Laying down the Ground Rules
30 June 2012
Lee Shih explains a significant decision on schemes of arrangement in Singapore.
The Singapore Court of Appeal decision of
The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and Others v TT International Ltd and another appeal [2012] SGCA 9 sets out guiding principles on how a scheme of arrangement should be implemented. The decision touched on issues concerning the role and duties of a scheme manager, the proof of debt process in a scheme of arrangement and the classification of creditors.
SUMMARY
The Court of Appeal elaborated on the stages leading to the sanctioning of a scheme of arrangement and approved of the English approach that issues of creditors’ classification should be considered by a court when it first hears the application for a creditors’ meeting.
The Court then laid down the following principles:
(1) A proposed scheme manager must act transparently and objectively and should not be in a position of conflict of interest (
i.e. if he aligns his interests without good reason with those of the applicant company). 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 applicant company.
(2) A scheme creditor is entitled to examine proofs of debt submitted by the other creditors in a proposed scheme of arrangement only if he produces
prima facie evidence of impropriety in the admission or rejection of such proofs of debt.
(3) A scheme creditor should be notified of the proposed scheme manager’s decision 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.
(4) 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.
(5) 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 (e.g. liquidation), then it should be classified differently.
(6) Related party creditors should have their votes discounted in light of their special interests to support a proposed scheme, by virtue of their relationship to the company. Wholly-owned subsidiaries should have their votes discounted to zero and are effectively classified separately from the general class of unsecured creditors.
BACKGROUND FACTS
The appeal arose from a High Court decision approving the scheme of arrangement of the applicant company, TT International Ltd (“Scheme”), despite the vigorous objections made by a number of creditors. The applicant company had obtained court approval to convene a meeting of a single class of creditors (“Scheme Meeting”). The proposed Scheme Manager chaired the Scheme Meeting and it was noted that the Scheme Manager was also concurrently the nominee for the individual voluntary arrangements (under the Bankruptcy Act) filed by the chairman and an executive director (who was also the chairman’s wife) of the applicant.
After the scheme creditors had voted at the Scheme Meeting, they were abruptly informed that the proposed Scheme Manager had not completed his adjudication of the proofs of debt. The proposed Scheme Manager later reported that the Scheme had been passed by a majority of creditors representing 75.06% in value, exceeding the statutory threshold of 75% by a razor thin margin. This prompted the opposing scheme creditors (the Appellants in this case) to seek copies of the proofs of debt lodged by certain creditors and other information regarding the other creditors’ claims.
Dissatisfied with the applicant’s adjudication of several proofs of debt as well as its response to their requests for information, the opposing scheme creditors objected to the Scheme. The High Court Judge, however, disagreed with those arguments and approved the Scheme. The opposing scheme creditors appealed to the Court of Appeal.
SCHEME OF ARRANGEMENT PROCEDURE
The Court of Appeal noted that there was a paucity of judicial guidance on the more precise mechanics of implementing the scheme of arrangement process and there was no statutory guidance on the many procedural issues relating to passing a scheme of arrangement. Hence, the Court summarised and laid down several guidelines.
The scheme of arrangement process takes place over three stages.
The First Stage
The first stage is the application to the court for an order that a meeting or meetings be summoned. The Court agreed with the approach in England (see the Practice Statement (Companies: Scheme of Arrangement) [2002] 1 WLR 1345) which would essentially require a preliminary determination of the correct classification of creditors.
The applicant would have to notify persons affected by the scheme of its purpose and the meetings which the applicant considers will be required. The applicant’s solicitors will have to unreservedly disclose all material information to the court to assist it in arriving at a properly considered determination on how the scheme creditors’ meeting is to be conducted. Any 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 hearing the application.
After the issuance of the notices summoning the meeting(s), the prospective scheme creditors will submit their proofs of debt and supporting documents. The chairman then has to perform the quasi-judicial task of adjudicating upon disputes as to the voting rights of anyone claiming to be a creditor. His role is akin to that of a judicial manager in deciding whether to admit or reject proofs of debt lodged with him.
The Second Stage
The second stage is where the scheme proposals are put to the meeting or meetings held in accordance with the earlier order and are approved (or not) by the requisite majority in number and 75% in value of those present and voting in person or by proxy.
It has become usual practice for the chairman to post a list of the creditors and the corresponding amounts of their admitted claims (for the purposes of voting) at the meeting venue prior to the meeting. After the creditors cast their votes, the chairman will immediately tabulate the results and announce them by the end of the meeting. If the statutory majority is achieved at the meeting(s), the proposed scheme then proceeds to the third stage.
The Third Stage
The third stage involves an application to the court to obtain the court’s sanction of the scheme. The court must be satisfied of three matters, namely (1) the statutory provisions have been complied with; (2) those who attended the meeting were fairly representative of the class of creditors and that the statutory majority did not coerce the minority; and (3) the scheme is one in which a man of business or an intelligent and honest man, being a member of the class concerned, would reasonably approve.
PROPOSED SCHEME MANAGER’S DUTIES AND CONFLICT OF INTEREST
The Court of Appeal then proceeded to deal with the issues before the court. The Court of Appeal explained that a proposed scheme manager has a good faith obligation to the applicant company and the body of creditors as a whole as well. Similar to a liquidator, the proposed scheme manager, in adjudicating proofs of debt, owes duties to be objective, independent, fair and impartial.
On the issue of conflict of interest, a proposed scheme manager must strike the right balance and manage the competing interests of successfully securing the approval of his proposed scheme and uncompromisingly respecting the procedural rights of all involved in the scheme process. He will go too far when he begins to align his interests with those of the company beyond what has been set out.
The Court found it inappropriate in this case that the proposed Scheme Manager was also the nominee for the individual voluntary arrangements (under Singapore’s Bankruptcy Act) filed by the chairman and an executive director (who was also the chairman’s wife) of the applicant. The Court ordered the proposed Scheme Manager to elect either to continue as such only or as nominee for the two individuals, as a result of which he eventually chose to act for the applicant alone.
ENTITLEMENT TO INSPECT PROOFS OF DEBT
The Court of Appeal highlighted that unlike insolvency and bankruptcy regimes which allow creditors to inspect the proofs of debt of other creditors, the interest of a creditor in a proposed scheme of arrangement is different. In the latter, the creditor has an autonomous voting right which may be critical to the jurisdiction of the court to sanction the scheme. Hence, claims to be given access to proofs of debt of other creditors can only be justified if the information is relevant to his voting rights.
In principle, therefore, a creditor has no legal right to have access to the proofs of debt of other creditors, except where his voting rights have been or are likely to be affected. In other words, he is entitled to such access only if he produces
prima facie evidence of impropriety in the admission or rejection of such proofs of debt.
NOTIFICATION OF CHAIRMAN’S DECISION TO ADMIT OR REJECT PROOF OF DEBT
The Court of Appeal approved of the practice of the chairman posting a list of the scheme creditors and the corresponding amounts of their admitted claims at the meeting venue before a creditors’ meeting. This allows the creditors to commence voting knowing how much their votes will count with or against those of their fellow creditors. In addition, the information allows some measure of informed consultation between the creditors regarding the exercise of their votes.
Therefore, the Court held that in the present case, the proposed Scheme Manager should have completed adjudicating all proofs of debt and then provided all the scheme creditors present with the full list of scheme creditors entitled to vote and the corresponding quanta of their claims that were admitted for the purpose of voting. A proposed scheme manager who cannot comply with such steps prior to the scheme creditors’ meeting should seek leave from the court to defer the meeting until the adjudication is completed.
APPEAL AGAINST DECISION TO ADMIT OR REJECT PROOF OF DEBT
The Court of Appeal recognised that there is no subsidiary legislation governing the admission and rejection of proofs of debt in relation to creditors’ meetings in a proposed scheme of arrangement. Having drawn comparisons with procedures in judicial management and liquidation, the Court of Appeal held that a creditor who has submitted a proof to the chairman of a scheme of arrangement creditors’ meeting can appeal the chairman’s decision in respect of the admission or rejection of both the creditor’s own proof of debt as well as those submitted by other creditors.
Such appeals should only be taken after the votes have been counted and it can be seen whether the vote in question would affect the result, preferably concurrently during the sanction stage. At such an appeal, the court will not ordinarily interfere with the chairman’s decisions based on his professional judgment unless it was affected by bad faith, a mistake as to the facts, an erroneous approach to the law or an error of principle. The court’s role is not to engage in its own valuation of a claim.
CLASSIFICATION OF CREDITORS
The principle on classification of creditors has been well established in that 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.
The Court of Appeal provided some clarification on this dissimilarity principle in that if a creditor’s (or a group of creditors’) position will improve or decline to such a different extent
vis-à-vis other creditors simply because of the terms of the scheme (and not because of its own unique circumstances) assessed against the most likely scenario in the absence of scheme approval (for instance, the frequent scenario of insolvent liquidation), then the creditor (or group of creditors) should be placed in a different voting class from the other creditors.
WHEN SHOULD SCHEME CREDITORS VOTES BE DISCOUNTED
In the situation of related creditors, while they need not constitute a separate class of creditors for voting purposes simply because they were related parties, the Court of Appeal agreed that the cases have consistently held that it is the norm to discount such votes in light of the related creditors’ special interests to support a proposed scheme by virtue of their relationship to the company. However, no guidance was provided on how much such a discount of voting weightage should be applied.
For wholly-owned subsidiaries (which are unsecured creditors), it was held that while they may be classed along with the other unsecured creditors, their votes should be discounted to zero. This effectively classed them separately from other unsecured creditors. The Court of Appeal viewed wholly-owned subsidiaries as extensions of the applicant company itself and their votes would undoubtedly be entirely controlled by the applicant company.
The Court of Appeal emphasised however that its decision on this point is limited to the treatment of wholly-owned subsidiaries. It recognised that the treatment of partially owned subsidiaries also raises difficult issues but this question would be addressed in a more appropriate case.
COMMENTARY
This decision provides a great deal of guidance in the area of the laws and procedure for schemes of arrangement. While decided in a Singapore context, these principles which are aimed at maintaining the integrity of the scheme of arrangement process, particularly the process in which proofs of debt are properly admitted or rejected for the purpose of voting, should be equally applied here. Any scheme must be grounded on the principles of transparency and objectivity, implemented by an independent and impartial proposed scheme manager.