Introduction

In early 2017, the Singapore Parliament introduced the super priority rescue financing mechanisms via the Companies (Amendment) Act 2017. The regime allows lenders who provide rescue financing to companies experiencing financial difficulties to obtain super priority status with approval of the court, thereby enabling them to be repaid prior to other creditors in the event of winding up of such companies. In a recent decision Re Attilan Group Ltd [2017] SGHC 283, the Singapore High Court (the “Court”) first considered this new super priority rescue financing mechanism.

Background

Attilan Group Limited (“the Applicant”) is a company listed on the main board of the Singapore Exchange. Pursuant to a subscription agreement (the “Subscription Agreement”) entered into between the Applicant and Advance Opportunities Fund 1 (the “Subscriber”), the Subscriber agreed to subscribe for convertible loan notes, in several tranches.

In March 2017, Phillip Asia Pacific Opportunity Fund Ltd, a creditor of the Applicant, instituted a suit against the Applicant (the “Suit”), which constitutes a default under the Subscription Agreement. As a result of the Suit, the Subscriber refused to subscribe for the remaining tranches under the Subscription Agreement. In light of the financial difficulties, the Applicant sought a scheme of arrangement, which involved, among other things, subscription of subsequent sums (the “Subsequent Sums”) by the Subscriber under the Subscription Agreement.

The Application

The Applicant sought leave from the Court to treat the Subsequent Sums as rescue financing and thereby be accorded super priority in the event of winding up of the Applicant. The application was made based on two limbs of new section 211E of the Companies Act, which empowers the Court to order rescue financing to be:

1.       treated as part of costs and expenses of winding up (section 211E(1)(a)); or

2.       given priority over certain preferential debts and all other unsecured debts, provided that the rescue financing would not be secured unless super priority was given (section 211E(1)(b)).

The Decision

Form of financing

The present case involved the provision of financing by the Subscriber, who was an existing creditor of the Applicant, with an existing obligation to provide such financing under the Subscription Agreement.

To constitute rescue financing, the Court considered that it is not necessary for the proposed financing to be entirely new. It can be additional financing from an existing creditor and can be premised on a prior obligation. However if the prior obligation to provide additional financing continues to bind the creditor then such funds should not be accorded protection and priority under the new super priority rescue mechanism.  This is consistent with the rationale for granting super priority over rescue financing, which aims at encouraging creditors to provide additional financing to companies in financial difficulties.

Under the Subscription Agreement, the Subscriber was excused from dispensing further tranches of fund due to the default, i.e. the initiation of the Suit. As such, any further sums disbursed by the Subscriber upon continuation of the existing Subscription Agreement are considered as additional funding, and can constitute “rescue financing” under section 211E of the Companies Act.

Conditions for granting super priority status

The Court made it clear that, when making an order of rescue financing granting priority over certain preferential debts and all other unsecured debts, it must be satisfied that the Applicant would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given priority. In other words, the Applicant must expend reasonable efforts to source for less disruptive sources of financing, i.e. financing without the super priority status as sought by the Applicant. Further, the Court noted that the grant of super priority status should not ordinarily be resorted to unless it is strictly necessary, as such super priority status disrupts the expected order of priority of the creditors of a company.

The Applicant however failed to adduce evidence of its attempt to obtain less disruptive sources of financing. Accordingly, the Court declined to grant super priority status to the proposed financing from the Subscriber.

Conclusion

Insights to Singapore

As the first judicial decision on the newly introduced rescue financing provisions in Singapore, the present case provides clear guidance on the operation of such provisions. In arriving at the present decision, the Court took reference to certain case laws from the United States as section 211E of the Companies Act was inspired by similar provisions in Chapter 11 of the United States Bankruptcy Code. The United States jurisprudence in this area, albeit non-binding, may provide useful guidance to practitioners in Singapore while interpreting other rescue financing provisions under the Companies Act. Following the present case, companies in Singapore are reminded to adduce sufficient evidence of reasonable efforts to obtain alternative financing on a normal basis to obtain orders under section 211E of the Companies Act.

Insights to Hong Kong

Hong Kong is yet to develop a widely-applicable, standalone rescue financing regime as the one in Singapore. Nonetheless, similar mechanism with limited application can be observed from section 265(5B) of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “CWUMPO”), which is substantially the same as section 38(5B) of the Bankruptcy Ordinance (Cap. 6) (the “BO”). It provides that in the event of successful recovery of assets under an indemnity for costs of litigation given by a creditor or where expenses in relation to which a creditor has indemnified a liquidator have been recovered, Hong Kong courts are empowered to make orders to give such creditors advantages over other creditors in the distribution of assets or expenses recovered.

Section 38(5B) of the BO was considered in Re Leung Yat Tung HCB 2019/2000. The court allowed the application of the petitioning creditor to recover its out-of-pocket expenses and deposit made under a funding agreement, pursuant to which the petitioning creditor financially supported the trustee in bankruptcy to proceed with avoidance proceedings (setting aside transfer of shares at an undervalue). In granting advantage to the petitioning creditor over others in distribution of the recovered assets, the court recognized the considerable risk assumed by the petitioning creditor under the funding agreement and the substantial benefits reaped by the bankruptcy estate.

The objective and the rationale behind section 265(5B) of the CWUMPO and section 38(5B) the BO are indeed similar to the newly introduced rescue financing regime in Singapore. While having a potential to introduce and implement a standalone rescue financing regime as the one in Singapore, Hong Kong may keep track on the development of such framework in Singapore and its impact on the country to act as a debt restructuring hub.

  

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017