Mandatory Disclosure in Corporate Debt Restructuring via Schemes of Arrangement: A Comparative Approach

I. Introduction

In the United Kingdom (UK), companies in financial distress may restructure their debts in a variety of ways, including workouts, Company Voluntary Arrangements, administration under the Enterprises Act 2002 and through the judicial process found in the scheme of arrangement (‘English schemes’) under the UK Companies Act.² The English schemes have proven to be an effective tool in debt restructuring.³ While the legislation does not comprehensively prescribe the disclosure requirements, English case law has developed to require debtors to disclose material information in the explanatory statement so to enable creditors to make an informed decision as to how to exercise their votes in the scheme meeting.⁴ There are three stages to the scheme: The debtor first applies for leave of court to convene a scheme meeting. At the scheme meeting, the scheme must be approved by the requisite creditor majority. ⁵ Finally, the scheme must be sanctioned by the court. Once approved, the English scheme can bind dissenting creditors within the same class of creditors.

The key objective of mandatory disclosure for schemes parallels the objective of disclosure requirements for shareholder meetings under English corporate and securities laws, that is, to reduce information asymmetry faced by the shareholders. Failure to disclose adequately to creditors can lead to courts refusing to sanction the scheme.⁶ Mandatory disclosure of information in the course of securing the vote of the restructuring plan also features prominently in Article 8 of the EU Directive on Preventive Restructuring Framework.⁷ Yet, it is widely acknowledged that disclosures are also costly to produce when the debtor company is seeking to control its expenses, and the debtor company may be concerned as to the necessity of preserving confidentiality of documents and protecting commercial secrets.⁸

The practice of the English schemes is not static and a modern development in the last 15 years is the use of restructuring support agreements (RSAs).⁹ Prior to the publication of the explanatory statement, a debtor may negotiate with certain creditors to enter into an RSA where they undertake to vote in favour of the proposed scheme in return for receiving a consent fee or some other benefit of early commitment, and it would be expected that these creditors would demand early access to financial information prior to entering into the RSA.

The English scheme has been transplanted, to varying extent, in a number of economically significant common law jurisdictions in Asia.¹⁰ In Hong Kong and Singapore, the English scheme has been transplanted into the domestic legislation and the case law in both jurisdictions have largely been consistent with the English law on schemes. RSAs have been used in recent Hong Kong schemes of arrangement.¹¹ While Hong Kong’s scheme framework has largely remained unchanged since its enactment, Singapore has amended its scheme framework to include several debtor-in-possession features of Chapter 11 of the US Bankruptcy Code (Chapter 11), such as the availability of super-priority, cross-class cramdown and availability of pre-packs, which are sales that are agreed upon prior to the formal filing of the petition. The disclosure requirements on Singapore schemes continue to be largely based on English case law.

However, there are specific risks in Hong Kong and Singapore that are either not present in the UK or not present to the same extent: shareholdings in listed companies are generally much more concentrated; schemes are used to compromise all debts and not only financial debts; and the significant presence of retail investors in debt instruments that are sought to be compromised.¹² Thus, the question arises as to whether the current disclosure regime, that is based on English schemes, sufficiently addresses the risks of information asymmetry and has the right incentives for debtors to disclose relevant and quality information for the creditors to make an informed decision when voting.

To answer these questions, we first examine the rationale underlying mandatory disclosure in Section II. Then, in Section III, we draw from the law and practice of the restructurings in Hong Kong and Singapore. Both jurisdictions contain high functioning judicial systems that are well-versed to address restructuring cases. In investigating the practice, we build upon the first comprehensive empirical study of schemes¹³ by conducting an empirical study of disclosures in debt restructurings of listed companies in both jurisdictions for the five-year period 2015-2019. Our empirical study identifies three concerns. First, there is a wide variation in how debtor companies present their liquidation or best alternative analysis (discussed in Section IIIC (1) below) and there is little basis to assess whether these estimates of liquidation value are based on reasonable assumptions. Second, companies do not disclose the fees of the advisers in the restructuring process and where they do, they provide scant information as to the basis of the fees, which presents difficulties for creditors in assessing the expenses of pursuing the restructuring. Third, some of the creditors receive the updated financial information at the stage of negotiating the RSA, and ahead of other creditors not privy to the RSA.

Next, in Section IV, we discuss the implications of our findings. In so doing, we draw references from the US Chapter 11. While Chapter 11 is a formal insolvency proceeding, unlike the English scheme which is a pre-insolvency proceeding, ¹⁴ as explained in Part II below, Chapter 11 is much more prescriptive as to the contents of disclosure of financial information and requires disclosure at the filing of the petition, which is at a much earlier than stage than disclosures under scheme explanatory statements. We argue that the disclosure framework in Hong Kong and Singapore should be adjusted to be more prescriptive and explanatory statements reviewed on an ex-ante basis. Selective disclosure to certain creditors will also need to be addressed. These changes are required for a predictable and transparent framework to enhance the creditors’ confidence to restructure under the regime. ¹⁵ 

II. Mandatory Disclosure in Schemes of Arrangement

A. Mandatory Disclosure: The Rationale

Companies which find themselves unable to pay their debts have two legal options, either liquidate the company and distribute the proceeds to creditors or restructure the company to protect its going concern value. In principle, on efficiency grounds, where the going concern value of a company exceeds the value of the company’s assets if sold at liquidation then the company should be restructured.¹⁶ Such a restructuring may permit a greater realisation for creditors than they would receive under liquidation and, additionally, it will protect the interest of other stakeholders in the form of, among others, retaining jobs and local tax revenue.¹⁷ However, when the asset value of the company (if liquidated) exceeds its going concern value should the company continue to operate, the company should be liquidated. The difficulty is that unless the creditor has contracted for information rights or is an insider, he or she is often not in a position to assess the value of the company or even the value received under the plan (for example, if equity in lieu of payment is offered).

When the company is financially distressed, managers are not always incentivised to fully disclose the true financial information of the company to the creditors for a number of reasons including that they may wish to delay matters and stay in office as long as possible. If a plan is contentious, the company may seek to limit disclosure of information that could be used by creditors in opposition to the plan. 18 Disclosure of financial information is also costly as such information has to be prepared and may deplete the already severely stretched resources of the company. Hence, the regulatory framework has to intervene to compel the debtor companies to make the requisite disclosures of financial information.

B. The English Approach

An early version of modern schemes first appeared in the Companies Act 1862. Under the Act, a scheme could only be proposed if the company was being or about to be wound up. In the case of a voluntary winding up, a scheme required approval of 75 per cent of shareholders and 75 per cent of creditors, both in number and value.¹⁹ The scheme did not require court sanction but allocated three weeks for creditors or contributories to object, at which point the court could amend or confirm the plan as it deemed just.²⁰ In the case of involuntary winding up, the liquidator could, with the sanction of the court, make a “compromise or other arrangement as the liquidators may deem expedient.’²¹ The provisions were vague and offered limited judicial oversight so in 1870 the provisions were further refined.

When the Companies Act was amended again in 1948 the scope and procedure remained substantially unchanged but a disclosure requirement was added requiring creditors and shareholders receive 

‘a statement explaining the effect of the compromise or arrangement and in particular stating any material interests of the directors of the company, whether as directors or as members or as creditors of the company or otherwise, and the effect thereon of the compromise or arrangement, in so far as it is different from the effect on the like interests of other persons.’²²

Failure to comply with the disclosure provision would result in a fine for company officers, including company liquidators.²³ This provision was re-enacted in the subsequent Companies Acts, including the Companies Act 2006.²⁴ English law, which is also reflected in its Practice Statement,²⁵ has held that the explanatory statement must provide such information as is reasonably necessary to enable the creditors to make an informed decision as to whether to vote in favour of the scheme.²⁶ The courts will not sanction the scheme if the debtor fails to provide an adequate disclosure in the explanatory statement. ²⁷ English courts approving schemes will also consider compliance with other disclosure requirements when assessing the adequacy of disclosure including requirements under the company’s articles.²⁸ It is also clear that it is not the court’s role to approve the explanatory statement prior to its circulation to the creditors.²⁹ In fact, there is no separate regulator to scrutinize the terms of the scheme.

A large corpus of case law has focused on disclosures relating to classification of creditors and the appropriate comparator or alternative which the creditor faces if the scheme is not approved.³⁰For the former, disclosing the relationship between the creditor and debtor or its directors (apart from the debtor-creditor relationship) and creditors is important as it enables to the court to determine whether classification is properly made. Creditors are placed in the same class if their rights are not dissimilar such that they can be consulted together.³¹ For example, in Re Indah Kiat International Finance,³² it was suggested by the court that bonds held by the debtor company or its affiliates could not possibly be in the same class as the bonds held by the other creditors.³³

For the latter, directors of the debtor company issuing the explanatory statements are required to provide the alternative if the scheme is not approved. Often, though not necessarily inevitable, this alternative is the liquidation analysis, that is, the amount that is recoverable if the scheme is unsuccessful and the company goes into liquidation, as well as the time-frame at which the creditors can expect the returns pursuant to the scheme.³⁴ While not formally required by legislation, practice has developed that the explanatory statement discloses the opinion of the financial adviser explaining the basis of the liquidation or best alternative analysis.³⁵ If there is no professional adviser’s opinion, the basis of the directors’ determination of the analysis may be questioned. For example, in Re Sunbird Business Services, the directors of the company disclosed that the recovery upon liquidation is negligible, even though, on the face of the company’s accounts, it had a positive total asset value. Snowden J found that in such a case, a reasonable creditor could not reach an “informed view” on whether the scheme was in his interest.³⁶ The division of proposed returns pursuant to the scheme between the creditors and shareholders will also be expected to be disclosed.³⁷

Recent case law and practice demonstrates that there has been some variation as to what the professional opinions actually attest. In the case of House of Fraser (funding) PLC restructuring, the English High Court refused to accept evidence by KPMG as to liquidation analysis on a non-reliance basis.³⁸ In Indah Kiat International Finance,³⁹ where the fairness opinion was inherently contradictory on its face, Snowden J held that the fairness opinion should contain the full analysis on all of the alternatives. Further Snowden J held that it should be made clear in the opinion as to whether the authors of the fairness opinion would owe any duties to the scheme creditors.⁴⁰

Fees of the professional advisers (including lawyers and insolvency practitioners) are not routinely disclosed in the English scheme because professional fees are often not the subject matter of compromises under the schemes as the professionals are paid in full. The fees comprise not only the fees of professionals advising the debtors but creditor groups that are negotiating with the debtors. While not all creditors may be interested in the fees of scheme managers, these deplete company resources and thereby impact the ability of the company to pay obligations post scheme, which may impact creditor decisions when voting.

A modern development of the English scheme is the “widespread”⁴¹ use of restructuring support agreements (such as in Re Noble Group Limited),⁴²or lock-up agreements (such as in Re Codere Finance 2),⁴³ where creditors undertake to vote in favour of the proposed scheme in return for a fee. Ancillary obligations include an obligation not to transfer the debt prior to the vote and in the case of RSAs, creditors may also agree to provide interim financing to the debtor, thereby increasing their ability to recover a greater amount pursuant to the scheme.⁴⁴ RSAs and lock-up agreements do not feature in the legislative framework on schemes but represent the innovation of the insolvency professionals in seeking to ensure that the proposed scheme is more likely to succeed. However, RSAs and lock-up agreements raise separate concerns.

In Re Noble Group, these concerns were discussed in detail. The first relates to the fees that were payable to only creditors that signed the RSA, thereby resulting in unequal treatment of creditors even if they are in the same class. The RSA in that case had two types of fees payable to creditors who signed the RSA, comprising (1) fees compensating certain creditors for waiver of a revolving credit facilities and work done pursuant to the scheme, which were payable irrespective of whether the scheme taking effect and were regarded as payments “made for legitimate reasons and be genuinely independent of the scheme and restructuring”;⁴⁵ and (2) “backstop fees”, which were fees that were payable to certain creditors to compensate them for underwriting new money that the new reorganised group would require for trading purposes, and were conditional upon the scheme becoming effective. For (2), the size of the fee or return to the participating creditors (relative to the outstanding amount) was not large and would make little difference to a scheme creditor to participate. Even though the size of the fees for (1) and (2) were significant, they did not require these creditors to be separately classified, but the fees were required to be disclosed in the explanatory statement.

The second concern relates to the risk participation option in the RSA, or the option for creditors to participate to receive the priority debt. While the option was available to all of the scheme creditors, under the original scheme that was formulated, Snowden J expressed concern that it was illusory because of the disparity in the access to information.⁴⁶ Those creditors who had signed the RSA had been provided the relevant information in advance to negotiate the terms of the risk participation agreement and would be aware of the financial position of the debtor. However, other scheme creditors that were unconnected with the debtor would have to assess based on the explanatory statement, would be required to elect whether to participate in the option within a very short period (representing approximately three weeks)⁴⁷ and had to find the necessary funding to do so. Eventually the debtor company extended the time to elect by a further 6 days.

More generally, for reasons of practicality and confidentiality, the RSAs or lock-up agreements cannot be offered to everyone prior to the publication of the explanatory statement, but only to those who have sufficiently large holdings to make an important difference to the outcome of the restructuring and are hence likely to be institutional investors. In Re Sunbird Business Services, Snowden J raised similar concerns over the use of creditor lock-up agreements on unequal provision of information. As negotiations over the lock-up agreements typically take place before the publication of the scheme document,⁴⁸ only creditors that are approached will be given up-to date financial information from the debtors, if they are not already provided such information. As the negotiations of the restructuring are often confidential, only selected creditors tend to be involved in these discussions.

Yet, a blanket prohibition of advance information disclosure to certain creditors to facilitate the entry into RSAs or lock-ups is unlikely to be productive. Notwithstanding the concerns raised in Re Sunbird Business Services, undertakings by creditors to vote in favour of schemes, in themselves, have been held consistently not to fracture the class of creditors and they serve the important function for debtor companies to avoid unnecessary costs if they knew that there was no broad support for the scheme prior to holding of the meeting. Quite apart from the question as to the size of the fee that is payable, the broader question is how the courts should deal with the RSAs or lock-up agreements where not the same treatment as to information is afforded, both in substance and in form, to all of the scheme creditors. 

III. Schemes of Arrangement in Hong Kong and Singapore

A. The institutional framework

Both Hong Kong and Singapore adopted English schemes into their domestic law. The disclosure requirements laid out in the legislation are similar; schemes must be accompanied by the explanatory statement which requires the creditors to be informed of any material interests of the directors of the company or the debenture trustees (where the arrangement affects the rights of debenture holders). ⁴⁹ As is the case on English law, the failure to disclose the relevant facts to enable creditors to make an informed decision on whether to vote on the scheme will result in the court refusing to sanction the schemes.⁵⁰

In 2017, Singapore further developed her schemes framework by adding elements of US Chapter 11 (2017 reforms). Through “cherry-picking” characteristics of Chapter 11, a debtor in-possession framework, an automatic stay which takes place upon filing of the application in respect of a proposed, or intention to propose, scheme of arrangement, a cross-class cramdown and rescue financing within the more flexible scheme structure, Singapore seeks to strengthen its position as a regional restructuring hub.⁵¹ However, the law on disclosure requirements for the purposes of seeking leave of court to convene a scheme meeting and the explanatory statement has not changed. In Pathfinder Strategic Credit LP v Empire Capital Resources (Pathfinder),⁵² a decision after the 2017 reforms, the Singapore Court of Appeal clarified that there remains two distinct standards of disclosure at different stages of the scheme proceedings: a lower standard for leave to convene a meeting of creditors and a higher standard after leave is granted to permit creditors the meaningful exercise of their voting rights.⁵³ At the leave stage, the company must disclose sufficient information to facilitate the courts’ determination on a variety of issues, including those pertaining to the classification of creditors and the prospects of a successful reorganisation.⁵⁴ It is only by the notice to the creditors convening the meeting that the petitioning company must show ‘sufficient information to ensure that the creditors are able to exercise their voting rights meaningfully’.⁵⁵

However, notwithstanding the transplantation, there are important differences in the institutional framework between the UK and Hong Kong/Singapore. 

1. Concentration in shareholdings in Hong Kong and Singapore

Given Singapore’s aspiration is to be the regional restructuring hub for Asian restructurings, including foreign companies in the region,⁵⁶ the disclosure framework has to be one that does not impose undue costs on the debtor, and yet ensure sufficient disclosure of information for creditors to make an informed decision whether to vote for the restructuring.

In jurisdictions that have concentrated shareholdings, management of the debtor, who are appointed by controlling shareholders, tend to be pro-restructuring, and thus have a bias to only disclose matters that favour the proposed restructuring. Otherwise, if the debtor is liquidated or sold (which often occurs if the scheme fails), the management is unlikely to be able to continue in their management roles and shareholders will be wiped out. This is particularly relevant in Singapore and Hong Kong where the shareholdings of their publicly listed companies are highly concentrated.⁵⁷ Nowhere are conflicts of interests more pronounced than when some of the creditors are also the controlling shareholders of the company and it is proposed that the controlling shareholders continue to have a role post reorganisation (and are not wiped out), even though the company is out of money.

Yet, the support of controlling shareholders may also be important as they may be required to contribute fresh financing and/or inject assets into the distressed enterprise. In the case of restructuring of Singapore Exchange-listed Nam Cheong Limited, its controlling shareholder (holding 51% of the shares) undertook to subscribe for its entitlement to the rights issue, and thereby avoiding having the company to incur the expenses of underwriting.⁵⁸ In the 2015 restructuring of SGX-listed PT Berlian Laju Tankers Tbk, among others, the controlling shareholders, the Surya parties agreed to procure the investment of fresh equity into the company and provided an additional 2% of their shares to unsecured creditors.⁵⁹ 

2. Presence of retail investors in bond restructurings

In the UK, the prospectus and registration rules for sales of securities tend to keep out retail investors.⁶⁰In any event, English schemes typically only involve financial creditors and other creditors are not parties to the schemes.⁶¹ However, in Singapore⁶² and Hong Kong,⁶³ trade creditors routinely have their debts compromised through schemes. Further, debt that is held by creditors in Singapore and Hong Kong is widely held to include not only financial creditors but also retail investors due to the regulatory policies that encouraged retail investment in corporate debt.

The global financial crisis of 2008 brought considerable challenges to Singapore’s equity markets due to competition from regional markets. As a result, attention was placed on growing the bond markets to include retail investors.⁶⁴ By 2019, private banking clients comprised a significant proportion of Singapore dollar-denominated issued bonds (23.4%); financial institutions held 29% and retail investors hold 4.7%.⁶⁵ Thus, it can be seen that financial institutions do not in fact hold the majority of the Singapore-dollar debt. This sets the stage for a number of recent bond restructurings that involve retail bond investors.⁶⁶

Like Singapore, Hong Kong also encourages retail investors to invest in bond markets as alternative sources of investments from equity.⁶⁷ In Hong Kong, in the lead-up to the Lehman Brothers minibond saga, around HK$20 billion of products were sold through retail banks to 48,000 investors.⁶⁸ Most of the corporate debt that is issued by companies (not sovereign) is not listed, though in 2019, HKSE announced the issuance of its first corporate and nongovernmental bond.⁶⁹

In assessing the adequacy of the disclosure framework, an English-modelled scheme is only scrutinized by the courts at the sanction stage, after the votes have been taken. The court grants leave for the company to call for a meeting but does not approve the explanatory statement. This approach works well for the English scheme, which are often used to compromise only debts of financial creditors, who ordinarily have access to management and financial statements. However, once the English-modelled schemes are used to compromise all kinds of debts held by retail investors, they face informational disadvantages and may lack the resources to be able to meaningfully raise objections at the sanction stage. 

B. The Practice of Schemes of Arrangement in Hong Kong and Singapore

In our analysis of the practice of schemes, we reviewed the sanctioned schemes involving listed companies in Hong Kong and Singapore for the five-year period covering 2015-2019 (even though some of these sanctioned schemes may not be reported in judgments). Our data is confined to listed companies for the following reasons. First, data on schemes is readily available for listed companies, as the companies are required under the applicable listing rules to disclose the progress of restructurings on the relevant stock exchange websites as material information. Second, listed company schemes are important due to the impact of such restructuring on the financial markets on institutional, retail investors and other stakeholders. Third, we limit the examination to sanctioned schemes because it may be difficult to draw inferences on the state of satisfactory disclosure unless the schemes are in fact sanctioned.

We assembled the dataset based on searches from the major financial press and repositories of filings (such as Factiva and Perfect Information, both of which are subscription databases), public court judgments and filings on SGX and the Stock Exchange of Hong Kong (SEHK). Information on disclosures is obtained from announcements made by listed companies, explanatory statements from publicly available sources, including the above-mentioned subscription databases, stock exchange websites and information agents for bond documentation. Where possible, we compare the disclosures to creditors with the separate disclosures to shareholders found in the shareholder circulars.

Based on the above, our dataset on listed company schemes comprises five schemes in Hong Kong and ten schemes in Singapore. The list is found in Appendix 1. In reviewing the extent and quality of disclosures, we focus on the following items of disclosure that case law and existing literature has determined to be of importance to creditors in English or English modelled schemes:

(1) The liquidation or best alternative analysis, since amount that creditors are likely to receive in the insolvent winding up or if the company is sold for going concern is important in deciding whether to vote in favour of the scheme.⁷⁰ We also review the professional advisers’ opinions given, if any, in connection with the liquidation analysis.

(2) The fees that are payable to the financial advisers advising the debtor companies can be significant.⁷¹ A high amount of fees, that comes out of the debtor’s assets, suggest that the restructuring is in fact too costly to be viable since it would substantially decrease the assets available for the distribution to the creditors; and

(3) Whether there is equality of information that is provided to creditors and in a timely manner. 

C. The three concerns in schemes of arrangement in Hong Kong and Singapore

1. Liquidation or best alternative analysis

In English and English-modelled schemes, as outlined in Part II above, case law has established that explanatory statement must contain the information on the what the creditors will receive in the event that the scheme is not approved, also known as the liquidation or best alternative analysis.⁷²Although often referred to as the liquidation analysis, schemes are compared against the next best alternative to restructuring via the scheme.⁷³ Assuming creditors receive full disclosure, this permits them to determine, against the alternative, whether the plan is in their best interests. While liquidation is often the alternative to restructuring via the scheme, selling the company for going concern value is often the next best alternative or “counterfactual”. While logical, this approach has its own challenges as determining the alternatives and going concern value can be difficult and subjective. In the case of insolvent enterprises, liquidation is often the counterfactual.

In two early Singapore High Court decisions, Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturing⁷⁴ (in 2003) and Re Econ Corp (2004),⁷⁵ the court on each occasion raised concerns over the disclosures made by the company as to the liquidation value and ultimately refused to sanction the schemes. While it is clear that the liquidation or best alternative analysis needs to be provided, the detailed contents of such liquidation analysis are not prescribed either in the legislation or in the case law.

In a recent prior study on Singapore schemes conducted by the authors,⁷⁶ we found that the Singapore schemes do not ordinarily detail how the company arrived at liquidation value estimate or the bases of their assumptions at reaching the estimates. While we expect that bank, and some institutional creditors will have prior access to updated financial information (or asset valuation) if they have significant outstanding debt as they would have negotiated with debtor or its advisers as to the terms of the proposed scheme, it is extremely difficult for individual creditors and/or retail investors to have access to such information. Without a mandatory prescriptive requirement as to the level of detail for the liquidation or best alternative analysis, retail creditors are in a weak position to challenge a plan in a proceeding subject only to ex post review as the creditor would not know the liquidation value of its claims.

To test our hypothesis on the necessity of a prescriptive framework, we review the shareholder circulars that are issued to the shareholders in connection with the scheme companies’ issuance of shares (such in a debt-equity swap or where new investors are injecting cash into the company). These circulars to shareholders are only issued after the sanction of the creditors’ schemes (as shareholders’ approval is sought after the sanction). In these cases, much greater detail is given as to how the swap ratio or issue price is arrived at and the independent financial adviser’s opinion as to whether the transaction is fair and reasonable is also included, ⁷⁷ due to the fact that they are disclosure requirements prescribed under the Singapore Code on Takeovers and Mergers.⁷⁸

In Hong Kong, the five schemes in the dataset relate to bondholders’ restructurings. Most of the explanatory statements (four out of five) disclose the financial advisers’ opinions supporting the liquidation analysis. While the financial advisers’ opinions are disclosed, however, it appears that no reliance can be placed on the opinions even by the debtors that have engaged these advisers. Three are expressed to be provided on a non-reliance basis,⁷⁹ and the fourth has an extensive provision disclaiming liabilities.⁸⁰ However, unlike Re House of Fraser,⁸¹ this point was not expressly raised at the court hearing, likely because there was no objection at the sanction hearing. 

2. Professional and other restructuring fees

In Hong Kong and Singapore, as in the UK, fees are not prescriptively required by legislation to be disclosed in the explanatory statement. The question that arises is whether the courts would nevertheless require the debtor company to disclose routine professional fees to creditors as being relevant for creditors to make an informed decision. After all, professional fees will reduce the amounts of payouts of an insolvent company that is available to creditors.

Insolvency practitioners’ fees payable in cash are generally not disclosed in the explanatory statements in Singapore schemes as they are excluded from the scheme and would be paid in full. In an earlier work, we find that there are only a handful of occasions where such disclosures are given ⁸² and there is usually no breakdown as to the split of the fees among the professional advisers.⁸³ There is one exception, that is, where the fees are payable in equity because such issuance of equity requires the approval of shareholders for Singapore incorporated companies.⁸⁴ Unlike court-appointed insolvency practitioners, such as liquidators or judicial managers, where the remuneration is subject to review by the courts,⁸⁵ the fees of the insolvency practitioners (who often go on to serve as scheme managers) are largely market-driven. ⁸⁶

The practice came under attack in connection with TT International’s 2009 restructuring.⁸⁷ In that case, the creditors of the debtor company argued that they were caught by surprise at the fee arrangement entered into by the company and insolvency practitioner (who was later appointed as the scheme manager), which had a success fee that was a percentage of the debt that was waived, written off or extinguished pursuant to the scheme. The success fee, as high as SGD30 million, was described by the court as “an extraordinary amount that will leave many breathless”.⁸⁸ At its conclusion, owing to a number of factors including non-disclosure of the fee arrangement, the Court of Appeal ordered that the fee should be based on the time costs with an uplift. The amount eventually awarded was substantially less than the success fee claimed. ⁸⁹

The controversy is far from over, though it appears that the debate has shifted from disclosure to the courts’ control over the size of the fees. In a recent scheme involving Hyflux Limited, subsequently placed under judicial management,⁹⁰ the holders of perpetual securities (which are deeply subordinated securities akin to equity) and preference shares objected to the S$25 million success fee payable by the debtor company to the insolvency practitioner, on the ground that it was disproportionately large as compared to the paltry sum that would be received by them if the scheme was successful.⁹¹ This time, it was reported that the terms of engagement of the insolvency practitioner were made available in the data room.⁹²

The position of professional fees in Hong Kong restructuring schemes remains a thorny issue. In Re Da Yu Financial,⁹³ the company’s only asset was its listing status, which is recognized in Hong Kong as an asset that could be realised for the benefit of the creditors.⁹⁴ In the course of the sanction hearing, the court asked whether the costs of the restructuring would consume most of the realizable asset, being the listing status. The court found that the one-liner disclosure of the restructuring fees of the insolvency practitioners and the legal advisers (without the associated break-down) was not adequate. The scheme was sanctioned but on condition that the taxed costs of restructuring be taxed and cost savings to be distributed to the scheme creditors. 

3. RSAs/lock-up agreements

RSAs and lock-up agreements have not been widely documented in the Singapore schemes within the sample in Appendix 1 but have been employed in a small minority of cases.⁹⁵ In contrast to Singapore’s experience, RSAs have featured prominently in four of the five Hong Kong schemes of arrangement.⁹⁶ In Winsway Enterprises Holdings,⁹⁷ Kaisa Group Holdings⁹⁸ and Mongolian Mining,⁹⁹ consent fees (amounting to 2%, 1% and 1% of the principal amount for the scheme claims respectively) were paid to creditors who entered into the RSA. The court in each of the afore-mentioned three decisions held that the consent fees did not fracture the class of creditors as the quantum of the size of the fee was relatively small. In China Singyes Solar Technologies,¹⁰⁰ likewise, a fixed sum representing the consent fee was also payable to the creditors who entered into the RSA.

In the four schemes, the RSA was entered into before the explanatory statements was published as the explanatory statements disclosed the aggregate holdings of creditors that have undertaken to vote in favour of the scheme.¹⁰¹ In Re China Singyes, two of the creditors complained that they did not have the opportunity to participate in the RSA and in one case, argued that he did not receive the financial information on time to make the assessment. This was resolved by the company agreeing to make an ex-gratia payment.¹⁰²

In each of these schemes, except for China Singyes, it was not argued that the creditors did not have sufficient information to assess the viability of the schemes prior to entering into the RSAs. In many of these cases, it was acknowledged that there was in fact a high degree of participation of the RSA. For instance, in Winsway, by the time of the explanatory statement was published, creditors holding 83.2% of the principal amount of debt signed up to the RSA.¹⁰³ Nevertheless, in light of the concerns in Re Sunbird Business Services, it remains to be seen whether future cases will challenge disparity in the timing at which the information is disclosed and the missed opportunities for non-participating creditors to enter into the RSA to boost their recoveries. 

Building on these findings, in the next section we argue that the transplant of the English modelled scheme framework needs to be adapted to account for heightened risks in restructurings in Hong Kong and Singapore. These risks, which can be mitigated with ex ante judicial review of disclosures, include the enhanced risks when creditors are also controlling shareholders and who face inevitable conflicts of interests in voting for schemes, the use of schemes to compromise not only financial but also operational debt, and the presence of retail creditors in public debt restructuring.

IV. Implications of our findings and lessons from Chapter 11

A. Chapter 11 and the disclosure plan

Given the concerns in Part III, can we draw lessons from Chapter 11 disclosure requirements, which are more onerous than English schemes¹⁰⁴ and required at an earlier stage in the process? Chapter 11 serves as an important comparator both because Singapore recently adopted Chapter 11 characteristics into domestic schemes and, similar to schemes in HK and Singapore, Chapter 11 is commonly used to restructure operational debt held by non-financial creditors.

A Chapter 11 plan must be provided to creditors with a disclosure statement supplying adequate information, which is defined as ‘information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records […] that would enable such a hypothetical investor of the relevant class to make an informed judgment about the plan’¹⁰⁵ and is determined independent of any non-bankruptcy disclosure requirements.¹⁰⁶ The statement is not only significant for the information disclosed but that it is available in one document. As such, disclosure statements often contain charts detailing distributions to creditors.¹⁰⁷ The debtor is not ordinarily required to obtain formal appraisals of its assets.¹⁰⁸ However, creditors then have the ability to request additional information if necessary. Rigorous financial projections are found in Chapter 11 plans but are rare in English schemes.¹⁰⁹

While the Chapter 11 disclosure statement framework lacks specificity,¹¹⁰ the courts are actively scrutinising the disclosure statement prior to its circulation. Scholars have argued that the incentives are built in to ensure that the requisite disclosures are met, through the combination of creditor committees that are given the wide-ranging power to investigate and to reject the Chapter 11 plan proposed in the absence of satisfactory disclosures and the US Trustees, appointed by the court, to carry out examinations. Indeed, to ensure all interests are represented more than one creditors’ committee may be formed to represent the interests of different creditors and a “committee member holding a conflict of interest cannot continue to serve.”¹¹¹ In deciding whether to permit multiple committees, the court must balance the administrative costs with the benefits of increased representation. This balance of creditors interests is similar evaluating the need for increased disclosure against the associated costs.

Further, under the Bankruptcy Code, attorneys and other professionals who provide services for the debtor and official committees are entitled to be paid from the bankruptcy estate, which would reduce the assets available for the restructuring. Section 330 of the Bankruptcy Code requires fees must be reasonable and necessary, and comparable to what attorneys charge outside of bankruptcy cases. Thus, while parties have some flexibility in negotiating the professional fees, they are subject to the approval of the court. The request to hire professionals must include a disclosure of any connection with the debtor, creditors or any other interested party.¹¹² That is not to say that the fees are always transparent. The requests and associated court approvals (or rejections) are available to creditors and the public online. However, the number of documents filed in a typical restructuring compounded with the fact that requests may be separate from the plan and disclosure statement makes tracking such expenses difficult and not cost-effective for the average unsecured creditor holding a small claim.

Thus, we suggest that more prescriptive list of information should be included in the explanatory statement. We recognise that there are important differences between the English or English modelled scheme and the Chapter 11 plan. In particular, the English or English modelled schemes are concerned with the disclosure of and alternative scenario if the scheme is not successful, that is the liquidation analysis, while valuation is key to Chapter 11; in fact, section 1129 specifies the valuation that needs to be done and valuation in the context of Chapter 11 is conducted on a going concern basis, rather than a liquidation analysis.¹¹³ However, notwithstanding the differences, we argue that some inspiration can be drawn from the Chapter 11 disclosure regime. First, Chapter 11 is used as a means to restructure the debts of the entire company, and the Hong Kong and Singapore schemes are used to compromise all of the debts of the companies. Second, and in particular, in the case of Singapore which has adopted Chapter 11 features, the ability of creditors to assess the valuation of the company should be central to the scheme framework, and this can only be achieved through a prescriptive disclosure of up-to-date financial information of the company. It is beyond the scope of this study to recommend as to whether the most appropriate valuation standard for schemes should continue be the liquidation analysis or a restructured enterprise standard.¹¹⁴ 

B. Enforcing an ex ante mandatory disclosure framework?

In Chapter 11 proceedings, the schedule of assets and liabilities and its statement of financial affairs are required to be filed within 14 days of filing the petition, in addition to the first day declarations on the debtor’s business affairs and events leading to the filing.¹¹⁵ Having information early in the process will mean that creditors can assess the viability of the restructuring at an earlier stage, in negotiating with the debtor companies as to whether they would support the likely restructuring. 

One solution is to tweak the schemes framework such that the courts play a much more active role ex ante, at the stage of the convening of the court meetings. In English schemes and English-modelled schemes, the review of the disclosure statement occurs ex post (at the stage of seeking the sanction of the court) rather than ex ante. Chapter 11 provides ex ante judicial review of the disclosure statements before they are circulated to the creditors. Ex ante review is particularly prudent for Singapore since the country adopted characteristics of Chapter 11 into the domestic schemes regime as discussed above. Cross-class cramdown, while an important and powerful tool in facilitating restructuring and thereby protecting the interests of stakeholders when business remains viable, provides increased risk for dissenting creditors. Providing ex ante review ensures creditors have sufficient information. As disclosure is required in proceedings whether ex ante or ex post, ex ante review will not necessarily increase costs and, as it will prevent the depletion of assets or delay that may occur by calling an in-effectual meeting of creditors due to insufficient disclosure, it may actually decrease the cost of the proceeding. An ex ante review also ensures that where the liquidation or best alternative analysis is supported by financial advisers’ opinion, the scope of the opinion and the permissible disclaimers can be considered by the courts.

Further, an ex-post review could have led to a greater reluctance of the courts to reject the scheme if the requisite majorities are obtained, notwithstanding the lapses in disclosure.¹¹⁶ The reasons are due to the lateness in the challenge, the harm caused to the stakeholders if the scheme is not approved would exceed that of the harm caused by the lapses of disclosures. For example, in TT International, the Singapore Court of Appeal did not overturn the scheme that was sanctioned even though the scheme managers and the debtor company failed to disclose the conflicts of interests posed by the success fee entered into by the company and the scheme manager. ¹¹⁷ In Yaohan Hong Kong Corporation,¹¹⁸ the lack of disclosure as to the legal effect of the division of the consideration between the shareholders and creditors (based on the earlier case law) did not result in the Hong Kong court refusing to sanction the scheme.

C. Monitoring RSAs?

RSAs have been described as a feature of modern bankruptcy practice in the US.¹¹⁹ The Bankruptcy Code provides for pre-packs, and allows for the solicitation of votes so long as there is disclosure of “adequate information”.¹²⁰ Post-petition RSAs are more controversial because the Bankruptcy Code prohibits solicitation of votes prior to the court approving the disclosure information that has “adequate information”,¹²¹ and votes that were solicited in violation of the prohibition could be invalidated.¹²² US case law has taken a pragmatic approach and upheld post-petition RSAs where the proposed restructuring is on arm’s length,¹²³ even though such agreements are entered into prior to the approval of the disclosure statement. However, courts are more cautious to approve RSAs where the transaction is with an insider and the debtor refuses to provide the same information to other creditors.¹²⁴ Where parties entering into the RSAs are sophisticated and the restructuring is on arm’s length, courts routinely uphold these bargains.¹²⁵ In these cases, there is no concern that the creditors are unduly taken advantage of.¹²⁶ 

However, there remains the concern that not all creditors have equal access to the financial information at the same time, as was raised in Re Sunbird Business Services. In Hong Kong, while the RSAs used in the sample dataset relate to consent fees in exchange for the voting undertaking and lock-up did not result in complaints, it is foreseeable that future RSAs (such as that utilised in Re Noble) could also include other terms such as provision of financing in exchange for higher returns. The inherent inequality in RSAs will mean that some creditors will have been in a privileged position to have more time in making these decisions on whether to vote on the scheme and/or to opt for a higher but riskier return or over a lower but safer cash option. Concerns should be heightened when the restructuring involves a controlling shareholder transacting with the debtor as part of the restructuring.

V. Conclusion

The English modelled scheme of arrangement has proven to be a very useful and flexible tool for the restructuring of corporate debts in Hong Kong and Singapore. Many of the reservations that are raised in English case law over the disclosure requirements in connection with the schemes will apply equally to Hong Kong and Singapore. In this paper, we find that there are three principal concerns in their current disclosure regimes in the two jurisdictions: how debtors disclose the liquidation or best alternative analysis; how debtors disclose the fees of the advisers; and the equality of provision of information in the scheme process with the use of RSAs.

We argue that the English-modelled scheme framework needs to be tweaked take into account the following specific risks that are heightened in restructurings in Hong Kong/Singapore: (1) the enhanced risks of creditors who are also controlling shareholders, and who face inevitable conflicts of interests in voting for schemes; (2) the use of schemes to compromise not only financial but also operational debt; and (3) the presence of retail creditors in public debt restructuring.

Drawing from the US approach towards disclosure in Chapter 11, notwithstanding the differences between the scheme and Chapter 11, we argue that disclosure of sufficient information as to the valuation of the company should be a central in the explanatory statement and the RSA should be carefully reviewed. We also argue for an ex ante approach to disclosure statements under schemes of arrangement at the stage of leave of court to convene the scheme meetings. As both jurisdictions have sophisticated and experienced judiciaries, earlier involvement of the courts may provide greater confidence in the process for investors by compelling the disclosure of key financial information.