Two offshore companies with stakes in a petrochemical complex on Jurong Island proposed schemes of arrangement with their creditors. The schemes passed the statutory majorities only because of votes from creditors who had taken assignments of debts shortly before. A judgment creditor objected. A five-judge Court of Appeal set the schemes aside.
Background
The operating company behind the aromatics complex went into receivership in 2015. Its two shareholding companies proposed schemes that depended on the receivers accepting a restructuring proposal from a new investor. If the proposal failed, creditors would receive only small fallback payments. The schemes passed the headcount and value tests only because of votes from creditors who had taken assignments of debts from related companies. The High Court sanctioned the schemes and granted a one-year moratorium.
Related creditors
The Court of Appeal declined to lay down a single test for when a creditor is related to a scheme company. It is a question of fact, and relevant factors include control, common controlling shareholders, common directors and family ties (at [39]–[42]). An assignee does not become related merely because it took its debt from a related creditor; what matters is the assignee’s own connection to the company (at [49]–[54]). The court also expressed a preference for wholly discounting the votes of tainted creditors, without deciding the point (at [64]–[67]).
Assignments and the headcount
Where debts are assigned in a way that increases the number of voting creditors, the court will look closely at whether the assignments, and the debts behind them, are genuine (at [68]–[83]). Here the debts said to be owed to the assignees were not proven: there was no audit confirmation or adequate documentation. The High Court therefore erred in sanctioning the schemes.
Disclosure and certainty
The receivers’ rejection of the restructuring proposal was material and should have been disclosed. But the directors’ unchallenged evidence was that the companies did not know of the rejection at the time of the creditors’ meetings, so there was no material non-disclosure by them (at [85]–[91]). The schemes were clear on their face, but with the central proposal rejected, what remained was essentially a shell that a court could not reasonably sanction (at [92]–[101]).
Why it matters
Companies proposing schemes must be ready to prove the debts that carry the vote, especially where debts have changed hands. Objecting creditors should probe the assignments and the documents behind them early.
Common questions
What is a scheme of arrangement?
A court-supervised compromise between a company and its creditors. It binds all creditors in a class if the required majorities vote for it and the court sanctions it.
Can creditors split or assign debts to influence a scheme vote?
Assignments are not banned, but where they are used to satisfy the headcount test the court will examine whether the debts are genuine and the dealings at arm’s length. Unproven debts can sink the scheme.
Akesh Abhilash is a Singapore disputes lawyer with eleven years in practice, acting in commercial, cross-border and criminal matters before the Court of Appeal, the High Court, the State Courts and international tribunals. Read his profile.