Court of Appeal · Decided 31 January 2012

The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal

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[2012] SGCA 9Case no. Civil Appeal Nos 44 of 2010 and 47 of 2010

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Laws this judgment relies on

Companies Act 1967

Grounds of decision

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V K Rajah JA (delivering the grounds of decision of the court):
Introduction
[1] A High Court Judge ("the Judge") approved the Respondent’s scheme of arrangement (“the Scheme”) pursuant to s 210 of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”) notwithstanding vigorous objections made by a number of creditors, including the two appellants (see Re TT International Ltd [2010] SGHC 177 (“the Judgment”) at [2]). After considering the submissions made to us, we allowed the appeals and ordered that new creditors’ meetings (“the Further Meetings”) be called within four weeks for the Scheme to be put to a re-vote, subject to certain directions. These directions are stated in Annexure I. We should also explain that the issuance of these detailed grounds for our decision has been deferred until the resolution of a number of consequential issues arising from our directions.
[2] Schemes of arrangement are a useful democratic process following which the claims of creditors asserting their ordinary legal rights against a company in financial straits may be compromised or varied. They sanction a process that restrains a minority from frustrating the will of a majority of creditors to implement a beneficial scheme for a distressed company. The objective of such schemes is to empower creditors to devise a composition with the company that will, on the whole, be more beneficial than the likely default alternative: liquidation. While the law allows the rights of a majority in number representing 75% in value of the creditors at a scheme creditors’ meeting (or meetings, if there is more than one class of creditors) to prevail over the objections of dissentients, it is also equally important that the rights of the minority are not illegitimately trampled over. The convening of a separate meeting for each disparate class of creditors, in particular, is a means of protecting a minority with different rights from the possibly oppressive conduct of the majority. Schemes of arrangement now appear to be the locally preferred mode of resuscitating salvageable businesses in parlous financial circumstances. For this reason, it is crucial that there be clarity in how such schemes are to be properly implemented and monitored in a practical way in the common interest of the creditors and the company. These grounds of decision emphasise the importance of scrupulous adherence to the integrity of the processes by all involved in the oversight of such schemes.
The facts
The parties to the appeal
[3] In Civil Appeal No 44 of 2010 (“CA 44”), the fourth appellant (the remaining appellants withdrew before the hearing), Oversea-Chinese Banking Corporation Limited (“OCBC”) took issue with the propriety of several aspects of the Scheme. OCBC was one of the respondent’s creditors and had an admitted claim of $21.66m. It had voted against the Scheme at a creditors’ meeting held on 16 October 2009 (“the Scheme Meeting”). It bears mention that the total value of the admitted claims was originally $502.82m.
[4] In Civil Appeal No 47 of 2010 (“CA 47”), the appellant was Ho Lee Construction Pte Ltd (“Ho Lee”). Ho Lee was the respondent’s main contractor for building works valued at $226m. It commenced work in March 2008 but suspended works in October 2008 under instructions from the Superintending Officer (“SO”), Jurong Consultants Pte Ltd (“Jurong Consultants”). Ho Lee submitted $84.56m worth of claims to Mr Nicky Tan Ng Kuang (“the proposed Scheme Manager”), of which $22.77m was admitted. It had also voted against the Scheme at the Scheme Meeting.
[5] The respondent in both appeals was TT International Limited (“the Respondent”). The Respondent was incorporated locally in October 1984 as a private limited company. It was listed on the Main Board of the Singapore Exchange Securities Trading Limited under its present name, TT International Limited, in June 2000. The Respondent is primarily in the business of trading and distributing consumer electronic products under the brand name of AKIRA. Accordingly, the main value of its business is in its trade receivables, inventory and distribution networks in various countries.
[6] The Respondent is the main distributor and licensee of the AKIRA brand worldwide. AKIRA is a locally grown brand for electronic products, and the trademark AKIRA was registered in 1995. The AKIRA trade mark has been registered in 141 countries worldwide. The Respondent has a significant overseas presence through its subsidiaries (collectively referred together with the Respondent as “the Group”) in Australia, South Africa, Poland, France, the United Arab Emirates and Nigeria, among other countries.
Events leading to the proposal of the Scheme
[7] The Group’s main business activities required high liquidity and it was heavily reliant on credit facilities. Unsurprisingly, the global credit crunch which followed the American subprime mortgage crisis in 2008 significantly affected the Group’s business. As of 31 October 2008, $66m out of $332m of the Respondent’s bank facilities and $17m out of $117m of the Respondent’s subsidiaries’ bank facilities had been cancelled, withdrawn, reduced and/or frozen by their lender banks. This severely impacted the Group’s existing working-capital, seriously disrupted its businesses and operations and had an immediate knock on effect on the Respondent’s operations.
[8] Unable to obtain new credit facilities, the Respondent faced severe cash flow problems which in turn made it difficult for it to service its borrowings. As a result, some bank creditors declared default events in respect of their facility agreements with the Respondent, recalled their facilities and demanded prompt repayment of the sums due. The financial pressure on the Respondent was further compounded when some of its trade and other creditors threatened to or commenced legal proceedings against the Respondent to recover the moneys owed to them.
[9] On 31 October 2008, the Respondent moved to improve its financial situation. It announced the appointment of nTan Corporate Advisory Pte Ltd (“nTan”) as an independent financial advisor to the Group and the appointment of WongPartnership LLP (“WongP”) as its legal advisor. Subsequent to an informal creditors’ meeting held that same day, the Respondent announced that pending some consensual restructuring of its operational activities and financial arrangements, it would implement an immediate standstill of repayment of amounts owing to the bank creditors and all other unsecured creditors, except for operationally essential trade creditors.
[10] On 4 December 2008, PricewaterhouseCoopers LLP (“PwC”) was appointed by the Respondent as the independent Special Accountant to the Group’s bank creditors, to advise them on the restructuring of the Respondent.
[11] On 29 January 2009, the Respondent applied for and received approval from the court pursuant to s 210(1) of the Act to summon a meeting of its creditors to propose a scheme of arrangement. That meeting was to be held by 29 July 2009. However, on 21 July 2009, the Respondent applied for and was granted an extension of time to call the meeting by 21 October 2009. Further, the Respondent also obtained a court order restraining the commencement or continuation of proceedings against the Respondent pending the approval by the court of the proposed scheme of arrangement. Consequently, a winding up application which Ho Lee filed on 19 January 2009 was stayed.
[12] Meanwhile, the key terms of the proposed scheme were the subject of a number of discussions and meetings between the Respondent, nTan, PwC and the Respondent’s bank creditors between November 2008 and September 2009. Despite the discussions, no consensus could be reached. Finally, in September 2009, the Respondent decided to propose the Scheme for voting by creditors despite not having secured the support of all its major creditors.
Salient features of the Scheme
[13] The proposed Scheme had three main features. First, the Respondent was empowered to employ the Reverse Dutch Auction (“RDA”) process to settle its debts with creditors who wanted early compromises. Creditors coming under the Scheme (“Scheme Creditors”) who were willing to accept a minimum discount of 80% on the repayment of their debts would have their debts retired on a priority basis under the RDA. The Respondent was to set aside $30m for the RDA. The Scheme Creditors who were willing to accept the deepest discounts on their claims would be paid off first. When the parties came before us, the RDA had been conducted and allowed for some $92.3m of the Respondent’s debts to be extinguished by the payment to participating creditors of a sum of around $14.7m. The $14.7m was to be paid out in three equal tranches. The first tranche of $4.91m had been paid out on 20 July 2010. At the initial hearing on 18 August 2010, we stayed further payments to be made pursuant to the Scheme.
[14] Second, $150m of the remaining debt would be restructured into “Sustainable Debt” (maintained as term or revolving loan facilities) to be repaid within five years of the Scheme’s effective date.
[15] Third, the rest of the debt (“the Non-Sustainable Debt”) would be converted into Redeemable Convertible Bonds (“RCBs”) with a 0% coupon rate and a tenor of 10 years from the effective date. The Respondent had to offer to convert a limited number of RCBs into shares between the third and fifth anniversaries of the effective date; and to convert the remaining RCBs into shares by the 10th anniversary of the effective date.
[16] The RCBs and the shares they were converted into could be sold subject always to rights of first refusal (“ROFRs”) granted to Mr Sng Sze Hiang (“Mr Sng”) and Ms Julia Tong (“Ms Tong”). Pertinently, the shares had to be offered to Mr Sng and Ms Tong at preferential prices fixed under the Scheme. By way of background we ought to mention that Mr Sng is the Chairman and Chief Executive Officer of the Respondent, owning 31.35% of its shareholding. Ms Tong is his wife. She is an Executive Director of the Respondent, owning 12.30% of its shareholding. Mr Sng and Ms Tong filed claims worth $0.26m and $6.17m respectively against the Respondent. Mr Sng’s entire claim was in respect of unpaid dividends declared by the Company on 30 October 2008 at a rate of 0.2 cents per share. As for Ms Tong, $0.18m of her claim pertained to the same unpaid dividends, while the remaining $5.99m related to a shareholder’s loan recognised in the Respondent’s financial statements as at 31 March 2009.
The conduct of the Scheme Meeting
[17] On 9 September 2009, documents relating to the Scheme (“the Scheme documents”) were despatched to the Scheme Creditors who had claims against the Respondent as at 31 July 2009 (“the Ascertainment Date”). The Scheme documents informed the Scheme Creditors that the meeting to vote on the Scheme would be held on 16 October 2009.
[18] The Scheme documents dated 9 September 2009 comprised the Scheme of Arrangement document itself (setting out the terms of the Scheme); the Explanatory Statement containing information required to be furnished under s 211 of the Act; and the proxy form for use at the Scheme Meeting. On 28 September 2009, the Respondent issued an addendum to the Scheme documents which extended the deadline for lodgement of proofs of debt from 28 September 2009 at 5.00pm to 6 October 2009 at 5.00pm.
[19] The proposed Scheme Manager chaired the Scheme Meeting at which all the Scheme Creditors voted in just one class on 16 October 2009. It is noteworthy that the proposed Scheme Manager was also concurrently the nominee for Mr Sng and Ms Tong in their proposed individual voluntary arrangements with their creditors under the Bankruptcy Act (Cap 20, 2000 Rev Ed). The minutes of the Scheme Meeting merit reference on some matters. According to the minutes of the Scheme Meeting prepared by the proposed Scheme Manager, the Scheme Creditors were initially informed that the voting results would be announced only after 5.00pm on that day as the Respondent’s shares were still being traded before that. The minutes also noted that shortly after 5.00pm, there was an unexpected change in the procedure as initially notified to them. The Scheme Creditors were abruptly informed that the final outcome of the voting could only be determined and announced after the proposed Scheme Manager completed his adjudication of the proofs of debt. Pertinently, the Scheme Creditors were not, at this stage, informed of how long this process might take.
[20] On 26 October 2009, the Respondent applied to court for additional time of a month from the date of the order for the proposed Scheme Manager to complete the review and assessment of the proofs of debt and for the proposed Scheme Manager to report the results of the Scheme Meeting to the court and apply for further directions within two weeks thereafter. The affidavit supporting this application disclosed for the first time that the proposed Scheme Manager had, despite the earlier publicised cut off date, allowed several Scheme Creditors to lodge their proofs of debt after 6 October 2009 – with the last proof lodged on 16 October 2009, the day of the Scheme Meeting. On 3 November 2009, the court granted the extension of time for the Chairman to report the results of the Scheme Meeting to the court by 17 December 2009.
The results of the Scheme Meeting
[21] The Chairman’s Report, dated 17 December 2009, stated that 84.81% of the Scheme Creditors attending in person or by proxy, representing 75.06% of the value of debts owing to the Scheme Creditors, had voted in favour of the Scheme. In tabular form, the results as reported were as follows:
[22] Pursuant to s 210(3) of the Act, a majority in number representing 75% in value of the Scheme Creditors had to vote in favour of the Scheme before the court could sanction the Scheme. Apparently, the Scheme only barely met the statutory threshold. It had been approved by just a majority of Scheme Creditors representing 75.06% in value, exceeding the statutory threshold by a razor thin margin. The Scheme would not have passed muster if the supporting Scheme Creditors’ claims were reduced by $1.3m or if an additional $0.4m of the opposing Scheme Creditors’ claims had been admitted.
The PwC report
[23] In January 2010, Rajah & Tann LLP (“R&T”), representing a group of creditors including OCBC (“the Opposing Bank Creditors”), wrote to the Respondent seeking copies of the proofs of debt (accompanied by supporting documents) lodged by certain Scheme Creditors and other information regarding the other Scheme Creditors’ claims. The Respondent provided some information on a “goodwill basis”, insisting at the same time that the Opposing Bank Creditors were not entitled to conduct an audit of the proposed Scheme Manager’s assessment of the proofs of debt filed by other Scheme Creditors. Unsurprisingly, given the curious delay in announcing the voting results, the sympathetic treatment by the Scheme Manager of certain proofs that were out of time and the announcement of this barest satisfaction of voting requirements, the Opposing Bank Creditors were dissatisfied with the result of the voting. We should add that the Respondent has not clarified whether this special indulgence was granted to all creditors who were tardy, or only to supporting creditors. What is, however, clear to us is that no prior court sanction was sought to extend the original deadline and that all creditors were not officially notified of this extension of time prior to its expiry.
[24] The proposed Scheme Manager was, however, adamant that access to the relevant proofs could and would not be given to the Opposing Bank Creditors. Nevertheless, to assuage their concerns, the Respondent appointed PwC on 4 February 2010 to independently review the assessment of the proofs of debt undertaken by the proposed Scheme Manager. Here, it should be mentioned that R&T had originally written to the Respondent on 7 October 2009, requesting that PwC independently verify all proofs of debt lodged by the Scheme Creditors related to the Respondent before the said proofs were admitted for the purpose of voting.
[25] PwC rendered its report (“the PwC Report”) on 12 February 2010. In conducting its review, PwC performed, inter alia, the following:
(a) reconciled the claim(s) in each proof to source documents supporting the claim(s) on a test basis;
(b) obtained an appreciation of the basis upon which the proof was assessed by the proposed Scheme Manager;
(c) considered the reasonableness of the quantum of the claim(s) submitted in the proof; and
(d) obtained an explanation for the difference, if any, in each proof between the amount reflected as owing by the Respondent as of 31 March 2009 (ie, the date of the Respondent’s latest financial statement) and the amount claimed in the proof as at the Ascertainment Date.
Except for certain negligible amounts, PwC found that reasonable grounds existed for the proposed Scheme Manager to have admitted or rejected the claims that he did.
The decision below
[26] The Judge approved the Scheme. She held (at [27] of the Judgment) that the two issues before her were:
(a) whether the Scheme had been approved by the requisite majority in number and value of the Scheme Creditors voting in person or by proxy at the Meeting; and
(b) whether there had been such lack of transparency on the Respondent’s part that the Scheme should not be considered fair and reasonable to the Scheme Creditors as a whole.
[27] The Judge answered the first question affirmatively. First, she held that the contingent creditors could vote in the same class as the other unsecured Scheme Creditors (see the Judgment at [42]). The Scheme provided that contingent creditors only had entitlements under the Scheme if their contingent claims crystallised within five years of the effective date. Notwithstanding that, the Judge found that the rights of contingent creditors were not so dissimilar (from those of the other Scheme Creditors) as to make it impossible for them to consult with the other Scheme Creditors (see the Judgment at [41]). She stated that given the financial difficulties of the Respondent, there was a real possibility that the Respondent would not be able to meet its liabilities to the contingent creditors, and that the contingent creditors had an interest in common with the other Scheme Creditors to assess the advantages and risks of the Scheme (see the Judgment at [42]).
[28] Second, the Judge held that the related creditors (subsidiaries or substantial shareholders of the Respondent) had rights against the Respondent which were similar to those of the other unsecured Scheme Creditors and were entitled to vote in the same class as them (see the Judgment at [48]). Although she noted that she was entitled to attach less weight to their votes on account of their special interest in the Respondent and the Scheme (see the Judgment at [47]), she did not do so, finding that there was no good reason to question their bona fides (see the Judgment at [122]). She also found that the ROFRs (see above at [16]) granted to Mr Sng and Ms Tong did not disqualify them from voting in the same class as the other unsecured Scheme Creditors. In her view, although the ROFRs might cause them to have an additional private interest to support the vote, that interest was not derived from their legal rights as shareholders claiming unpaid dividends from the Respondent (see the Judgment at [48]).
[29] Third, the Judge held that substantial shareholders who had claims which pertained to unpaid dividends and were thus subordinated in liquidation pursuant to s 250(1)(g) of the Act (“the subordinated claims”) could vote in the same class as the other unsecured Scheme Creditors (see the Judgment at [54]). She reasoned that s 250(1)(g) of the Act was irrelevant as it applied only when the company concerned was being wound up (see the Judgment at [53]).
[30] Fourth, the Judge dismissed objections that the Opposing Bank Creditors raised against the proposed Scheme Manager’s admission or rejection of specific proofs of debt, namely:
(a) The questionable basis of a claim by Akira Corporation Pte Ltd (“Akira Pte Ltd”), a wholly owned subsidiary of the Respondent and a supporting Scheme Creditor, which saw an “astronomical increase” from $5.155m as at 31 March 2009 to $86.97m as at the Ascertainment Date. $75.73m of Akira Pte Ltd’s $86.97m claim was based on license and distribution agreements with the Respondent which did not tally with the Respondent’s audited and unaudited financial statements before and after the Ascertainment Date.
(b) The inconsistent treatment of the proofs of debt lodged by Bank of East Asia (“BEA”) and St George Bank Limited (“St George Bank”), in that while the security that BEA (an opposing Scheme Creditor) held was deducted from its claim, the security that St George Bank (a supporting Scheme Creditor) held was not deducted from its claim. Also, St George Bank’s claim for $28m, which was based on a guarantee granted by the Respondent for banking facilities granted to its subsidiary TEAC Australia Pty Ltd (“TEAC Australia”), was admitted in full. However, the Opposing Bank Creditors submitted that it was unreasonable for St George Bank’s claim to be admitted in full since the Respondent would be liable on the corporate guarantee only if TEAC Australia failed to pay St George Bank.
(c) The admission in full of a $53.8m claim by Ascendas Real Estate Investment Trust (“Ascendas”) arising from the Respondent’s corporate guarantee on a lease of 10 Toh Guan Road to TT International Tradepark Pte Ltd (“Tradepark”), a subsidiary of the Respondent. The Opposing Bank Creditors also objected to the double counting of the $53.8m claim by Ascendas and a $6.86m claim by First Capital Insurance Limited (“First Capital”), which arose from the Respondent’s indemnification of an insurance guarantee First Capital granted in favour of Ascendas as a security deposit under the 10 Toh Guan Road lease. Both Ascendas and First Capital were supporting Scheme Creditors.
[31] With respect to Akira Pte Ltd’s claim, the Judge was satisfied that the claim arose properly out of, inter alia, the license and distribution agreements. She did not have sight of the distribution agreement and was content to rely on the PwC Report which described it (see the Judgment at [71]–[72]). Although she noted that the Respondent’s balance sheets as at 31 March 2009 did not fully reflect the Respondent’s indebtedness to Akira Pte Ltd resulting from the licensing agreements, she noted that the unaudited balance sheets disclaimed reliability (see the Judgment at [74]). She expressed her concurrence with PwC’s view that it was reasonable for the proposed Scheme Manager to admit Akira Pte Ltd’s claim in full (see the Judgment at [75]).
[32] Regarding BEA’s and St George Bank’s claims, she noted that while BEA had already enforced its security over real property, it would not make commercial sense for St George Bank to enforce its security in the form of fixed or floating charges over the Respondent’s assets (which excluded real property) as that would interfere with the Respondent’s business operations (see the Judgment at [80]). Also, she noted that under the Scheme, any creditor with contingent claims against the Respondent was required to prove its debt in respect of its whole claim against the Respondent, including the amounts of any contingent claims (see the Judgment at [79]). On that basis, she accepted that St George Bank’s $28m claim was correctly admitted in full (see the Judgment at [81]).
[33] Next, the Judge rejected the Opposing Bank Creditors’ suggestion that the admission in full of Ascendas’ $53.8m claim was questionable (see the Judgment at [86]) as the claim had been verified in the PwC Report (see the Judgment at [85]). As for the double counting of Ascendas’ and First Capital’s claims, the Judge found that the 12 November 2008 announcement and the 18 January 2010 press release by Ascendas which referred to Ascendas’ potential use of a security deposit from an unnamed “previous anchor tenant” as “bridging income” to be insufficient evidence to suggest that First Capital’s security deposit had not been used to offset Ascendas’ claim (see the Judgment at [89]). She also did not think that Ascendas’ claim against the Respondent included the $6.86m claimed by First Capital (see the Judgment at [90]). She thus concluded that First Capital’s claim was reasonably admitted (see the Judgment at [91]).
[34] The Judge also dismissed Ho Lee’s objections to the proposed Scheme Manager’s rejection of $61.79m of its $84.56m claim. In particular, two heads of Ho Lee’s claims were rejected wholly: (a) the damages payable to sub-contractors and suppliers due to the termination of Ho Lee’s contract (“the damages claim”); and (b) the loss of profits suffered due to the termination of Ho Lee’s contract. Ho Lee opposed the Scheme (“the loss of profits claim”).
[35] The PwC report concluded that these amounts were reasonably rejected as they were supported by insufficient documentary evidence. The Judge relied on it to find that the proposed Scheme Manager had acted in a bona fide manner in rejecting the claims (see the Judgment at [95]). The Judge also stated that the proposed Scheme Manager’s “duty to assess the claims presented in the proofs of debt objectively should only extend to examining the claims on the basis of the supporting documentation provided by the Scheme Creditors” and she found that he had fairly and reasonably carried out that duty (see the Judgment at [97]).
[36] While Ho Lee disputed the rejection of its claim, the Judge adopted what was in her view the practical step forward (see the Judgment at [99]):
[37] As regards the second issue which the Judge identified (see above at [26]), the Judge found the “crucial question” to be “whether the further information requested by the Opposing Bank Creditors would have caused any Scheme Creditor voting in favour to change its view or any abstaining Scheme Creditor to vote against the Scheme” (see the Judgment at [110]). She thought that since PWC, whose independence and qualification was unquestioned by the Opposing Bank Creditors, had reconciled the claims in each proof to the source documents (which the Opposing Bank Creditors had requested) and had concluded that the challenged claims were reasonably admitted and rejected, then the same documentation if provided to the Scheme Creditors would not have affected the voting outcome (see the Judgment at [112]).
[38] The Judge also held that the authorities did not lay down the strict rule that the Respondent must provide supporting documentation for each proof of debt so long as the same was requested by any opposing creditor, or risk the Scheme being disapproved by dint of lack of transparency (see the Judgment at [115]).
[39] As can be seen from our summary of the Judge’s decision, the Judge relied extensively on the findings of the PwC Report in evaluating the proposed Scheme Manager’s decisions to admit or reject the proofs submitted by various creditors. This is an appropriate juncture for us to add that we have carefully perused the PWC Report and it seems to us that the authors quite rightly did not purport to make any legal assessment about the correctness of the subject proofs. Our view, with respect to the Judge, is that it would therefore be a mistake to place too much weight on the conclusions reached in the PWC Report.
The parties’ arguments on appeal
OCBC’s arguments
[40] On appeal, OCBC made, inter alia, the arguments set out below.
[41] First, scheme creditors have the right to review the proofs of debt of all other scheme creditors, hence the Respondent had a duty to grant OCBC access to the proofs of debt (accompanied by supporting documents) filed by the other Scheme Creditors.
[42] Second, the court must satisfy itself that the supermajority approval required under s 210(3) has been achieved. Hence, where the company’s admission or rejection of a proof of debt raises serious queries or doubts, the court should insist that the company provide an explanation and the evidence for its decisions. In a case like the present, where a slight difference in the quanta of debts admitted or rejected can swing the outcome of the vote, the court must undertake a stringent inquiry. The court cannot delegate this function to an independent accounting firm. Thus, the court should have refused to sanction the Scheme on the basis that there was insufficient evidence that the Scheme has received supermajority approval.
[43] Third, where a disputed debt has the potential to swing the outcome of the vote, the company must exclude the disputed debt from the scheme while the dispute is being resolved. If the disputed debt is eventually established, the company will settle the debt or bring the debt within the main scheme via a supplemental scheme which also has to receive supermajority approval. Thus, the Respondent should not have refused Ho Lee’s vote on the rejected part of its claim and yet insisted that the rejected part of the claim (if ultimately established as valid) be subject to the Scheme.
[44] Fourth, contingent creditors whose claims are not crystallised by the Scheme cannot vote in the same class as the other unsecured Scheme Creditors. The Judge’s statement that there was a real possibility that the Respondent would not be able to meet the contingent liabilities when they fell due was speculative. Therefore, the contingent creditors should not have been allowed to vote in the general class of unsecured Scheme Creditors.
[45] Fifth, regarding the subordinated claims, it did not matter that the Respondent was not being wound up. In Re Telewest Communications plc [2004] BCC 342 (“Re Telewest”), the English High Court made clear (at [29]) that “the relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation.” Therefore, the creditors with subordinated claims should not have been allowed to vote in the general class of unsecured Scheme Creditors.
[46] Sixth, Mr Sng’s and Ms Tong’s ROFRs gave them additional substantive legal rights which the ordinary Scheme Creditors did not enjoy. Thus, they should not have been allowed to vote in the same class as other unsecured Scheme Creditors.
[47] Seventh, the Judge ought to have treated the votes of related parties sceptically and attached significantly less weight to their votes in the exercise of her discretion to sanction the Scheme.
[48] Eighth, as regards to its specific objections to the proofs of debt filed by Akira Pte Ltd, St George Bank, Ascendas and First Capital, OCBC largely repeated the arguments it submitted to the Judge.
Ho Lee’s arguments
[49] Apart from its arguments which adopted those of OCBC (see above at [41]–[48]), Ho Lee submitted that the Judge had erred in finding that the proposed Scheme Manager had acted reasonably in a bona fide manner in assessing Ho Lee’s claim. The crux of Ho Lee’s argument was that the proposed Scheme Manager should either have asked Ho Lee to explain any of the discrepancies which led to the rejection of its claims or sought technical assistance from the SO, Jurong Consultants.
The issues
[51] Essentially, these appeals raised the following core issues:
(a) when a proposed scheme manager might be placed in a position of a conflict of interest;
(b) whether scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors in respect of a proposed scheme;
(c) when a scheme creditor should be notified of the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt;
(d) whether a scheme creditor may appeal the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt;
(e) whether the chairman’s decisions to admit or reject certain proofs of debt for the purpose of voting, in this case, were correct;
(f) when scheme creditors should be classified differently for voting purposes in a s 210 scheme of arrangement; and
(g) when scheme creditors should have their votes discounted.
[52] We summarise here, for easy reference, our answers to the preceding issues:
(a) a proposed scheme manager is in a position of conflict of interest when he without good reason aligns his interests with those of the company, such as in this case, where the proposed Scheme Manager was the nominee for the individual voluntary arrangements (“the IVAs”) filed by Mr Sng and Ms Tong (see [74]–[78] below);
(b) yes, scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors in respect of a proposed scheme (see [79]–[93] below);
(c) a scheme creditor should be notified of the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt before the votes are cast at the creditors’ meeting (see [94]–[99] below);
(d) yes, a scheme creditor may appeal the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt (see [100]–[110] below);
(e) the proposed Scheme Manager’s decisions to partially reject Ho Lee’s proof of debt (to the extent that he did) and wholly admit St George Bank’s, Ascendas’ and First Capital’s proofs of debt for the purpose of voting were incorrect (see [111]–[129] below);
(f) scheme creditors should be classified differently for voting purposes when their rights are so dissimilar to each other’s that they cannot sensibly consult together with a view to their common interest (see [130]–[151] below);
(g) related party creditors should have their votes discounted in light of their special interests to support a proposed scheme, by virtue of their relationship to the company; wholly owned subsidiaries should have their votes discounted to zero and are effectively classified separately from the general class of unsecured creditors (see [152]–[171] below).
Overview of schemes of arrangement under s 210
Objective
[53] Section 210 of the Act, as its heading states, confers on a company that meets the stipulated criteria the “[p]ower to compromise with creditors and members”. This court has recently considered the purpose of schemes of arrangement under s 210 in The Oriental Insurance Co Ltd v Reliance National Asia Re Pte Ltd [2008] 3 SLR(R) 121 (“Oriental Insurance”) at [38]–[40]. We affirm our agreement (see Oriental Insurance at [38]) with Street J’s summary (in Re Norfolk Island And Byron Bay Whaling Co. Ltd. (1969) 90 WN (Pt 1) (NSW) 351 at 354D) of the purpose of s 181 of the Companies Act 1961 (NSW) of the State of New South Wales (which was the statutory inspiration for our s 210, although it has since been replaced by s 411 of the Corporations Act 2001 (Cth)):
[54] The updated edition of Walter Woon on Company Law (Tan Cheng Han gen ed) (Sweet & Maxwell Asia, Rev 3rd Ed, 2009) ("Walter Woon") also helpfully restates the objectives of s 210 (at para 16.2) which we reproduce here for ease of reference:
Procedure
[55] In Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 (“Re Hawk Insurance”), Chadwick LJ instructively outlined the process by which a compromise or arrangement became binding on the company and its creditors via s 425 (“the UK s 425”) of the Companies Act 1985 (c 6) (UK) (“the 1985 UK Act”) (the UK s 425 is in pari materia with s 210 of the Act; it has since been replaced by s 895 of the Companies Act 2006 (c 46) (UK)). Chadwick LJ pointed out (at [11]–[12]):
[56] While the passages cited above are helpful in outlining the general procedure by which a scheme of arrangement is finalised, there appears to be a paucity of judicial guidance on the more precise mechanics of implementation. Also, as OCBC took pains to emphasise, there is no statutory guidance on the many procedural issues relating to passing a scheme of arrangement under s 210. These issues relate, inter alia, to the conduct of creditors’ meetings as well as the admission and rejection of proofs of debt. Therefore, we think it will be useful to companies and their creditors for us to further particularise the proper procedures that ought to be adopted in the local context vis-à-vis s 210 of the Act.
First stage: formal steps towards the scheme creditors’ meeting(s)
[57] The first formal step towards obtaining approval for a scheme of arrangement is for the subject company to apply ex parte to court for a meeting of all creditors, or meetings of all classes of creditors to approve the scheme (“scheme creditors’ meeting(s)”). The court can grant such an application pursuant to s 210(1), which reads:
[58] Woon’s Corporations Law (LexisNexis, Looseleaf Ed, 1994, Issue 37 (July 2011 release)) at p L6 states correctly at para 53 that at this stage, “[o]ne of the key tasks and responsibilities of the promoter of a scheme of arrangement is to classify its creditors according to their separate interests.” This is not just a matter of form. If the scheme creditors’ meeting(s) are not properly conducted, the court has no jurisdiction to sanction the proposed scheme (see UDL Argos Engineering & Heavy Industries Co Ltd & Others v Li Oi Lin & Others [2001] 3 HKLRD 634 (“UDL Argos”) at [27(5)]).
[59] In England, the practice regarding applications to court for meetings is governed by an updated Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345 (“the Practice Statement”) that replaced an earlier Practice Note issued in 1934 (see Practice Note [1934] WN 142). The Practice Statement states that it is the applicant’s responsibility to determine whether more than one meeting of creditors is required by the scheme and for that purpose, to notify persons affected by the scheme of its purpose and the meetings which the applicant considers will be required. The court, in considering whether or not to order meetings of creditors, “will consider whether more than one meeting of creditors is required and if so what is the appropriate composition of those meetings” [emphasis added] (see the Practice Statement at 1345G). It is also stated that it is the applicant’s responsibility to raise any issues relating to creditors to the court for its directions. Notwithstanding the above, it is further provided that creditors who consider themselves unfairly treated will still be able to raise objections at the sanction hearing, though the court will expect a good explanation for why they were not raised earlier.
[60] Lord Millett NPJ’s view in the Hong Kong Court of Final Appeal case of UDL Argos, which suggests that issues of creditors’ classification should rather be left to the sanction hearing (see below at [70]), should also be noted. This particular view was grounded on the belief that processes seeking to address those issues earlier could prematurely attract contentious legal proceedings which might otherwise have been avoidable (see UDL Argos at [14]):
[61] While Lord Millett NPJ’s view certainly has some force, it seems to us that it avoids the classic chicken and egg conundrum facing every applicant. Indeed, without a preliminary determination of the correct classification of creditors, how can it be known whether a scheme is likely to attract sufficient support and subsequently pass muster? Further, if it were certain from the outset that certain opposing creditors would be classified separately so that the scheme would never pass, then it would be a futile exercise to even conduct scheme creditors’ meetings. The reality of what happens in practice has also to be factored into this dynamic process. Almost invariably, the applicant would have made the effort to ascertain, as best as it could at an early stage, prior to any court application, how particular creditors might be inclined to vote.
[62] Concerns about delays and contentious proceedings at an early stage may be somewhat overstated as the court has complete carriage over timelines and the conduct of the proceedings. In our view, even if there is a need at this stage to hear potentially dissenting creditors, such a hearing could usually be conducted expeditiously and summarily. Having considered the relative advantages of both approaches, we are inclined to prefer the approach in the Practice Statement which commends itself for the greater degree of certainty it injects into the process of passing a scheme. The adoption of this procedure in Singapore requires the company’s solicitors, when applying for an order to summon the scheme creditors’ meeting, to unreservedly disclose all material information to the court to assist it in arriving at a properly considered determination on how the scheme creditors’ meeting is to be conducted. Any issues in relation to a possible need for separate meetings for different classes of creditors ought to be unambiguously brought to the attention of the court hearing the application. As time is ordinarily of the essence in such applications, all scheme related matters (including appeals therefrom) should be heard on an expedited basis.
[63] Following the court’s consideration of the issues raised by the applicant and the creditors in relation to the creditors’ meetings for the proposed scheme, it may give directions for the calling of scheme creditors’ meeting(s). However, two points should be noted. First, the court should not consider the merits and fairness of the scheme at this stage, as this stage really concerns the court’s jurisdiction to sanction the scheme later if it proceeds. In this regard, Re Telewest (see above at [45]) at [14] (approved by the English Court of Appeal in Re Telewest Communications plc [2005] BCC 29 (“Re Telewest Communications plc”) at [9]) is instructive:
[65] In the event that the court issues directions for the calling of scheme creditors’ meeting(s), notices summoning the meeting(s) must be sent to the creditors. Section 211 of the Act requires that such notices be accompanied by a statement that clearly explains the intent and purport of the compromise or arrangement and, in particular, discloses any material interests of the directors and the effect of the scheme thereon. Further, it is essential that the explanatory circular must be “perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote”: In re Dorman, Long and Company Limited [1934] Ch 635 at 657. Although s 211 does not expressly require it, a copy of the scheme of arrangement document and a proxy form for the creditor’s use at the scheme creditors’ meeting should usually be enclosed to ensure that the creditors have adequate information about the proposed scheme.
[66] After this, the prospective scheme creditors will submit their proofs of debt together with any supporting documents to the chairman of the meeting(s) for his adjudication. We pause to note that since the chairman of the meeting is almost invariably the proposed scheme manager (or his nominee), our references to chairmen (in the context of the s 210 scheme creditors’ meetings) below may be taken generally as references to proposed scheme managers as well. Generally, submissions have to be made before a “cut-off point” stated in the scheme document and highlighted in the s 211 explanatory statement. If the chairman wishes to extend the time for submission of proofs, not only should prior court sanction for this be sought, all creditors should also be informed to ensure that the extension of time benefits all, and not merely a particular group of sympathetic creditors.
[67] The chairman then has to perform the quasi-judicial task of adjudicating upon disputes as to the voting rights of anyone claiming to be a creditor. The chairman cannot act capriciously or arbitrarily and must determine issues objectively. His role is akin to that of a judicial manager in deciding whether to admit or reject proofs of debt lodged with him.
Second stage: the conduct of the scheme creditors’ meeting(s)
[68] As in the lead up to creditors’ meetings in the judicial management context (see ERPIMA SA v Chee Yoh Chuang and another [1997] 1 SLR(R) 923 at [5]), the entire process of proof, admission or rejection is ordinarily completed before the scheme creditors’ meeting(s) is held. Although s 210 does not expressly spell this out, it has also become the usual practice for the chairman to post a list of the creditors and the corresponding amounts of their admitted claims (for the purpose of voting) at the meeting venue prior to the meeting. Disclosure of material information about the scheme or the company’s affairs ought not to be deliberately withheld until the meeting so as to influence its outcome. This would unfairly prejudice those which may have decided not to attend after considering the information sent to them earlier and will likely be seen as an attempt to improperly influence the voting outcome.
[69] After the creditors cast their votes, the chairman will immediately thereafter tabulate the results and announce them by the end of the meeting. Section 210(3) of the Act reads as follows:
Thus, if the proposed scheme is accepted (within each designated class, if any), by a majority in number of the creditors (present and voting) who hold at least 75% of the total debts owed by the company (to the respective designated classes, if any), the proposed scheme can proceed to the third stage.
Third stage: seeking the court’s approval
[70] The third stage of the process is an application to the court for its approval of the scheme. This requirement is underscored by s 210(3) which states that the scheme will become binding only “if approved by order of the Court”. As explained earlier (see above at [53]–[54]), s 210 allows a majority of creditors to “cram down” on the rights of a minority of objecting creditors and implement a scheme notwithstanding the latter’s objections. The requirement of the court’s approval serves as an additional crucial check to ensure the integrity of voting outcome(s) at the scheme creditors’ meeting(s) and the objective fairness of the proposed scheme. In Oriental Insurance (at [43]), we reaffirmed that the court must be satisfied of three matters before it sanctions a scheme, namely:
If the court is so satisfied, it will issue an order of court approving the scheme. When that order is lodged with the Registrar of Companies and Businesses, the scheme becomes binding on all parties (including dissenting creditors) pursuant to s 210(5) of the Act.
Transparency and objectivity
[71] Plainly, the integrity of voting outcome(s) of the scheme creditors’ meeting(s) is dependent upon the fairness of the proof of debt adjudication process. The objectivity of the chairman is a critical aspect of the entire process. Regarding the objectivity of the chairman, we find the following passage from Edward Bailey and Huge Groves, Corporate Insolvency: Law and Practice, (LexisNexis, 3rd Ed, 2007) (“Bailey & Groves”) at p 260, para 9.45 referring to the chairman of a creditors’ meeting leading to a Company Voluntary Arrangement (“CVA”) (a corporate rescue mechanism broadly similar to that of a s 210 scheme of arrangement) under the United Kingdom’s Insolvency Act 1986, equally apposite in defining the role of the chairman of a scheme creditors’ meeting:
[72] The proposed scheme manager’s responsibility to be independent in managing differences between the company and creditors is in a broad sense not different from the legal obligation imposed on other insolvency practitioners, eg, a liquidator. In this regard, our observations in Fustar Chemicals Ltd (Hong Kong) v Liquidator of Fustar Chemicals Pte Ltd [2009] 4 SLR(R) 458 (“Fustar”) at [18] are pertinent in so far as the chairman’s duty of adjudicating proofs is concerned:
[73] Notwithstanding that s 210 is silent on the issues of transparency and objectivity, we cannot overstate the importance of respecting and safeguarding the integrity of the voting outcomes of the scheme creditors’ meeting(s). The minority creditor will be involuntarily bound by a scheme which it voted against. Its property rights might be very severely affected or compromised in a scheme. Often this could involve deep “haircuts”, ie, accepting the repayment of an amount which is significantly less than the outstanding debt in full settlement of the debt. Its opposing vote suggests that it would prefer for the company to go into liquidation than to be bound by the scheme. If the minority creditor is to be “crammed down” upon by the majority, then it has every right to insist that the majority is constituted strictly in compliance with the requirements of s 210 and that the chairman of the meeting scrupulously discharges his responsibilities fairly.
Determination of issues
When a proposed scheme manager might be in a position of a conflict of interest
The evolving nature of the proposed scheme manager’s duties
[74] Before moving onto other aspects of this matter, it is apt that we make some observations on the proposed scheme manager’s duties. The proposed scheme manager is engaged by a company that is usually in a parlous financial position. He formulates a scheme of arrangement to save the company and pitches it to the creditors to secure approval of his plan. At that stage of the process, he owes no direct duties to the creditors, save of course that he must act in good faith and must not mislead creditors or suppress material information from them. It is trite law that the court will not sanction a scheme if the company and/or its majority creditors are not acting bona fide (see Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd [2001] 2 SLR(R) 791 at [36]). It follows that before the scheme is sanctioned, the proposed scheme manager has a good faith obligation to the company and the body of creditors as a whole as well.
[75] As stated above at [67], the proposed scheme manager’s duties are then amplified when he assumes the quasi-judicial role of adjudicating on the admission and rejection of the proofs of debts. We mentioned Fustar earlier (see above at [72]) for the proposition that “[a] liquidator must never favour the interests of his appointers over that of the other legitimate claimants to the company's assets” [original emphasis omitted]. The same is true for a proposed scheme manager in the discharge of his responsibility of adjudicating proofs. In his quasi-judicial role, he owes duties to be objective, independent, fair and impartial (see above at [71]–[73]).
[76] As for his duties upon appointment as scheme manager, we again think it fitting to refer to the office of the liquidator as a comparator. It is well-established that liquidators are fiduciaries, owing duties to, inter alia, the company and its creditors. In this regard, see Andrew R Keay, McPherson’s Law of Company Liquidation (Sweet & Maxwell, 2 Ed, 2009) ("McPherson") at para 8.018:
Earlier versions of the same passage (without material differences) were approved by the Federal Court of Australia in Pace and another v Antlers Pty Ltd (in liq) [1998] 26 ACSR 490 at 501 and Olney J in Re G K Pty Ltd (in liq); Ex parte Deputy Commissioner of Taxation (1983) 7 ACLR 633 at 639 respectively. In our view, the proposed scheme manager’s duties to administer the approved scheme take on a fiduciary nature upon his appointment as the scheme manager.
Conflict of interest
[77] To an extent, the proposed scheme manager is inherently in a position of conflict because if he successfully resuscitates the company, he is remunerated, inter alia, for managing the scheme and reviving the company. Therefore, there are undeniable incentives for the proposed scheme manager to prefer the interests of his appointers (not infrequently, the company itself as is the case here) over those of their creditors from the outset. He must, nevertheless, seek to strike the right balance and manage the competing interests of successfully securing the approval of his proposed scheme and uncompromisingly respecting the procedural rights of all involved in the scheme process. It must also be appreciated 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 (see Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] 3 SLR(R) 629 (“Wah Yuen”) at [24]).
[78] A proposed scheme manager goes too far when he begins to align his interests with those of the company beyond what we have described above. The temptation to do so is especially acute when his initial appointers are not the creditors, but the company’s management. In this case, the proposed Scheme Manager was also surprisingly the nominee for the IVAs filed by Mr Sng and Ms Tong. The success of those IVAs in turn depended heavily on the success of the Scheme. In our view, this additional relationship with Mr Sng and Ms Tong, key personnel of the Respondent, was inappropriate because it put the proposed Scheme Manager in an unacceptable position of unavoidable conflict of interest. Therefore, we ordered the proposed Scheme Manager to elect either to continue as such only or as nominee for Mr Sng and Ms Tong in their proposed IVAs only (see Annexure I at [11]). He eventually chose to act for the Respondent alone.
Whether scheme creditors are entitled to examine the proofs of debt submitted by other creditors in respect of a proposed scheme
[79] In considering the submission that creditors have the right to review the proofs of debt submitted by all other creditors in respect of a proposed scheme, the Judge held (the Judgment at [115]):
[80] The Judge also reasoned that (at [110]):
[81] She also eventually came to the view (at [119]) that:
[82] In her determination, the Judge relied on the case of Wah Yuen (see above at [77]) which was decided by this court; as well as the subsequent High Court cases of Re Econ Corp Ltd [2004] 1 SLR(R) 273 (“Re Econ”) and Re Horizon Knowledge Solutions Pte Ltd [2004] SGHC 270 (“Re Horizon”), both of which relied on Wah Yuen. In Wah Yuen, this court found that the company presenting its scheme of arrangement for approval “had not been sufficiently transparent about the circumstances in which the related parties’ debts were incurred” (see holding (5) of the headnote). As a result, this court withheld its approval for the proposed scheme of arrangement because it found “that the creditors were not in a position to assess the fairness and reasonableness of the scheme.” (See Wah Yuen at [37]) This court explained (also at [37]) that this was because:
[83] In this appeal, OCBC’s complaint was not so much that the creditors had insufficient accurate information to make an informed choice between the Scheme and liquidation or that given more information, they might have voted differently. Rather, its complaint was that it had inadequate information “to assess whether the [proposed] Scheme Manager’s decisions in admitting and rejecting the proofs of debts were proper”. OCBC was not seeking more information to evaluate the Scheme against a liquidation scenario. Rather, it was seeking more information to assess whether the proposed Scheme Manager’s decision to admit the claims of certain creditors was proper. OCBC rightly submitted that the Judge did not adequately appreciate that the two complaints are different.
[84] The question in Wah Yuen was whether the scheme there should have been sanctioned given that the lack of transparency regarding the related party debts prevented the creditors from assessing the fairness and reasonableness of the scheme. The issue raised by OCBC, however, was rather different: whether scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors to ensure the integrity of the voting process regardless of whether they are related parties or not. (We use the general term “scheme creditor” generously in this context, describing also creditors who have submitted proofs in respect of a proposed scheme that has yet to be passed.)
[85] The issue of access to proofs of debt requires an assessment of the rights and interests of individual creditors in relation to the collective interests of the other creditors and the company. We have highlighted earlier (see above at [73]) why it is imperative for the process through which proofs of debt are adjudicated upon and admitted to be transparent. However, we also recognise the force of the Respondent’s contention that the easier it is for individual creditors to challenge the chairman’s decisions on the adjudication and admission of proofs of debt, the more difficult it might be to get the scheme off the ground and this may unnecessarily frustrate the creditors supporting the scheme (possibly forming the requisite statutory majority) while the company convulses and shrivels into terminal decline in the meantime. Certainly, the quicker the scheme gets sanctioned, the earlier the company can be rescued.
[86] Indeed, in Wah Yuen, this court remarked at [18] that:
[87] However, OCBC submitted that there should be symmetry on this issue with the related regimes of bankruptcy and insolvency as a scheme is usually proposed in lieu of liquidation. Rule 179 of the Bankruptcy Rules (Cap 20, R 1, 2006 Rev Ed) (“the Bankruptcy Rules”) expressly provides for the inspection of proofs:
[88] Although there are no equivalent provisions in the Companies (Winding Up) Rules (Cap 50, R 1, 2006 Rev Ed) (“the Companies (Winding Up) Rules”) or the Companies Regulations (Cap 50, Rg 1, 1990 Rev Ed) (“the Companies Regulations”), these rules and regulations do also contemplate creditors’ challenges of liquidators’ and judicial managers’ decisions in respect of proofs of debt (see rr 93 and 95 of the Companies (Winding Up) Rules; and regs 80 and 82 of the Companies Regulations). The Bankruptcy Rules also have similar provisions (at rr 198 and 201) which provide for creditors’ challenges of decisions of the Official Assignee or trustees, as the case might be. OCBC submitted that these provisions imply that creditors generally have the right to inspect the proofs of debt filed by other creditors.
[89] As an example, we set out r 93 of the Companies (Winding Up) Rules here:
[90] We noted that r 93 might be read as merely allowing a creditor to apply to court to reverse or vary the liquidator’s decision as to its own proof (and not the proofs of other creditors). However, on reflection, it seems to us that if that were the case, r 93 would refer to the creditor’s own proof of debt as “its proof” rather than “a proof”.
[91] We noted further that in England and Wales, liquidators are statutorily required to allow the inspection of proofs of debt lodged with him by any creditor who has submitted his own proof of debt. See the Insolvency Rules 1986 (SI 1986 No 1925) (UK):
[92] We did not disagree with OCBC’s submission that all the local insolvency and bankruptcy regimes allow creditors to inspect the proofs of debt submitted by other creditors and challenge the admission of the other creditors’ claims, but the competing interests in a proposed scheme of arrangement are not the same.
[93] In a proposed scheme of arrangement, the interest of a creditor is different from that of a creditor in a liquidation or a judicial management. In a proposed scheme of arrangement he has an autonomous voting right which may be critical to the jurisdiction of the court to sanction the scheme. Hence, claims to be given access to proofs of debt filed by other creditors can only be justified if the information is relevant to his voting rights. The creditor has a positive “right” to be given his voting rights according to the value of his lawful claims against the company, and he also has a negative “right” to protect his voting rights from being whittled down by excessive voting rights given to another creditor. Of course, he has an interest in the eventual payout if the scheme is proved, but may prefer not to have that payout, and instead may vote against the proposed scheme so that he could recover his claim in a liquidation. In principle, therefore, a creditor has no legal right to have access to the proofs of debt of other creditors, except where his voting rights have been or are likely to be affected. In other words, he is entitled to access only if he produces prima facie evidence of impropriety in the admission or rejection of such proofs of debt. At the hearing, we queried why OCBC did not apply earlier to the court for an order that the Respondent disclose the proofs of debt and supporting documentation which it requested. Counsel for OCBC responded that such an application was then unprecedented. In our view, if the proposed chairman of a scheme creditors’ meeting rejects a scheme creditor’s request for the disclosure of other scheme creditors’ proofs of debt (together with supporting documentation), there is no bar against the requesting scheme creditor applying to court for an order that the proofs and supporting documentation be disclosed to it. The court will determine this issue after weighing the rights of the applicant creditors against the collective interests of the other creditors and the company, taking into account any allegations about the prima facie dubiousness of the challenged debts. To this, we also add that should the proofs in question contain confidential information pertaining to the other creditors or the company, the court should ensure that there are proper safeguards to address any issues of confidentiality that have arisen.
When a scheme creditor should be notified of the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt
[94] As mentioned above at [68], it is common practice for the chairman to post a list of the scheme creditors and the corresponding amounts of their admitted claims (for the purpose of voting) at the meeting venue before the creditors’ meeting. In describing the conduct of the analogous meeting for a CVA (see above at [71]), Bailey & Groves states at para 9.47 that “[t]he first task of the chairman will usually be to determine who is entitled to vote and in what amounts.” This ought to be done before the votes are cast at the creditors’ meeting.
[95] This practice is sound as it safeguards the integrity of the voting outcome. The creditors commence voting knowing how much their votes will count with or against those of their fellow creditors. In addition, the information allows some measure of informed consultation between the creditors regarding the exercise of their votes. This is likely to lead to a more considered and informed vote by the body of creditors as a whole.
[96] In the present case, the proposed Scheme Manager, in conducting the Scheme Meeting, did not adopt the practice referred to above at [94]–[95]. Prior to the meeting, the Scheme Creditors were not provided by the proposed Scheme Manager with a list of Scheme Creditors and the corresponding quanta of their claims that had been admitted for the purpose of voting. This was notwithstanding that counsel for OCBC had earlier written to the proposed Scheme Manager to request for a full list of the claims lodged by the Scheme Creditors for the purpose of voting and the amount of those claims.
[97] Further, as explained above at [19], although the Scheme Creditors were first informed that the voting results would be released after the trading day at 5.00pm, they were then unexpectedly informed after 5.00pm that the proposed Scheme Manager had in fact not completed his adjudication of the proofs of debt submitted to him. The proposed Scheme Manager eventually reported the results of the Scheme Meeting slightly over two months later in the Chairman’s Report on 17 December 2009 (see above at [21]). As a consequence of the proposed Scheme Manager’s unexplained conduct of the Scheme Meeting, doubts were understandably sown in the minds of some opposing creditors about the integrity of the voting process.
[98] During the subsequent two-month period between the Scheme Meeting and the Chairman’s Report, the proposed Scheme Manager knew precisely which way each creditor had voted but had not determined how much of each creditor’s claim was to be admitted. In the apt words of Mr Thio, lead counsel for Ho Lee, this gave the proposed Scheme Manager “perfect foresight” when it came to adjudicating the claims submitted for the purpose of voting. Mr Thio did not go so far as to allege dishonesty on the part of the proposed Scheme Manager; however, he did suggest that the proposed Scheme Manager might have suffered from a confirmation bias - which created a predisposition towards the hypercritical examination of evidence contrary to his own desired position (ie, documents supporting Ho Lee’s proof of debt). While we need not determine this issue, we are constrained to observe that we find it unsatisfactory that the proposed Scheme Manager had placed himself in a situation that invited such criticism.
[99] As we have explained earlier (see above at [73]), the transparency of proofs of debt adjudication process and the objectivity of the chairman in evaluating the proofs are key aspects of every s 210 scheme. As the scheme created binds and often severely prejudices dissenting creditors, it is only fair that the integrity of the s 210 procedure be scrupulously observed. Therefore, in our view, before the Scheme Meeting took place, the proposed Scheme Manager should have:
(a) completed adjudicating all proofs of debt; and
(b) provided all the Scheme Creditors present with the full list of Scheme Creditors entitled to vote and the corresponding quanta of their claims that were admitted for the purpose of voting.
A proposed scheme manager who cannot comply with the above prior to the scheme creditors’ meeting should act prudently and seek from the court leave to defer the meeting until after the adjudication is completed.
Whether a scheme creditor may appeal the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt
[100] As stated above at [56], there is no subsidiary legislation governing the admission and rejection of proofs of debt in relation to creditors’ meetings summoned to consider a proposed scheme of arrangement under s 210. However, comparably in the context of judicial management (see above at [87]), the Companies Regulations provide for admission and rejection of proofs in, inter alia, regs 72, 75, 79 and 80:
For liquidations, the equivalent provisions are to be found at rr 124, 128, 92 and 93 of the Companies (Winding Up) Rules respectively.
[101] The provisions relating to the admission and rejection of proofs of debt in the Companies Regulations and the Companies (Winding Up) Rules are not, however, free from difficulties. For example, if a creditor is entitled to vote under reg 72 of the Companies Regulations having duly lodged his proof of debt with the judicial manager, it is not clear how the chairman may reject his proof for the purpose of voting under reg 75 (see further the discussion of the Australian statutory “cousins” of the said provisions (regs 5.6.23 and 5.6.26 of the Corporations Regulations 2001 (Cth)) in Selim v McGrath [2003] NSWSC 927 (Selim v McGrath) at [88]–[106], endorsed by the Full Court of the Federal Court of Australia in Bacnet Pty Ltd and Others v Lift Capital Partners Pty Ltd (in liq) and Others [2010] FCAFC 36 (“Bacnet”) at [76]). Nevertheless, in considering the admission and rejection of proofs of debt by the chairman of a s 210 creditors’ meeting, it is worth bearing in mind the commonsensical procedure in these provisions. For convenience, all references made below to provisions in the Companies Regulations should be concurrently taken as references to their corresponding provisions in the Companies (Winding Up) Rules.
[102] Thus, the chairman of a s 210 creditors’ meeting has three options when assessing a contentious claim for the purpose of voting. First, he might admit the claim wholly. Second, he might reject a claim wholly or partially, in which case he should provide to the creditor written grounds of his rejection. We elaborate on this by stating our view that the chairman’s decisions should not be peremptory. His duty to give reasons puts the onus on him to look at each proof more carefully in the proper exercise of his quasi-judicial function. This requirement also improves the transparency of the voting process (see above at [73]). Third, if the chairman has doubts whether a proof should be admitted or rejected, he should mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained. We should add that in coming to his decision, the chairman may often require further evidence in support of a proof.

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The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal

Laws this judgment relies on

Grounds of decision

Introduction

The facts

The parties to the appeal

Events leading to the proposal of the Scheme

Salient features of the Scheme

The conduct of the Scheme Meeting

The results of the Scheme Meeting

The PwC report

The decision below

The parties’ arguments on appeal

OCBC’s arguments

Ho Lee’s arguments

The issues

Overview of schemes of arrangement under s 210

Objective

Procedure

First stage: formal steps towards the scheme creditors’ meeting(s)

Second stage: the conduct of the scheme creditors’ meeting(s)

Third stage: seeking the court’s approval

Transparency and objectivity

Determination of issues

When a proposed scheme manager might be in a position of a conflict of interest

The evolving nature of the proposed scheme manager’s duties

Conflict of interest