Introduction

1. The key to a successful scheme of arrangement is, without doubt, the consent of creditors. With the High Court’s recent decision in Re Brightoil Petroleum (S’pore) Pte Ltd [2022] SGHC 35 (Re Brightoil), distressed companies now have a new tool in their arsenal to obtain favourable votes on a scheme.

2. Re Brightoil represents the first occasion on which the Singapore High Court has issued written grounds discussing whether and how creditors who enter into lock-up agreements (i.e. where the creditor undertakes to vote in favour of a scheme in exchange for certain benefits) should be placed in a separate class from the other creditors for the purpose of voting on a scheme of arrangement under Section 71 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA). The Court approved the proposed scheme there, and provided guidance on the principles applicable to such lock-up agreements.

3. This article discusses the Court’s decision and provides some pointers on its significance.

Background

4. The scheme company, Brightoil Petroleum (S’pore) Pte Ltd (BPS), was part of a group of companies that had faced financial difficulties and had been unable to continue its operations since 2019. As part of a complex debt restructuring process within the group, BPS had proposed a scheme in order to restructuring its unsecured debts. Under this scheme, the potential recovery for Scheme Creditors (12%) was 60 times more than recovery in a liquidation scenario (0.2%), which would have been the likely outcome had the scheme not been sanctioned.

5. For the purposes of an application under s 71 of the IRDA, BPS obtained notional votes from 11 Scheme Creditors. A single class of creditors was used for the voting process. Having obtained ten out of 11 of the Scheme Creditors’ votes in favour of the scheme, BPS then sought the Court’s sanction under s 71 of IRDA.

6. Crucially, three of the Scheme Creditors had entered a lock-up agreement to undertake to vote in favour of the scheme in exchange for 1% of the respective Scheme Creditor’s admitted debt against BPS. Further, one of the three locked-in Scheme Creditors had entered into a modified lock-up agreement wherein Brightoil Petroleum (Holdings) Limited (BOHL) (of which BPW was an indirect wholly-owned subsidiary) would make a separate payment to the said Scheme Creditor in part satisfaction of guarantee obligations owed by BOHL to it. The lock-up agreement was proposed to all Scheme Creditors.

7. The question that arose before the Court was whether the BPS scheme ought to be approved under s 71 of the IRDA despite the existence of the lock-up agreements among the single class of creditors used for the voting process.

The Court’s Decision

8. The Court allowed the application and sanctioned the scheme, holding that the classification of Scheme Creditors was valid. The Court also observed that generally, lock-in agreements will not fracture a class when voting on a scheme, subject to certain requirements.

9. The Court embarked on a review of English and Hong Kong authorities on the issue, and arrived at three non-exhaustive principles relevant to determining whether creditors who enter into lock-up agreements should be classed separately in voting on a scheme:

1. Relative size of benefit conferred: The question is whether the benefit conferred on locked-in creditors is so sizeable that it would have a significant influence on the decision of a reasonable creditor when voting for the proposed scheme. Influence is assessed by comparing the relative size of the consent fee (or benefit) against the forecasted returns to creditors under the implemented scheme and the estimated recovery in liquidation (or appropriate comparator). The Court also cautioned that this principle does not entail a purely numerical comparison, but must take into account other contextual reasons why a reasonable creditor might enter the scheme.
2. Equal opportunity to enter the lock-up agreement: The lock-up agreement must have been made available to all scheme creditors within the relevant class, and on the same terms.
3. Bona fides: The lock-up agreement must be used bona fide (e.g. no misleading of creditors).

10. Applying these principles, the Court found that there was no need to place the locked-in Scheme Creditors in a separate class from the other Scheme Creditors and the reliability of the notional vote was not compromised. On the specific principles:

1. The Court found that the consent fee of 1.0% of the Scheme Creditor’s admitted debt was not considered to be significant compared to the potential recovery of 12.0% under the Scheme, and a 0.2% recovery in liquidation.
2. All the Scheme Creditors were given the opportunity to enter into the lock-up agreements on substantially the same terms. In respect of the Scheme Creditor which entered a modified lock-up agreement, the Court held that the Scheme Creditor’s rights against BOHL was independent from its rights under the unsecured debts it was owed by BPS. Accordingly, the Court found there was no dissimilarity between that Scheme Creditor’s rights and the others so great that it ought to have been classed separately.
3. The Court also considered that the lock-up agreements here were offered as a bona fide attempt to introduce certainty into the restructuring process, and BPS had informed the Scheme Creditors of the plan to seek sanction of the scheme under s 71 of the IRDA. Further, the expected recovery under the Scheme, as described in the lock-up agreements was not far from the eventual recovery estimated by BPS.

11. As an aside, the Court tentatively took the view that presence of provisions in lock-up agreements allowing a signatory to terminate the agreement in the event of a “material adverse change” to the company’s financial position, while not mandatory, went toward demonstrating the bona fides and fairness of the arrangement.

12. The Court also addressed the issue of the discounting of the votes of related creditors. On the present facts, the related creditors are not the wholly-owned subsidiaries of the scheme company. The Court noted the divergent approach between the Court of Appeal decisions in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213 and SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] 2 SLR 898 as to whether the Court should follow a partial discounting approach or wholly discounting approach to the votes of related creditors.

13. In this case, no discount was applied as the related creditors had been placed under creditors’ voluntary liquidation and were therefore under independent control.

Conclusion

• When properly used in relation to a scheme of arrangement, lock-up agreements can lead to significant savings of costs and time. They serve the very useful commercial purpose of giving an indication as to whether the scheme is likely to be supported by its creditors, before further time and expense is incurred in finalising negotiations and documentation.
• Nonetheless, principles articulated in Re Brightoil demonstrate the need for the balance between efficiency and fairness to creditors. It is also evident that lock-up agreements require careful negotiation and formulation so that they will pass muster.
• The Court’s openness to consider less conventional processes in the restructuring process also bodes well for the positioning of Singapore as a regional forum of choice for debt restructuring.
• Lastly, the law on the discount of related creditor votes may be ripe for reconsideration in future. While the Court of Appeal in SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] 2 SLR 898 approved of a wholly discounting approach, it observations are obiter.

Dentons Rodyk thanks and acknowledges Practice Trainee Shaun Cheng for his contributions to this article.