Voluntary Arrangements in Bankruptcy – Extension and Revocation

Client Update: Singapore 2018 DECEMBER

Restructuring & Insolvency

Introduction

Voluntary arrangement schemes allow insolvent debtors to stave off bankruptcy by proposing an arrangement for approval at a creditors’ meeting. At the same time, the debtor may apply for an interim order, which in effect, stays bankruptcy applications and prevents continuance of other legal process without leave of court.

In Re Aathar Ah Kong Andrew [2018] SGHC 124, the High Court set aside the approval obtained at a creditors’ meeting for a voluntary arrangement for material irregularities. This was the second attempt by the debtor for a voluntary arrangement after his earlier voluntary arrangement was set aside in Re Aathar Ah Kong Andrew [2017] SGHCR 4.

The debtor appealed and sought an extension of the interim stay order pending the determination of his appeal by the Court of Appeal. In Re Aathar Ah Kong Andrew [2018] SGHC 227, the High Court dismissed the application, holding that it did not have the power to grant such an extension, and in any event would not have exercised its discretion to do so.

Jansen Chow and Danitza Hon of Rajah & Tann Singapore LLP successfully represented one of the creditors in these proceedings.

Brief Facts

The insolvent debtor (“Debtor”) in this case was an investor who was heavily in debt towards creditors and financial institutions for purported debts in excess of $300 million.

The Debtor’s first attempted voluntary arrangement was set aside in Re Aathar Ah Kong Andrew [2017] SGHCR 4, which was the first reported decision in Singapore on the duties of debtor and nominee under the voluntary arrangement scheme.

In 2017, the Debtor sought to make a new voluntary arrangement proposal and appointed a senior legal practitioner as his new nominee. The Debtor also obtained an interim order under section 45(1) of the Bankruptcy Act (the “Interim Order”), which stayed bankruptcy and other proceedings from being commenced against him without the leave of court.

Client Update: Singapore 2018 DECEMBER

Restructuring & Insolvency

Under this new arrangement, the Debtor proposed to pay a total of $3 million, which he would borrow, to his creditors over 50 months, in satisfaction of debts of approximately $317 million. At the creditors’ meeting (“Creditors’ Meeting”), the Debtor obtained the approval of the requisite majority.

Four of the creditors then applied to revoke the approval obtained at the Creditors’ Meeting, submitting that there had been multiple material irregularities.

Re Aathar Ah Kong Andrew [2018] SGHC 124

The High Court affirmed the guiding principles laid down by the English High Court in Andrew Fender v The Commissioner of Inland Revenue [2003] EWHC 3543 (Ch) for voluntary arrangements, and emphasised two points that were crucial to the efficacy of any voluntary arrangement.

First, the debtor’s full disclosure is fundamental as it is an independent principle of law that creditors should be put in possession of such information as is necessary to make a meaningful choice in the scheme. The second relates to the importance placed upon the role and conduct of the nominee, who facilitates the meeting and later administers the arrangement.

The High Court held that there had been material irregularities in the following main aspects:-

(i) The nominee, in his final adjudication, did not assign any value to the litigation claims for the purposes of voting, even though he had, during the Creditors’ Meeting, agreed to allow the plaintiffs in those claims to vote on an “objected to” basis. Under the relevant provisions, the nominee (as chairman of the meeting) could agree to put upon an unliquidated debt an estimated minimum value for the purpose of voting. Having agreed to set such a minimum sum for voting on an “objected to” basis, it was not for the nominee to then declare such votes invalid as any decision as to invalidity is that of the court.

(ii) The nominee had wrongfully included the claims of 24 Indonesian creditors who made up 74.2% of the total declared debt. The circumstances surrounding their alleged claims warranted greater scrutiny, but he had not done so, and had only reviewed the supporting documents on a cursory basis.

(iii) The nominee had made an error in admitting a $20 million claim in the Creditors’ Meeting Report when he had previously decided at the meeting to only adjudicate the claim at $3 million.

Seen in totality, these irregularities led to the conclusion that the proposal would have been rejected had the Creditors’ Meeting been properly conducted.

In light of these material irregularities, the Court set aside the approval for the voluntary arrangement.

Client Update: Singapore 2018 DECEMBER

Restructuring & Insolvency

The Debtor has appealed against this decision.

Re Aathar Ah Kong Andrew [2018] SGHC 227

Subsequent to the Debtor filing his appeal against the substantive decision to set aside the approval for his second voluntary arrangement, the Debtor sought an extension of the Interim Order pending the determination of his appeals. This application was rejected by the High Court.

The High Court held that it did not have the power to grant an extension at this stage of proceedings.

(i) Under the provisions of the Bankruptcy Act, the court may grant an interim order as a temporary moratorium. It is intended to operate for a limited period of time to achieve the purpose of allowing the creditors time to consider the debtor’s proposal.

(ii) Parliament had intended for the process to be expeditious and closely supervised by the court, providing tight time frames and limited situations in which an extension could be granted.

The Debtor sought to rely on section 45(4) of the Bankruptcy Act, which only allows the court to extend the interim order beyond the default of 42 days to give the nominee more time to prepare his report. In light of the purpose of the statutory framework, the Court rejected the submission that section 45(4) is a general provision which allows the extension of the interim order at any stage. Such power could not be exercised in the present situation, where the creditors’ approval for the voluntary arrangement has already been revoked by the court.

Even if the court did have such power, the High Court held that it would not have exercised its discretion to extend the Interim Order in the present situation. It was insufficient reason that the decision to revoke the creditors’ approval was going on appeal; there would have to be special circumstances to justify the extension of the Interim Order.

The Court found that the Debtor had failed to show the existence of special circumstances. The Court also took into account the Debtor’s conduct in continuing to prejudice the creditors by refusing to pay the outstanding costs orders against him.

Therefore, the Court declined to grant an extension of the Interim Order.

Concluding Words

Voluntary arrangements are a useful avenue to help an insolvent debtor avoid bankruptcy. However, they also compromise the rights of creditors, particularly the minority creditors who vote against a successfully approved proposal. As such, the mechanism for voluntary arrangements imposes strict requirements, duties and timelines on the part of the debtor and the nominee.

Client Update: Singapore 2018 DECEMBER

Restructuring & Insolvency

These decisions demonstrate that debtors and nominees must ensure compliance with these requirements. Approval for a proposal is unlikely to be recognised where the creditors’ meeting is improperly conducted. Further, extensions of time will not be granted unless they are for the purpose of facilitating the consideration and approval of a proposal.

For further queries, please feel free to contact our team below.

Contacts

Jansen Chow Danitza Hon Partner Associate

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[email protected] [email protected]

Please feel free to also contact Knowledge and Risk Management at [email protected]

Client Update: Singapore 2018 DECEMBER

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Client Update: Singapore 2018 DECEMBER

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