Pre-Packed Schemes of Arrangement: the Singapore Approach
In 2018, Singapore enacted the Insolvency, Restructuring and Dissolution Act (IRDA 2018), which streamlined its debt restructuring regime by consolidating provisions previously set out in various statutes into a piece of omnibus legislation.
Among other developments, the IRDA 2018 built upon existing provisions relating to pre-packed schemes of arrangement (i.e. pre-packed schemes) and enhanced pre-packed schemes as a viable tool in Singapore’s arsenal of debt restructuring mechanisms.
In this article, we set out Singapore’s approach to pre-packed schemes and provide an appraisal of the process.
How pre-packed schemes work
Ordinarily, a Singapore court will not approve a scheme of arrangement until it has ordered a meeting of the creditors of a company and the creditors have been able to consider the proposed scheme at that meeting.
A pre-packed scheme, however, enables a distressed company to negotiate directly with its creditors and apply to court to approve the pre-negotiated scheme. This dispenses with the need for both a court hearing (to summon a creditors’ meeting) and the actual creditors’ meeting. However, the court will not approve a pre-packed scheme until certain requirements are met, including the following.
First, a company must provide each creditor intended to be bound by the pre-packed scheme with a statement that contains:
- information concerning the company’s property, assets, business activities, financial condition and prospects;
- information on the manner in which the terms of the compromise or arrangement will affect the rights of the creditor; and
- any other information necessary for the creditor to make an informed decision regarding the pre-packed scheme.
The statement must also explain the effect the pre-packed scheme has on any material interests of the company’s directors (in any capacity). If the pre-packed scheme affects any debenture holders’ rights, a similar explanation of the effect of the scheme on the material interests of the directors of the company must be made to the trustees for the debenture holders.
Second, the company must publish, in the Government Gazette and in at least one English local daily newspaper, a notice of its application to court for the approval of the pre-packed scheme, and must send a copy of the notice published in the Government Gazette to the Registrar of Companies. Furthermore, the company must notify and send a copy of its application to court for the approval of the pre-packed scheme to every creditor who is to be bound by the scheme.
Third, the court must be satisfied that if a creditors’ meeting had been called, the majority of those creditors would have agreed to the pre-packed scheme. The court may require evidence before it is satisfied that the creditors would have indeed consented to the pre-packed scheme. For example, if a company solicits votes prior to filing an application for a pre-packed scheme, those votes may be relied upon by the court as evidence of consent if the court is satisfied that the votes “exceed the requisite majority” needed to approve that scheme.
If the court is satisfied that all the necessary conditions have been fulfilled, it can grant its approval to the pre-packed scheme, subject to any adjustments it deems fit. Once the court makes an order approving the pre-packed scheme, and a copy of the court’s order has been lodged with the Registrar of Companies, the scheme becomes binding on the company and the creditors intended to be bound.
Purpose of pre-packed schemes
Pre-packed schemes are designed to strike a balance between considerations such as expediency and the interests of creditors.
Singapore’s approach to pre-packed schemes is modelled after Chapter 11 proceedings in the USA in which proceedings can be completed in 30 to 45 days. Indeed, in 2018, Singapore courts granted approval of a pre-packed scheme for the restructuring of debts amounting to around SGD 80 million in just over two months from the time the company proposed the scheme to its creditors and less than three weeks after it filed an application to the court for approval. This approach favours all parties involved by allowing them to streamline the debt restructuring process, and come to a quick resolution on the steps forward.
IRDA 2018 does not favour debtor companies to the detriment of creditors. In fact, several provisions protecting creditors are enshrined in the pre-pack scheme process. For example, IRDA 2018 requires companies proposing a pre-packed scheme to disclose “material information” that equips creditors with the necessary details for them to determine whether the allocation of loss and the division of benefits are fair and in their commercial interests. The court ultimately has discretion to approve or reject an arrangement and will not approve a pre-packed scheme where it is not satisfied that the extent of the company’s disclosure is sufficient to provide creditors with the requisite information necessary to make an informed decision.
An analysis of the pre-packed schemes regime
As a process that simplifies the process of obtaining approval for schemes of arrangement, pre-packed schemes offer a number of benefits.
First, the process saves time and costs for parties involved. Pre-packed schemes enable companies to sidestep some of the bureaucracy inherent in the debt restructuring regime. If a company can demonstrate that it has the requisite creditor support for a proposed scheme, it is not necessary for a court hearing to be held to call a creditors’ meeting, nor is it necessary for the actual creditors’ meeting to be convened just to demonstrate that support. In addition, companies that are already cash-strapped do not need to incur unnecessary costs, including the legal fees involved in the court hearing as well as any other costs resulting from organising and holding a creditors’ meeting. This has the added benefit of protecting the company’s pool of assets, ensuring that creditors can recover more of their assets from the company as less resources are spent on the restructuring process.
Second, since parties are able to negotiate privately, pre-packed schemes may protect confidential and/or sensitive information from being shared publicly. Without the pressure of legal proceedings hanging over parties’ heads, parties may be more likely to reach an amicable resolution of the issue or issues while avoiding protracted public disputes that may tarnish the company’s name, affect the goodwill it holds, and other effects that may impact the company financials.
For more information on pre-pack procedures in Singapore, contact your CMS client partner or these CMS experts.
