After a company makes an application for a scheme of arrangement (“SA”), it must convene a meeting of creditors to vote on its proposal. We now consider practical points that surface during the voting process.
Voting support with lock-up agreements
A company proposing an SA may wish to incentivise creditors to vote in its favour by offering benefits such as a fee for the creditors undertaking to vote in favour of the SA. Such lock-up agreements can allow the company to secure creditor support in advance of a creditors’ meeting, and the certainty they offer can be very useful before parties incur time and costs in finalising an SA. The Singapore High Court clarified earlier this year that a lock up agreement does not invariably create a separate class of voting creditors.
In Re Brightoil Petroleum (S’pore) Pte Ltd [2022] SGHC 35, the High Court considered lock-up arrangements for the first time, and found that they will generally not fracture a class of creditors. The court also laid down the following factors for deciding whether creditors should be classed separately on the basis that some of them may have received a benefit under a lock-up agreement:
- Whether the benefit offered is so sizeable as would have a significant influence on a reasonable creditor voting on an SA. On the facts, the court considered that the fee of 1% of a creditor’s admitted debt for agreeing to the SA was not so significant as compared to the potential recovery of 12% under the scheme and 0.2% in liquidation. Noting that the returns under the SA were 60 times compared to liquidation, the court considered that there was little reason to think that the consent fee distorted voting outcomes.
- Whether the lock-up agreement was offered to all creditors in the relevant class on substantially the same terms.
- Whether the use of the lock-up agreement was bona fides, g., without providing any misleading information to the creditors.
Voting by potential investors
It is not uncommon for a potential investor to try acquiring debts and equity in a company undergoing restructuring. The question of classifying such a white knight for purposes of voting on an SA was considered in Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 (“Re DSG”), where the court found that the investor should be placed in a separate class of creditors for voting on an SA if it would only be able to acquire equity on the SA being approved.
In Re DSG, a potential investor, Allington Advisory (“Allington”) (i) acquired certain claims held by parties related to the scheme company (DSG), and (ii) pursuant to a term sheet it concluded with DSG, agreed to provide a working capital facility of up to S$3 million and acquire a majority stake in DSG for S$2 million. DSG’s application for approval of a pre-packed SA was resisted by four creditors on the basis (among others) that Allington should not have been placed in the same class as other unsecured creditors due to its status as a potential investor. Since Allington’s investment was conditional on the SA being implemented, the Court considered that that rendered Allington unable to consult with the other unsecured creditors with a view to their common interest. As such, its rights as a potential investor affected its classification. Allington’s rights as a rescue financier were found to be irrelevant to classification as they did not arise out of and were not dependant on the scheme.
Voting by related creditors
It is clear that the votes of creditors which are also wholly owned subsidiaries of the scheme company should be discounted to zero: The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) v TT International Ltd [2012] 2 SLR 213 (“TT International”). The position is however not clear for other related companies which are not wholly owned subsidiaries. Relatedness in this context is a fact-specific query, and an inference of relatedness may arise where the scheme company and the creditor have common controlling shareholders. Other non-exhaustive instances where a presumption of relatedness may arise are as follows (SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] 2 SLR 898 (“SK Engineering”)):
- The scheme company controls the creditor or vice versa.
- The scheme company and the creditor have a common controlling shareholder, e., a shareholder who owns (directly/indirectly) 50% or more of the shares in the companies.
- 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. What would be considered de minimis would depend on the facts (the threshold would for instance be higher in the case of a public listed company as opposed to a private company).
- The creditor and the scheme company have common director(s), in particular, director(s) who propose or support the scheme.
- 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.
A presumption of relatedness may be rebutted by statutory declarations made by the scheme company and the creditor in question as was done in SK Engineering. The level of discount to be applied to the votes of related creditors that are not wholly owned subsidiaries of the scheme company is not currently settled. The Court of Appeal in TT International took the view that such votes should be discounted partially, while in the SK Engineering it disagreed with the partial discounting approach reasoning that it appears more principled and certain to wholly discount the votes of creditors once they are found to be related to the scheme company. It remains to be seen how the divergence will be resolved. While the Court’s remarks in SK Engineering suggest that votes of related creditors who are not wholly owned subsidiaries of the scheme company will be fully discounted, this may not preserve the interests of shareholders who may have extended rescue financing to assist the scheme company before it made the scheme application.
Voting by creditors with both secured and unsecured claims
It is not uncommon for a creditor to have both secured and unsecured claims against a company. Under English law, where a creditor has crossholdings, i.e., holds claims across different classes, that does not by itself fracture a class or require any separate class meetings to be convened. Thus, a creditor will get the same rights as a member of a particular class as other creditors in that class. That said, such matters are appropriately considered at the sanction stage of an SA, when it can be ascertained whether the majorities in one class have been obtained as a result of creditors with crossholdings voting so as to promote their interests in another class rather than in the interests of the class in which they are voting.
There are no reported Singapore decisions yet considering the classification of creditors with both secured and unsecured claims, or creditors with under-secured claims (i.e., where the claim value exceeds the value of security).
