Singapore High Court considers classification of creditors in lock-up agreements for scheme of arrangements
30 March 2022
Re Brightoil Petroleum (S’pore) Pte Ltd  SGHC 35
The General Division of the Singapore High Court in Re Brightoil Petroleum (S’pore) Pte Ltd handed down its first reported decision on the question whether creditors in a lock-up agreement for a scheme of arrangement should be placed in a separate class when voting on the scheme of arrangement instead of being allowed to vote in a single class with other voting creditors. The application to sanction the scheme was made under section 71 of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) (i.e. an application for a pre-packaged scheme).
Under lock-up agreements, a scheme company undergoing restructuring invites creditors to provide an undertaking to vote in favour of the proposed scheme of arrangement in exchange for certain benefits, such as a consent fee. Where properly employed, lock-up agreements can help to save significant time and costs as they reduce the risk of the proposed scheme eventually falling through due to a lack of support by the creditors.
The High Court in this case ruled that “lock-in agreements will not generally fracture a class of creditors when voting on a scheme of arrangement, subject to certain requirements” for the purpose of determining whether the notional voting outcomes satisfied the statutory majority requirements.
In this case, BPS proposed a scheme of arrangement (“BPS Scheme”) to restructure its debts owing to its unsecured creditors.
The court observed that there are two essential elements to obtaining the court’s approval under section 71 of the IRDA: (a) disclosure of information, and
(b) satisfaction of the statutory majority requirements in the notional counting of votes.
The court accepted that the first requirement was satisfied.
In relation to the notional statutory majority requirement, a voting form for the BPS Scheme was circulated among the 12 scheme creditors which were eligible to vote, for the purposes of tabulating what the notional votes in favour of the BPS Scheme would have been had a creditors’ meeting been held. A single class of creditors was constituted for the voting process. Of the 11 eligible scheme creditors who cast their votes, 10 voted in favour of the BPS Scheme, representing 94.26% in value. It was thus clear that there was sufficiently strong support for the BPS Scheme. BPS then sought the court’s sanction of the scheme under section 71 of the IRDA.
Three of the scheme creditors (“Locked-in Creditors”) had provided undertakings to vote in favour of the BPS Scheme in exchange for certain benefits (“Lock-up Agreements”). The benefit mainly consisted of a fee of 1.0% of the scheme creditor’s admitted debt against BPS (“consent fee”). The opportunity to enter into the Lock-up Agreements was extended to all scheme creditors.
The main issue which arose was whether the Locked-in Creditors should have been placed in a separate class when voting instead of being allowed to vote in a single class with the other voting scheme creditors. If the Locked-in Creditors should have been classed separately, then the reliability of the vote conducted was in question.
After considering English and Hong Kong authorities, the Judge laid down the legal position to be adopted in Singapore.
In the Judge’s view, lock-up agreements will generally not fracture a class when voting on a scheme of arrangement, subject to certain requirements. In determining the classification of creditors, the court considers any rights conferred or to be conferred in other agreements that are provided for under the terms of the scheme or which are conditional on the scheme. Hence, the presence of lock-up agreements with some creditors is relevant to the court’s consideration for the classification of creditors when voting on a scheme. However, it cannot be the case that the entering into lock-up agreements by creditors, in and of itself, would mean that those creditors must be classed separately when voting.
The Judge laid down the following, non-exhaustive, principles which would be relevant in determining whether creditors who enter into lock-up agreements should be classed separately for the purposes of voting on a scheme of arrangement, even for the notional tabulation of votes under section 71 of
- Size of benefit: While the benefits that can be conferred on creditors who enter into lock-up agreements are varied (the most common of which are the payment of consent fees), the critical question in every case is whether the benefit conferred is so sizeable that it would have a significant influence on the decision of a reasonable creditor when voting for the proposed scheme. In assessing whether there was a significant influence, one would look at the relative size of the consent fee (or benefit) when compared to the forecasted returns to creditors under the implemented scheme and the estimated recovery in liquidation (or another appropriate comparator).
In this case, the consent fee of 1.0% of the scheme creditor’s admitted debt would not be so significant as compared to the potential recovery of 12.0% under the BPS Scheme and a 0.2% recovery in liquidation. By acceding to the BPS Scheme compared to the recovery in liquidation, there was a potential 60-fold recovery of the admitted debt value which would have been sufficient commercial justification alone for the scheme creditors to vote in favour of the BPS Scheme. In these circumstances, even without the additional consent fee of 1.0%, it was foreseeable that a reasonable creditor would have voted in favour of the scheme regardless. There was little reason to think that the voting outcomes were distorted.
However, the Judge cautioned that such an assessment is not one that is based purely on numerical comparison but must be done contextually, taking into account the other reasons as to why a reasonable creditor might enter the scheme and compromise on their debts.
- Equal access to lock-up agreement: The lock-up agreement must have been made available to all scheme creditors within the relevant class such that they were all given the equal right to enter into the agreement, and the agreements made with each creditor must be on substantially the same terms.
The Lock-up Agreements were made available and sent to all scheme creditors. Hence, each scheme creditor was conferred an equal right to enter the arrangement proffering a consent fee, and none was being exalted over the other. These offers were all made on the same terms.
- Bona fide: The use of the lock-up agreement must be done bona fide (e.g. no misleading of creditors). The court will not sanction a scheme under section 71 of the IRDA if the company and/or its majority creditors are not acting bona fide.
The Lock-up Agreements were offered as a bona fide attempt, as part of the BPS Scheme, to introduce certainty into the restructuring process. BPS had informed the scheme creditors of the application to sanction the scheme under section 71 of the IRDA and, as of the date of the application, there had been no objections. The Lock-Up Agreements did not mislead creditors as to what could be recovered under the proposed scheme of arrangement. The Lock-Up Agreements had informed the creditors of the expected recovery under the scheme, which was not far off from the eventual recovery.
Interestingly, the English authorities raised a question as to whether the Lock-Up Agreements should need to provide that a creditor signing up to it has the right to terminate the agreement (and cease to support the scheme) in the event of a “material adverse change” to the company’s financial position. The Judge’s tentative view was that whilst such a provision would go towards the bona fides and fairness of the lock-up arrangement, this may not be a mandatory requirement. As the issue did not arise on the present facts, the Judge left it open for future determination.
Based on the circumstances considered, the Judge determined that there was no need to place the Locked-in Creditors in a separate class from the other non-Locked-in Creditors for the purpose of determining whether the notional voting outcomes satisfied the statutory majority requirements under section 71 of the IRDA, and the reliability of the notional majority vote was not compromised.