practical issues in debt restructuring & schemes of ...19... · practical issues in debt...

© Rajah & Tann LLP 1

1

© Rajah & Tann LLP

Practical Issues in Debt Restructuring & Schemes of Arrangement

Patrick AngPartner, Rajah & Tann LLP19 March 2009

2

© Rajah & Tann LLP

Scope• 1) Introduction• 2) Overview of Insolvency Legal Framework• 3) Consensual debt restructuring

– Why?– Why not?– Procedure– Issues– Typical terms

• 4) Scheme of Arrangement– Introduction– Procedure– Issues

• 5) Cross border issues• 6) Challenges & issues• 7) Question & Answer


Introduction

4

© Rajah & Tann LLP

Introduction• 15 September 2008 – Lehman Brothers filed for

bankruptcy protection under Chapter 11• Lehman Brothers collapse has become symbolic of

the current financial crisis – almost pivotal• Financial stability of US and European institutions

called into question even before then – subprimemortgage crisis

• Financial crisis hit equity markets, commodities, trade – became worst global economic crisis in decades


5

© Rajah & Tann LLP

Introduction• Singapore’s export driven/open economy

amongst first in Asia to go into recession• String of listed companies announced losses

and several have started debt restructuring discussions with creditors, some filed for schemes

• The stronger ones are also preparing for the worst and raising finance and taking measures to ride the storm with no visibility

Overview of insolvency framework


7

© Rajah & Tann LLP

Overview of insolvency framework• Liquidation• Judicial management• Receivership• Schemes of Arrangement (section 210)• Consensual debt restructuring

Consensual debt restructuring


9

© Rajah & Tann LLP

Why consensual debt restructuring?• Inadequacies of formal insolvency procedures• Higher prospect of proper rescue with higher returns

to stakeholders• Creditor community more matured in approach

towards identification, realisation or preservation of commercial value

• A more “save face” method – less stigma of failure• Greater incentive to owner/management to maintain

and enhance value• No workable legal option in certain legally less

developed countries – many only offer liquidation as the only legal option – internationally recognised

10

© Rajah & Tann LLP

Why consensual debt restructuring?• Preservation of confidentiality or better managed

publicity• Flexibility in negotiating positions without Court

intervention – yet not giving up option to resort to legal options [restructuring in the shadow of liquidation]


11

© Rajah & Tann LLP

Why NOT consensual debt restructuring?

• Too flexible – debtor drags feet/ delays time• Too flexible – creditors cannot reach consensus • It requires 100% of the relevant creditors to agree to

the restructuring plan• Distrust in management of debtor company• Inability of group companies to hold subsidiaries

together• Inability to persuade small or medium sized creditors

to participate in the restructuring plan – small creditors insist on being paid 100%

• Debtor is in sunset industry or is inefficient• Creditors’ temptation to investigate affairs• No moratorium against legal action

12

© Rajah & Tann LLP

Debt restructuring - procedure• Announcement or notification of insolvency

• Initiation of collective creditors’ forum

• Formation of committees and professional advisers

• Financial review by professional accountants

• Standstill agreement

• Formulation of restructuring plan


13

© Rajah & Tann LLP

Debt restructuring - procedure• Negotiation of restructuring plan

• Monitering of business and cash flows

• Reach agreement on restructuring plan

• Implementation of restructuring plan

14

© Rajah & Tann LLP

Debt restructuring - Issues• When to announce inability to pay debts?

• Who should be notified of inability to pay debts?

• Who should be members of debtor’s task force?

• Which creditors should be in Steering Committee?

• Composition and terms of Steering Committee? – Should a fee be paid to Steering Committee members?– How about Committee’s advisers’ fees?– How many members?


15

© Rajah & Tann LLP

Debt restructuring - Issues• How much information ought to be given to creditors

and in what manner?

• How long is standstill and on what terms? Creditors’view is that they are giving a lot for forbearance to sue and they expect security and other “gives” by debtor in exchange. Debtor looks at standstill as a necessary prelude to restructuring. – Often standstill agreement is achieved while negotiating it!

• Who should the advisers be and on what terms and scope? Conflict of interests? Should creditors and company each have separate representation? Who pays the costs?

16

© Rajah & Tann LLP

Debt restructuring - Issues• Creditors sell their debt – changing creditor base.

[Can facilitate or destroy restructuring]. Some owners of debtor corporates buy out debt to ensure success.

• Which creditors ought to be “preferred” or paid in full? Eg employees, critical suppliers, secured creditors

• Does the debtor company have a “runway” to continue business and operate pending the restructuring? – interco fund transfers/ interim financing and cash flow


17

© Rajah & Tann LLP

Debt restructuring - Issues• Different levels of expertise and experience amongst

creditors’ representatives at collective forum

• Creditors having divergent views or interests – eglong v. short term view/ exit v. stay view/ optimistic v. pessimistic outlook

18

© Rajah & Tann LLP

Debt restructuring – typical terms• Term out payments• “Hair cut”• Interest or default interest waivers or reduction• New monies from current stakeholders or new party• New security or guarantees• Debt equity swap• Call or put options on shares issued to creditors• Hive off• Payment in kind• Preferential treatment of employees/critical suppliers• Cash sweeps or cash pooling arrangements


Schemes of Arrangement

20

© Rajah & Tann LLP

Introduction to Schemes• “Cram-down” mechanism allowing a restructuring

plan to bind a class of creditors once 75% in value and majority in number of the class have approved the plan and the plan is sanctioned by the court

• Schemes became widely used after 1997 crisis, and often in preference to judicial management.


21

© Rajah & Tann LLP

Schemes - Procedure• 1. Application to Court for sanction to convene creditors

meeting

• 2. Moratorium against legal action under section 210(10) may be applied for

• 3. Scheme is negotiated and finalised

• 4. Company convenes creditors meeting to voting on the proposed scheme

• 5. Second application to Court to approve the scheme

• 6. Scheme takes effect upon Court’s sanction and lodgement of Order with ACRA

22

© Rajah & Tann LLP

Schemes - Issues• Can a “Scheme to scheme” be accepted?

• What is a reasonable timeline for a scheme to be presented and for a creditors meeting to be called?

• Is there an influential block of creditors who can veto any Scheme proposed by the debtor?

• Classification of creditors– “Everybody thinks they are in a special class!”– Secured / Employees/ CPF/ Creditors receiving

different treatment/ related parties?


23

© Rajah & Tann LLP

Schemes - Issues• Material disclosure and transparency

– Sufficient information necessary to make informed decision– Scheme can be set aside

• Objections to a scheme

– to record your objections and communicate it clearly to the Company and its advisers

– ensure that the objections are well founded – raise the objections as soon as possible [even if negotiations

are ongoing]

24

© Rajah & Tann LLP

Schemes - Issues• Moratorium against legal action must be applied for –

not automatic

• Most contracts now make a compromise or scheme of arrangement an event of default

• Appointment of special accountant or moniteringaccountant – what scope?

• Confidence issue once Scheme is announced.


Cross border issues

26

© Rajah & Tann LLP

Cross border issues

• Schemes have no legal effect overseas – although a scheme can be proposed for a foreign company. [Foreign companies cannot apply for judicial management]

• Ring-fencing tendencies amongst local creditors in each jurisdiction

• Upstreaming of revenue from overseas subsidiaries stop upon scheme or restructuring being announced

• Certain foreign countries have strong labour laws –union rights/ social issues/ large payouts


Challenges and issues

28

© Rajah & Tann LLP

Challenges and Issues1) Speed and extent of current downturn

2) Lack of visbility of what lies ahead

3) Increased complexity of corporate structures and transactions

4) Deluge of information and documentation

5) Difficulty of valuations (utility of valuations diminished)

6) Revamped Scheme of Arrangement provisions? Chapter 11 style?


Question and Answer

30

© Rajah & Tann LLP

THANK YOU

For more information, please contact:

Lawyer’s name: Patrick AngTel:62320400Email:[email protected]: http://www.rajahtann.com

practical issues in debt restructuring & schemes of ...19... · practical issues in debt...

Documents