Mandatory Disclosure in Corporate Debt Restructuring via Schemes of Arrangement: A Comparative Approach
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By Casey Watters (Bond University) and Wai Yee Wan (City University of Hong Kong)

Casey Watters
Wai Yee Wan

Creditors often face significant information asymmetry when debtor companies seek to restructure their debts. In the United Kingdom, it is mandatory for debtor companies seeking to invoke a court’s jurisdiction to restructure their debts via schemes of arrangement (schemes) to disclose material information in the explanatory statement. This information enables creditors to make an informed decision as to how to exercise their votes in creditors’ meetings. 

English schemes have been transplanted into common law jurisdictions in Asia, including Hong Kong and Singapore. However, due to the differences in the shareholding structures and the kinds of debts prevalent in restructurings in the UK as compared to those in Hong Kong and Singapore, this transplantation gives rise to the question of whether the English-based scheme process adequately addresses information asymmetry in the local context. Drawing from the experiences of Hong Kong and Singapore, our paper, supported by the Research Grants Council of the Hong Kong SAR, argues that there are three principal concerns in the current disclosure regimes: how debtors disclose the liquidation analysis or alternative to restructuring via schemes; how debtors disclose advisors’ fees; and the equality of provision of information in the scheme process. 

The key objective of mandatory disclosure for schemes parallels the objective of disclosure requirements for shareholder meetings under English corporate and securities laws:  reducing information asymmetry faced by the shareholders. Failure to make adequate disclosures to creditors can lead courts to refuse to approve the scheme. Mandatory information disclosure in the course of securing a vote on the restructuring plan also features prominently in Article 8 of the EU Directive on Preventive Restructuring Frameworks 2019/1023. 

However, there are specific risks in Hong Kong and Singapore that are either not present in the UK or not present to the same extent under traditional English schemes. First, shareholdings in listed companies in Hong Kong and Singapore are generally much more concentrated than in the UK. As a result, management’s interests are aligned with the controlling shareholders even when the company is “out of money.” In addition, schemes resolve all debts in Hong King and Singapore, rather than financial debts alone, as in the UK. Finally, retail investors have a significantly higher presence in debt instruments falling under the court’s jurisdiction. These different circumstances raise the question of whether the current disclosure regime sufficiently addresses risks arising from information asymmetry and provides the right incentives for debtors to disclose relevant and high-quality information for the creditors to make an informed decision when voting. 

While Hong Kong’s scheme framework has largely remained unchanged since its enactment, Singapore has amended its scheme framework to include several debtor-in-possession features of Chapter 11 of the US Bankruptcy Code (Chapter 11), such as the availability of super-priority, cross-class cramdowns, and pre-packs. However, Singapore’s disclosure requirements continue to be largely based on English case law.

Drawing from the US approach towards disclosure in Chapter 11, we argue that disclosure of sufficient information on the company’s valuation should be a central focus of the explanatory statement and that the restructuring support agreement (RSA) should be carefully reviewed. We also argue for an ex ante approach to disclosure statements under schemes of arrangement at the stage in which the court decides rather to grant permission to convene the scheme meetings. As both Hong Kong and Singapore have sophisticated and experienced judiciaries, earlier involvement of the courts may provide greater confidence in the process for investors by compelling the disclosure of key financial information. 

In our analysis of the practice of schemes, we reviewed approved schemes involving listed companies in Hong Kong and Singapore for the five-year period covering 2015-2019.  We obtained information on disclosures from announcements made by listed companies, explanatory statements from publicly available sources, stock exchange websites, and information agents for bond documentation. Where possible, we compare the disclosures to creditors with the separate disclosures to shareholders published in shareholder circulars. We conclude that the disclosure requirements under the traditional English scheme model are insufficient to adequately address risks to investors and creditors in Hong Kong and Singapore. In order to provide investors with greater confidence in the scheme process, additional disclosure in the explanatory statement regarding the value of the company, and ex ante review of explanatory statements and RSAs are needed. 

The full paper can be accessed here. 

A version of this post first appeared on the Oxford Business Law Blog.

Singapore Schemes of Arrangement: Empirical and Comparative Analysis
by | posted in: Bankruptcy Reform, Bankruptcy Roundtable Updates, International and Comparative | 0

By Wai Yee Wan (City University of Hong Kong), Casey Watters (Bond University), and Gerard McCormack (University of Leeds)

Wai Yee Wan
Casey Watters
Gerard McCormack

The scheme of arrangement, brought to Singapore through a transplantation of English law, provides one of the most flexible debt restructuring tools for companies. In 2017, Singapore enacted substantial reforms to its insolvency laws, transplanting elements of US Chapter 11, including a moratorium, rescue financing, and cross-class cramdown, into the flexible Singapore restructuring regime. Our paper (published recently in the American Bankruptcy Law Journal) addresses the effectiveness of English-modelled schemes as debt-restructuring tools in Singapore, both pre-2017 reforms and as a hybrid with elements of Chapter 11.

The English scheme of arrangement has been spoken of as a model for ‘early stage’ restructuring procedures. Although the scheme functions as Singapore’s de facto debtor-in-possession restructuring regime, it does not have any bankruptcy or insolvency stigma since it is a procedure based on company law rather than insolvency law. It is activated by the filing of documents with the court and an application to the court to convene meetings of relevant creditors to approve the scheme. The meeting of creditors under schemes is substantially similar to those conducted in Chapter 11 cases under § 341 of the US Bankruptcy code. Creditors whose rights are altered by the scheme are grouped into classes with creditors holding similar legal rights.

This is the first empirical study to date that comprehensively examines schemes of arrangement, including non-reported schemes, over a period. To this end, it employs a mixture of quantitative and qualitative data. To assess the schemes framework in Singapore, we conducted a study of schemes in three parts based on data availability. First, we examine the filings in court-sanctioned schemes of arrangement for the period 1996–2004 (with reported judgments). This period covers the Asian financial crisis of 1997 and includes private and publicly traded companies. Second, similarly, we examine the filings for schemes of arrangement with reported judgments for the period 2006–2015. This period covers the global financial crisis of 2008. We extended the database by including filings in court-sanctioned schemes of arrangement for SGX-listed companies, including non-reported judgments. Third, we examined the filings in court-sanctioned schemes between January 1, 2016 and May 22, 2019. May 22, 2019 was selected as it is the second anniversary from the date that the 2017 reforms came into force. We are able to have a wider sample size because cases during the latter period were tracked by the Supreme Court Registry. On examining the filings, we coded a number of variables related to the schemes of arrangement, including financial information related to the companies, class composition and outcomes of the schemes. Such data were manually collected and coded from all the filings, which were provided by the Singapore Supreme Court.

From our analysis of the data, we identified multiple characteristics of successful schemes, the most significant of which are controlling shareholder support and availability of new financing, often provided by the controlling shareholder. When present, disputes have centred on insufficient disclosure, with informational asymmetry a substantial concern identified in the study. Liquidation values were often missing and, when present, lacked a detailed bases for the stated values.

The results of the empirical study demonstrate the effectiveness of schemes as a debt restructuring tool for large insolvent companies. The scheme reforms, along with other insolvency reforms in Singapore, including adoption of the UNCITRAL Model Law on Cross-Border Insolvency, recent common law developments, and removing a ring-fencing provision that protected domestic creditors at the expense of foreign creditors, provide additional tools and lower barriers to restructuring in Singapore. The flexibility of schemes coupled with Chapter 11 tools make schemes an attractive debt restructuring option for many insolvent companies.

The full article is available here.

For related Roundtable posts, see Gerard McCormack and Wai Yee Wan, Transplanting Chapter 11 of the US Bankruptcy Code into Singapore’s Restructuring and Insolvency Laws.