Re Attilan Group Ltd (Singapore, High Court, 8 November 2017) is the first decision on super-priority in relation to a scheme of arrangement. The new super-priority provisions for rescue financing were introduced on 23 May 2017 as part of the amendments to the Companies Act intended to make Singapore more attractive as a hub for restructuring.
In this case, the High Court held that an applicant for super-priority should adduce some evidence of reasonable attempts at trying to secure financing on a normal basis, ie, without any super-priority, to move the court to exercise its discretion. It also held that an existing creditor may claim super-priority for providing new financing provided that it is not obliged to provide the new financing.
The case concerned Attilan Group Limited (Attilan), a company incorporated in Singapore and listed on the main board of the Singapore Exchange. In January 2017, Attilan entered into a subscription agreement (Subscription Agreement) with Advance Opportunities Fund 1 (Advance) under which it would issue notes to Advance for a total of up to S$50 million. The notes would be issued over several tranches.
About two months later, in March 2017, a creditor, Phillip Asia Pacific Opportunity Fund Ltd (Phillip), brought a claim against Attilan on the basis of a guarantee that Attilan had given it. As a result, Advance refused to subscribe further under the Subscription Agreement.
In order to find a solution to its financial difficulties, Attilan brought an application for a scheme of arrangement in order to try to find a compromise arrangement with Phillip and its other creditors. As part of this application, it also asked for the Court to grant Advance super-priority for any further financing provided under the Subscription Agreement.
Under section 211E of the Companies Act, a company applying for a scheme of arrangement may ask the Singapore court to grant super-priority for rescue financing as a part of the scheme. There are four levels of super-priority that may be granted to the debt from the rescue financing:
- Level 1: The debt takes priority together with the costs and expenses of the winding up but behind secured creditors;
- Level 2: The debt takes priority above all preferential and unsecured debts, behind only secured creditors;
- Level 3: The debt is secured by a security interest over property of the company that is unsecured or by a subordinate security interest over secured property; and
- Level 4: The debt is secured by a security interest over already secured property of the company and takes the same or higher priority over the existing security.
For super-priority at Levels 2 to 4, section 211E expressly provides that the super-priority may only granted if the company would not have been able to obtain the rescue financing from any person unless the debt from the rescue financing was granted the super-priority requested. There is no such requirement set out for Level 1 super-priority.
Requirement to Show Reasonable Steps
Attilan was asking the Court to grant either Level 1 or Level 2 super-priority to Advance’s financing to be provided under the Subscription Agreement. The Court rejected the application for super-priority (but granted the application to call a meeting of creditors to consider the scheme). It did so on the grounds that Attilan had not shown that it had made any attempt to obtain financing from any other sources.
As noted above, it is not a condition for Level 1 super-priority to be granted for the applicant to establish that the company would not have been able to obtain rescue financing from any person without the grant of super-priority. However, the Court held that in deciding whether to exercise its discretion to grant super-priority it would factor in whether the applicant had shown some evidence of reasonable attempts at trying to secure financing on a normal basis, ie, without any super-priority. This is because giving super-priority disrupts the expected order of priority of the various creditors of the company, and its grant should thus not ordinarily be resorted to.
The Court also considered what would be required for an application for Level 2 super-priority, in particular, what would be required to establish that the company would not have been able to obtain the rescue financing from any person without the super-priority requested. It held that the applicant must demonstrate that reasonable efforts had been undertaken to explore other types of financing that did not entail super-priority. This did not mean, however, that the applicant must show that he had sought credit from every possible source. Examples from US cases were cited by the Court: in one, the applicant had approached four large lending institutions; in another, the applicant had conducted negotiations and discussions with various financial entities.
In this case, while Attilan’s management had attested to having discussions with various parties to source for financing, it had not backed up this statement with evidence as to the sources of alternative financing sought but rejected (e.g., evidence of correspondence with other financial institutions). It was not enough for an applicant to state that it would be futile for it to search for other sources of financing due to its weak financial position even if this belief was genuinely held.
Rescue Financing May Come from an Existing Creditor
The Court considered the issue of whether the financing to be provided by Advance could be considered rescue financing as the Subscription Agreement had been entered into before Attilan’s dispute with Phillip. It commented that a pre-existing obligation to provide financing could still amount to rescue financing if the injection of funds is at the option of the creditor, and its exercise of that option can be made contingent on its obtaining super-priority status for the injected funds. In this case, the Subscription Agreement had provided that it was a condition precedent to the dispensing of further tranches of funds that there be no legal actions or proceedings against Attilan. As Phillip had brought a claim against Attilan, the condition precedent was not fulfilled and Advance was therefore entitled to consider that its obligation to subscribe for further notes had terminated. Accordingly, a decision to revive financing under the Subscription Agreement would amount to rescue financing.