Singapore recently implemented a bold set of US Chapter 11 inspired restructuring laws that allow super priority rescue financing over unsecured or secured creditors. In Singapore's first judgment on rescue financing, the Singapore High Court in Re Attilan Group Ltd [2017] SGHC 283 refused an application for rescue financing to be granted priority as a liquidation expense or a debt ranking above preferential debts of the company. The Court described super priority as something that should not ordinarily be resorted to and the courts will be slow to grant an order for super priority unless it is strictly necessary. The Court's cautious approach towards the disruption of the usual order of priority not only brings comfort to existing secured and unsecured lenders but also provided some useful guidance on rescue financing going forward.
Facts of Re Attilan Group Ltd
Attilan Group Limited ("Attilan") is a Singapore incorporated company listed on the main board of the Singapore Exchange. In 2016, Attilan entered into a subscription agreement with Advance Opportunities Fund 1 (the "Subscriber") for the latter to subscribe, over several tranches, to unsecured equity-linked redeemable structured convertible notes issued by Attilan.
After Attilan went into financial difficulties, the Subscriber refused to subscribe further under the subscription agreement. Attilan sought to implement a scheme of arrangement.
The scheme provided for subsequent sums disbursed by the Subscriber under the subscription agreement to be treated as "rescue financing" with super-priority in the event of Attilan's winding up:
(a) as if it were part of the costs and expenses of winding up under Section 211E(1)(a) of the Companies Act; or
(b) with priority over all preferential debts and unsecured debts under Section 211E(1)(b) of the Companies Act.
Decision
1. The Court held that rescue financing could be in the form of a financing by an existing creditor under a pre-existing arrangement. It is not necessary for the proposed financing to be entirely new. It can be additional financing from an existing creditor or it can even be premised on a prior obligation.
2. The Court will consider the following factors in exercising its discretion:-
(a) whether alternative financing without super priority is available;
(b) whether the rescue financing is in the exercise of sound and reasonable business judgement;
(c) whether the rescue financing is in the best interest of the creditors;
(d) whether the terms of the rescue financing are fair, reasonable and adequate; and
(e) whether the terms of the rescue financing are negotiated in good faith and at arm's length.
3. The Court however declined to exercise its discretion to grant super-priority status to further sums to be disbursed by the Subscriber for the following reasons:
(a) the company had not discharged its obligation to use reasonable efforts at securing financing on a normal basis (without any super priority); and
(b) the company was not in objectively such abysmal financial health that normal financing would be impossible.
The Court emphasized that it would be slow to grant super priority unless strictly necessary, and it must be fair and reasonable for the Court to intervene and reorder the priorities of a company on winding up.
Implication for Banks – A Comfort and Caution
1. Existing bank creditors with no intention to grant rescue financing – a Comfort
Existing bank creditors with no intention to grant rescue financing should take comfort from the cautious approach of the Court towards super priority rescue financing which disrupts the order of priority of existing creditors. The grant of super priority will not be ordinarily resorted to and the courts would be slow to do so unless it is strictly necessary. In addition, the distressed company must first use reasonable efforts at securing financing on a normal basis before resorting to super priority rescue financing.
2. Existing bank creditors with an intention to grant rescue financing – a Caution
It is helpful that the Court has clarified that rescue financing could be in the form of a financing by an existing creditor under a pre-existing arrangement. It is not necessary for the proposed financing to be entirely new. However, banks intending to grant rescue financing under pre-existing arrangements still need to show that they are legally not obliged to make additional funding but have elected to do so as rescue financing. This will in turn depend on the existing financing terms such as events of defaults, draw-stop events and bring-forward events that provide for the legal rights of banks to discontinue additional funding. Certain financing structures which involve a rollover of a revolving loan, non-recall of an overdraft, extension of the duration of a bankers guarantee/letter of credit, restructuring, refinancing and roll-ups must also be closely examined to determine the extent to which it can be regarded as additional funding via rescue financing.
Separately, it also appears that the Court is cognizant of existing creditors trying to improve or protect their position via rescue financing. This may take the form of a defensive or offensive rescue financing or a rescue financing with a roll-up, clean-up and/or cross-collateralization. However, rescue financing in whatever form will only be permitted if financing on a normal basis (without any super priority) is not available. In addition, the terms of the rescue financing must also be fair, reasonable and adequate and negotiated in good faith and at arm's length.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
