Trust is the foundation of all relationships: personal, business and legal. However, when a company is insolvent and unable to pay its debts, the trust of the stakeholders, which include the creditors, shareholders and debtors, is often at the lowest point.
When an insolvent company first announces that it intends to enter into restructuring, questions will invariably arise as to whether there have been any mismanagement or misdeeds by the existing management that led to the insolvency.
While the insolvent company is in negotiations with its creditors, the insolvent company would request for the creditors’ indulgence not to place it in liquidation, or seek a moratorium from the Singapore courts on all proceedings and enforcement actions. If the insolvent company intends to undergo a debtor-in-possession regime, as is often the case in Singapore, creditors are asked to place trust in the existing management of the insolvent company to lead the company through the restructuring and obtain the best deal for the stakeholders.
When the insolvent company proposes the restructuring plan, the creditors are often required to accept the proposed restructuring plan as the best option available, forego part of their claims and refrain from pursuing any action against the insolvent company and its directors post-restructuring.
Nevertheless, in order to successfully emerge from its financial woes, the debtor company needs to win sufficient trust from its stakeholders at each stage of the restructuring. It is therefore important for the insolvent company to rebuild, or at least prevent the erosion of, the stakeholders’ trust in the insolvent company.
Although there are steps that the insolvent company can take to rebuild the stakeholders’ trust, such as the appointment of an independent monitoring accountant or enlisting the help of a neutral third party to facilitate discussions in a mediation, it is fundamental that the insolvent company be transparent to its stakeholders at all stages of its restructuring. After all, trust cannot be regained without transparency.
Overview of the current disclosure regime in Singapore
Disclosure requirements in a scheme of arrangement
When the debtor company intends to restructure its existing liabilities through a scheme of arrangement pursuant to section 210 of the Singapore Companies Act, it must first obtain leave from the Singapore courts to convene a meeting of scheme creditors (Leave Stage). After the scheme is passed by a majority in number representing three-quarters in value of each class of creditors present and voting at the meeting, the debtor company has to seek the Singapore courts’ approval to sanction the scheme (Sanction Stage).
It is settled law that when a debtor company seeks the Singapore courts’ approval to sanction the scheme passed by the requisite majority of creditors, it must demonstrate that it has disclosed, by the time of the creditors’ meeting, sufficient information to ensure that the creditors are able to ‘exercise their voting rights meaningfully’.
In the recent decision in Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd, the Singapore Court of Appeal clarified the disclosure obligations required of the debtor company when it applies for leave to convene a meeting of scheme creditors. The Singapore Court of Appeal held that the level of disclosure is less onerous at the Leave Stage. In particular, the debtor company bears a duty at the Leave Stage to provide financial disclosures ‘in such manner and to such extent as is reasonably necessary for the court to be satisfied that fair conduct of the creditors’ meeting is possible’.
Recognising the financial burden that the disclosure obligations may place on the debtor company, the Singapore Court of Appeal provided three guiding principles and clarified that the required financial disclosures will depend on, inter alia, factors such as the size and resources of the company, the size of the debts to be restructured, the urgency of the application and the reasons for the company’s inability to provide further disclosure.
In this case, the applicant, Empire Capital Resources Pte Ltd (Empire Capital Resources), is a member of the Berau group of companies and proposed a scheme to release the liabilities owed by members of the Berau group to the holders of two sets of notes. Empire Capital Resources argued that it had provided adequate disclosures and sought to justify the disclosures (and lack thereof) on the basis that some information was subject to disclosure obligations owed to the Indonesian government and contained highly sensitive trade secrets; the opposing creditors were related to a competitor, and several deficiencies in information alleged by the opposing creditors go to the merits of the proposed scheme and thus ought to be examined at the Sanction Stage rather than at the Leave Stage.
However, the Singapore Court of Appeal allowed the appeal of the opposing creditors and dismissed Empire Capital Resources’ application for leave to convene a meeting of scheme creditors. The Singapore Court of Appeal held that the financial disclosure provided by Empire Capital Resources was wholly inadequate to pass the less onerous standard of disclosure at the leave stage because, among other things, there was no financial disclosure for creditors to determine the financial statuses of the entities in the Berau group, even though the proposed scheme sought to compromise the debts of these entities.
Disclosure requirements in an application for pre-scheme moratorium
In the 2017 reforms to the Companies Act, following the recommendation of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (the Committee), several features of Chapter 11 of the US Bankruptcy Code were introduced in Singapore’s restructuring regime. Among other things, a debtor company may now file an application for moratorium relief against creditor action before it proposes a scheme of arrangement under section 211B of the Singapore Companies Act, and an automatic moratorium will arise upon the filing of the application under section 211B(8).
To safeguard against potential abuse, the Committee recommended that:
an applicant should be required to give disclosure of adequate information from the point of filing its application for a moratorium under section 210(10). However, recognising that disclosure of all relevant information at the point of filing is impractical, the level of disclosure required at the point of filing may be confined to disclosure of basic key information about the debtor and the restructuring. If an extension of the moratorium is required, the applicant should provide all such information as may be required by the court to justify the extension. Generally, the degree of disclosure required should be proportionate to the length of time and the scope of related entities in respect of which the moratorium is sought to be extended.
Having regard to the requirements for disclosure of information in the Chapter 11 process, the Committee recommends that debtors seeking to use a scheme of arrangement to restructure their debts should provide basic disclosure at the point of filing and detailed disclosure by the time the first hearing is scheduled. Such requirements can be modified by the judge hearing the case, who is best placed to consider the complexity of the case and the benefit of additional information to creditors and other stakeholders.
In other words, and in line with the debtor-friendly approach, the Committee recommended that the disclosure obligations should not be too onerous such that debtor companies are unduly burdened to disclose all material information when they file the application for a moratorium pursuant to section 211B.
Adopting the recommendations of the Committee, section 211B(6) prescribes four categories of information that the Singapore courts may order the disclosure of when the Singapore courts grant the moratorium order, and provides the Singapore courts with the flexibility to order the disclosure of other information depending on the needs of the case:
The Court must order the company to submit to the Court, within such time as the Court may specify, sufficient information relating to the company’s financial affairs to enable the company’s creditors to assess the feasibility of the intended or proposed compromise or arrangement including such of the following information as the Court may specify:
- a report on the valuation of each of the company’s significant assets;
- if the company acquires or disposes of any property or grants security over any property – information relating to the acquisition, disposal or grant of security, such information to be submitted not later than 14 days after the date of the acquisition, disposal or grant of security;
- periodic financial reports of the company and the company’s subsidiaries;
- forecasts of the profitability, and the cash flow from the operations, of the company and the company’s subsidiaries.
It is undisputed that there needs to be a flexibility for ‘the judge hearing the case, who is best placed to consider the complexity of the case and the benefit of additional information to creditors and other stakeholders’. However, this flexibility has led to contests in invariably all the recent significant restructurings on the extent of information that the debtor company needs to disclose, and to whom the information should be provided.
Degree of transparency
When a debtor company applies for a moratorium under section 211B(6), the Singapore courts have to weigh the interests of the creditors and the debtor company in determining the disclosure obligations to be granted.
On one hand, with the lack of trust in the debtor company, creditors are inevitably wary about the prospects of a successful restructuring, and will demand that the debtor company be fully transparent so that the creditors may assess the debtor company’s restructuring plan. On the other hand, the debtor company will often try to limit its disclosures to the bare minimum on the grounds that the material information is subject to confidentiality obligations owed to third parties, the information involves trade secrets, and that disclosure of certain information (such as offers received) would jeopardise the restructuring efforts.
Some of these concerns may indeed be legitimate. For example, where trade secrets such as pricing information are provided to competitors, the debtor company will lose its competitive advantage and may not be profitable even if it undergoes a successful restructuring.
However, the question of how this tenuous balance between the interests of the creditors and the debtor company should be struck has continued to be an issue that the Singapore courts have to grapple with.
Disclosures in the restructuring of the Hyflux Group
The high-profile restructuring of Hyflux Ltd and its subsidiaries (Hyflux Group), where the hearings are open to members of the public and are widely reported by local and foreign media agencies, serves as a prime example of the unenviable task that the Singapore courts have to face in the attempt to strike a balance between these competing interests.
When the Hyflux Group first obtained the moratorium under section 211B of the Singapore Companies Act to reorganise its debts and liabilities in June 2018, the Singapore courts ordered that, in addition to the information under section 211B(6), the Hyflux Group was to provide, among other things, updates on the progress of matters and any relevant update to the information relating to the Hyflux Group’s financial affairs.
Four months later, in October 2018, a group of unsecured banks filed an application requesting further disclosure orders and alleged that the restructuring was not conducted in a reliable and transparent manner because the disclosures had been wholly inadequate, and the information provided was not sufficient and meaningful. For example, the cash flow forecasts failed to include commentary or detailed assumptions, and the Hyflux Group did not provide meaningful information on the investor search process.
In response, the Hyflux Group justified its opposition to the further disclosure orders on the basis that the information sought by the banks is, among other things, subject to confidential obligations, irrelevant or commercially sensitive. In addition, the Hyflux Group asserted that the disclosure obligations differ when a debtor company applies for a pre-scheme moratorium under section 211B and when the debtor company applies for leave to convene a meeting of scheme creditors at the Leave Stage.
Therefore, the Hyflux Group argued that when a debtor company is at the start of the restructuring process, the information to be disclosed need only provide creditors with an understanding of the business and the debtor company’s debt profile. Thereafter, and only when the debtor company proposes a restructuring plan, the debtor company has the duty to disclose information relevant to the proposed restructuring plan, such as the liquidation analysis and details of the restructuring proposal so as to enable the creditors to consider and vote on the restructuring plan.
At the hearing of the application on 31 October 2018, the Honourable Justice Aedit Abdullah made no ruling on whether the staged disclosure approach is appropriate, and held that the test under section 211B(6) should be ‘what information is required for a reasonable creditor to assess the feasibility of the intended or proposed compromise or arrangement’. His Honour requested that parties attempt to work through their differences, and parties eventually did reach an agreement on the disclosures orders following an adjournment. As such, the Honourable Justice Aedit Abdullah did not need to decide, and thus there is no judicial pronouncement, on whether each of the requested financial disclosures would satisfy the test.
Following the termination of the restructuring agreement with the investor, SM Investments Pte Ltd, in April 2019, the Hyflux Group is back to the drawing board in securing an investor for the restructuring. As the moratorium has been in place for over a year, the Honourable Justice Aedit Abdullah was minded to place the Hyflux Group on a tight leash and requested that the parties address his Honour at the next hearing on the ability and appropriateness of the Singapore courts to specify a condition that the representatives of creditor groups be present at the meetings of the board of directors or senior management.
Once again, the Hyflux Group was able to reach an agreement with the creditors on the financial disclosures prior to the hearing, including an agreement to hold a weekly update meeting with the representatives of the creditors. As such, the Honourable Justice Aedit Abdullah did not need to decide whether the Singapore courts have the ability, and whether it is appropriate, to grant an order for representatives of the creditors to attend the meetings of the board of directors or senior management.
Information demands by the different stakeholders
Besides striking a balance between the creditors and debtor company, the Singapore courts may be called upon to adjudicate on whether the information can be disclosed to different groups of stakeholders. As each stakeholder group has different forms of leverage and profiles, debtor companies often provide differing levels of disclosure to each group of stakeholders. As a general rule of thumb, the stakeholders of a restructuring can be classified into the following three categories, with decreasing access to information.
Creditors to whom the debtor company owes disclosure obligations
In the first category of creditors, the debtor company owe a disclosure obligation to the creditors pursuant to the loan agreements, and the creditors are usually bound by a corresponding obligation to keep the information confidential under the loan agreement or statute. Typically, this group of creditors includes the banks and financial institutions.
In addition to the contractual obligation to disclose certain financial information, this group of creditors often hold a significant amount of secured or unsecured debt. As the proposed scheme of arrangement requires approval by a majority in number representing 75 per cent of each class of creditors present and voting at the meeting, the banks and financial institutions will either vote in a separate class if their debt is secured or hold at least 25 per cent of unsecured debt to block any scheme proposed by the debtor company.
Therefore, this first category of creditors tends to wield considerable influence on the conduct of the restructuring, and the debtor company will often try to accede to the information requests of these creditors. Furthermore, the debtor company’s concerns about the leakage of trade secrets are often assuaged by the confidentiality obligations imposed on the creditors by the loan documents or statute. In spite of this, the restructuring of Hyflux Ltd has shown that even creditors belonging to this category may face difficulties in obtaining information from the debtor company.
Creditors that are financially savvy and hold significant amounts of debt
The adage of having strength in numbers also holds true in a restructuring. In the second category of creditors, while the debtor company does not owe any disclosure obligation to the creditors, the creditors may decide to act together as a group with a blocking vote in the proposed scheme of arrangement. This allows the creditors, as a group, to demand for disclosures that the debtor company may otherwise ignore.
A typical example of this situation is where the debtor company issued listed debt or securities. There is no legislation currently in place to regulate how the debtor company should engage the holders of its listed debt or securities, and frequently the holders of listed debt often have to act through the trustee of the debt.
Nevertheless, when such a debtor company enters into restructuring, the Securities Investors Association (Singapore) (SIAS), a non-profit organisation that advocates for retail investors, often steps in to make sure that the voices of the holders of the listed debt or securities are heard. This is particularly important as the retail investors are typically not organised or represented by legal or financial advisers.
SIAS will work with the debtor company to first call for a town hall meeting of the holders of the listed debt. At the town hall meeting, SIAS will then facilitate the formation of an informal steering committee of these creditors, and the appointment of financial and legal advisers to represent the informal steering committee. The members of the informal steering committee will generally comprise a mixture of institutional investors and individual investors that hold a significant portion of the listed debt or securities.
The last category of creditors includes the retail creditors who do not hold a large amount of the listed debt or securities. As the strength of the informal steering committee lies in its unity, the informal steering committee typically consists of not more than seven members in order to ensure that any responses, and the decision-making process, are not too inefficient. Therefore, these creditors are generally not part of the informal steering committees.
These creditors often do not have the financial appetite or means to engage professional advisers experienced in restructuring matters, especially when they are already facing a significant write-down on their investment. Therefore, this last group of creditors generally have the least access to information and are very dependent on the debtor company to provide them with information and updates on the restructuring. Unfortunately, it is not easy to manage the information disclosure to such a diverse group of creditors. These creditors may become very vocal in their opposition, and could prove disruptive, to the restructuring. 
Issues with the present disclosure regime
Until there is judicial or legislative guidance on the appropriate disclosure orders, the following issues will be present in, and may undermine the success of, almost all restructurings.
First, when creditors are not given the same and full access to confidential information on the restructuring, it engenders mistrust in the debtor company. In most restructurings, the debtor company only provides generic updates on the restructuring process before it announces its proposed restructuring plan when it applies for leave to convene a meeting of scheme creditors under section 210(1). When the retail creditors are not given adequate information on the restructuring nor involved in the negotiations of the restructuring plan, doubts as to whether the debtor company is acting genuinely in the best interests of all the creditors, or only in the interests of a group of creditors, will surely creep in. This issue is especially pertinent for the third category of creditors.
Second, as explained above, the debtor company would typically seek to control the parties that are able to receive the information by applying for a sealing order from the court, or requiring the recipients of the information to enter into non-disclosure agreements. Since the information disclosed will probably have a material effect on the price or value of the debt, the creditors that receive the information will be restricted from trading due to concerns of insider trading until the debtor company makes the same information publicly available (in other words, ‘cleanse’ the information). However, the debtor company does not have any statutory obligation to cleanse the information and will unfailingly refuse to bind itself to any obligation to do so. Therefore, creditors are forced to either receive the information and be restricted from trading, or refuse the information and trust their financial and legal adviser, who will act as the primary filter of material non-public information, and the debtor company to secure a deal that is in their best interests.
The present state of affairs inhibits the development of a vibrant and liquid market in distressed debt. Institutional investors are hesitant to take up positions as the publicly available information is often inadequate for them to evaluate the investment return, or they may wish to preserve their ability to trade in order to take a larger position in the restructuring or exit from the investment depending on the investment opportunities available. As for the financial institutions, the lack of a market in distressed debt forces the financial institutions to keep the debtor company’s bad debt on their books until the restructuring is concluded.
Third, even for the second category of creditors where the creditors are represented by financial and legal advisers, there could also be a level of mistrust in the conduct of the restructuring. If the creditors do not wish to receive material non-public information, the advisers are often only able to provide their opinion derived from the information they have received, instead of disclosing the information in a manner that is sufficient or meaningful for the creditors to perform their own analysis. Therefore, the creditors are asked to place trust in their advisers.
However, the second category of creditors often look to the debtor company to bear the remuneration of the creditors’ advisers in practice. Since there are no legislative or contractual provisions imposing such an obligation on debtor companies, debtor companies hold the leverage in deciding which creditors’ adviser fees to bear and when the fees will be paid. Therefore, while the advisers are professionals who owe professional and contractual duties to the creditors, this unsatisfactory fee arrangement creates a potential and perceived conflict of interests, and may erode the trust of the creditors in their advisers if the advisers fail to properly manage their relationship with the creditors and the debtor company.
Lastly, it is presently unclear as to what information may be sealed or protected by a non-disclosure agreement. Debtor companies with listed securities or debt have argued that they are already subject to disclosure obligations imposed by the listing rules of the exchanges. Therefore, the disclosures to the public pursuant to the listing rules are sufficient and any further information disclosed pursuant to section 211B(6) is commercially sensitive, and has to be sealed by the Singapore courts or will only be provided upon a non-disclosure agreement so as to protect the debtor company’s competitive advantage. However, the basis of this justification has not been fully examined by the Singapore courts and this has led to ironic situations where privately held companies are ordered to disclose more information than the publicly listed counterparts.
When the Committee provided its recommendations that led to the disclosure obligations under the present section 211B(6), it recognised the fact that any debtor company intending to undergo restructuring is already facing issues with cash flow, and was mindful that it would be impractical for the debtor company to comply with extensive disclosure obligations that would increase the compliance costs.
However, and as discussed above, the costs of the restructuring are now shifted to the creditors. The current disclosure regime provides the debtor companies with significant leverage over the creditors, and prejudices the interests of the second and third categories of creditors who may not have the financial resources or appetite to obtain proper representation and advice in the restructuring.
This should not be the case. Trust, once lost, is hard to earn and is certainly harder to earn than money. Furthermore, the directors of the debtor company have a duty to act in the best interests of the creditors when the company is insolvent. Therefore the exercise of determining where the balance should be struck between full disclosure to creditors and to protect the debtor company’s legitimate commercial interests should not only be left to the Singapore courts. It is imperative for a debtor company to be mindful of, and have a strategy on, how it should manage its disclosures obligations and engage with the stakeholders before it first announces that it intends to enter into restructuring so that it can rebuild, or at least prevent the erosion of, the stakeholders’ trust.
If a debtor company fail to properly manage its disclosures to, and engagement with, the stakeholders, the debtor company may find itself at the end of the restructuring with shareholders or creditors that doubt its every action and the restructuring proposal. Creditors may reject even the best thought-out and beneficial restructuring plan in favour of liquidation when emotions run high as they often do in restructuring.
Having said that, the legislative and judiciary also have a role to play in setting the standard of disclosure required of debtor companies. In this regard, initiatives are currently being considered to address some of the issues highlighted in this article. Where a debtor company fails to provide adequate disclosure for ‘a reasonable creditor to assess the feasibility of the intended or proposed compromise or arrangement’, the Singapore courts need to step in to order the debtor company to provide such disclosures with or without an application from the creditors, or be empowered to do so if necessary. After all, creditors not only have to place their trust in the debtor company, but also in Singapore’s restructuring regime, that their voices will be heard and their interests will be adequately protected.
 See, for example, the English Court of Appeal decision of Bristol and West Building Society v Mothew  Ch 1 (Bristol) where Millett LJ held at 18A–18C that ‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular manner in circumstances which give rise to a relationship of trust and confidence’; see also the Singapore Court of Appeal decision of Tan Yok Koon v Tan Choo Suan and another and other appeals  1 SLR 654 at  citing this speech in Bristol.
 See Re IM Skaugen SE and other matters  3 SLR 979 at  to .
 See SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal  2 SLR 898 at .
 Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd  SGCA 29 (Pathfinder Strategic Credit).
 Pathfinder Strategic Credit at  to .
 Pathfinder Strategic Credit at  to .
 Pathfinder Strategic Credit at .
 Pathfinder Strategic Credit at  to .
 Pathfinder Strategic Credit at .
 Pathfinder Strategic Credit at  to .
 Report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring, 20 April 2016 (2016 Report).
 Prior to the 2017 amendments, the Singapore courts were able to grant an order for pre-scheme moratorium pursuant to section 210(10) of the Singapore Companies Act. However, a moratorium pursuant to section 210(10) does not stay actions by secured creditors to enforce their security, and the moratorium only takes effect upon the making of the order by the Singapore courts.
 See the 2016 Report at paragraphs 3.20 and 3.21.
 Section 210(3) of the Singapore Companies Act.
 Following the dissimilarity principle as set out by the Singapore Court of Appeal in the decision of The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal  2 SLR 213 at , as secured and unsecured creditors have different rights in the liquidation, they will be placed in different voting classes regardless of the terms of the scheme.
 Section 47 of the Singapore Banking Act imposes a statutory obligation of confidentiality on banks in Singapore, subject to the exceptions as set out in the Third Schedule of the Singapore Banking Act.
 In the restructuring of the Hyflux Group, the holders of the preference shares and perpetual securities have written to the Singapore courts to request that the courts intervene in the restructuring, and staged a protest to vent their anger over the state of affairs in the restructuring.
 See the 2016 Report at paragraph 3.20.
 See the Singapore Court of Appeal decision of Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd  4 SLR 1089 at  to .