Case Summaries

Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd [2019] SGCA 29


30 April 2019

Case summary

Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd
[2019] SGCA 29
Civil Appeal No 99 and 100 of 2018


Decision of the Court of Appeal (delivered by Sundaresh Menon CJ):

Outcome: CoA set aside leave granted under s 210(1) Companies Act for a company to convene a creditors’ meeting to consider a proposed scheme of arrangement on the basis that the company had failed to provide the minimal level of financial disclosure reasonably necessary to satisfy the court that fair conduct of the meeting was possible.


The facts

1          Empire Capital Resources Pte Ltd (“Empire Capital”) is an investment holding company incorporated in Singapore with a nominal share capital. It is a member of the Berau Group of companies, which is one of the world’s largest coal producers (“the Berau Group”). The Berau Group faced financial difficulties since a crash in global coal prices in 2014 to 2015. In April 2017, Empire Capital filed the present application under s 210 of the Companies Act (“CA”) seeking, amongst other things, leave to convene a creditors’ meeting to consider and vote on a proposed scheme of arrangement (“the Proposed Scheme”). This was the Berau Group’s fourth set of restructuring proceedings in Singapore.

2          The Proposed Scheme sought to compromise two sets of notes issued by Berau Capital Resources Pte Ltd (“BCR”) and PT Berau Coal Energy Tbk (“BCE”) respectively on behalf of the Berau Group. The first set issued in 2010 by BCR for an aggregate sum of US$450m was due for maturity in July 2015 (“the 2015 Notes”). The second set issued in 2012 by BCE for an aggregate sum of US$500m was due for maturity in March 2017 (“the 2017 Notes”). The security packages for the two sets of notes largely overlapped. The most significant security interest was the accounts governed by the Cash and Accounts Management Agreement (“CAMA”), under which the Berau Group was obliged to pay and hold all revenue and receipts from the sale of coal for the benefit of the holders of the 2015 and the 2017 notes. Save that BCR was not a guarantor of the 2017 Notes, the 2015 and the 2017 Notes were also guaranteed by the same entities in the Berau Group.  

3          In essence, the Proposed Scheme provided for the full and final release of all liabilities under the 2015 and the 2017 Notes. In consideration, PT Berau Coal (“Berau Coal”), the main operating entity of the Berau Group, would issue new notes on a dollar-for-dollar basis on certain terms (“the New Notes”). The Berau Group urged the creditors to vote in favour of the Proposed Scheme as the creditors purportedly stood to recover less in the event of a liquidation than under the Proposed Scheme.

4          Pathfinder Strategic Credit LP and BC Investment LLC (collectively, “the Minority Creditors”) opposed the leave application. Out of the US$800m in aggregate outstanding principal under the 2015 and the 2017 Notes, they collectively held notes with a face value of around US$112m.

5          The High Court judge (“the Judge”) granted leave for Empire Capital to convene the creditor’s meeting, but took the position that the 2015 and the 2017 Noteholders should be grouped into two separate classes for the purpose of voting on the Proposed Scheme.

6          The Minority Creditors appealed against the Judge’s decision to grant leave for the creditors’ meeting to proceed, and Empire Capital appealed against his decision that the creditors should be separated into two classes.

Decision on appeal

7          In recent years, schemes of arrangement have become an increasingly popular tool for companies seeking to effect a debt restructuring. These reasons include the fact that it permits the debtor to remain in control of the company, and further permits a statutory majority of the company’s creditors to impose their views even over the objections of a minority group of dissentients. For the same reasons, safeguards to protect the interests of the minority creditors, and of the creditors as a whole, are especially important (at [27]).

8          Generally, a less onerous standard of disclosure is required of the applicant-company at the stage where it seeks leave to convene a creditors’ meeting to vote on the proposed scheme (“the leave stage”), than at the subsequent stage where court approval is sought of a scheme passed by the requisite majority of creditors (“the sanction stage”) (at [48]). However, there remains a minimal standard of disclosure that a company must satisfy before leave will be granted under s 210(1) of the CA (at [50]).

9          At the leave stage, the company bears a duty of unreserved disclosure to assist the court in determining whether and how the creditors’ meeting is to be conducted. This requires at least such disclosure as would enable the court to determine the issues that it must properly consider at this stage, such as the classification of creditors, the proposal’s realistic prospects of success, and any allegation of abuse of process (at [50]). In addition, the company must provide such financial disclosure in such manner and to such extent as is reasonably necessary for the court to be satisfied that fair conduct of the creditors’ meeting is possible (at [51]).

10        The court is not unappreciative of the concerns of and difficulties faced by applicant-companies who seek refuge of the scheme regime in times of financial turmoil. Disclosure obligations that are oppressive may fetter genuine attempts at restructuring, especially by smaller companies lacking resources and bargaining power. Thus, it is only in clear and obvious cases that the court should intervene at the leave stage solely on the ground of inadequate disclosure. Although this logic cannot be taken to its extreme, the adequacy of disclosure is to some extent a matter of commercial risk for the creditors themselves to weigh against other commercial factors (at [57]).

11        On the facts, Empire Capital had failed to provide the scheme creditors with the minimal level of financial disclosure reasonably necessary to satisfy the court that fair conduct of the creditors’ meeting was possible (at [71]).

12        First, there was a complete lack of updated financial information about the companies whose debts are sought to be compromised under the Proposed Scheme. Amongst other things, no financial disclosure (whether audited or otherwise) had been made in relation to any member of the Berau Group other than Berau Coal, even though the Proposed Scheme sought to compromise the debts of 10 other obligors within the Berau Group. Further, even in relation to Berau Coal, the latest set of audited accounts disclosed was for the year 2014, which was almost four years prior to the hearing of the appeals (at [62]).

13        Second, despite the Minority Creditors’ specific complaint from the outset that the Berau Group had wrongfully diverted at least US$150m from the CAMA accounts from around April 2016, there had been a woeful absence of information disclosed by Empire Capital concerning these funds (at [64]).

14        A proposed scheme may compromise liabilities owed by third parties to the applicant-company’s creditors if there is a sufficient nexus or connection between the release of those liabilities and the relationship between the company and the creditors (at [77]). On this basis, the Proposed Scheme would appear to fall within the scope of s 210(1) of the CA, as the release of the debts owed by other members of the Berau Group as co-guarantors to the noteholders was evidently closely related to the creditor-debtor relationship between these noteholders and Empire Capital – the debts arose out of the same issues and the discharge of one would extinguish the right to pursue the other (at [80]).

15        Provisionally, the Court of Appeal held that the 2015 and the 2017 Noteholders could properly be classed together for the purposes of considering and voting on the Proposed Scheme (at [91]). The differences between the relative positions of the noteholders under the Proposed Scheme and in an insolvent liquidation did not appear material (at [90]).

16        The threshold for a finding of abuse of process is necessarily a high one, particularly in the context of scheme applications where regard must be had to the inherently dynamic nature of the restructuring process (at [94]). On the facts, there was insufficient evidence for a finding that Empire Capital’s application amounted to an abuse of process, as there had been genuine changes in the restructuring plans put forward in the various applications, and the ad hoc creditors’ committee itself had also changed significantly over time both in terms of its positions and its composition (at [95]).

17        On account of the woefully inadequate disclosure, the Court of Appeal set aside the order below granting leave under s 210(1) of the CA for Empire Capital to proceed with the creditors’ meeting to consider the Proposed Scheme (at [96]).

This summary is provided to assist in the understanding of the Court’s grounds of decision. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.