Often, an insolvent company is worth more as a going concern than if it were to go into receivership or liquidation. However, it may be difficult for the company to persuade all its creditors to give it an opportunity to resolve its financial difficulties. Most creditors tend to be sceptical about staying their individual actions and opting for a collective rescue operation. This is partly due to the lack of transparency and information about the company's financial situation, and partly due to a general distrust of other creditors. The judicial management regime was implemented to allow for the rehabilitation of insolvent commercial enterprises under the charge of a court-appointed officer, while keeping creditors at bay via a statutory moratorium on claims for the duration of the judicial management order.

While judicial management may be the more appropriate statutory regime for the rehabilitation of commercial enterprises, it is not popular with the company's management, as management loses control of the company to the court-appointed officer. In such cases the company is unable to avail itself of the statutory moratorium against claims and must find some other mechanism to ward off its creditors. This is usually by way of a scheme of arrangement under the Companies Act, which also entitles the company to apply for a stay of court proceedings against it.

The recent decision of Deutsche Bank AG v Asia Pulp & Paper Company Ltd (2002) saw a locally listed public company with ties to a well-known and financially troubled Indonesian conglomerate (and substantial interests in Indonesia as well as regionally) successfully retain control of its rehabilitation process and fend off a judicial management petition brought against it by two of its bank creditors. This case was a challenge not only to the judicial management/insolvency regime in Singapore, but also to its corporate regulatory system as a whole.

The respondent company was under heavy debt (around S$13 billion worth) and announced a standstill on all debt repayments in order to embark on a highly complex debt restructuring scheme of arrangement. The appellant bank and another creditor of the company soon became concerned that the company's management was taking advantage of the scheme of arrangement process to the creditors' disadvantage, and petitioned for the company to be placed under judicial management pursuant to Section 227B of the Companies Act.

They contended that the company and its management had seriously delayed the restructuring process and failed to agree on the fundamental principles on which a restructuring could progress. At the time, the company had yet to draw up a restructuring plan which would merit serious consideration by creditors and had failed to cooperate with professional advisers, which in turn hindered the creditors' review of the group's financial position. In addition, the company had engaged in transactions which suggested that substantial amounts of money were being siphoned from the company into other companies under the group's control. The creditors also alleged that notwithstanding the debt repayment standstill, some preferential payments had been made to certain creditors, and the company had failed to establish any satisfactory mechanism to control the operating cash-flow of the group and direct that towards meeting obligations.

The court at first instance dismissed the petition for the making of a judicial management order against the company, a decision which was subsequently upheld by the Court of Appeal.

At first instance, the court accepted that many of the petitioning banks' complaints had substance. However, it considered that the company had in fact hastened the pace of restructuring in order to forestall the judicial management petition, and given the current involvement of the Indonesian state agency, the Indonesian Bank Restructuring Agency, in assisting and overseeing the restructuring process of the group as a whole, the court considered that such efforts to restructure the group's debts by consensus should be allowed to proceed. The court also considered the practical difficulties a judicial manager would face, if the order were made, in understanding and taking control of the complex group with subsidiaries and assets in various jurisdictions.

The Court of Appeal agreed, although it cautioned that if the consensual restructuring of the company's debts remained stalled, or if questionable transactions continued to be entered into by the group, the difficulties facing potential judicial managers would not be a permanent barrier preventing the making of a judicial management order in the future.

This case highlights a significant turning point for the judicial management regime in Singapore. Opting for a scheme of arrangement effectively provides ailing companies with a means to reap the benefits of a moratorium on claims without the burden of having to displace management which would be compulsory under the judicial management regime. This way the company is able to stave off creditors while its management remains in control of both the scheme of arrangement process and the day-to-day running of the company.

If this marks a new trend for companies teetering on insolvency, the judicial management regime may in time be rendered obsolete. It has been suggested that what inherently undermines the judicial management regime in Singapore is the limited capacity of the independently appointed judicial managers, who do not possess the same business contacts and historical knowledge of the company as the business managers who have been actively running the company, sometimes for many years. As such, the judicial manager is not necessarily better placed to turn the company round and succeed where the business managers have failed. That this is the prevailing commercial reality is illustrated by the popularity of the Chapter 11 management-in-control process over the administration (judicial management) regime in the United States.

For further information on this topic please contact Edwina Taylor at Wong Partnership by telephone (+65 6416 8000) or by fax (+65 6532 5722) or by email ([email protected]).