Schemes of Arrangement (Singapore) PDF

Takeaways Schemes of Arrangement can be used as a debt restructuring tool for insolvent companies. The key legislation for schemes of arrangement is Section 63 to 72 of the Insolvency Dissolution Act (IRADA) and Section 210 and 211 of the Companies Act. A company must file an application for an i...

Takeaways Schemes of Arrangement can be used as a debt restructuring tool for insolvent companies. The key legislation for schemes of arrangement is Section 63 to 72 of the Insolvency Dissolution Act (IRADA) and Section 210 and 211 of the Companies Act. A company must file an application for an in-train moratorium to seek protection from legal and enforcement action. The company must comply with the requirements for an interim moratorium, including evidence of creditor support and a brief description of the proposed scheme. The moratorium restricts legal and enforcement action by creditors and may be extended to acts by creditors outside Singapore. The company must apply to court for leave to convene creditors\' meeting and achieve the requisite threshold for creditors\' approval. Creditors are classified based on the dissimilarity principle, and the scheme must be approved by the requisite majority of each class of creditors. If the requisite majority is not met for some classes, the cross-class cramdown mechanism in Section 70 of the IRADA may allow approval of the scheme. The court order approving the scheme binds all parties, including dissenting creditors, and may release or compromise the obligations of third parties. A scheme may terminate according to its terms, duration, events of default, or mechanisms for managing the scheme. Andrew Yip (00:02.166) This is the lecture on schemes of arrangement. Andrew Yip (00:11.758) This lecture is meant to give an outline of the key principles and steps in the Scheme of Arrangement. Schemes of Arrangement can be used by solvent and insolvent companies, for members or creditors or both. The focus here is on how schemes are used as a debt restructuring tool for insolvent companies. The key legislation to note are Section 63 to 72 of the Insolvency Dissolution Act or the IRADA for short. At the same time, must also know section 210 and 211 of the Companies Andrew Yip (00:58.594) Who can initiate a scheme of arrangement process in Singapore? It is generally commenced by the debtor company. A Singapore incorporated company can commence a scheme of arrangement process in Singapore. Can a foreign company do We should refer to the meaning of company as defined the purposes of the scheme of enrichment. See section 63, three of the IRDA and section 210, 11 of the company\'s apps. The key points to note are the company who can initiate a scheme process must be a corporation liable to bound up under the IRDA. And the key point is that there must be substantial connection with Singapore. Andrew Yip (01:51.585) What are the key stages in a scheme process? In many cases, a company needs time, it needs breathing space to negotiate with its creditors. It does not yet have a proposed scheme ready, but needs protection from legal and enforcement action. Such a company generally seeks protection by filing an application for an in -train Andrew Yip (02:18.733) This moratorium arises automatically upon filing of the application and lasts for an initial 30 days. Generally, the company seeks an extension of the moratorium, for example, for three to six months, depending on the circumstances. A company must comply with the requirements set out for an interim moratorium. Refer to Section 64 -4 of the IRDA. Such requirements include some evidence of creditor support for the proposed scheme, and where the company has not yet proposed a scheme to its creditors, a brief description of the proposed scheme with sufficient particulars. We should refer to the decision of the Singapore High Court in IMS Galgan. where the court sets out the key principles and approaches. Andrew Yip (03:16.469) Now we look at the scope of the moratorium. What does the moratorium restrict? The moratorium is strict to set out in Section 64, 1A of the IRDA and includes a stay against legal and enforcement action by creditors. In an appropriate case, the moratorium may be extended to prohibit acts by creditors outside Singapore. Important to note that generally contractual set -off rights of creditors should not be affected by the In -Train Moratorium. This is in addition to an express provision that prescribed set -off enacting arrangements are not affected. Please refer to the relevant regulations in the subsidiary legislation. Andrew Yip (04:08.717) While the moratorium is in force, the company works with its advisors and creditors to formulate a proposed scheme of arrangement. The next step, the key step, the application to court for leave to convene creditors\' meeting, for considering and voting on the scheme. If the court grants leave, there will be a timeline for the company to put the proposed scheme before the creditors for voting. What is the requisite threshold for creditors\' approval? It is majority number of each class of creditors representing three forbs in value, present and voting. Andrew Yip (04:50.613) Assuming the company is able to achieve the requisite threshold for the scheme, the company must now seek court approval of the scheme. If the court sanctions the scheme, the company will lodge a copy of the court order with the Registrar of Companies. That is when the scheme becomes effective. Andrew Yip (05:15.969) Let\'s go through in more detail the application to court, the lead to convene creditors meeting. The application is by Ex Parte, originating summons with a supporting F.E. David. In practice, creditors will also attend a hearing of the application and the court will consider the views and position. Andrew Yip (05:38.487) What is the court\'s approach in considering such an application? The key principles are set out by the Court of Appeal in TT International. A very important decision to read carefully. An application for leave to convene creditors\' meeting is not the appropriate forum to consider the merits and fairness of the scheme. The role of the court at that stage is to decide whether a meeting should be called and the manner in which it should be conducted. I must also highlight that there is a minimal level of disclosure by the company. And on that, you should read the Court of Appeal decision in PowerFinder. Andrew Yip (06:22.967) There are also cases where the court may refuse to grant leave to complain creditors\' meeting. And this is where the court forms a view that there is no realistic prospect of a scheme receiving the requisite approval. Andrew Yip (06:44.863) After leave is granted by the court to convene the accreditor\'s meeting, the company must then prepare a number of documents, the notice of meeting, and an explanatory statement which accompanies the The expanatry statement must contain a number of important particulars. It must explain the nature of the scheme. It must state any material interests of the company\'s directors and shareholders. The statement must also contain full and fair disclosure of information reasonably necessary to enable recipients to determine how to Andrew Yip (07:26.615) We now turn to the important issue of classification of creditors. As mentioned, the scheme must be approved by the requisite majority of each class of creditors. Creditors must be properly classified for purposes of voting in a scheme. The company should address the issue of classification of creditors when it files the application or leads to convene creditors\' As stated in TT International, the company must disclose all material information to the court to assist it in arriving at the properly considered determination on how the meeting is to be conducted. Any issues in relation to the possible need to separate the meetings for several councils of creditors ought to be brought to the attention of the court. during the application. Andrew Yip (08:19.105) How are creditors classified? The test is the dissimilarity principle. Creditors are divided into separate classes with their rights are so dissimilar that they cannot sensibly consult together with a view to the common interest. Andrew Yip (08:41.399) So these are the possible classes of creditors. To clear examples, we\'ll be secured creditors should be put in different class from unsecured creditors. Creditors with priority and preferential claims and who receive full payments may also be put in different classes. Creditors whose claims are subordinated in speculation. And do read the case of UTG International as dealt with issues on related unsecured creditors and contingent Andrew Yip (09:18.145) The voting of a proposed scheme, the company needs to the required majority and majority is majority number representing three forms and value of the creditors of each class of creditors present and voting at the meeting. And the creditor may be present and voting either in person or by proxy. Andrew Yip (09:41.685) If a represent majority of creditors vote in favour of the scheme, the minority is bound as well. We say that the minority creditors has been crammed What happens if there are two or more classes of creditors and the requisite majority is not met for some of the classes? For example, you cross an approval threshold for class A but not for class B. Is the scheme bound to fail? The answer is no if the company can rely on the cross -class clampdown mechanism set down in Section 70 of the IRDA. If the requirements in Section 70 are met, this allows a scheme to be approved even though not all classes of creditors have crossed the threshold. What are the requirements? Requirements are that there must at least be one approving class. There is the requisite approval from meant to be bound by the scheme overall. There must be no unfair discrimination between two or more dissenting classes of creditors, and the scheme is overall fair and equitable to each dissenting class. For present purposes, is sufficient for you to know these requirements in general. Andrew Yip (11:08.205) It is possible for our company to get the scheme approved without holding actual creditors\' The requirements in Section 71 of the IRDA are satisfied. I\'ll leave it to you to read Section 71 in detail. This is intended to allow our company to dispense with creditors\' and hence save costs in the process. Andrew Yip (12:19.885) There are examples where the court refused to sanction a scheme. One example is the case in Wai Wen Electrical Engineering, where the court refused to sanction the scheme due to lack of transparency on how related company debts were incurred. Other examples are Ray Econ Corp. Ltd. and Ray Horizon Knowledge Solutions Tribal Ltd. The general point is the lack of transparency and disclosure by the company in the process. Andrew Yip (12:56.695) So what is the effect of the court order approving the scheme? All parties to the scheme are bound, including the dissenting creditors, which I\'ve mentioned just now, they are crammed down by the majority. Do read the case in Oriental Insurance and Reliance National Asia, where the court discusses the effect of the court order sanctioning the scheme. Andrew Yip (13:23.669) A scheme compromises the company\'s debt obligations owed to its creditors. In many cases, there are third parties who are also liable for the debts, for example as Garing Tors. It is possible for a scheme to incorporate terms which release or compromise the obligations of third parties such as Garing Tors. If the scheme is approved and sanctioned, the third party\'s obligations may be released or compromised in accordance with the terms of the scheme. So you should read the cases in Dewu, Singapore and Pathfinder where the courts discuss the effect of schemes arrangement on third parties. Andrew Yip (14:09.301) A scheme will generally terminate in accordance with its terms. For example, the clear case of the scheme having been implemented and completed. Other cases of the scheme coming to an end could be by way of the duration the scheme may provide that is meant for a certain duration. There could be occurrences of events of defaults or the scheme may provide for certain mechanisms for creditors can vote on how to manage the scheme. and how the scheme should move forward. Andrew Yip (14:46.487) That\'s the end of the lecture on schemes of arrangement. Thank