of certain substantial shareholders should have been classified separately. This was because the substantial shareholders’ claims would have been subordinated in a liquidation pursuant to s 250(1)(g) of the Act, but they would not have been subordinated under the Scheme (at [130]-[151]).

 

  • (f) Related party creditors and contingent creditors should generally have their votes discounted; while wholly owned subsidiaries should have their votes discounted to zero and should effectively be classified separately from the general class of unsecured creditors (at [152]-[175]).

[1] See Supreme Court Note: The Royal Bank of Scotland NV v TT International Ltd 2012] SGCA 9 (principles governing implementation of schemes of arrangement), Supreme Court Note, Supreme Court, Mar 2012 (1).

Case Update: SAAG Oilfield Engineering (S) Pte Ltd v Shaik Abu Bakar bin Abdul Sukol and another and another appeal [2012] 2 SLR 189 – contingent creditors under scheme of arrangement

SAAG Oilfield Engineering (S) Pte Ltd (formerly known as Derrick Services Singapore Pte Ltd) v Shaik Abu Bakar bin Abdul Sukol and another and another appeal [2012] 2 SLR 189; [2012] SGCA 7whether workmen who have tortious claims against a company (contingent creditors) are creditors under a scheme of arrangement.

Two workmen suffered injuries in industrial accidents in the course of their employment under a company (Derrick Services), which was later bought over by SAAG, and initially lodged claims under the then Workmen’s Compensation Act (“WCA”). The company was subject to a Scheme of Arrangement. The two workmen did not attend the creditors’ meeting and did not submit any proof of debt to the Scheme administrators. After the Scheme had terminated, the workmen withdrew their WCA claims and commenced common law tort actions against SAAG. SAAG applied to the High Court to determine whether these tort actions had been extinguished by the implementation of the Scheme.

The High Court held that the workers’ tortious claims were not extinguished by the Scheme as they did not participate in the Scheme and their claims were covered by insurance policy which the former company, Derrick Services, and SAAG had in respect of the workmen’s claims. SAAG appealed, so their tortious liability would be effectively borne by the insurer.

The Court of Appeal allowed the appeal and held that the workmen (who were contingent creditors) were deemed creditors for the purposes of section 210 of the Companies Act and specifically for the purposes of the Scheme.

The fact that the workmen’s claims were covered by insurance (or guarantee or indemnity) made no difference to the analysis of whether the workmen were creditors (at [47]).

The Court thought that it would render section 210 (which provides for Schemes of Arrangement) pointless if tort claimants, who may form a substantial class of a company’s creditors, are excluded from a Scheme (at [48]).

Where claims against a company have not been agreed, it is usual to allow creditors to vote for the amounts for which they estimate that the company is liable to them, subject to reasonableness. Where there is serious doubt over the existence and/or size of a tort claimant’s unliquidated claim, and if such a claim is critical to determining whether there is the requisite majority for the Scheme to be executed, then the creditors’ meeting should be adjourned and the matter be decided by the courts: at [49].

The Court followed the English decision of Re Midland Coal, Coke, and Iron Co, Re [1895] 1 Ch 267 and held that creditors include contingent creditors whose claims could be admitted to proof in a winding up, even if it was for an unproven, unliquidated amount (at [33], [50]).

The Court then held that the workmen were Scheme Creditors under the definition of the Scheme (based on contractual interpretation) because SAAG was liable to them, notwithstanding that they were indemnified against that liability by virtue of the insurance policy (at [57]).

It was not open for a creditor (who was intended to be bound by the Scheme) to argue that he was not bound because he did not consent to or participate in the Scheme and thus did not receive any payouts, because a Scheme was a statutory contract and was not subject to common law requirements of contractual formation, e.g. need for consideration etc: at [61]-[62].

The workmen were therefore bound by the terms of the Scheme and therefore precluded from maintaining their common law claims against SAAG: at [63].

There would be no injustice in this case because the workmen still had recourse to their WCA claims as the WCA claims were under the terms of the Scheme: at [65]-[66].

However, this was merely fortuitous. In future cases, tort claimants who were not aware of and/or did not participate in a Scheme could find their claims entirely barred without their knowledge: at [67].

Thus, the Court stated several guidelines adopted from the Australian decision of R L Child & Co Pty Ltd (1986) 10 ACLR 673 so that such a wide interpretation of ‘creditors’ taken would not cause injustice (at [68]):

A responsible officer of the company proposing the scheme should provide evidence that the company has received no notice of any pecuniary claim against it and it is not aware of any circumstances likely to give rise to a pecuniary claim against the company other than what was disclosed to the court.

The courts should be slow to approve a scheme which would have the effect of barring a potential claim with no effective notice of the scheme given to the potential claimant and where this can be avoided without frustrating the commercial purpose of the scheme.

It would be appropriate to qualify the definition of a creditor in a scheme of arrangement to exclude any person having a claim in respect of which the company is entitled to indemnity under a policy of insurance, to the extent of the amount recoverable under such policy in respect of such claim.

Significance: entities who act as Scheme Managers should advise the company in respect of the above guidelines laid down by the SGCA in relation to contingent creditors vis-a-vis a Scheme.

Case Update: The Royal Bank of Scotland NV v TT International Ltd [2012] 4 SLR 1182; [2012] SGCA 53 – disclosure of professional fee arrangements to scheme creditors and the court

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; [2012] SGCA 53disclosure 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.

  1. 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.
  1. 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 [23].
  1. 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 [20]-[23].
  1. 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 [25]-[27].
  1. 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 [28]-[32], [37].
  1. 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 [33], [36].
  1. 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 [33]-[34].
  1. 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 [14].