The Singapore High Court recently issued the first-ever super-priority order for debts arising from rescue financing under Section 211E(1)(b) of the amended insolvency laws in the Companies Act. The decision shows that the court is open to adopting relatively unique deal structures, and could be a benefit for more business-centric solutions.
The April 8 super-priority order was made in favor of the proposed rescue financing by Malaysia’s Hatten Group in the ongoing scheme of arrangement proceedings concerning online travel platform Asiatravel.com Holdings Ltd (ATH) and its affiliate, AT Reservation Network Pte. Ltd (together, the Scheme Companies). This decision is the first of its kind in Singapore, following the unsuccessful application in Re: Attilan Group Ltd  SGHC 283 (Re: Attilan).
Existing Law on Super-Priority Rescue Financing in Singapore
In this case, it became clear from an early stage that the super-priority regime in Section 211E of the Companies Act (the Act) draws heavily from the debtor-in-possession (DIP) financing regime under Chapter 11 of the US Bankruptcy Code, and local precedents for rescue financing applications were comparatively scarce.
In Re: Attilan, the only prior case of its kind in Singapore, Attilan Group Limited had sought for sums to be disbursed by a subscriber under a subscription agreement to be treated as rescue financing, and granted super priority over the other creditors of the company. In that case, Judge Aedit Abdullah rejected the application for super priority, noting, among other things, that the company must put forth evidence that it had taken reasonable efforts to secure financing that would not prejudice its existing creditors. The Court had to be satisfied, on a balance of probabilities, that there was a basis to grant the super-priority application.
The judge further made reference to US cases, such as In re Western Pacific, in detailing guidelines that an applicant would have to satisfy in order to succeed in a super-priority application. Such guidelines included that
- the proposed financing has to be in the exercise of sound and reasonable business judgment,
- no alternative financing is available on any other basis,
- such financing is in the best interest of the creditors, and
- no better offers, bids, or timely proposals are before the Court.
In other words, in order to successfully obtain super-priority status for its rescue financing, the Scheme Companies would have to satisfy the tests that a US court would apply under the corresponding provisions in the US Bankruptcy Code.
The Super-Priority Applications
The Scheme Companies are in the online travel business. The Scheme Companies had been facing cash-flow difficulties since a proposed investment by a Chinese investor and ATH’s controlling shareholder, Zhong Hong Holdings Ltd, failed to materialize. Following this, in mid-2018 the Scheme Companies applied for, among other things, a moratorium to be granted under Section 211B of the Act. The moratorium was granted by Justice Kannan Ramesh on September 7, 2018.
Following the grant of the moratorium, the Scheme Companies began sourcing for potential investors to buttress the terms of the schemes of arrangement to be proposed to their creditors. One of these potential investors was Malaysia’s Hatten Group (the Investor), which demonstrated a significant commitment to both investing new capital in ATH by way of a scheme of arrangement and providing rescue financing in order to preserve the value of the Scheme Companies’ business while the terms of the proposed scheme were being finalized and considered by the Scheme Companies’ creditors. However, one key term of the proposed rescue financing was that such rescue financing be granted super-priority status under Section 211E of the Act.
Accordingly, the Scheme Companies applied for the proposed rescue financing to be granted super-priority status (the Super-Priority Applications) in early January 2019; the applications were heard and granted by the High Court on April 8.
Key Takeaways from the Super-Priority Applications
No Better Offers, Bids, or Proposals
In granting additional time for the Scheme Companies to satisfy the Court that the Super-Priority Applications ought to be granted, the judge raised concern as to whether the proposal by the Investor was, in reality, the best deal available to the Scheme Companies.
In the Scheme Companies’ case, only two other proposals (aside from the Investor’s) had been received. These were proposals to acquire discrete portions of the Scheme Companies’ assets. In contrast, the proposed investment from the Investor involved new capital injection into the Scheme Companies (as opposed to disposal of assets), and would, if carried through, revive the Scheme Companies’ business as well as completely resolve the debt owing to the Scheme Companies’ creditors (if the proposed scheme were accepted by them). Moreover, the availability of rescue financing to protect the Scheme Companies’ value was especially attractive given the competitive nature of the online travel platform business, as the Scheme Companies’ businesses had been halted.
No Alternative Financing Available
Drawing on the guidelines laid down in Re: Attilan, the judge granted time for the Scheme Companies to conclusively show that there was no alternative rescue financing available on any other basis.
Notwithstanding that the Investor’s proposal was the preferred proposal available to the Scheme Companies, in preparing for the Super-Priority Applications (aside from those to acquire assets), the Scheme Companies had invested further efforts to approach both institutional lenders and funds. These efforts were swiftly rebuffed. In early March 2019, the Scheme Companies also engaged DHC Capital, in an advisory role, to approach the market in the context of the proposed rescue financing by the Investor, and to identify other potential lenders that would be willing to match the Investor’s proposal for super-priority rescue financing.
DHC Capital proceeded to approach four separate groups of potential lenders, namely (1) banks, (2) strategic lenders, (3) SME lenders, and (4) distressed lenders. None of these attempts were successful.
While engaging DHC Capital for this purpose necessitated incurring an additional layer of costs, the financial advisor’s work showed that the Scheme Companies had sought professional help and reasonable efforts had been made to obtain financing without super priority, or indeed on any other basis.
Relatively Bespoke Nature of the Rescue Financing
Unlike the vast majority of DIP cases where the rescue financing is extended by banks or other institutional lenders, this was a case where the proposal by the Investor included the supply of inventory (from the Investor’s affiliated hotels in Malaysia) and theme park tickets to be sold on the online platform, as well as an injection of cash. This was therefore a more practical structure than in many other proposed rescue financing arrangements: the Investor provides the value of goods in order to kickstart the resumption of the Scheme Companies’ business, with the total value of the various components (of the rescue financing) to be converted into equity under the terms of the proposed schemes of arrangement.
In addition to practicality, this structure had the added advantage of restarting the Scheme Companies’ business at the earliest juncture, thereby buttressing ATH’s eventual application to the SGX-ST to resume the trading of its shares.
With this decision, the Court has shown itself willing to adopt relatively unique deal structures, as long as the guidelines set out in Re: Attilan (and the US cases cited therein) are complied with and the applicant company can show that such financing proposal is in the best interests of the company and its creditors. This flexibility is a boon for more business-centric solutions, instead of the traditional routes of rescue financing by institutions that may be wary of throwing good money after bad.
Where Do the Scheme Companies Go from Here?
Rescue financing is only the first step. The Court has granted an extension of the moratorium for the Scheme Companies, and a corresponding extension of time to prepare the terms of the schemes of arrangement to be presented to the Scheme Companies’ creditors. Nonetheless, the grant of super-priority status for the rescue financing is a crucial first step in the process.
In looking back on these successful Super-Priority Applications, one fundamental fact is clear: The Singapore High Court is still extremely cautious in granting such applications, and a successful applicant will need to persuade the Court that super-priority status is absolutely necessary.
Therefore, in order to succeed, any prospective applicant will be well advised to conduct significant groundwork and preparation to show the Court what efforts it has taken to secure alternative financing, and to persuade the Court that the super-priority proposal is indeed in the applicant company’s and its creditors’ best interests. Such groundwork will likely include, as the present case did, the involvement of independent advisers to reach out to the market, thereby providing the Court with the assurance that the applicant has made reasonable efforts to source for alternative funding.
Further, the success of the Super-Priority Applications highlights an important point. While we traditionally think of rescue financing as being the injection of heavily ring-fenced funds under, for example, credit facilities by banks or other institutional lenders, the Singapore High Court is prepared to consider bespoke and solution-focused rescue financing proposals like that proposed by the Investor here. The creation of value in a business through the supply of inventory (in this particular case, inventory that is not even in Singapore) can, in special cases such as that of the Scheme Companies, be granted super-priority status under Section 211E of the Act. This is a groundbreaking development that opens doors for the extension of rescue financing by businesses and corporations (both cross-border and local) that see strategic business partnerships (instead of mere value) in distressed entities.