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03 May 2019
Application for super priority rescue financing under Section 211E(1)(b) of the Companies Act
Applicants must undertake reasonable efforts to explore other financing
Other factors to consider under Section 211E(1)(b) of the Companies Act
Why was AGL unsuccessful in its super priority application?
Business quick-start financing
On 8 April 2019 Asiatravel.com Holdings Ltd (ATH) and its subsidiary, AT Reservation Network Pte Ltd (ATRN), (the applicants) obtained Singapore's first super priority order for rescue financing pursuant to Section 211E(1)(b) of the Companies Act (Cap 50, 2006 Rev Ed). The Honourable Justice Kannan Ramesh granted the order giving priority to the debt arising from the rescue financing over all of the applicants' unsecured and preferential debts (as specified in Sections 328(1)(a) to (g) of the Companies Act) – a crucial step in the restructuring of the applicants by way of a scheme of arrangement with the creditors.
ATH is a public company listed on the Catalist of the Singapore Exchange Trading Limited (the SGX). The applicants ran an online travel platform through which they sold travel products, including hotel rooms, flights and tours. The applicants ran into financial difficulty and on 7 August 2018 filed applications with the Singapore High Court seeking moratoria against enforcement actions and legal proceedings by creditors under Section 211B of the Companies Act. The moratoria were extended on 7 September 2018. The Singapore Tourism Board decided to suspend the applicants' travel agent licence on 5 October 2018 and, as a result, they ceased business operations.
Under Section 211B of the Companies Act, companies can avail themselves of an automatic stay upon the filing of a stay application and pending the application's formal hearing. Section 211B of the Companies Act was introduced as part of the amendments to the Companies Act in May 2017.
In November 2018 the applicants found an investor that was willing to invest up to S$6.5 million in them in exchange for shares if their existing debts were compromised by way of a scheme of arrangement. As the investor also operates in the tourism industry, the parties agreed to revive the applicants' business instead of assuming a new business or acquiring new assets.
However, in order to obtain the SGX's approval in principle for the issuance of new shares to the creditors and the investor, and for the resumption of trading of ATH's shares, ATH had to be an ongoing concern with an existing business. In view of this, the applicants negotiated with the investor for S$1.5 million of the S$6.5 million investment to be channelled towards reviving their business (the so-called 'business quick-start financing'). The business quick-start financing was to be invested before the schemes of arrangement's approval. As a result, the investor required the protection afforded by the grant of super priority over the business quick-start financing.
On 21 January 2019 the applicants applied under Section 211E(1)(b) of the Companies Act for the business quick-start financing to be granted priority over all of the preferential debts specified in Sections 328(1)(a) to (g) of the Companies Act and all other unsecured debts. Section 211E(1)(b) of the Companies Act was also part of the 2017 amendments to the Companies Act.
In order to apply for super priority for rescue financing under Section 211E of the Companies Act, a company must have made an application under Sections 210(1) or 211B(1) for:
Under Section 211E(1)(a) of the Companies Act, rescue financing is treated as part of the costs and expenses of the winding up mentioned in Section 328(1)(a)of the act. The High Court in Re Attilan Group Ltd ( 3 SLR 898) held that the applicant should adduce some evidence of reasonable attempts to secure financing without any super priority to move the court to exercise its discretion, even though it is not a condition that financing would not be obtained but for the grant of super priority.
Under Section 211E(1)(b) of the Companies Act, rescue financing is granted priority over all of the preferential debts specified in Sections 328(1)(a) to (g) of the act and all other unsecured debts. Applicants must satisfy the courts that they would be unable to obtain rescue financing from any party unless the debt arising from the rescue financing is given this priority.
Under Section 211E(1)(c) of the Companies Act, rescue financing is secured by:
Applicants must satisfy the courts that they would be unable to obtain the rescue financing from any party unless the debt arising from the rescue financing is given this priority.
Under Section 211E(1)(d) of the Companies Act, rescue financing is secured by a security interest on property of the company that is subject to an existing security interest of the same priority as or a higher priority than that existing security interest if:
Re Attilan is the only reported decision on an application for super priority under Section 211E of the Companies Act. In Re Attilan, the applicant (AGL) applied unsuccessfully for super priority under Sections 211E(1)(a) and (b) of the Companies Act in respect of a subscription of convertible equity-linked notes (the subscription).
The High Court in Re Attilan stated that applicants must demonstrate that reasonable efforts have been undertaken to explore other financing that does not entail super priority. While this was only one of the factors to be considered by the court in exercising its discretion on whether to grant a super priority application under Section 211E(1)(a) of the Companies Act, it is a material condition stated in Section 211E(1)(b) of the act.
The High Court stated that the following factors from US cases are relevant considerations in the exercise of its discretion in adjudicating a super priority application:
Nonetheless, the High Court stated that most of the factors from US cases were not directly relevant, as AGL's application had failed because it could not show the unavailability of financing without super priority under Section 211E(1)(b) of the Companies Act. Therefore, the court stated that it would consider the above factors more closely when the issue specifically arose.
In Re Attilan, the High Court provided two main reasons for declining to grant super priority status to the proposed financing under the subscription.
AGL did not undertake reasonable efforts to secure financing without super priority
First, the court was of the view that AGL had failed to provide evidence of the unavailability of financing without super priority under Sections 211E(1)(a) and (b) of the Companies Act. AGL had failed to demonstrate that it had undertaken reasonable efforts to source for financing without the type of super priority sought.
AGL did not demonstrate that the terms of the subscription were the best available
With respect to AGL's application under Section 211E(1)(b) of the Companies Act, the court stated that AGL's belief that the terms of the subscription were the "best possible that could be obtained" was not backed up by any credible evidence. The court explained that evidence should have been deposed to put on record that alternative sources of financing had been sought but had been rejected. For example, AGL could have produced correspondences relating to rejections or negotiations with other financial institutions or possible rescuers. The court stated that AGL had provided mere unsubstantiated assertions.
The following factors may have differentiated the applicants' business quick-start financing from AGL's proposed financing under the subscription, which may have resulted in their success in obtaining the super priority order:
This case deals only with an application under Section 211E(1)(b) of the Companies Act for an order that if a company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company is to have priority over all of the preferential debts specified in Sections 328(1)(a) to (g) of the act and all other unsecured debts. Singapore has yet to see a successful application under Sections 211E(1)(a),(c) and (d) of the Companies Act. The decision in Re Attilan left unanswered questions regarding the factors that the courts will consider in an application for super priority under Section 211E(1)(a) of the Companies Act for an order that if the company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company will be treated as if it were part of the costs and expenses of the winding up mentioned in Section 328(1)(a) of the Companies Act. It also remains to be seen what would constitute "adequate protection for the interests of the holder of that existing security interest" under Section 211E(1)(d) of the act.
Nonetheless, this groundbreaking decision provides valuable guidance to insolvency practitioners regarding future applications for super priority rescue financing. This will hopefully increase the attractiveness of distressed financing as an investment opportunity in Singapore, fostering its development as an insolvency and restructuring hub.
For further information on this topic please contact Tan Meiyen, Thenuga Vijakumar, Dennis Oh or Averill Chow at Oon & Bazul LLP by telephone (+65 6223 3893) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Oon & Bazul LLP website can be accessed at www.oonbazul.com.
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