High Court Refuses Priority Rescue Financing Status in First Case on Singapore’s New DIP Financing Regime
In the first judgment under Singapore’s new “super priority” “debtor in possession” (DIP) financing regime, the Singapore High Court (Court) declined to grant priority status to funds to be advanced to the Attilan Group.
The Singapore regime is the first to import the US Chapter 11-style DIP priority funding mechanisms into a jurisdiction with primarily English-law based corporate law and insolvency regimes.
The judgment discusses how the Singapore provisions align with the established principles under US Bankruptcy Code provisions and case law.
The Court emphasised the importance of applicants first taking reasonable steps to raise finance on a non-priority basis (and producing evidence of such efforts), before seeking priority rescue funding.
The Court has considered the new scheme of arrangement priority rescue funding regime contained in section 211E of the Singapore Companies Act (Cap. 50) (Companies Act). The judgment of Judicial Commissioner Aedit Abdullah (now Justice Abdullah) in Re Attilan Group Ltd  SGHC 283, delivered on 8 November 2017, marks the first time that section 211E has been considered since amendments introducing the priority rescue financing mechanisms (among other amendments) came into effect in May 2017.
The Court declined to grant priority rescue funding status under section 211E(1)(a) or (b) to future advances by the Advance Opportunities Fund 1 (AOF 1) to the Attilan Group (Group) under a pre-existing subscription agreement with the Group (Subscription Agreement).
In making its decision, the Court made observations on a number of key areas, including:
- The relevance and usefulness of US authorities on Chapter 11 DIP financing provisions when interpreting and applying similar provisions under the Singaporean legislation;
- The need for an applicant to first attempt to source alternative financing on a normal basis (that is, without priority status), and provide satisfactory evidence of those attempts to the Court; and
- Whether advances under pre-existing agreements can qualify as rescue financing.
Singapore’s New Rescue Financing Regime
Section 211E of the Companies Act provides that where a company has made an application to convene a meeting for the purposes of a scheme of arrangement, or for a scheme moratorium under section 211B, that company may also apply for various categories of priority status for any “rescue financing”.
Specifically, the Court may make an order under section 211E(1) that the debt arising from “rescue financing”:
- is to be treated as part of the costs and expenses of winding up (should the company subsequently be wound up);
- is to have priority over preferential and unsecured debts (should the company subsequently be wound up);
- is to be secured by a new security interest over unsecured property, or a subordinated security interest (where the property is already subject to security); or
- is to be secured by a new security interest over already-secured property, of the same priority or a higher priority than the existing security interest.
As is expected given the different priority levels of each of limbs (a) to (d), they each have different requirements that must be satisfied before they may be granted. Re Attilan Group considered limbs (a) and (b) of section 211E(1).
The concepts in section 211E draw heavily on section 364 of Chapter 11 of the US Bankruptcy Code.
A Note on Terminology
We note that Judicial Commissioner Abdullah (as he then was) referred to limbs (a) and (b) of section 211E(1) as conferring “super priority” status, adopting the legislative title of the section (being “Super Priority for Rescue Financing”). However, neither limb (a) nor (b) involves granting priority over existing secured debts: this can only be conferred by limb (d) — which is more closely aligned to what Chapter 11 practitioners commonly understand as constituting “super priority”.
To add further confusion to the terminology, section 211E(9) defines a “super priority debt” as a debt arising from any rescue financing pursuant to and under limb (b). In an effort to avoid confusion, we have therefore sought to avoid reference to “super priority” in this article.
Re Attilan Group: The Facts and Arguments
The application filed by the Group in the Court sought the following orders:
- That a creditors’ meeting be convened to consider a proposed scheme of arrangement under section 210(1) of the Companies Act; and
- That rescue financing sought to be obtained by the company would be granted priority status under section 211E(1) of the Companies Act.
The Group’s proposed scheme of arrangement was only briefly described in the decision, but broadly involved:
- Issuing new shares;
- Expanding and diversifying the Group’s business;
- Funding such expansion and diversification by a subscription of further equity-linked notes under the subscription agreement; and
- A moratorium on court proceedings.
It was the additional sums to be advanced under the Subscription Agreement for which the Group sought priority as “rescue financing”. This update will focus on the Court’s discussion of the new rescue financing priority mechanisms rather than the other issues relating to the creditors’ meeting and class formation that were also considered.
In particular, the Group argued that the funding to be advanced under the Subscription Agreement qualified as rescue financing under section 211E on the basis that such financing was necessary for the Group’s survival. The Group asserted that it had approached several parties to explore new financing arrangements, to no avail. These efforts included offering Phillip Asia Pacific Opportunity Fund Ltd (Phillip Asia), a creditor of the Group which challenged the scheme and priority applications, the same priority offered to AOF 1 in return for future funding (albeit only 11 days before the court hearing).
Phillip Asia, in opposing the grant of any special priority status for the rescue funding, noted that the Group had failed to identify which limb of section 211E(1) it was seeking to invoke, and that AOF 1’s offer of finance (as subscribed under the Subscription Agreement) was “vague” and subject to conditions.
Phillip Asia further argued that:
- If section 211E(1)(a) was being relied upon, the Group should be required to show that it had used reasonable efforts to obtain unsecured funding (relying on In Re Johnson Rubber Company, Inc et al,1 Case No 07-19391 (Bankr, ND Ohio, 2008) (In Re Johnson). a United States case which interpreted section 364(b) of the US Bankruptcy Code). Phillip Asia asserted that the Group had failed to do so and had not provided sufficient evidence to satisfy this; and
- If the Group was relying on section 211E(1)(b), then applying In Re Western Pacific Airlines, Inc2 223 BR 567 (Bankr, D Colo, 1997) (In Re Western Pacific). (another US Bankruptcy Code case, this one interpreting section 364(c)), the Group was required to show a number of things, including that no alternative financing was otherwise available and that no superior proposals were before the Court. Phillip Asia argued that the Group had not provided sufficient evidence of discussions with other lenders on the basis of non-priority status, or discussions with other lenders on the basis of priority status for the new funds (which would have allowed a comparison of the terms on which the new priority status funding was being offered).
The Court permitted a meeting of creditors to be held to consider the scheme of arrangement, but determined that any proposed financing from AOF 1 would not be given priority status under section 211E(1)(a) or (b).
Requirements for Priority Status under Section 211E
The Court noted that for an order to be made granting priority status under section 211E, the following factors must be present:
- The proposed financing must be “rescue financing” as defined under section 211E(9);
- The applicant must meet the condition(s) under whichever limb(s) of section 211E(1) it seeks to obtain priority status (although there are no conditions specified in the legislation for priority under section 211E(1)(a)); and
- The Court must exercise its discretion to grant priority status.
“Vague and Conditioned”
The Court rejected Phillip Asia’s arguments around AOF 1’s proposed financing being subject to pre-conditions and “vague”. It held that AOF 1 unequivocally stated that it would not terminate the Subscription Agreement and would continue to support the Group via continued subscription to that agreement on the specified terms and conditions. Further, the Court noted that there is nothing in the language of section 211E(9) that prevents a rescue financier from stipulating conditions to its financing.
Can Funds Advanced under a Pre-Existing Agreement Be “Rescue Financing”?
Under section 211E(9) of the Companies Act, financing is “rescue financing” if it satisfies one or both of the following conditions:
- It is necessary for the survival of the relevant company seeking the “rescue financing” (or the whole or any part of the undertaking of that company) as a going concern; or
- It is necessary to achieve a more advantageous realisation of the assets of the relevant company seeking the “rescue financing”, than on a winding up of that company.
The Court considered whether “rescue financing” could be in the form of proposed financing by an existing creditor under a pre-existing agreement. It held that in order to come within the scope of “rescue financing” it is not necessary for the proposed financing to be entirely new; it can be additional financing from an existing creditor or can even be premised on a prior obligation that (due to the default of the debtor or similar) the creditor may elect to either fulfil or terminate.
In this case, AOF 1 was not obliged under the existing Subscription Agreement to provide further funds, because an event of default had arisen which entitled AOF 1 to terminate the Subscription Agreement. Thus, any future funding provided by AOF 1 under the Subscription Agreement was discretionary on the part of AOF 1 and if provided would be additional financing for the Group. Such funding could qualify as “rescue funding” within the meaning of section 211E(9).
In practice, it could be expected that most well-drafted loan agreements would contain an event of default (relieving the lender of the obligation to advance further funds) should the borrower (or any related group member) propose a scheme of arrangement. The Court’s reasoning therefore suggests that in such cases where a lender elects to continue to fund under such a pre-existing loan agreement this can potentially qualify as “rescue financing” under section 211E (where the other requirements of section 211E(9) are satisfied).
Relevance of US Authorities When Interpreting Singapore Provisions
The Court noted that this was the first Singapore case to consider the new priority rescue financing mechanisms, and that the concept was “alien” to jurisdictions with English-law based corporations laws systems. It noted similarities with the US Chapter 11 DIP priority provisions which had “at least inspired” the Singapore regime, citing parliamentary debates in which the Chapter 11 concepts were referred to as “being adopted”.
As such, despite differences in the statutory language, the Court noted that US authorities could “be helpful in illuminating the appropriate construction of the newly enacted provisions … concerning rescue funding”. The Court emphasised, however, that these US decisions were only “a useful guide” as Singapore develops its own law in the field, and that arguments presented to the Court would strongly influence how closely the Singapore position follows or deviates from the US position.
Need to Identify Priority Sought, and Relevant Threshold
The Court took issue with the Group’s initial failure to identify a limb of section 211E(1) and the level of priority being sought, as such information was necessary for opposing creditors to prepare their arguments. This ultimately did not turn out to be an issue, as the Group subsequently clarified in oral arguments that the Group was relying on limbs (a) or (b).
On the standard of proof to be met by an applicant seeking priority status, Judicial Commissioner Abdullah (as he then was) noted that “it is not necessary to set a high threshold for the evidence”, and that the Court was to be satisfied on the balance of probabilities, that the relevant requirements in section 211E were made out.
Requirements under Section 211E(1)(a)
The Court noted that section 211E(1)(a) of the Companies Act is analogous to section 364(b) of the US Bankruptcy Code. However, it did note differences between the US and Singapore statutes, and therefore stated that the US cases on section 364(b) of the Bankruptcy Code could not be automatically or directly applied.
Nevertheless, the Court found persuasive the decision in In Re Johnson (a US case interpreting section 364(b) of the Bankruptcy Code), which required an applicant to expend “reasonable efforts to secure other types of financing” (that is, financing without any special priority). Although not a condition (as it is under section 211E(1)(b)), in most cases the applicant would be expected to show evidence of such efforts. However, as in the case of In Re Johnson, the Court noted that there is no need to demonstrate availability of unsecured funding where circumstances dictate that any efforts to secure it would be futile.
Notably, the Court suggested that the priority rescue funding status, even under section 211E(1)(a), should not be granted lightly. At paragraph 61 of the judgment, Judicial Commissioner Abdullah (as he then was) stated:
“Giving super priority disrupts the expected order of priority of the various creditors of the company. The grant of super priority should thus not ordinarily be resorted to and the courts would be slow to do so unless it is strictly necessary. Generally, it is only where there is some evidence that the company cannot otherwise get financing that it would be fair and reasonable to reorder the priorities on winding up, giving the rescue financier the ability to get ahead in the queue for assets. For this reason, even for an application under section 211E(1)(a), the applicant should adduce some evidence of reasonable attempts at trying to secure financing on a normal basis, ie, without any super priority, to move the court to exercise its discretion.”
In this instance, there was insufficient evidence of any efforts being expended to secure financing without any special priority, and thus the Court declined to exercise its discretion to grant “super priority” under section 211E(1)(a).
Requirements under Section 211E(1)(b)
The Court also noted the similarities between section 211E(1)(b) of the Companies Act and section 364(c) of the US Bankruptcy Code.
A number of US cases were cited in relation to section 364(c) of the Bankruptcy Code, which the Court noted were “relevant considerations for the court in the exercise of its discretion in adjudicating an application for super priority” (despite these not being expressed in either section 364(c) or section 211E(1)(b)). These factors included:
- From the US case of In Re Western Pacific:
- The proposed financing must be in the exercise of sound and reasonable business judgment;
- No alternative financing is available on any other basis;
- The financing is in the best interest of the creditors;
- No better offers, bids or timely proposals are before the court; and
- From the case of In Re Mid-State Raceway, Inc and Others,3 323 BR 40 (Bankr, ND New York, 2005). another US case:
- The proposed transaction is necessary, essential and appropriate for the continued operation of the debtor’s business;
- The terms of the financing are fair, reasonable and adequate in the circumstances; and
- The financing agreement was negotiated in good faith and at arm’s length.
As the Group was unable to demonstrate that it “would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given the priority mentioned in this paragraph”, which is the material condition under section 211E(1)(b), the Court declined to consider these further factors set out in US case law (and their applicability in Singapore) in close detail and left that question for a later case.
Citing US case law (in particular, In Re The Crouse Group, Inc4 71 BR 544 (Bankr, ED Pennsylvania, 1987). and In Re Ames Department Stores, Inc5 115 BR 34 (Bankr, SD New York, 1990).), the Court held that notwithstanding the statutory differences between the Singapore and US statutes, the broad idea that the applicant must expend reasonable efforts to obtain less disruptive financing was common to both the US and Singapore.
In this regard, a debtor does not have to show that it has sought credit from “every possible source”, but it does need to show that reasonable efforts were employed, in order to demonstrate that it would not have been able to obtain rescue financing from any person without special priority status.
On the facts, the Group failed to adduce sufficient evidence of those efforts. It was not clear from the affidavit evidence whether discussions with other potential lenders involved “super priority” terms or otherwise, and there was no credible evidence (rather, only “unsubstantiated assertions”) demonstrating that the funding from AOF 1 was on the best possible terms that could be obtained. An assertion that attempts to secure other funding would be futile due to the weak financial position of the company would generally not be sufficient.
As the first case on Singapore’s new priority rescue financing mechanisms, it is extremely helpful that the Court addressed issues such as how the Singapore provisions may align, or not align, with established principles under the corresponding US Bankruptcy Code provisions and case law. This is particularly so as the Singapore provisions mark the first time that Chapter 11-style DIP priority funding provisions have been imported into a jurisdiction with primarily English-based corporate and insolvency laws.
A key takeaway for any company looking to obtain priority for rescue financing under section 211E is the need for a proper process to raise that finance. Such a process would prudently involve approaching a number of lenders and seeking funding from those lenders on a non-priority basis, and if that fails, also on a priority basis. Precisely how extensive the process should be will need to be assessed on a case-by-case basis — applicants will need to consider what amounts to reasonable efforts to source such funding in their circumstances. The process and its results should be clearly evidenced to the Court. The judgment suggests the Courts will generally expect this process as a baseline requirement irrespective of which priority limb is being relied upon (although the requirement to seek non-priority funding may not be required if demonstrably untenable). In most cases, we would expect companies to engage appropriate financial advisors to assist with such a process.
It is next worth bearing in mind that the Court in the case of Re Attilan Group only considered limbs (a) and (b) of section 211E(1). It has not yet considered limbs (c) and (d).
However, the wording of the condition to obtaining priority under limb (b) is very similar to the wording of the condition under limb (c), and one of the conditions under limb (d) of section 211E(1). All of these provisions refer to the need to establish that “the company would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing” is given the priority or security mentioned in the applicable paragraph. Re Attilan Group therefore provides some guidance as to how the Courts will approach those similar conditions in respect of rescue financing applications under sections 211E(1)(c) and (d).
Having said that, limb (d) may raise additional issues, as it concerns super priority “priming” security over all existing security interests, and accordingly contains a further condition that there is adequate protection for the interests of the holder of any existing security interest that is primed. This will likely involve issues of security and collateral valuation.
We also note the comments of Judicial Commissioner Abdullah (as he then was), as to whether financing provided under pre-existing agreements can be considered “rescue financing” and therefore potentially be granted special priority status. The Court appeared to consider, referring to the rationale expressed in parliament, that only “additional financing” can qualify as “rescue financing” for troubled companies. This indicates that the Court may be cautious about allowing the rescue financing and the priority provisions in section 211E to elevate the position of advances that have already been made to the company, whether directly or by way of a refinance of existing indebtedness. Given the interest that has been expressed by some participants in the market of using the new priority rescue financing regime to “roll-over” existing pre-application debt into a priority loan under section 211E, we anticipate this issue may well arise and needs to be specifically addressed in future cases.
The case also marks the first reasoned judgment on Singapore’s new restructuring regime that was enacted in early 2017. Whilst there have been several moratorium orders under the new section 211B in respect of schemes of arrangements, to date the Courts have not provided any written reasoned judgments when such moratorium orders have been made. This is disappointing, given that these moratorium orders are also new and give rise to various potential questions around the standard of evidence required. Of note is also the level of detail that must be presented to the Court for a company to be granted such orders, as well as the appropriate scope and term of the moratorium orders if they are granted. Hopefully, we will see the Court publicly engage more often with questions such as those dealt with in Re Attilan Group, so as to shed light onto how these new provisions will operate in practice.
Finally, it is helpful to see the Court address, and cautiously embrace, the role of US principles and case law in construing provisions that derive from sections of the US Bankruptcy Code. Whilst the Court did not definitively address questions about the degree to which US principles may be applied in Singapore, it is certainly useful for practitioners to be aware that these principles are likely to be considered in future, as this area of Singapore law develops. Conversely, and as alluded to by the Court, Singapore is by no means bound to follow the US precedent; thus, practitioners should not simply assume that satisfying the Chapter 11 requirements will be sufficient to achieve the desired outcome under the different context of the Singapore legislation, and Singapore’s broader corporate and insolvency law framework.
For further information on Singapore’s debt restructuring law reforms, see our previous articles, Singapore Unveils Major Debt Restructuring Law Reforms and Singapore Enacts Key Restructuring Law Reforms.
Herbert Smith Freehills LLP is a foreign law practice licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with Prolegis LLC, a Singapore law practice with whom we have a Formal Law Alliance. The alliance creates a “one-stop shop” for clients to access the legal services of each firm — the international skills of Herbert Smith Freehills and the Singapore law expertise of Prolegis LLC.
Endnotes [ + ]
|1.||↑||Case No 07-19391 (Bankr, ND Ohio, 2008) (In Re Johnson).|
|2.||↑||223 BR 567 (Bankr, D Colo, 1997) (In Re Western Pacific).|
|3.||↑||323 BR 40 (Bankr, ND New York, 2005).|
|4.||↑||71 BR 544 (Bankr, ED Pennsylvania, 1987).|
|5.||↑||115 BR 34 (Bankr, SD New York, 1990).|