Introduction

When a company wishes to implement a scheme of arrangement, it is required by the Companies Ordinance (Cap. 622) (“CO”) to convene a meeting with creditors and shareholders for approval of the proposed scheme. In a recent decision, the Singapore Court of Appeal in SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] SGCA 51 ruled that the assignments of some of the debts by existing creditors were made to circumvent the statutory hurdle in passing the scheme at the creditors’ meeting.

Background

A scheme of arrangement is a statutory mechanism by which a company in financial difficulties may seek to compromise its debts such that the creditors are bound to accept a discounted amount of the debt that they are owed. Typically, the distressed company puts together a proposal to be presented to the company’s creditors and shareholders at a meeting of the respective classes of creditors and shareholders convened pursuant to a Court Order. In many jurisdictions, a scheme of arrangement is passed if the requisite majority of creditors and shareholders approve the proposed scheme. In Hong Kong, the statutory majority is set out at s.674 CO which requires a majority in number representing at least 75% in value (in the case of creditors) or voting rights (in the case of shareholders) of creditors/shareholders voting in person or by proxy in favour of the proposed scheme of arrangement. Similar requirements can be found in the English Companies Act 2006 and the Singapore Companies Act. In addition, the English Companies Act 2006 and the Singapore Companies Act further require a majority (i.e. 50%) in number of creditors/shareholders to be present.

It can be reasoned that the 75% and/or 50% hurdles are to ensure that the scheme of arrangement as a critical proposal of the company is supported by a vast majority of the key affected stakeholders of the company, namely the shareholders and creditors. If the statutory majority is achieved, all creditors, including those voting against the scheme, would be bound by the terms of that scheme. In recent years the Courts in various jurisdictions were asked to decide on whether certain practices are artificially carried out to circumvent the statutory requirements to manipulate voting results.

Share Splitting

In the landmark Hong Kong decision in Re PCCW Ltd [2009] 3 HKC 292, the Court of Appeal made it clear that share splitting for the purpose of manipulating the outcome in a shareholders’ scheme of arrangement is a form of abuse. More recently in Re Dee Valley Group plc [2017] EWHC 184 (Ch), the English High Court held that the chairman at the class meeting was justified in disallowing the votes of 434 individual shareholders who were each transferred one share by a minority shareholder employee. In essence, the English High Court considered that the transfer of 434 shares to 434 individual shareholders was share splitting which is a manipulative malpractice merely to achieve a majority in number representing 75% in value of the class of members present and voting at the meeting so required by s.899(1) of the Companies Act 2006. Had the chairman not disallowed those votes, the scheme in question would have failed because it would not have been approved by a simple majority present and voting at the meeting. The above two cases illustrate the Court’s attempt to protect the integrity of the court meeting against manipulative malpractice such as share splitting.

Debt Splitting

On 30 August 2017, the Singapore Court of Appeal handed down its decision in SK Engineering which sheds light on the Court’s view on, among other things, debt splitting which is the focus of this Newsletter. 

In this case, Conchubar Aromatics Ltd (“Conchubar”) and UVM Investment Corporation (“UVM”) (collectively, the “Scheme Companies”) were the direct and indirect shareholders, respectively, of Jurong Aromatics Corporation Pte Ltd (“JAC”). JAC was in financial difficulties and was put into receivership in September 2015. As a result, the Scheme Companies themselves were in financial difficulties because their shares in JAC were their primary assets. Jurong Energy International Pte Ltd (“JEI”) was set up on 13 July 2015 in an attempt to preserve and rehabilitate the JAC project. JEI submitted to the receivers and managers of JAC proposed schemes of arrangement (the “Schemes”). The Scheme Companies then proposed the Schemes to their respective creditors.

On 18 March 2016, the Court granted leave to the two Scheme Companies to convene meetings of their respective creditors to consider the Schemes. The voting results, which satisfied the requisite statutory majority set out in s.210(3AB) of the Singapore Companies Act, were as follows:

In relation to Conchubar:

Creditors	Total Debt Owed (USD)	Vote for (Value)	Vote for (%)	Vote Against (Value)	Vote Against (%)
Conchubar Chemicals Ltd (“Chemicals”)	50,000,000.00	50,000,000.00	65.55%	-	-
Universal Petrochem Corp. Ltd (“Universal”)	10,599,174.00	10,599,174.00	13.90%	-	-
Estanil Assets Ltd (“Estanil”)	1,150,912.00	1,150,912.00	1.51%	-	-
SK Engineering & Construction Co. Ltd (“SKEC”)	14,527,732.33	-	-	14,527,732.33	19.04%
Total	76,277,818.33	61,750,086.00	80.96%	14,527,732.00	19.04%

 

Chemicals is the major creditor of Conchubar. Chemicals allegedly owed to Universal. On 30 April 2015, Chemicals assigned to Universal its receivables of US$10.422 million from Conchubar. On 30 April 2015, Chemicals assigned to Estanil its receivables of US$1,131,673 from Conchubar.

In relation to UVM:

Creditors	Total Debt Owed (USD)	Vote for (Value)	Vote for (%)	Vote Against (Value)	Vote Against (%)
MacNair Group Inc (“MacNair”)	28,000,000.00	28,000,000.00	86.8%	-	-
Shefford Investment Holdings Ltd (“Shefford”)	317,651.00	-	-	-	-
Emirates Resources Inc (“Emirates”)	132,462.00	132,462.00	0.4%	-	-
SK Engineering & Construction Co Ltd (“SKEC”)	4,129,333.57	-	-	4,129,333.57	12.8%
Total	32,583,446.57	28,136,462.00	87.2%	4,129,333.57	12.8%

 

MacNair is the major creditor of UVM. MacNair allegedly owed to Emirates. On 30 April 2015, MacNair assigned to Emirates its receivables of US$134,181 from UVM.

SKEC, which was a judgment creditor of both Scheme Companies, was the only creditor of the Scheme Companies that voted against both of the Schemes. On 29 August 2016, the High Court sanctioned the Schemes to which SKEC objected on the basis that the votes of all the creditors which had voted in favour of the proposed Schemes ought to be wholly discounted as they were each related to Conchubar or UVM.  SKEC then appealed to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal found that the assignments of some of the debts (i.e. vote-splitting) by Chemicals and MacNair were made for the purpose of circumventing the “headcount” test in s.210(3AB)(a) of the Singapore Companies Act. In particular, the Court considered that the general concern with vote-splitting in respect of shareholders’ schemes of arrangement would not be any different in relation to creditors’ scheme of arrangement. The assignments to Universal, Estanil and Emirates had the effect of allowing the two Schemes to be passed when they otherwise would have been rejected.

In arriving at its decision, the Court of Appeal assessed whether: (a) the statutory requirements have been satisfied; (b) the statutory majority have voted in a manner that is representative of the interests of the class concerned; and (c) the Schemes are reasonable. Where creditors have obtained debts by assignment, there has to be sufficient information to satisfy the Court that the assignments were genuine and made at arm’s length, such as through audit confirmations. In the present case, the Court of Appeal was of the view that Chemicals and MacNair did not owe genuine debts to Universal, Estanil and Emirates.

The way in which the Court of Appeal formed its assessment in the current case suggests that the Court focuses on the substance rather than the form. The Court of Appeal’s approach is a welcome one and is consistent with the approach in share splitting cases in the sense that whether or not the splitting is a circumvention is to be decided in context. 

Conclusion

Following SK Engineering, the position of the Court is clear: manipulative measures purported to circumvent the statutory hurdle for scheme of arrangement would be disregarded, whether for share-splitting in shareholder schemes or debt-splitting in creditor schemes. In particular, in deciding the legitimacy of the splitting, the Court is likely to consider the commercial rationale and substance. In other words, the parties involved in such practices should be prepared to be challenged by the Court.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: insolvency@onc.hk                                   T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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