[Originally published in Skrine’s Legal Insights Issue 2/2013]
The Singapore Court of Appeal in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and Others v TT International Ltd and another appeal  SGCA 53 revisited its earlier decision in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and Others v TT International Ltd and another appeal  SGCA 9 (“TT International No. 1”) (my earlier commentary on TT International No. 1 is found here) and laid down important guidelines on the disclosure of fees to be paid to a scheme manager in a scheme of arrangement.
Arising from the decision of TT International No. 1, the Court had ordered for meetings of the creditors to be called. At these meetings, the creditors approved a scheme of arrangement (“Scheme”) which was thereafter sanctioned by the Court. Under the terms of the Scheme, a Monitoring Committee made up of representatives from some of the major creditors was set up to oversee the implementation of the Scheme by the appointed Scheme Manager (“Scheme Manager”).
Close to a year after the sanction, during the implementation of the Scheme, the Monitoring Committee discovered that the company had prior to the sanction of the Scheme, entered into a success fee arrangement with the Scheme Manager’s firm. The Scheme Manager would be paid for the time costs incurred as well as a Value-Added Fee (“VAF”) which was a success-based fee. Under the VAF component, the greater the amount of the creditors’ debt that is written off or extinguished, the greater the quantum of the remuneration received by the Scheme Manager’s firm. By that stage, it was estimated that the quantum of the VAF was between S$15 million to $30 million.
The Monitoring Committee informed the Court of Appeal of the existence of this success fee arrangement and requested that the Court direct that the VAF be assessed in court. The key issue before the Court of Appeal was whether the VAF should have been disclosed to the creditors and/or the Court prior to the sanction of the Scheme.
COMPANY’S DUTY TO DISCLOSE MATERIAL INFORMATION
The Court of Appeal emphasised that transparency in the affairs of a distressed company through making available all material information that could impinge on the financial interests on creditors was essential. This duty of disclosure on the company has been emphatically declared to be an independent principle of law entirely distinct from the disclosure requirements mandated by statute.
The Court of Appeal took into consideration the prevailing practice of success-based fee remuneration of scheme managers both in Singapore and abroad. It was found that it was not uncommon for some scheme managers or financial advisers to include a success-based element in their fees for the debt restructuring work which they carried out. There was also no established practice in Singapore of such success-based fees of scheme managers being voluntarily disclosed to the creditors or the courts. Nonetheless, the Court of Appeal held that a commercial practice, no matter how widespread, does not have the force of law if it is contrary to legal principle.
In considering the legal issues, the Court of Appeal held that the company’s obligation to disclose all material information should cover liabilities such as the VAF which it had incurred immediately prior to the sanction of the Scheme. The VAF was a contingent liability incurred by the company which would have crystallised the moment the Scheme was successfully implemented. Ordinarily, such contingent liabilities would have been disclosed but the Scheme Manager’s firm was found to have been conveniently classified as an excluded creditor and therefore did not have to submit a proof of debt.
The Court did not view favourably the current practice of companies making use of the device of “excluded creditors” in order to not reveal to other creditors the actual or contingent liabilities, which may be very substantial. That practice would permit directors of an insolvent company to commit the company to a substantial contingent financial commitment that will come from an unguarded pocket. It held that the law does not allow such a practice as it can be used to conceal all kinds of financial arrangements which may prejudice the interests of the scheme creditors.
Therefore, it was held that the company was under a legal obligation to disclose all material information to the scheme creditors to enable them to make informed decisions on whether or not to support the Scheme. The company breached this obligation by failing to disclose the VAF to the scheme creditors. Furthermore, this information should have also been disclosed to the Court at the sanction stage.
SCHEME MANAGER’S DUTY OF DISCLOSURE
In referring to TT International No. 1, the Court of Appeal emphasised that it has been held that the Scheme Manager has to act in good faith towards the scheme creditors and must not mislead the scheme creditors or suppress material information.
In this case, the Scheme Manager had placed itself in a position of conflict, where the quantum of the VAF which would accrue to the Scheme Manager’s firm was dependant on the value of the debts which would be adjudicated upon by the proposed Scheme Manager himself. The Court of Appeal held that this conflict could only be resolved by the informed consent of the scheme creditors. There was no such informed consent because of the Scheme Manager’s (and also the company’s) failure to inform the scheme creditors of the VAF.
The Court of Appeal considered that the parties with a genuine interest to ensure that the proposed Scheme Manager is being reasonably remunerated would be the scheme creditors who would determine whether the scheme is commercially viable (and preferable to liquidation). It was therefore only fair, reasonable and right that both the company and the Scheme Manager disclose to the scheme creditors and the Court the terms of the proposed Scheme Manager’s appointment prior to the sanction of the Scheme.
REMUNERATION FOR INSOLVENCY PRACTITIONERS
In considering the above points, the Court of Appeal also considered that the issue of potentially exorbitant fees for insolvency practitioners was a matter of public interest. Central to this problem is the fact that their fees come from an unguarded pocket that in reality belongs to the creditors and not the financially distressed company.
The Court of Appeal found that the wildly divergent interests of the stakeholders often allow insolvency practitioners almost carte blanche to determine (without rigorous oversight) their levels of remuneration even for the most mundane tasks.
The Court of Appeal held as a matter of general principle, the determinative consideration as to the fair and reasonable remuneration for financial advisors/scheme managers should be the value contributed to the process in terms of tangible results for the creditors and the company, as opposed to the mere quantum of debt involved or the time spent.
CONSEQUENCES OF THE BREACH OF DUTY
As the company and the Scheme Manager were in breach of their common law duty of disclosure, the Court of Appeal found that ordinarily, the Scheme should be set aside and put to a fresh vote because it might not have been approved by the scheme creditors if they had known about the VAF. However, as the Scheme had been implemented for more than two years, the Court found that it was not practical to set it aside without causing more harm to the company and the scheme creditors.
Therefore, the Court of Appeal ordered the relevant parties to the dispute to try to reach an agreement on the proper amount of professional fees to be paid out. It also ordered that, if parties are unable to reach an agreement, then the fees would be assessed by a High Court Judge.
If the matter were to proceed to assessment, then the Court of Appeal laid down the following guiding principles. The Court would first consider the value (in this case the benefits, from a holistic and not mathematical standpoint, accruing to the company and the creditors) contributed by the Scheme Manager’s firm. Other factors would include the nature of the work involved, the time spent, the assistance provided, the scope of work and reasonable disbursements incurred.
Financial advisers or scheme managers in Malaysia may also include success-based components in their fee arrangements and there is no mandatory requirement to disclose such fee arrangements in the scheme papers.
Although decided in a Singapore context, the principles outlined in this decision should be equally applied here. The onus is on both the company and the scheme manager to disclose the fee arrangements of the company’s financial advisers or the proposed scheme manager to the scheme creditors and to the Court in a scheme of arrangement. This ensures that the informed consent of the scheme creditors is obtained and underlines the uncompromising need for transparency in relation to material information.
The aforesaid common law duty of disclosure imposed on the company and the proposed scheme manager would strike a sound balance between valuing the work done by financial advisors/scheme managers and safeguarding the interests of the creditors.
The decision is also significant in giving some guidance on the principle that should guide the determination of remuneration for such financial advisors/scheme managers in a scheme of arrangement. Rather than a mathematical scale based on the quantum of debt or time spent, the primary factor should be the value contributed to the process in terms of results for the creditors and the company.