Topic 8

Scheme of Arrangement

[Slide 11] Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd (2003)Reasoning Wah Yuen had applied to court under S210 CA, for leave to convene a meeting of its creditors

for the purpose of considering and, if thought fit, approving a scheme of arrangement with its creditors.

Section 210(3) only requires 50% in number and 75% in value of the creditors (or a class of them) to vote in favour of the scheme (“the percentage requirements”).

As the 81.52% in number and the 82.26% in value that had voted in favour of the scheme complied with the percentage requirements of s 210(3), Wah Yuen applied to the High Court for its approval to implement the revised scheme.

Where a meeting is summoned under s 210 of the Act, s 211(1) requires the company to provide its creditors with a statement “explaining the effect of the compromise or arrangement and in particular stating any material interests of the directors, whether as directors or as members or as creditors of the company or otherwise, and the effect thereon of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons”. In other words, the creditors should be put in possession of such information as is necessary to make a meaningful choice.

As Selvam J held in Re Halley’s Departmental Store :“Since s 210 does not lay down any matters on which the application must be based, it is of extreme importance that the company furnishes full information to the creditors and the court before they can give their approval.”

While the courts have generally adopted the stance from the case of In Re English, Scottish, and Australian Chartered Bank [1893] that “the creditors … are much better judges of what is to their commercial advantage than the court can be”, this is premised on the assumption that the creditors have been provided with such information as is necessary to make an informed decision.

In the case, the related party may have been motivated by personal or special interests to disregard the interests of the class as such and vote in a self-centred manner.

On the face of it, the proposed scheme was certainly an attractive one because it offered the creditors an estimated realisable value of 15% as opposed to 0.4% in a liquidation scenario. The creditors were assured of payment because the funds came from an external investor as opposed to the struggling company itself. The related parties even went so far as to give the other creditors priority by subordinating their claims to theirs. Unfortunately, the creditors were not in a position to ascertain whether the scheme was in fact as attractive as it appeared because of Wah Yuen’s lack of transparency.

For the creditors to evaluate the revised Scheme and for the court to approve the revised Scheme there needs to be transparency in relation to the Company’s accounts. It would only be fair (especially in cases where the required creditor support was obtained through the exercise of the related party votes) that the Company made full disclosure of all relevant documents so that the bona fides of the transactions could be subjected to scrutiny. Failure to provide relevant accounting details would place third party creditors at a disadvantage which they would not be under if the Company were wound up and a liquidator appointed.

It was disingenuous for Wah Yuen to claim that it had neither the time nor the money to respond to Singapore Cables’ queries on the related party debts when the circumstances in which they were incurred were within the knowledge of its directors.

Although Wah Yuen itself acknowledged that it was in possession of all that was necessary to establish the existence of the related party debts, it did not produce any of its evidence. Instead, Wah Yuen had the temerity to dismiss Singapore Cables’ concerns by telling it that it could always raise its objections before the court when the scheme came up for the court’s approval. This was hardly the sort of attitude that we would expect from a company that was at its creditors’ mercy. Wah Yuen could not legitimately expect its creditors to be satisfied with the mere assertion that the movements were “not unusual” when the proposed scheme required them to decide if they should relinquish their claims in toto in exchange for only a limited return: Re Pheon Pty Ltd (1986) 11 ACLR 142 at 156. In the absence of further information, it was not unreasonable for Singapore Cables to suspect that there may have been some impropriety in the manner in which the related party debts were incurred.

Re Sembawang Engineers and Constructors Pte Ltd (2015)Issue The application was resisted by one of the Company’s creditors, which disputed the viability of

the proposed scheme of arrangement. The creditor submitted that the proposed scheme of arrangement was unlikely to be approved given its lack of detail, that some of its measures were conditional upon actions or approvals by the Company’s related entities, and that the Company was ‘hopelessly insolvent’

Reasoning Whether a company’s ‘hopeless’ insolvency should be an automatic bar to allowing that

company’s application under s 210(1) CA, the court in the case of Re Sembawang Engineers declined to adopt the test of balance sheet or commercial insolvency as a determining factor in an application under S210(1) CA.

The court was of the view that even if the company may be insolvent and hopelessly insolvent by this measure, the company may still be able to propose a viable scheme of arrangement.

The objective of S210 is to permit companies in financial difficulties to seek a way out by way of an agreement worked out with their respective creditors. In this sense, the company should generally be permitted to at least have a discussion with its creditors and allow them to consider its proposed scheme of arrangement.It would also be difficult for the court to scrutinize the commercial viability of a proposed scheme of arrangement, based only on the incomplete information at the S210(1) stage. In general, the creditors are better able to protect their own interests by speaking and voting at the meeting. If they are not satisfied with the proposed scheme of arrangement, they could always express these at the meeting, and vote accordingly.

[Slide 22] Leun Wah Electric Co (In Liquidation) (2006)*An example of a commentary by a local court on the value of legitimate commercial pressure in the context of unfair preference.

ReasoningUndue/Unfair Preference The court held that a transaction is not likely to be an unfair preference in situations where a

company makes a payment in response to commercial pressure. The evidence showed that the company had intended to pay off its most pressing debt in the belief that it was in its commercial interests to do so. Further, the assignment helped the company to retain its principal supplier, which in turn enabled it to carry on its projects and collect payment. At best, there was a misplaced optimism on the part of the company. Although the company was insolvent at the time of the assignment, it could not be shown that the company’s decision to give the assignment to the creditor had been influenced by a desire to produce the effect of an unfair preference.

Undervalue Transactions The court held that the assignment to the creditor had not been given to discharge a greater debt,

and had been given to provide part payment to the creditor so as to keep the business between the company and the creditor going.

As such, the court noted that there was no indication of any bad faith. Therefore, it was held that the assignment by the company did not amount to a transaction at an

undervalue.

The court in Leun Wah case did not think it was necessary to consider the defence in reg 6 of the CABAR, that is, that the assignment was a transaction which the company entered into in good faith and for the purpose of carrying on it business, at a time when there was reasonable grounds for believing that the transaction would benefit the company.

But you can consider in the exam!!!!