Landmark decision: Singapore’s first successful application for super priority rescue financing

Introduction

On 8 April 2019, Asiatravel.com Holdings Ltd (“ATH”) and its subsidiary, AT Reservation Network Pte Ltd (“ATRN”) (together the “Applicants”) obtained Singapore’s very first super priority order for rescue financing pursuant to section 211E(1)(b) of the Companies Act (Cap 50, 2006 Rev Ed) (the “Companies Act”). The Honourable Justice Kannan Ramesh granted the order giving priority to the debt arising from rescue financing over all the Applicants’ unsecured and preferential debts (as specified in section 328(1)(a) to (g) of the Act). A crucial step in the restructuring of the Applicants by way of a scheme of arrangement with the creditors.

Background

ATH is a public company listed on the Catalist of the Singapore Exchange Trading Limited (the “SGX”). The Applicants ran an online travel platform through which it sold travel products, including hotel rooms, flights and tours.  The Applicants ran into financial difficulty and on 7 August 2018 filed applications with the Singapore High Court seeking moratoria against enforcement actions and legal proceedings by its creditors under section 211B of the Companies Act. The moratoria were extended on 7 September 2018. As the Singapore Tourism Board decided to suspend the Applicants’ travel agent licence on 5 October 2018, the Applicants ceased business operations.

Under section 211B of the Companies Act, companies are able to avail themselves of an automatic stay on the filing of a stay application pending the formal hearing of the stay application. Section 211B of the Companies Act was introduced as part of the amendments to the Companies Act in May 2017.

Application for super priority rescue financing under section 211E(1)(b) of the Companies Act

In November 2018, the Applicants found an investor who was willing to invest up to S$6,500,000 in the Applicants in exchange for shares, if the Applicants’ existing debts were compromised by way of a scheme of arrangement. As this investor also operates in the tourism industry, the parties agreed to revive the Applicants’ business instead of assuming a new business or acquiring new assets.

However, in order to obtain the SGX’s approval in principle for the issuance of new shares to the creditors and the investor, and for the resumption of trading of ATH’s shares, the SGX requires ATH to be an on-going concern with an existing business. In view of this, the Applicants negotiated with the investor for S$1,500,000 out of the S$6,500,000 to be channelled towards reviving the business of the Applicants (the “Business Quick Start Financing”). The Business Quick Start Financing is to be invested prior to the approval of the schemes. As the Business Quick Start Financing is to be invested in the Applicants prior to the successful completion of the schemes of arrangement, the investor required the protection afforded by the grant of super priority over the Business Quick Start Financing.

On 21 January 2019, the Applicants applied under section 211E(1)(b) of the Companies Act for the Business Quick Start Financing to be granted priority over all the preferential debts specified in section 328(1)(a) to (g) of the Act and all other unsecured debts. Section 211E(1)(b) of the Companies Act was also part of the 2017 amendments to the Companies Act.

In order to apply for super priority for rescue financing under section 211E of the Companies Act, a company must have made an application under section 210(1) or 211B(1) of the Companies Act for a Court-supervised compromise with creditors, members and holders of units of shares or for the Court to restrain proceedings against the company respectively.

Under section 211E(1)(a) of the Companies Act, rescue financing is treated as part of the costs and expenses of the winding up mentioned in section 328(1)(a) of the Companies Act. The High Court in Re Attilan Group Ltd [2018] 3 SLR 898 (“Re Attilan”) held that the applicant should adduce some evidence of reasonable attempts at trying to secure financing without any super priority to move the Court to exercise its discretion, even though it is not a condition that financing would not be obtained but for the grant of super priority.

Under section 211E(1)(b) of the Companies Act, rescue financing is granted priority over all the preferential debts specified in section 328(1)(a) to (g) of the Act and all other unsecured debts. The applicant must satisfy the Court that it would not be able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given this priority.

Under section 211E(1)(c) of the Companies Act, rescue financing is secured by (i) a security interest on property of the company that is not otherwise subject to any security interest; or (ii) a subordinate security interest on property of the company that is subject to an existing security interest. The applicant must satisfy the Court that it would not be able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given this priority.

Under section 211E(1)(d) of the Companies Act, rescue financing is secured by a security interest, on property of the company that is subject to an existing security interest, of the same priority as or a higher priority than that existing security interest, if —

• (i) the company would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is secured in this manner; and
• (ii) there is adequate protection for the interests of the holder of that existing security interest.

There is one reported decision on an application for super priority under section 211E of the Companies Act. In Re Attilan, the applicant (“AGL”) applied unsuccessfully for super priority under sections 211E(1)(a) and (b) of the Companies Act in respect of a subscription of convertible equity-linked notes (the “Subscription”).

Applicants must undertake reasonable efforts to explore other financing that did not entail super priority

The High Court in Re Attilan stated that an applicant must demonstrate that reasonable efforts have been undertaken to explore other financing that did not entail super priority. While this was only one of the factors to be considered when the Court exercises its discretion on whether to grant the super priority application under section 211E(1)(a) of the Companies Act, this was a material condition stated in section 211E(1)(b) of the Companies Act.

Other factors to be considered under section 211E(1)(b) of the Companies Act

The Court stated that the following factors from US cases are relevant considerations for the Court in the exercise of its discretion in adjudicating an application for super priority:

• no alternative financing is available on any other basis;
• the proposed financing has to be in the exercise of sound and reasonable business judgment;
• such financing is in the best interest of the creditors;
• no better offers, bids, or timely proposals are before the Court;
• the proposed credit transaction is necessary to preserve the assets of the estate, and is necessary, essential, and appropriate for the continued operation of the debtors’ businesses;
• the terms of the financing agreement are fair, reasonable, and adequate in light of the circumstances of the debtor and the proposed lender; and
• the financing agreement was negotiated in good faith and at arm’s length between the debtor, on the one hand, and the agents and the proposed lender, on the other hand.

Nonetheless, the Court stated that most of these factors from US cases were not directly relevant, because AGL’s application failed as AGL could not show the unavailability of financing without such super priority under section 211E(1)(b) of the Companies Act. The Court in that case therefore stated that it would consider the above factors more closely when the issue specifically arises.

Reasons why AGL was unsuccessful in its super priority application

The Court in Re Attilan provided two main reasons for declining to grant super priority status to the proposed financing under the Subscription.

AGL did not undertake reasonable efforts to secure financing without super priority

First, the Court was of the view that AGL failed to provide any evidence of unavailability of financing without such super priority under both section 211E(1)(a) and (b) of the Companies Act. AGL had failed to demonstrate that it had undertaken reasonable efforts to source for financing without the type of super priority sought.

AGL did not demonstrate that the terms of the Subscription were the best possible

With respect to AGL’s application under section 211E(1)(b) of the Companies Act, the Court stated that AGL’s belief that the terms of the Subscription were the “best possible that could be obtained by” AGL was not backed up by any credible evidence. The Court explained that evidence should have been deposed to put on record that alternative sources of financing were sought but rejected. For example, AGL could have produced correspondences relating to rejection or negotiation with other financial institutions or possible rescuers. The Court stated that AGL provided mere unsubstantiated assertions.

The Applicants’ Business Quick Start Financing

The following factors may have differentiated the Applicants’ Business Quick Start Financing from AGL’s proposed financing under the Subscription, which may have resulted in the Applicants’ success in obtaining the super priority order:

The Applicants approached their existing lenders who were not willing to provide any further financing. Apart from their own efforts, the Applicants also engaged a third-party investment banking and financial advisory firm, DHC Capital Pte Ltd (“DHC”), to approach the market and identify other potential lenders who would be willing to offer financing to them. None of the nine other potential lenders which DHC approached were willing to provide any financing for a variety of reasons. These included:

• the weak financial positions of the Applicants. The Applicants do not have any hard assets or assets of significant identifiable value compared to the loan size of S$1.5 million that potential lenders can look to as security for financing. This is likely to discourage potential lenders from providing funding as there is limited downside protection to potential lenders in the event the business cannot successfully recommence;
• the cessation of the Applicants’ business operations. This is likely to discourage potential lenders from providing funding as there was uncertainty surrounding the Applicants’ ability and timeline to re-commence operations. The Applicants must also operate successfully for several months before it can apply to the Singapore Exchange Securities Trading Limited for resumption of trading of its shares;
• the short timeline to finalise terms of funding, given the Court deadlines and need to quickly re-commence business operations. This together with the complexities and inter-connectedness of multiple work streams such as the Court process under section 211B of the Companies Act, proposed new equity investment and compromising debts owed to the Applicants’ creditors by way of schemes of arrangement may also have discouraged potential lenders from providing funding; and
• the niche nature of the online travel agency market with only a limited number of players that might be interested in investing in the Companies. A factor which a potential lender might consider is its business strategy (such as nature of industry and stage of investment) and level of business synergies that can be captured once the Applicants’ business operations have re-commenced or turned around. These business synergies could include reducing costs through shared cost centres and strategic synergies via combining similar businesses to capture scale or geographic expansion.  To that end, there may not have been any interest from the lenders because the limited number of players may have had other alternative options at their disposal such as setting up their own platform or forming commercial partnerships or joint ventures.

The Applicants set out in their affidavit evidence, the efforts made to secure rescue financing for the purpose of restarting the Applicants’ business activities and why such rescue financing is critical to the restructuring efforts.

The Applicants also filed affidavit evidence containing an analyses of how each component of the rescue financing was arrived at and the assumptions that were made in this regard.

The liquidation scenario would have resulted in no returns to the Applicants’ unsecured creditors because the Applicants’ had no discrete assets to be realised for value apart from its online platform.

Conclusion and thoughts

This case only deals with an application under section 211E(1)(b) of the Companies Act for an  order that if the company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company is to have priority over all the preferential debts specified in section 328(1)(a) to (g) and all other unsecured debts. Singapore has yet to see a successful application under sections 211E(1)(a), (c), and (d) of the Companies Act. The decision in Re Attilan left unanswered questions on the factors which the Court will consider in an application for super priority under section 211E(1)(a) of the Companies Act  for an order that if the company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company is to be treated as if it were part of the costs and expenses of the winding up mentioned in section 328(1)(a) of the Companies Act. It also remains to be seen what would constitute “adequate protection for the interests of the holder of that existing security interest” under section 211E(1)(d) of the Companies Act.

Nevertheless, this ground breaking decision provides valuable guidance to insolvency practitioners on future applications for super priority rescue financing. This will hopefully increase the attractiveness of distressed financing as an investment opportunity in Singapore, fostering Singapore’s development as an insolvency and restructuring hub.

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