Schemes of Arrangement in Singapore: Empirical and Comparative Analyses.

• Author: Wan, Wai Yee

1. INTRODUCTION

   The scheme of arrangement ('scheme') has historically been one of the most flexible and popular debt restructuring tools in Singapore and the United Kingdom (UK). Its chief attractions have been the ability of company management, often under the advice of an insolvency practitioner, to take the lead in the restructuring and to effect a 'within-class' creditor cram-down, thereby binding dissenting creditors within an accepting class to the terms of the scheme once the requisite approvals are obtained. Although the scheme procedure is created by legislation (and is found in the Companies Act 2006 (UK) and in the Companies Act (Singapore)), (1) the law has largely been driven by judicial interpretation. (2)

   The scheme featured prominently in Singapore's 2017 introduction of wide-ranging reforms to its insolvency and restructuring laws (2017 reforms) with a view to enhancing its attractiveness as an international centre for debt restructuring. (3) Central to these reforms is the transplantation (with modification), of certain provisions from Chapter 11 in the United States Bankruptcy Code (Chapter 11), into the well-established scheme framework. The key question that this paper addresses is how well the English-modelled scheme has served as an effective debt-restructuring tool in Singapore, both pre- and post-2017 reforms. Existing bankruptcy scholarship considers that the core of any corporate reorganization theory is how the value of the restructured enterprise should be divided among the various claims and interests and there are several studies that examine how well the restructuring regime works in this context. (4) In assessing how well the scheme has functioned, we make comparisons with the English schemes and Chapter 11 (from which the 2017 reforms have been derived). We evaluate the processes (such as the length of time for the restructuring to be approved by the court, costs and the information made available for the creditors to make voting decisions) and substantive outcomes (such as the haircut and dilution to shareholders' interests) based on a mix of empirical and qualitative data.

   Our paper is the first study to address these issues by using a mix of qualitative and quantitative data and case studies on Singapore schemes as debt restructuring tools that cover the 1996-2019 period. (5) This period will cover the impact of the 2017 reforms. We seek to answer the following questions. First, what are the factors that are present in the successful schemes? In particular, do they require injection of external new financing and to what extent do shareholders provide such new funds? Second, how are schemes used to resolve outstanding claims by creditors and how much of the value is distributed among creditors and shareholders? Third, has the restructuring process resulted in considerable delay, potentially prejudicing creditors where the moratorium/stay of proceedings is in force? Fourth, how have the 2017 reforms introducing the Chapter 11 provisions affected the way in which schemes are filed? Our paper contributes to the literature on what is currently a dearth of larger scale empirical studies of English (6) or English-modelled schemes.

2. BACKGROUND

   The English scheme (7) differs in many respects from Chapter ll. (8) Chapter 11 is a debtor in possession regime where the management remains firmly in the control of the debtor company, allows for the cram-down of entire classes of creditors (not only within classes), has a robust automatic stay and sophisticated tools to deal with pre-packs and super-priority financing, and also sophisticated methods to deal with valuation of the enterprise. (9)

   The English scheme has been spoken of as a model for 'early stage' restructuring procedures. (10) Although the scheme functions as Singapore's de facto debtor-in-possession restructuring regime, it does not have any bankruptcy or insolvency stigma since it is a procedure based on company law rather than insolvency law. It is activated by the filing of documents with the court and an application to the court to convene meetings of relevant creditors to approve the scheme. The meeting of creditors under schemes is substantially similar to those conducted in Chapter 11 cases under [section] 341 of the U.S. Bankruptcy Code. Creditors whose rights are altered by the scheme are grouped into classes with creditors holding similar legal rights. In Singapore, case law has held that the votes of creditors related to the company may be discounted by the court as their interests (as distinct from rights) may differ from "'ordinary, independent and objective creditors of the same class." (11) In Chapter 11, a disclosure statement must be filed with the court that contains "adequate information" regarding the financial state of the debtor and the debtors' assets and liabilities, so as to permit creditors to make an informed decision in voting whether to approve the plan. Singapore case law has also held that "an informed voting process can only take place if all material information a creditor might need to determine how to vote is made available." (12)

   Under both Chapter 11 plans and schemes, the debtor organization is responsible for grouping creditors into the correct classes. In the case of schemes, this process of proposing the schemes to relevant classes of creditors is conducted under the guidance of an insolvency practitioner, who is then confirmed as the scheme manager if the scheme is adopted. The two most significant distinctions between schemes and Chapter 11 restructuring regimes with respect to the meeting of creditors are non-judicial administrative oversight and voting threshold requirements. In a Chapter 11, the process is overseen by, among others, the U.S. Trustee who provides oversight to protect against fraud, ensures adequate disclosure and ensures creditor committees represent the interest of the groups they represent. Schemes lack this external administrative oversight and instead, creditors may object to court approval of the scheme, referred to as "sanctioning" the scheme, should procedural or disclosure issues arise or should the scheme be unfair to a class of creditors.

   For a Chapter 11 plan to be confirmed, there must be acceptance by at least two-thirds in principal amount and one-half in number of the claims approved for payment under the plan of each class of impaired creditors and shareholders, respectively. (13) For schemes, creditor approval requires at least 75% in value of creditors within the relevant class plus a majority in number. (14) The scheme procedure can be used for various purposes including by companies of doubtful solvency to restructure their debts or rearrange their affairs. It has also proved extremely attractive as a restructuring vehicle of choice for companies incorporated outside the UK since the UK courts have jurisdiction to sanction a scheme (15) if the company is deemed to have 'sufficient connection' with the UK irrespective of where it was incorporated. As Snowden J said in Re Van Gansewinkel Groep BV:

   The use of schemes of arrangement in this way has been prompted by an understandable desire to save the companies in question from formal insolvency proceedings which would be destructive of value for creditors and lead to substantial loss of jobs. The inherent flexibility of a scheme of arrangement has proved particularly valuable in such cases where the existing financing agreements do not contain provisions permitting voluntary modification of their terms by an achievable majority of creditors, or in cases of pan-European groups of companies where co-ordination of rescue procedures or formal insolvency proceedings across more than one country would prove impossible or very difficult to achieve without substantial difficulty, delay and expense. (16) The traditional English scheme procedure lacks certain features of Chapter 11 including the automatic stay, cram-down of creditors across classes and provision for new financing on a priority basis. (17)

   In 2017, Singapore decided to amend its insolvency and restructuring laws with a view to enhancing its attractiveness as an international centre for debt restructuring. (18) Central to these reforms is the engrafting (with modification) of certain provisions from Chapter 11, including an enhanced moratorium (that functions similarly to the automatic stay under the bankruptcy code), (19) cross-class cram-down, pre-packed schemes (pre-packs) and super-priority financing.

   Our examination of the Singapore schemes will have implications not only for how the value of the restructured enterprise is distributed to the creditors and shareholders but also for how effective legal transplantation is from one country to another, providing a case study on how legal transplantation works. It is well established that reforms must be sensitive to local conditions and should take account of different implementing environments. Legal concepts tend to behave differently in different countries, and the importation of a new concept may have unintended consequences for the rest of the body of law. Although one should not preclude the possibility of borrowing from other countries, a good fit of foreign with domestic law would be enhanced by the meaningful adaptation of imported laws to local conditions. In our research, we critically assess whether Singapore's adaptation of the Chapter 11 provisions will work well in the insolvency and restructuring practice. We also evaluate the data against well-established characteristics of effective insolvency regimes, including the ability of creditors to initiate proceedings, the availability of a moratorium or stay of proceedings, rescue financing, cram-down and the position of management during insolvency proceedings. (20)

   At a wider level, the impact of the Singapore reforms is relevant to the UK, where Chapter 11 style reforms were considered following a Review of the...