20 December 2021
Yihua Lifestyle Technology Co, Ltd & Anor v HTL International Holdings Pte Ltd & Ors  SGCA 87
In Yihua Lifestyle Technology Co, Ltd & Anor v HTL International Holdings Pte Ltd & Ors, the Singapore Court of Appeal declined to intervene in the decision of an insolvent company’s judicial managers (“JMs”) to sell the company’s assets to one party rather than to another. In so ruling, the Court of Appeal upheld the High Court’s decision in Re HTL International Holdings Pte Ltd  SGHC 86, and set out a two-stage test to determine when it would be appropriate to displace the discretion exercised by the JMs.
The JMs were confronted with two competing offers for the assets of HTL International Holdings Pte Ltd (“Company”):
- An offer of US$100 million from Golden Hill Capital Pte Ltd (“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.
- 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 - effectively bringing Man Wah’s offer to US$110 million. 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 JMs accepted the offer from Golden Hill Capital and proceeded to complete the sale of the asset.
As Man Wah was the buyer preferred by the Company’s sole shareholder (“Shareholder”), the Shareholder applied under section 227R of the Companies Act (“CA”) (now section 115 of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”)) for an order setting aside the sale to Golden Hill Capital. The application was made on the basis that the sale to Golden Hill Capital was unfairly prejudicial to the Shareholder’s interests.
In dismissing the Shareholders’ application, the High Court Judge found that there was no unfair prejudice to the Shareholder.
In its appeal against the High Court’s decision, the Shareholder argued that the JMs acted perversely in selecting Golden Hill Capital’s offer, which was inferior to Man Wah’s offer in terms of shareholder returns.
Test for unfair prejudice under section 227R of CA
The High Court Judge had held that the court would only interfere with the JMs’ decision if it could be shown that their conduct had been plainly wrongful, conspicuously unfair or perverse. According to the test formulated by the court, JMs have a wide berth to exercise their commercial judgment and discretion, despite any objections from the shareholders of the insolvent company.
The Court of Appeal broadly agreed with the High Court’s exposition of the relevant principles and held that a two-stage test ought to be applied to determine whether a judicial manager has acted or proposed to act in a manner which would unfairly harm the interests of the applicant:
- It must be shown that the action complained of has caused, or would cause, the applicant to suffer harm in his capacity as a member or creditor.
- The harm caused by the action complained of must be unfair. In this regard, unfairness may arise from (a) conspicuously unfair or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the objective of the judicial management or the interests of the members or creditors as a whole; or (b) a lack of legal or commercial justification for a decision which causes harm to the members or creditors as a whole. In the second category of unfair prejudice where there is no unequal treatment (for example, the JMs’ decision affects everyone within a class), the court will not interfere with the JMs’ decision unless it is perverse (i.e. unable to withstand logical analysis).
JMs did not act in a manner that was unfairly prejudicial to the interests of the Shareholder
As the Shareholder did not claim to be the subject of differential treatment, the Court of Appeal considered whether the JMs’s decision to sell the assets to Golden Hill Capital was perverse. The court found that the Shareholders’ assertion that Man Wah’s offer would yield a higher shareholder return than Golden Hill Capital’s offer was unmeritorious:
- The court noted that the Shareholder’s expert was unwilling to challenge the JMs’ assessment of the shareholder returns generated by Golden Hill Capital’s offer, as the expert accepted that the JMs were more familiar with the terms of that offer.
- The court found that it was entirely reasonable for the JMs to take the view that the entire US$20 million interim facility offered by Man Wah would be completely depleted within the time required for the completion of Man Wah’s offer. The JMs had disclosed advice from Hong Kong counsel, which was not disputed by the Shareholder, estimating that Man Wah’s offer would take between two and six months to complete, and that, furthermore, it would not have been able to generate income for the Company in the interim.
- The Shareholder’s contention that the post-completion working capital of US$20 million offered by Man Wah could be set off against the Company’s liabilities was without merit as Man Wah had clearly stated that the working capital facility was to be provided to the Company’s subsidiaries and not to the Company.
The Shareholder also argued that the JMs’ refusal to provide a full set of the Company’s financial accounts deprived Man Wah of an opportunity to submit an improved offer. This argument was rejected as being speculative and without basis. In particular, the court was unpersuaded by the Shareholder’s claim that Man Wah could potentially have increased the amount of the US$20 million interim facility if it had been provided with the full set of financials as the Shareholder’s claim was a bare assertion without any substantiation.
This decision illuminates the factors to consider 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 and will be instructive to insolvency professionals, shareholders of companies facing insolvency, creditors of an insolvent company, and potential purchasers of distressed assets.
Notably, the two-stage test adopted by the Court of Appeal distinguishes between a JM’s decision which results in differential treatment and a JM’s decision which affects everyone in a class. Where the JM’s decision affects everyone in a class, the court will only intervene if the JM’s decision is perverse (i.e. unable to withstanding logical analysis).
Although section 227R of the CA is no longer in force and has been superseded by section 115 of the of the IRDA, the respective provisions are in pari materia and accordingly, the principles set out in this case would still be relevant to an application to challenge a judicial manager’s decision to sell an insolvent company’s assets under section 115 of the IRDA.
For more information about the High Court decision, please read our article titled “Singapore High Court considers whether to set aside judicial manager’s decision to sell insolvent company’s assets”.