Deutsche Bank AG and Another v Asia Pulp & Paper Co Ltd

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 29 April 2003
• Neutral Citation: [2003] SGCA 19
• Date: 29 April 2003
• Subject Matter: Discretion exercised by trial judge,Whether real prospect that one or more of statutory purposes would be achieved,Companies,Civil Procedure,Appeals,Factors to be considered before making judicial management order,Companies Act (Cap 50, 1994 Rev Ed) ss 227A, 227B,Interference by appellate court,Receiver and manager,Judicial management order
• Docket Number: Civil Appeal No 95 of 2002
• Published date: 17 December 2003
• Defendant Counsel: Davinder Singh SC, Julian Kwek, Hri Kumar and Tan Boon Khai (Drew and Napier LLC)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Alvin Yeo SC and Nish Shetty (Wong Partnership)

Delivered by Tan Lee Meng J

1 The first appellant, Deutsche Bank AG ("DB"), a foreign bank incorporated in Germany, and the second appellant, BNP Paribas ("BNP"), a foreign bank incorporated in France, have branches in Singapore and are creditors of the respondent, Asia Pulp & Paper Company Ltd ("APP"). DB and BNP claimed that APP owed them around US$193m and US$20m respectively. They jointly petitioned to have APP placed under judicial management pursuant to section 227B of the Companies Act (Cap 50). The petition was dismissed by Lai Siu Chiu J on 22 August 2002 and the appellants have appealed against her decision.

[A] Background

2 APP, which was incorporated on 12 October 1994, is a Singapore holding company for around 150 subsidiary companies in China, Indonesia, Mauritius and the United States (the "APP group"). Its main source of income is the fee it charges for management services provided to its operating subsidiaries around the world. The Widjaja family of Indonesia (the "controlling shareholders") has a majority shareholding in the company through another company, APP Global Limited.

3 The APP group is one of the world’s largest producers of pulp and paper products. Its business in Indonesia, its main market, is conducted through a holding company, PT Purinusa Ekapesada ("Purinusa"), which has 4 major subsidiaries, namely:

(i) PT Indah Kiat ("Indah Kiat");

(ii) PT Pabrik Kertas Tjiwi Kimia Tbk ("Tjiwi Kimia");

(iii) PT Pindo Deli Pulp & Paper Mills ("Pindo Deli"); and

(iv) PT Lontar Papyrus Pulp & Paper Industry ("Lontar Papyrus").

4 The APP group’s China operations are also conducted through a holding company, APP China Group Limited. The China operations involve 6 paper and packaging mills.

5 The APP group is part of the Sinar Mas group, which is also controlled by the Widjaja family. The Sinar Mas group, which is one of Indonesia’s largest conglomerates, has diversified interests in palm oil, timber, paper and financial services. Two Sinar Mas companies, namely PT Arara Abadi ("Abadi") and PT Wirakaya Sakti ("Sakti"), own timber concessions in Sumatra and the Riau Islands and they supply wood to the APP group’s Indonesian subsidiaries.

6 The APP group is presently insolvent. The total consolidated debt of its Indonesian subsidiaries is US$6.5 billion while that of its Chinese subsidiaries is US$3 billion. APP’s own debts amount to around US$7 billion. There are a number of reasons why the APP group found itself in this position. Apart from the fact that the price for pulp and paper has fallen dramatically in recent times, the group’s largest market, Indonesia, was badly affected by the Asian economic crisis in 1997. As the Indonesian rupiah declined in value, the group found it increasingly difficult to service its foreign currency debt.

7 On 12 March 2001, APP announced that it and its subsidiaries would cease to pay their debts ("debt repayment standstill") and would arrange for consensual debt restructuring. The press statement was in the following terms:

On the advice of our financial advisors, Credit Suisse First Boston …, we intend to immediately cease payment of interest and principal on all holding company debt and on debt issued by our subsidiaries and affiliates, the obligations of which are funded by such subsidiaries. In order to allow our operating subsidiaries to continue normal operations, we will be giving priority to servicing our suppliers and trade creditors….

[W]e believe it is in the best long-term interest of the Company and its creditors and we plan to seek a consensual arrangement with our creditors.

8 APP appointed a number of financial and legal advisors to work on various aspects of the restructuring exercise with its creditors. These include Credit Suisse First Boston, who are its advisors on a debt restructuring plan, and JP Morgan, who are its advisors on the disposal of assets. The creditors also formed a number of committees to represent their interests. These include a Bondholders Steering Committee for public bondholders and a Combined Steering Committee for banks, trading companies and export credit agencies.

9 In China, the consensual restructuring of the APP group’s debts appears to have made some progress. However, the pace of the promised restructuring of debts in other places was rather slow and the company’s restructuring proposal in February 2002 was rejected by creditors, including DB. Thereafter, negotiations between the two sides did not yield results that satisfied the appellants.

10 A discussion of APP’s efforts to restructure its debts must take into account the position of its Indonesian subsidiaries and the role of the Indonesian Bank Restructuring Agency ("IBRA"), a state agency, in the unravelling of the APP group’s financial problems. IBRA is in the thick of things because APP’s Indonesian subsidiaries borrowed money in the 1990s from PT Bank Internasional Indonesia Tbk ("BII"), a bank owned by the Sinar Mas group. This bank, which faced a liquidity crisis during the recent Indonesian economic crisis, was placed under the control of IBRA, which has the task of recovering BII’s assets as well as state funds disbursed to this bank. By taking control of BII, IBRA became the largest single creditor of Purinusa, the majority shareholder of APP’s Indonesian subsidiaries. In early 2001, BII granted IBRA security over the assets of APP’s Indonesian subsidiaries under the terms of a settlement agreement. Notwithstanding the debt repayment standstill, some payments had been made to IBRA, prompting the appellants to complain about the preferential treatment afforded to this state agency. IBRA, which has now taken the lead in restructuring efforts in Indonesia, has opposed the petition for a judicial management order.

11 In Singapore, some creditors commenced legal proceedings against APP. As at 20 June 2002, APP’s creditors had instituted more than 20 separate actions against the company. These included two winding-up petitions, which have been stayed pending the proposed restructuring of the company. As for the appellants, they filed their petition for a judicial management order on 23 June 2002. Their grounds for such an order are that the company and its management had:

(i) seriously delayed the restructuring process and failed to agree on the fundamental principles on which a restructuring could progress;

(ii) not drawn up a restructuring plan that merits serious consideration by creditors;

(iii) failed to co-operate with professional advisors and thereby hindered their review of the APP group’s financial position;

(iv) engaged in transactions that suggested that substantial amounts of money were being siphoned from the company into companies or organisations related to the Widjaja family;

(v) wilfully breached various undertakings in facility agreements and preferred some creditors over others; and

(vi) failed to establish any satisfactory mechanism to control the operating cash-flow of the APP group and direct that towards meeting obligations.

12 The appellants also complained that KPMG, which had been appointed by creditors to conduct an independent audit of the company, was unable to meet the deadline and revised deadlines for its report because of APP’s unwillingness to provide access to information relating to, inter alia, the company’s operations in China and inter-related company transactions. The appellants said that without this report, the company’s debt restructuring proposals cannot be properly evaluated.

[B] The Trial Judge's Decision

13 After a hearing that lasted 7 days, Lai J, who thought that the filing of the petition for a judicial management order prompted APP to hasten the pace of restructuring to stave off judicial management, accepted that many of the appellants’ complaints against APP did not lack substance. However, she noted that there was no overwhelming support for or against the making of a judicial management order and thought that "it would be a pity to scuttle IBRA’s efforts (albeit at the last minute) to restructure the group’s debts by consensus". She saw no harm in allowing the Widjaja family one last chance to show its sincerity in restructuring the group’s debts. She added that "whatever misdeeds the Widjaja family had committed in the past were not going to be unravelled retrospectively by an order for judicial management" and appointing judicial managers at this stage would only add another layer to the costs to be borne by APP and its subsidiaries. Such expenditure could be saved for payment to creditors. She thus dismissed the petition with costs.

[C] The Appeal

14 At the outset, it must be emphasized that the appeal before us concerns Lai J’s decision in August 2002 and is not a fresh hearing as to whether or not a judicial management order ought to be made in the light of events which have occurred after the petition was dismissed by her. As such, the attempt by both parties to furnish evidence as to whether or not the management of APP has done enough with respect to the restructuring of the company’s debts since August 2002 was quite unnecessary.

15 A discussion of whether or not an order for judicial management should have been made ought to begin with a consideration of sections 227(A) and 227(B) of the Companies Act, which provide as follows:

Section 227(A)

Where a company or where a creditor or creditors of a company consider that –

(a) the company is or will be unable to pay its debts; and

(b) there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up,

an application may be made to the Court under section 227B for an order that the company should be placed under the judicial management of a judicial manager.

Section 227B

(1) Where a company or its directors (pursuant to a resolution of its...