19 January 2018
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Supreme Court Note: Re: Attilan Group Ltd [2017] SGHC 283 (the applicable test for grant of super-priority for rescue financing under s 211E of the Companies Act (Cap 50, 2006 Rev Ed)

Supreme Court Note
12 Jan 2018

The applicant, a locally incorporated company listed on the main board of the Singapore Exchange, sought the Court’s leave to convene a meeting of its creditors to consider a scheme of arrangement under s 210(1) of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”), as well as for super priority to be granted under the recently introduced s 211E of the CA.

Given that this is the first decision on s 211E, the High Court judgment is of particular note for the requirements to be met for super priority to be granted for rescue financing. The Court noted that for an application for super priority to be granted: (1) the proposed financing must constitute “rescue financing” under s 211E(9) of the CA; (2) the applicant must meet the condition(s) under one of the limbs specified in s 211E(1); and (3) it must be a case where the court decides to exercise its discretion to grant super priority: see [53] of the judgment.

The funds for which rescue financing was sought concerned the issue of unsecured equity-linked redeemable structured convertible notes to an intended subscriber (“the Subscriber”) under a subscription agreement (“the Subscription Agreement”). As a result of the applicant’s failure to meet the condition precedent in the Subscription Agreement, the Subscriber was contractually entitled to terminate the agreement. Notwithstanding that, the Subscriber indicated its willingness to subscribe further under the Subscription Agreement if amongst others, super priority was granted to its funds. The applicant accordingly sought for subsequent sums disbursed by the Subscriber to be treated as “rescue financing” and be given super priority.

One threshold issue that was discussed in the judgment was whether “rescue financing” can be in the form of a proposed financing by an existing creditor with an erstwhile obligation to provide financing which no longer subsists. Drawing support from parliamentary debates, the Court decided the question in the affirmative and reasoned that it was not necessary for the proposed financing to be entirely new – as long as the injection of funds was at the option of the creditor, the funds will qualify as “rescue financing”: see [77] of the judgment.

In its super priority application, the applicant relied on the limbs of either ss 211E(1)(a) or 211E(1)(b) of the CA. Given Parliament’s indication that the rescue financing provisions in Singapore were adapted from the Bankruptcy Code 11 USC (US) in the US, the Court analysed several decisions from the United States in ascertaining the ambit of these two limbs. Preliminarily, the Court made it clear that the decision to grant super priority under any of the limbs in s 211E(1) is in the full discretion of the courts: see [59] of the judgment.

For s 211E(1)(a), the Court noted that whilst it is not a condition for the applicant to show unavailability of other funds in order to obtain super priority, it is prudent for an applicant to nevertheless adduce some evidence of reasonable attempts at trying to secure financing on a normal basis, ie, without any super priority. This would be a relevant consideration in the exercise of the court’s discretion to grant super priority. The Court stated that this is justified in policy. Since super priority disrupts the expected order of priority of the creditors, it is only where there is some evidence that the company cannot otherwise get financing that it would be fair and reasonable to reorder the priorities on winding up: [61] of the judgment.

For s 211E(1)(b), the Court noted that the US cases interpreting a similar provision have identified a list of factors that are relevant to the court’s exercise of discretion to grant super priority. Whilst noting the relevance of these factors, the Court did not have to go further given that the applicant’s application failed for non-satisfaction of the material condition under s 211E(1)(b) of unavailability of financing without such super priority. The Court noted that this material condition will be satisfied where the applicant can demonstrate that he has expended reasonable efforts to source for other types of financing that did not entail such a priority, ie, financing that did not entail priority over all preferential debts specified in the CA and all other unsecured debts. The inquiry of whether reasonable efforts had been undertaken is a fact-sensitive one: see [69] and [70] of the judgment.

The Court eventually declined to grant the super priority application under either ss 211E(1)(a) or 211E(1)(b) of the CA for the primary reason that there was insufficient evidence of reasonable efforts expended by the applicant to secure financing without any super priority: see [62] and [72] of the judgment.

To view the judgment, please click <here>.

Disclaimer: The above is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court.