Client Update: What are the Disclosure and Classification Requirements under a Pre-Pack Scheme?

30 September 2021

In Re DSG Asia Holdings Pte Ltd [2021] SGHC 209 (“Re DSG”), the Singapore High Court dismissed an application (the “Application”) to sanction a pre-packaged scheme of arrangement (“pre-pack scheme”) pursuant to s 71 of the Insolvency, Restructuring and Dissolution Act 2018 (Act 40 of 2018) (“IRDA”) on two grounds.

First, the Court found that DSG Asia Holdings Pte Ltd (“DSGA” or the “Applicant”) did not adequately disclose all material information to the scheme creditors to enable them to make an informed decision on whether to support the pre-pack scheme pursuant to s 71(3)(a) of the IRDA.

Second, the Court was also not satisfied that the voting requirements in s 210(3AB) of the Companies Act (Cap. 50) (“CA”) (the “statutory majority requirements”) would have been met had a creditors’ meeting been summoned to approve the proposed scheme upon proper classification of the creditors.

The Applicant has appealed, but the High Court decision, as it stands, sets out important guidelines as to the requirements for court sanction of a pre-pack scheme.

Brief Facts

The Applicant is part of a group of companies (the “DSG Group”) that has faced financial difficulties since 2020. The DSG Group consists of six (6) Singapore companies (the “SG Companies”) and three (3) Malaysian companies (the “MY Companies”).

In late February 2021, the Applicant executed a deed poll (the “Deed Poll”) to become a primary co-obligor in respect of all claims against the nine DSG Group companies, which were to be the subject of a new proposed scheme (the “Scheme”) under s 71 of the IRDA.

From early March 2021 to late April 2021, the Applicant solicited votes for the Scheme and accepted ballot forms. Of the creditors who voted, 91.57% in number representing 87.33% in value of the adjudicated claims of the voting creditors voted in favour of the Scheme.

One of the creditors, Overseas-Chinese Banking Corp Ltd (“OCBC”), questioned the inclusion of related creditors’ votes in the Scheme. The DSG Group informed OCBC that the related creditors’ claims had been assigned (the “Debt Sale”) to a potential white knight investor, Allington Advisory Pte Ltd (“Allington”).

The Applicant subsequently filed the Application to seek the Court’s sanction of the Scheme. Four creditors opposed the application, including OCBC. The grounds for OCBC’s objections were:

• there was a failure to disclose all material information to the creditors, as the DSG Group did not disclose the purchase price of the Debt Sale before the vote solicitation;
• Allington should not be placed in the same class as other unsecured creditors for the vote solicitation due to its status as (i) the assignee of related creditors’ claims, (ii) a secured creditor; and (iii) a potential investor; and
• the DSG Group had no grounds for pooling the liabilities of the companies in the group into one entity and asking the creditors to vote in one scheme.

Inadequate disclosure of material information

The Court held that the purchase price paid by Allington (the white knight investor) to purchase the related creditors’ claims was information necessary to enable creditors to make an informed decision. This information needed to be disclosed so that creditors could assess the Debt Sale and Allington’s resulting participation in the Scheme for themselves.

The Applicant argued that it was bound by the confidentiality provisions in the sale and purchase agreement in the Debt Sale from unilaterally disclosing the information and the non-disclosure should not be held against it. The Court disagreed, and found that such non-disclosure was sufficient to disqualify the application from the expedited process under s 71 of the IRDA.

Proper classification of creditors

The Court also found that it was implicit in the satisfaction of the statutory majority requirements that creditors must be properly classified, as classification would affect how the votes would have been tallied. The Court observed that if Allington had been placed in a separate class, the statutory majority requirements would not have been met (only 64% in value of the other unsecured creditors voted in favour of the Scheme).

Since a s 71 application bypasses the creditors’ meeting, the Court has to scrutinise both the rights and private interests of the voting creditors in an application to approve a pre-pack scheme pursuant to s 71 of the IRDA.

The Court set out the following analytical framework to be applied for a pre-pack scheme, taking reference from the framework established for schemes pursuant to s 210 of the CA:

• In classifying the creditors to determine whether the notional voting outcomes would have satisfied the statutory majority requirements set out in s 210(3AB) of the CA, the Court will consider the creditors’ rights; and
• If the statutory majority requirements are satisfied, the Court in determining whether to approve the scheme must be satisfied that the creditors whose votes were solicited were fairly representative of the class of creditors to which they belong. In conducting this inquiry, the Court will also have regard to the creditors’ private interests.

Applying the framework to the Application, the Court found that Allington’s rights as a potential investor affected its classification and rendered Allington unable to consult with the other unsecured creditors with a view to their common interest.

The Court found that Allington’s envisaged investment – Allington’s acquisition of the SGX-listed holding company of the DSG Group, Design Studio Group Ltd (“DSGL”) – was effectively conditional on the Scheme being approved and implemented. Thus, Allington’s interest as a potential investor was relevant to classification and rendered Allington unable to consult with the other unsecured creditors with a view to their common interest.

Conclusion

As the first reported judgment in Singapore involving an application to seek the Court’s sanction for a pre-pack scheme of arrangement pursuant to s 71 of the IRDA, the case of Re DSG is instrumental in setting out the necessary requirements to be satisfied before the Court would sanction a pre-pack scheme.

Particularly noteworthy is the statement from the Court that pre-pack scheme should generally only be used for clear cases of agreement. The Court also observed that where a major creditor objects, or where the scheme company has difficulty providing all material information to its creditors, that is a strong signal that the process under s 71 of the IRDA should not be utilised and is probably unavailable. Instead, scheme companies in such situations should attempt to restructure their debts via the normal procedure set out in s 210 of the CA.

This client update is authored by Partner Keith Han and Associates Angela Phoon and Maverick Tan. If you have enquiries pertaining to the new legal developments in corporate insolvency, or require assistance in any corporate restructuring or insolvency related matters, please do not hesitate to contact Keith by email [email protected] or mobile +65 9436 8330.

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