5. Schemes of Arrangement

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Questions and Answers

What is required to initiate the scheme process for an insolvent company under the IRDA?

Documented proof of substantial connection to Singapore (correct)

A detailed financial report of the company

Evidence of creditor opposition to the scheme

A majority vote from the company's shareholders

What is the initial duration of the automatic interim moratorium provided by section 64 of the IRDA?

14 days

90 days

30 days (correct)

60 days

Under what condition can the court sanction a proposed scheme after creditor meetings?

If the scheme is approved by a majority in number of each class of creditors representing two-thirds in value

If a two-thirds majority of any class of creditors vote in favor

If the requisite majority of creditors representing three-fourths in value approve (correct)

If all creditors approve the scheme unanimously

What must be included in the affidavit supporting the application to the Court for leave to convene a meeting?

Authorization from a duly appointed company representative Signup and view all the answers

What does the automatic interim moratorium prevent during its duration?

Restraint of acts outside Singapore under specific circumstances Signup and view all the answers

What is the primary role of the court when considering an application for leave to convene a meeting?

To determine whether a meeting should be called and its conduct Signup and view all the answers

Which section of the Companies Act specifies the requirements for creditor meetings when proposing a scheme?

Section 210 Signup and view all the answers

What is a prerequisite for the interim moratorium to be effective?

Evidence indicating creditor support for the scheme must be presented Signup and view all the answers

What is required for a court to grant leave to convene a creditors' meeting?

No realistic prospect of the scheme receiving requisite approval Signup and view all the answers

Which statement best describes the requirements for the explanatory statement sent to creditors?

It needs to provide full disclosure of information necessary for voting decisions Signup and view all the answers

Under the dissimilarity principle, when should creditors be divided into separate classes?

If their rights are so dissimilar that they cannot sensibly consult together Signup and view all the answers

What is the statutory majority needed for voting on a proposed scheme?

Majority by number representing ¾ in value of the creditors present and voting Signup and view all the answers

What conditions must be met for a court to cram down dissenting classes of creditors?

There must be at least one approving class and no unfair discrimination Signup and view all the answers

When can the court approve a scheme without convening a meeting of creditors?

When conditions for approval would have been met if a meeting had been convened Signup and view all the answers

What must the court satisfy itself of before approving a scheme?

Certain matters have to be met, which include the fairness to all dissenting classes Signup and view all the answers

Which class of creditors is considered to have the highest priority during the liquidation process?

Creditors with priority and preferential claims Signup and view all the answers

What is a necessary condition for the approval of a scheme by the court?

The meeting attendees must represent the creditor class without coercion. Signup and view all the answers

Which of the following was a reason the court refused to sanction the scheme in Wah Yuen Electrical Engineering Pte Ltd v Singapore Cable Manufacturers Pte Ltd?

There was a lack of transparency regarding related company debts. Signup and view all the answers

What effect does the court order have on dissenting creditors once a scheme is approved?

All parties to the scheme, including dissenting creditors, are bound. Signup and view all the answers

How can a scheme potentially affect third parties?

Terms may be incorporated that affect third party rights or obligations. Signup and view all the answers

What types of termination events are typically outlined in a scheme document?

Duration, events of default, final payments, and votes. Signup and view all the answers

In the context of scheme approval, which statement is true regarding a reasonable businessperson's perspective?

The scheme should be comprehensible and reasonable for an interested member. Signup and view all the answers

What is a common requirement for creditors to be considered representative in a meeting regarding scheme approval?

There must be no coercive tactics applied to the minority. Signup and view all the answers

What does the court's refusal to sanction a scheme due to lack of transparency typically reflect on the involved companies?

A sign of mismanagement within the companies. Signup and view all the answers

Study Notes

Schemes of Arrangement

Relevant Legislation: Sections 63 to 72 of the Insolvency, Restructuring and Dissolution Act (IRDA) and Sections 210 and 211 of the Companies Act.
Focus: Schemes for creditors of insolvent companies.
Who Can Commence the Scheme Process: Any corporation liable to be wound up under the IRDA (including companies with a substantial connection with Singapore)
Interim Moratorium:
- Automatic Interim Moratorium: Arises upon application, providing an initial 30-day moratorium, extendable by court order.
- Requirements: Evidence of creditor support for the scheme, and if a scheme isn't fully developed, a brief description of the proposed scheme with sufficient particulars.
- Scope: Restricts acts outside Singapore and actions by creditors (except for prescribed set-off or netting arrangements).
Key Steps before a Scheme Becomes Binding:
- Application to Court: Request to convene one or more meetings of creditors.
- Creditors' Meeting: The proposed scheme is presented for approval, requiring a majority vote by number and value (¾) present and voting.
- Court Sanction: The court may sanction the scheme if it has the requisite majority approval.
Application to Court for Leave to Convene a Meeting:
- Method: Ex-parte originating summons under Order 38 Rule 2(1) of the Rules of Court.
- Support: Affidavit from a duly authorized person in the company.
- Court's Role: To decide whether a meeting should be called and its format, not to evaluate the merits of the scheme.
Considerations for Granting Leave to Convene:
- Realistic Prospect of Approval: The court should avoid granting leave if there's no realistic chance of the scheme getting the necessary approval.
- Disclosure and Transparency: The company must disclose material information to the court to facilitate a properly considered determination on how the meeting will be conducted.
After Leave is Granted:
- Notice and Explanatory Statement: Notice of the meeting and an explanatory statement must be sent to creditors, clearly explaining the scheme and the material interests of directors/shareholders. The statement should contain enough information to assist creditors in voting.
Classification of Creditors:
- Dissimilarity Principle: Creditors must be divided into different classes if their rights are so different that they cannot meaningfully collaborate to protect their interests.
- Possible Classes: This could include secured creditors, unsecured creditors, and those with priority or preferential claims.
Voting on Proposed Scheme: Requires a majority in number representing ¾ in value of creditors present and voting (either in person or by proxy).
Cramming Down Dissenting Classes of Creditors:
- Court's Power: The court can approve a scheme even if some creditor classes oppose it.
- Requirements: An approving class, majority approval from creditors meant to be bound, no unfair discrimination between classes, and a scheme deemed fair and equitable for each dissenting class.
Approval of Scheme Without a Meeting:
- Court's Power: The court may approve a scheme without holding a meeting of creditors if it's deemed that conditions for approval would have been satisfied if a meeting had been conducted.
Court Approval of the Scheme:
- Court's Satisfaction: The court must be satisfied that statutory provisions have been followed, representatives of the creditor class were present, and the scheme is reasonable for the class.
- Transparency and Disclosure: The court will scrutinize the information provided to ensure transparency and fairness, considering previous cases like Wah Yuen Electrical Engineering Pte Ltd v Singapore Cable Manufacturers Pte Ltd.
Effect of Court Order:
- Binding Effect: All parties to the scheme are bound, including dissenting creditors.
Effect of Scheme on Third Parties:
- Third-Party Rights: The scheme can have implications for third-party rights and obligations, as seen in cases like Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd and Pathfinder Strategic Credit LP v Empire Credit Resources Pte Ltd.
Termination of a Scheme: The scheme document will outline termination events such as a specified duration, the occurrence of certain conditions, final payments to creditors, or a vote by creditors/scheme manager.

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Description

This quiz explores the key aspects of Schemes of Arrangement under the Insolvency, Restructuring and Dissolution Act and the Companies Act. It covers the relevant legislation, the commencement of the scheme process, and the necessary steps before a scheme becomes binding. Test your knowledge on creditor arrangements and interim moratoriums in the context of insolvent companies.