29 July 2021
Re HTL International Holdings Pte Ltd  SGHC 86
In the recent case of Re HTL International Holdings Pte Ltd, the Singapore High Court considered whether it should intervene in, and set aside, the decision of an insolvent company’s judicial managers to sell the company’s assets to one party rather than another.
In this case, the judicial managers sold the entire issued and paid-up share capital in the insolvent companies’ subsidiaries to an entity linked to the original founder of the insolvent company, who was also a former director of the company. The sale of the insolvent company’s interests in its subsidiaries to the former director was opposed by the sole shareholder of the company, who had identified an alternative buyer for those subsidiaries.
The unique facts of the case presented an opportunity for the court to consider the test of unfair prejudice under section 227R of the Companies Act (now section 115 of the Insolvency, Restructuring and Dissolution Act 2018), which had not previously been considered in any reported decision of the Singapore courts.
On the facts of the case, the High Court found that the judicial managers’ decision to sell the subsidiaries to the entity linked to the former director, instead of the shareholder’s preferred buyer, was not unfairly prejudicial to the shareholder because it was not plainly wrongful, conspicuously unfair or perverse to do so.
The High Court held that to amount to unfair prejudice, the conduct of the judicial managers must have been plainly wrongful, conspicuously unfair or perverse. According to the test formulated by the court, judicial managers have a wide berth to exercise their commercial judgment and discretion, despite any objections from the shareholders of the insolvent company.
The judicial managers were confronted with two competing offers for HTL International Holdings Pte Ltd’s (“Company”) interests in its subsidies:
- An offer of US$100 million from Golden Hill Capital, an entity linked to the original founders of the Company who, through a related entity, were the largest external creditor of the Company and its subsidiaries. The related entity was the largest external creditor of the Company following the assignment of the Company’s debts to the related entity. The former director in question had also extended bridging loans to the Company when it was in interim judicial management. In addition to the offer of US$100 million, Golden Hill Capital agreed to provide to the Company a further US$20 million in working capital and a draw-down of the remaining US$3 million under a bridging loan given by the former director.
- An offer of US$100 million from Man Wah Holdings Ltd (“Man Wah”), with a promise of US$10 million more than Golden Hill Capital’s offer. In addition, Man Wah also agreed to provide US$20 million to the Company in post-completion working capital and an interest-free US$20 million interim credit facility that would be set off against the consideration payable.
After considering the competing offers, the judicial managers proceeded with the sale of the subsidiaries to Golden Hill Capital.
As Man Wah was the buyer preferred by the Company’s shareholder (“Shareholder”), the Shareholder applied under section 227R of the Companies Act (“section 227R CA”) for, inter alia, an order setting aside the sale to Golden Hill Capital and a direction requiring the judicial managers to accept Man Wah’s offer. The application was made on the basis that the sale to Golden Hill Capital was unfairly prejudicial to the Shareholder.
The law on unfair prejudice
The High Court held that:
- To establish unfair prejudice under section 227R CA, the applicant must show that (a) the act complained has caused prejudice to the interests of the company’s creditors or members generally or part thereof, and (b) this prejudice must be “unfair”.
- Wide latitude must be given to judicial managers. Where a judicial manager’s decision gave rise to unequal treatment, it will only be regarded as unfairly prejudicial if the pain caused to the section 227R CA applicant is wholly unrequired or the judicial manager’s decision is not at all commercially justifiable. In the words of the court, the section 227R CA applicant would have to show that “the pain caused to” the applicant “is out of whack with the reward to others”. On the other hand, if there is no unequal treatment (or, in other words, where the judicial manager’s decision has affected everyone within a class), such as where the judicial managers have sold a company’s assets at an undervalue, unfair prejudice will only be found if the judicial manager’s decision is illogical or perverse.
- Significantly, the court held that even if the price obtained in the sale of a company’s assets was not the best, this on its own would not conclusively establish unfair prejudice.
- When exercising their wide discretion, judicial managers will be justified in weighing the interests of creditors more than those of the members or shareholders. In this regard, the court re-affirmed the principle that where a company is insolvent or near-insolvent, the creditors’ interests prevail over those of the shareholders because, in a practical sense, it will be the creditors’ assets and not the shareholders’ assets that, through the medium of the company, will be under the management of the judicial managers.
Applying these principles, the High Court dismissed the Shareholder’s application to set aside the sale of the subsidiaries to Golden Hill Capital because the court found that the sale was not unfairly prejudicial to the Shareholder.
On the facts of the case, the court concluded that the judicial managers’ sale of the subsidiaries to Golden Hill Capital, instead of Man Wah, did not cause prejudice to the Shareholder. In particular, the court accepted the judicial managers’ determination that, in terms of shareholder returns, Golden Hill Capital’s offer was at least comparable or equal to Man Wah’s offer:
- The court noted that there was a need for an urgent completion of the sale given the precarious financial position of the subsidiaries. If the subsidiaries collapsed prior to the completion of the sale, their value would plummet substantially. The court therefore agreed with the judicial managers that even though Man Wah offered US$10 million more than Golden Hill Capital, it was not unreasonable to conclude that any benefit from the additional US$10 million would be offset by the fact that the Man Wah deal would require a longer time for completion.
- The court further held that it was reasonable for the judicial managers to consider that the Man Wah deal required more time for completion than the Golden Hill Capital deal and that during the estimated period for completion, the US$20 million interim credit facility offered by Man Wah would be depleted. The court also noted that there was evidence that the US$20 million interim credit facility provided by Man Wah to the Company would be further loaned by the Company to its subsidiaries and thereafter waived, thereby reducing the Company’s assets.
The court also found that, even if prejudice had been caused to the Shareholder, the judicial managers’ sale of the subsidiaries to Golden Hill Capital was not unfairly prejudicial as it was not plainly wrongful, conspicuously unfair or perverse. The sale to Golden Hill Capital was in the interests of the creditors and the Shareholder as a whole, given the aforementioned financial pressures faced by the subsidiaries and the limited time available to prevent their collapse.
Moreover, on the evidence, the judicial managers had fairly considered the competing offers from Man Wah and Golden Hill Capital. The court found that the judicial managers had seriously evaluated Man Wah’s proposals and had given Man Wah sufficient opportunity and time to improve its offer.
This is a welcome decision illuminating the factors to be taken into consideration when determining whether a judicial manager acted in an unfairly prejudicial manner in his management of the affairs, business and property of the company under judicial management. This case will be instructive to insolvency professionals, shareholders of companies facing insolvency, creditors of an insolvent company and potential purchasers of distressed assets.
The High Court made clear that the threshold for setting aside a decision of a judicial manager is high: unfair prejudice would only be established if the conduct of the judicial manager was plainly wrongful, conspicuously unfair or perverse. The court also confirmed that judicial managers have a wide berth to exercise their commercial judgment and discretion, despite any objections from the shareholders of the insolvent company and re-affirmed the principle that where a company is insolvent or near-insolvent, the creditors’ interests prevail over those of the shareholders.
The unique facts of the case - which presented a stark conflict between the preferences of the shareholder and creditors’ interests - presented a long-overdue opportunity for the court to consider the test of unfair prejudice under section 227R CA. As previously mentioned, prior to this case, there has not been any reported decision of the Singapore court on this issue. Although section 227R CA is no longer in force and has been superseded by section 115 of the of the Insolvency, Restructuring and Dissolution Act 2018, the respective provisions are in pari materia and accordingly, the principles set out in this case would still be relevant to an application (made now) to challenge a judicial manager’s decision to sell the insolvent company’s assets under section 115 of the of the Insolvency, Restructuring and Dissolution Act 2018.