Re Design Studio Group Ltd and other matters [2020] SGHC 148
Significance: The High Court granted the applicants super-priority to a debt arising from rescue financing under s 211E of the Companies Act, now s 67 of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA“). Notably, the financing was a ‘roll-up’, i.e. using newly input post-petition finances to pay off existing pre-petition debt, such that the pre-petition debt is effectively paid off and “rolled up” into the super-priority post-petition debt.
Aedit Abdullah J considered various materials and listed four main factors applicable to the court’s exercise of discretion to grant super-priority to proposed rescue financing (at [33]):
(a) Creditor’s interests: whether the other creditors will be unfairly prejudiced from the arrangement, or whether the arrangement will be beneficial to them. This involves weighing of the risk to creditors against the possible benefit to them, to determine what would be in their best interests. The court should also assess whether creditors are adequately protected, and whether the risks entailed can be managed. The degree of creditor opposition can also be considered.
(b) Viability of restructuring: whether there is a good probability that the restructuring will succeed. The court should assess how the rescue finances are proposed to be used, whether it would create new value for the company, whether stable returns are expected, or whether they would be used in risky investments.
(c) Alternative financing: whether better financing proposals are available. The court should consider if there were better proposals, offers or bids before the court, in particular, whether there were proposals which would not require super-priority. The court should also assess if the applicant had made reasonable efforts to procure such offers. Evidence of such reasonable attempts can include failed negotiations with other potential lenders; however, it is not necessary to show that financing was sought from every possible source.
(d) Terms of proposed financing: whether the terms were reasonable and in the exercise of sound business judgment. The court should assess the terms and conditions of the financing to consider if it was made in good faith, was for a proper purpose, and is fair, reasonable and adequate.
The court accepted at [39]-[40] that the proposed financing constitutes rescue financing. It was necessary for the survival of the fifth applicant as a going concern. If not for the proposed financing, the group would most certainly need to file for liquidation. It would also achieve a more advantageous realisation of assets of the fifth applicant than on a winding up. Creditors were expected to be paid more quickly and receive more recovery in a scheme compared to a liquidation of the group.
The court observed that there was no legislative intention to prohibit all roll-ups or to regard all roll-ups as rescue financing: at [44]-[49]. The proposed rescue financing should consist new loans and additional financing and create new value. The terms of each roll-up have to be scrutinised on a case by case basis. The amount of new funds put in should not be a miniscule or token sum or otherwise it would lack bona fides.
The court found on the evidence that the applicants had made bona fide genuine attempts to obtain other funding: at [58]-[59]. They engaged a reputable independent global financial services firm to seek potential lenders, but only five expressed interest with high return expectations, whereas the proposed financing was for much lower interest rates and fees.
The court found that the terms of the proposed financing were fair, reasonable and adequate: at [60]-[62]. The majority of the financing would create new value. Interest rates and fees were relatively low. The terms do not show that other creditors were being taken advantage of or that financing parties were gaining any disproportionate or unduly favourable advantage.
Accordingly, the court found that the proposed financing was viable: at [63].
There would be no undue harm or prejudice upon the other creditors, but would be in the creditors’ best interests; none of the creditors opposed the terms of the proposed financing: [64]-[66].
The court also granted sealing orders sought in respect of certain documents to protect the identity of the financial services firm, potential financiers and their proposed quotations: [68]-[69].