In coming to its decision, its first in relation to the new provisions in Section 211 E of the Companies Act (CA) relating to super-priority rescue financing, the High Court took guidance from U.S. Chapter 11 authorities and set out useful guidelines for future applications for super-priority rescue financing.
In the recent case of Re: Attilan Group Ltd [2017] SGHC 283, the Singapore High Court released its first decision in relation to the new provisions in Section 211 E of the Companies Act (CA) relating to super-priority rescue financing.
In coming to its decision, the High Court took guidance from U.S. Chapter 11 authorities and set out useful guidelines for future applications for super-priority rescue financing.
Key Facts
At the end of 2016, Attilan Group Ltd. entered into a subscription agreement with Advance Opportunities Fund 1 (the “Subscriber”) pursuant to which the Subscriber would subscribe for convertible loan notes, which could be converted into shares in Attilan. The subscription was to take place over several tranches and sub-tranches.
Subsequently, Attilan ran into financial difficulties, and had a suit instituted against it by Phillip Asia Pacific Opportunity Fund Ltd. Thereafter, the Subscriber refused to subscribe further under the subscription agreement.
Attilan sought the court’s leave to convene a creditors’ meeting to approve a scheme of arrangement under s 210(l) of the CA to restructure and turnaround its financial affairs. As part of this scheme of arrangement, Attilan also applied to the court under Sections 211E(1)(a) and (b) of the CA for the further subscriptions by the Subscriber to be treated as super-priority rescue financing. Sections 211E(1)(a) and (b) of the CA are as follows:
- An order that if the company is wound up, the debt arising from any rescue financing obtained, or to be obtained, by the company is to be treated as if it were part of the costs and expenses of the winding up mentioned in section 328(1)(a);
- An order that if the 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 the preferential debts specified in section 328(1)(a) to (g) and all other unsecured debts, if the company would not have been able to obtain the rescue financing from any person unless the debt arising from the rescue financing is given the priority mentioned in this paragraph.
Phillips Asia and certain other creditors opposed both of Attilan’s applications.
Decision
The High Court allowed Attilan’s application to convene a creditors’ meeting, but disallowed the application for the Subscriber’s further subscriptions to be given super-priority status.
In relation to the application under Section 211(1)(a) of the CA, the court reviewed §364(b) of U.S. Chapter 11, and the cases of In re Johnson Rubber Company, Inc. et al Case No 07-19391 (Bankr, N.D.Ohio, 2008) and In re Ames Department Stores, Inc. 115 BR 34 (Bankr, S.D.N.Y., 1990).
The court held that the rule in Johnson that “reasonable efforts” must be shown to have been expended in obtaining “financing on an unsecured basis” did not apply to an application under Section 211E(1)(a), as the language in Section 211E(1)(a) and §364(b) was different. However, the broader point that the applicant should expend reasonable efforts to secure other types of financing would go toward the court’s discretion to grant the application for super-priority.
In this respect, the court held that one of the factors it would consider in deciding whether to grant super-priority under Section 211E(1)(a) was whether an applicant had taken reasonable attempts at trying to secure financing on a normal (non-super-priority) basis. This was even though it was not a condition for the grant of super-priority under Section 211E(1)(a).
The court also considered the qualification in Johnson that there is no need to demonstrate availability of unsecured financing under §364(b) where the “circumstances reasonably dictate that such efforts would be to no avail.” The court held that this was not the case here, as Attilan had not shown it was in objectively such abysmal financial health that no financial aid could have been reasonably received without any offer of super-priority.
In this case, the court found that there was insufficient evidence of any efforts to secure financing without any super-priority.
In relation to the application under Section 211E(1)(b) of the CA, the court reviewed §364(c) of U.S. Chapter 11 and the cases of In re Western Pacific Airlines, Inc. 223 BR 567 (Bankr, D.Colo., 1997) and In re Mid-State Raceway, Inc. 323 B.R. 40 (Bankr, N.D.N.Y., 2005).
The court held that, in the context of Section 211E(1)(b), an applicant must demonstrate that reasonable efforts had been undertaken to explore other types of financing that did not entail super-priority. This would include, for example, evidence of failed negotiations and attempts with other potential lenders.
The court held that what would amount to reasonable efforts is a question of fact that would be determined on a case-by-case basis. It does not mean that the debtor must show he had sought credit from every possible source. In this respect, the court found U.S. cases, such as Ames, Mid-State Raceway and In re The Crouse Group, Inc. 71 BR 544 (Bankr, E.D.Pa., 1987) to be useful in providing guidance on what was reasonable.
In this case, the court found that Attilan had not demonstrated that it had undertaken reasonable efforts to source for financing without super-priority. Although Attilan stated on affidavit that it had approached and discussed with various parties to source for financing, there was no evidence whether these discussions were in respect of financing without the super-priority terms envisaged in Section 211E(1)(b). There was also no evidence backing Attilan’s bare assertion that the terms imposed by the Subscriber were the “best possible that could be obtained by the Applicant.”
As for Attilan’s offer of super-priority to Phillip Asia, this attempt was irrelevant for two reasons. First, this was not an effort by Attilan to source for financing without super-priority. Second, the offer was only made after Attilan had taken out the application for super-priority.
The court also held that it was not necessary for the proposed financing to be entirely new to qualify as “rescue financing” under Section 211E. If the existing creditor was obliged to inject funds, that would not qualify as “rescue financing.” If, however, the injection of the funds was at the option of the creditor, and its exercise could be made contingent on its obtaining super-priority status for those injected funds, then such funding could qualify as “rescue financing.”
Key Takeaways
The decision in Attilan provides certain key guidelines for parties seeking to apply for super-priority rescue funding:
- It is crucial to adduce evidence that reasonable steps have been taken to secure financing without super-priority status. This appears to be necessary regardless of the particular limb of Section 211E(1) under which the application is made. Bare assertions, even if made on oath, are insufficient.
- It is necessary to set out which particular limb of Section 211E the application for super-priority rescue financing is being made.
- The court will look to U.S. Chapter 11 authorities for guidance on the applicable principles in deciding whether to approve super-priority status.
- Existing financing can qualify as rescue financing under Section 211E, so long as the existing creditor is not under an obligation to continue financing.
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