Judicial Management, Scheme of Arrangement and Winding Up in Singapore. Copyright Colin Ng & Partners LLP 1

Judicial Management, Scheme of Arrangement and Winding Up in Singapore Copyright Colin Ng & Partners LLP 1

Introduction Economic crisis many companies hit by cash flow problems and financial difficulties. Business is still viable, just need some respite from creditors, need to avoid winding up. Alternatives Judicial Management and Schemes of Arrangement. How to choose the appropriate option? Copyright Colin Ng & Partners LLP

Introduction Insolvency proceedings are governed by the Companies Act (Cap 50). A. Rehabilitative procedures:- 1. Judicial Management; and 2. Scheme of Arrangement; B. Liquidation or Winding Up proceedings. Copyright Colin Ng & Partners LLP 3

Introduction Main objectives of corporate insolvency regimes:- to maximise an insolvent company s assets; for rehabilitative proceedings, there is the added objective of keeping financially troubled companies afloat so as to stave off a winding up; and for liquidation proceedings, there are the added objectives of procuring fair distribution of the assets of an insolvent company amongst creditors; and identifying the causes of failure and holding those guilty of mismanagement or misconduct responsible for their acts. Copyright Colin Ng & Partners LLP 4

Judicial Management Judicial Management ( JM ) is a temporary court-supervised rescue plan. Objective: to give viable companies which are in financial trouble a more even chance to rehabilitate themselves and be restored to profitability. Copyright Colin Ng & Partners LLP 5

Judicial Management Procedure & Timeline (a) Application for JM court order may be made by: the company; its directors; or its creditors. (b) Grounds for appointment of judicial manager:- the company is unable to pay its debts; and the appointment would be likely to achieve: the survival of the company or the whole or part of its undertaking as a going concern; the approval of a compromise or arrangement between the company and its creditors; or a more advantageous realisation of the company s assets than could be effected on a winding up. Copyright Colin Ng & Partners LLP 6

Judicial Management (c) Effects of filing an application for JM: a moratorium - no steps can be taken to wind up the company; and legal proceedings or execution of judgments against the company cannot be commenced or continued unless with prior leave of court. Copyright Colin Ng & Partners LLP 7

Judicial Management (d) Nomination and Appointment of Judicial Manager After an application is presented to court, a JM order is usually made 3 to 5 weeks later. In cases of urgency, the applicant may apply for an interim judicial manager to be appointed. Nomination of a judicial manager is made by the applicant. Judicial Manager must be an approved company auditor, but not the auditor of the company. Creditors may by voting at a meeting oppose the nomination by majority in number and value. Copyright Colin Ng & Partners LLP 8

Judicial Management Upon JM order being made, the board of directors becomes functus officio and its functions and powers are transferred to the judicial manager. Statement of affairs to be submitted by BOD within 21 days of receiving notice of the JM order. Judicial Manager to present a statement of proposals to the creditors within 60 days of appointment, at creditors meeting. Copyright Colin Ng & Partners LLP 9

Judicial Management (e) Statement of Proposals and Creditors Meeting A creditor must first lodge a proof of debt to be able to vote on these proposals. Debt must be liquidated and not contingent and the value thereof must be ascertained. A secured creditor is not allowed to vote unless he surrenders the security, or unless part of the debt owed to him is unsecured. The proposal may be approved by the majority of the creditors in number and value. The proposal may be modified at the meeting prior to its approval as long as the Judicial Manager consents. Copyright Colin Ng & Partners LLP 10

Judicial Management A Judicial Manager has the duty to manage company s affairs in accordance with approved proposals. A JM order remains in force for 180 days and may be extended. Court has power to adjourn creditors meeting, allow amendments to the proposals and make interim orders. Court may grant relief to any member from unfair prejudice. Copyright Colin Ng & Partners LLP 11

Judicial Management CASE STUDY DEUTSCHE BANK AG AND ANOTHER VS ASIA PULP & PAPER CO LTD [2003] 2SLR320; [2003] SGCA 19 Facts: JM remedy sought by insolvent company s creditors and opposed by the insolvent company. Ruling: The court declined to issue JM order to allow company to restructure its debts and retain present managers. Issue: The court had to examine the case to see whether to hand the company over to independent judicial managers or leave the restructuring process to be run by the present management. Copyright Colin Ng & Partners LLP Points considered by the court: a) The costs to be incurred by JM will be very high and will deplete assets; b) The local knowledge of parties controlling the company s subsidiaries is vital; and c) There would be litigation when judicial managers try to take control of entities in different jurisdictions.

Schemes of Arrangement Schemes of Arrangements ( SA ) are very wide ranging and include any form of compromise or give-and-take agreements between debtors and creditors. SAs assist a company to come up with an overall plan to deal with all creditors at the same time. SAs overcome the difficulty of obtaining the individual consent of every creditor or shareholder to a compromise or an arrangement of their debts or rights against the company. Copyright Colin Ng & Partners LLP 13

Schemes of Arrangement Procedure and Timeline (a)court Application for Scheme Meeting The company will prepare a sample scheme and make an application to court for a meeting (the Scheme Meeting ) of the creditors or members to be ordered. Within 3 to 5 weeks, Court gives its approval for the Scheme Meeting. Approval of Scheme by majority in number representing three-fourths in value of the creditors/members or class of creditors/members present and voting. Applicant brings the approved Scheme to court for approval. Court approves scheme and it becomes binding on all the creditors/members. Scheme is made effective upon lodgment with Registrar of Companies. Copyright Colin Ng & Partners LLP 14

Schemes of Arrangement (b) Two-fold function of the court: (1) Ensure that the statutory procedure has been complied with and that the resolutions are passed by the requisite majority in value and in number of creditors or members at meetings duly convened and held; and (2) Determine that the scheme is fair and reasonable. In deciding whether a scheme has been properly approved by the requisite majorities, the court may consider whether the members and creditors have been provided with sufficient information in order for them to make an informed decision. There is no automatic moratorium on action against the company while a SA is being proposed. Section 210(10) of the Act provides that an application may be made to court for an order that proceedings pending against the company be stayed. Copyright Colin Ng & Partners LLP 15

Schemes of Arrangement CASE STUDY RE HORIZON KNOWLEDGE SOLUTIONS PTE LTD [2004] SGHC 270 Issue: Whether related unsecured creditors should be treated as falling within the same class as unrelated unsecured creditors for purposes of sanctioning a SA. Ruling: No. Court declined to sanction the scheme. Definition of class of creditors - dissimilarity test - a group of persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. Should not result in injustice to any party. Lack of transparency about the circumstances in which the related parties debts were incurred. Copyright Colin Ng & Partners LLP

Comparison between JM and SA Judicial Management Objective: give viable companies in financial trouble a chance to rehabilitate and be restored to profitability An independant auditor takes over the running of the company. Management is displaced. Automatic and immediate moratorium once an application for JM has been filed. Scheme of Arrangement Objective: to come up with an overall plan to deal with creditors on the compromise or the restructure of debts. Unless the SA is part of a JM, the BOD still running the business. Trust in management is thus a factor. No automatic moratorium. Have to apply to court. No protection in the interim. More publicity. Less publicity. Copyright Colin Ng & Partners LLP 17

In Comparison: Chapter 11, United States Bankruptcy Code Chapter 11 - pro-debtor rather than pro-creditor. It is a process normally begun by the company itself, seeking protection from its creditors. The existing management is not displaced in favour of a court-appointed administrator. Debtor in possession or DIP concept the debtor in possession can run the business in its ordinary manner, but court approval is required if it wants to sell any substantial assets. The management itself prepares a reorganization plan to be put to the vote of creditors and shareholders. This plan, once approved, will have to be confirmed by the court. Copyright Colin Ng & Partners LLP 18

In Comparison: Chapter 11, United States Bankruptcy Code There is provision for financing of the company during the period it is under protection of Chapter 11. New financing has priority over pre-petition unsecured debts. There is no real requirement that the company should be insolvent before an application can be made. Once a company is placed into Chapter 11, there is an automatic moratorium on all proceedings or executions against the company and its assets. Copyright Colin Ng & Partners LLP

Chapter 11 - A Possible Model for Singapore s New Insolvency Act? In Singapore, the closest we have to the Chapter 11 model is probably the JM, coupled with the SA. DIP concept in Chapter 11- management in control. True rehabilitation under Chapter 11. New financing possible under Chapter 11. Secured creditors objections can be statutorily overcome. Chapter 11 model is pro-debtor. Copyright Colin Ng & Partners LLP 20

Liquidation Procedure Effects of Winding up: the company s business is closed down, its assets sold off, the creditors paid and the balance of the assets (if any) distributed to the members. At the end of the entire process, the company is dissolved and ceases to exist. Modes of winding up: voluntary; and compulsory. Copyright Colin Ng & Partners LLP 21

Voluntary Winding Up Where a company is solvent - Members Voluntary Liquidation. the company s members pass a resolution to commence the proceedings. the directors make a statutory declaration that they are of the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up. Where the company is insolvent Creditors Voluntary Liquidation. proceedings will have to be initiated by its members and then confirmed by a vote of its creditors. Copyright Colin Ng & Partners LLP 22

Compulsory Winding Up Tests for insolvency:- (a) cash flow test; (b) balance sheet test. Presumed to be insolvent when unable to pay sum demanded within 21 days from demand. Who may apply for compulsory winding up:- (a) the company itself; (b) a creditor; (c) a contributory; (d) the personal representative of a deceased contributory; (e) the trustee in bankruptcy or the official assignee of the estate of a bankrupt contributory; (f) the liquidator of the company; (g) the judicial manager of the company; and (h) the Minister for Finance. Copyright Colin Ng & Partners LLP 23

Compulsory Winding Up Some grounds for compulsory winding up (Section 254(1): the company is unable to pay its debts; the court is of the opinion that it is just and equitable that the company be wound up; the company has no member; the directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatever which appears to be unfair or unjust to other members; a banking company has had its licence revoked or has carried on business in contravention of any written law relating to banking; the company has carried on multi-level marketing or pyramid selling; and the company is being used for an unlawful purpose or for purposes prejudicial to public peace, welfare or good order of Singapore, or against national security to the national interest. Copyright Colin Ng & Partners LLP 24

Liquidation Procedure Upon commencement of winding up:- every invoice, order for goods or business letter issued by the company must indicate that it is in liquidation and the type of liquidation it is in; the business of the company ceases except so far as the liquidator thinks it necessary for the beneficial winding up of the company; the liquidator has no power to carry on the business with a view to resuscitating the company or making profits; the liquidator will call on each of the company s creditors to lodge a proof of debt; and the liquidator adjudicates on the proofs of debt lodged with him. A creditor who is dissatisfied with the decision of the liquidator in respect of a proof of debt may appeal to the court. Copyright Colin Ng & Partners LLP 25

Liquidation Procedure An order for winding up is usually made 5 to 6 weeks after the application is made, unless the court adjourns the matter for some reason. In cases of urgency, the applicant may apply for a provisional liquidator to be appointed. A compulsory liquidation commences at the date of filing of application to court. A voluntary winding up commences immediately upon the passing of the requisite resolutions. Copyright Colin Ng & Partners LLP 26

Liquidation Procedure The company s property is to be applied as follows:- (a) (b) (c) (d) (e) (f) (g) in payment of the costs and expenses of the winding up; in payment of wages or salary; in payment of retrenchment benefits; in payment of workmen s compensation; in payment of contributions to the national superannuation scheme; in payment of remuneration payable in respect of vacation leave; and payment of income tax and goods and services tax. The unsecured creditors share pari passu in the remaining assets; and any surplus remaining is distributed amongst the members according to their rights and interests in the company. Copyright Colin Ng & Partners LLP 27

Liquidation Procedure Points to note:- No automatic stay of legal proceedings against the company upon application for winding up. The court has discretion under section 258 of the Act to make an order staying or restraining further proceedings in the action or proceedings on the application of the company, a creditor or a contributory. Once a winding up order is made or a provisional liquidator appointed, there is an automatic stay of proceedings against the company under section 262(3) of the Act unless the court gives leave for the proceedings to continue. Any attachment, sequestration, distress or execution put in force against the estate or effects of the company shall after the commencement of liquidation be VOID. Any such proceedings commenced before the commencement of the winding up but which has not been completed at that time are also ineffective. Copyright Colin Ng & Partners LLP 28

Thank You. Copyright Colin Ng & Partners LLP 29