Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ,Judith Prakash JA,Steven Chong JA
• Judgment Date: 30 April 2019
• Neutral Citation: [2019] SGCA 29
• Year: 2019
• Published date: 18 May 2019
• Hearing Date: 23 November 2018,14 September 2018,28 January 2019
• Plaintiff Counsel: Philip Jeyaretnam SC (Dentons Rodyk & Davidson LLP) (instructed counsel), Chan Chee Yin Andrew, Yeo Alexander Lawrence Han Tiong, Tay Yu Xi, and Chew Jing Wei (Allen & Gledhill LLP)
• Defendant Counsel: Nair Suresh Sukumaran, Foo Li-Jen Nicole, and Tan Tse Hsien Bryan (Nair & Co LLC)
• Court: Court of Appeal (Singapore)
• Citation: [2019] SGCA 29
• Docket Number: Civil Appeals Nos 99 and 100 of 2018

Sundaresh Menon CJ (delivering the judgment of the court):Introduction

Before us are cross-appeals by Empire Capital Resources Pte Ltd (“Empire Capital”), the applicant-company, which is seeking leave to hold a creditors’ meeting to vote on a proposed scheme of arrangement (“the Proposed Scheme”), and by Pathfinder Strategic Credit LP and BC Investment LLC (collectively, “the Minority Creditors”) who oppose the leave application. The matter was first heard by a High Court judge (“the Judge”), who granted leave for Empire Capital to convene the creditors’ meeting despite various objections put forward by the Minority Creditors, but took the position that the creditors should be grouped into two classes for the purpose of voting on the Proposed Scheme. In CA/CA 99/2018 (“CA 99”), the Minority Creditors appeal against the Judge’s decision to grant leave for the creditors’ meeting to proceed, and in CA/CA 100/2018 (“CA 100”), Empire Capital appeals against his decision that the creditors should be separated into two classes.

The determinative issue that arises in these appeals is the extent of disclosure that is required of an applicant-company under s 210(1) of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”) at the time it applies for leave to convene a creditors’ meeting in order to consider a proposed scheme. Three other issues concerning the validity of third party releases under a scheme of arrangement, the proper classification of creditors, and abuse of process, also arise for consideration.

We heard the parties on 14 September 2018 and adjourned the appeals upon an indication by Empire Capital that further disclosure might be made in order to assist the creditors’ consideration of the Proposed Scheme. Thereafter, following a case management conference held on 23 November 2018, we heard the parties again on 28 January 2019. Having considered the evidence and the oral and written submissions, we now deliver our judgment.

Background The parties

The applicant in the present case is Empire Capital, an investment holding company incorporated in Singapore in 2006 with a paid-up share capital of S$2. Empire Capital is a member of the Berau group of companies (“the Berau Group”), which is based in Indonesia and is one of the world’s largest coal producers. According to the audited consolidated accounts of the Berau Group released in 2014 (“the Audited Accounts 2014”), Empire Capital was valued at US$2,000 at that time.

Apart from Empire Capital, three other entities within the Berau Group are primarily relevant in these appeals:PT Berau Coal Energy Tbk (“BCE”): This is the holding company incorporated in Indonesia, which occupies the apex of the Berau Group. It was previously listed on the Indonesian stock exchange, but apparently it was de-listed in 2017 as a result of non-compliance with certain financial reporting obligations. BCE is not registered with the Accounting and Corporate Regulatory Authority of Singapore for the purpose of establishing a place of business or carrying on business in Singapore.PT Berau Coal (“Berau Coal”): This is the main operating entity of the Berau Group, holding the licenses and concessions under which the group operates its coal mining and exporting business. It was incorporated in Indonesia in 1983.Berau Capital Resources Pte Ltd (“BCR”): This is a company incorporated in Singapore in 2010 with a share capital of S$2. It appears to have been established for the purpose of raising debt-based financing for the benefit of BCE.

Empire Capital is a wholly owned indirect subsidiary of BCE and a direct subsidiary of Berau Coal.

Based on the Audited Accounts 2014, as at the end of the financial year 2014, more than four years ago, the Berau Group had total assets of around US$1.77bn and total liabilities of around US$1.82bn. It also employed 1,311 employees.

The only creditors who took an active position in the appeals are the Minority Creditors who oppose Empire Capital’s application. The Minority Creditors are the ultimate beneficial owners of certain notes to be compromised under the Proposed Scheme (see [13] below), and they are represented in these proceedings by their shared investment manager, Argentem Creek Partners LP.

The relevant liabilities

The Proposed Scheme seeks to compromise two sets of notes issued by BCR and BCE respectively on behalf of the Berau Group.

The first set is the guaranteed senior secured notes issued in 2010 by BCR for an aggregate sum of US$450m at a fixed interest rate of 12.5% per annum due for maturity on 8 July 2015 (“the 2015 Notes”), pursuant to an indenture dated 8 July 2010. The Bank of New York Mellon (“NY Mellon”) acted as the trustee for and on behalf of the noteholders (“the 2015 Noteholders”). There are more than 30 security documents attached to this note issuance, the most significant of which is the Cash and Accounts Management Agreement (“CAMA”) that prescribes a payment and accounts mechanism in accordance with which the Berau Group is obliged to pay and hold all revenue and receipts from the sale of coal for the benefit of the 2015 Noteholders. The 2015 Notes are also guaranteed by various entities in the Berau Group, including BCE, Berau Coal, and Empire Capital. BCR lent the money it raised under the 2015 Notes to BCE to fund its capital expenditures and refinance its existing indebtedness.

The second set refers to the guaranteed senior secured notes issued in 2012 by BCE for an aggregate sum of US$500m bearing a fixed interest rate of 7.25% per annum due for maturity on 13 March 2017 (“the 2017 Notes”), pursuant to an indenture dated 13 March 2012. NY Mellon also acted as the trustee for these noteholders (“the 2017 Noteholders”). Save for certain distinct CAMA accounts, the security package for the 2017 Notes largely overlaps with that for the 2015 Notes. Further, except for the exclusion of BCR, the 2017 Notes are guaranteed by the same guarantors as the 2015 Notes.

Collectively, the two note issuances effectively securitise the Berau Group’s future receivables in coal production in exchange for immediate liquidity. It is not disputed that, as at January 2016, the 2015 and the 2017 Notes were the only material external financial indebtedness of the Berau Group. Notably, Empire Capital, as the applicant before us, is a guarantor of both the 2015 and the 2017 Notes but not the issuer of either.

Out of US$799,872,000 in aggregate outstanding principal under the 2015 and the 2017 Notes, the Minority Creditors collectively hold notes with a face value of around US$112,190,000 in the following proportions:25.28% of the outstanding principal under the 2015 Notes;4.91% of the outstanding principal under the 2017 Notes; and14% of the aggregate outstanding principal under the 2015 and the 2017 Notes.

The context of the application

In July 2015, following a crash in global coal prices that occurred sometime in the period 2014 to 2015 and amid several public bouts of management infighting, the Berau Group faced severe financial difficulties and could not fulfil its repayment obligations when the 2015 Notes matured. The default on the 2015 Notes in turn triggered a cross-default of the 2017 Notes.

Thereafter, several applications were filed in Singapore and the US with the common broad aim of restructuring the liabilities of the group. The purpose and characterization of some of these applications are contested, but for present purposes, the proceedings in Singapore may be summarised as follows:In July 2015, BCR commenced HC/OS 630/2015 seeking a moratorium under s 210(10) of the CA to restrain proceedings against members of the Berau Group in order to facilitate a restructuring of the group’s liabilities. At that time, the restructuring plan was premised on a US$150m facility that was to be extended to the group through its (then new) ultimate majority shareholder, Asia Coal Energy Ventures Limited (“ACE”). An initial 6-month moratorium was granted by the High Court in July 2016. Thereafter, the facility was terminated due to a winding up petition being taken against ACE, and the restructuring plan could no longer be implemented as initially proposed. In January 2016, BCR applied for an extension of the moratorium and put forward a revised restructuring plan. Following discussions between the parties and arguments made before the High Court, the extension application was dismissed in March 2016.In June 2016, BCR applied in HC/OS 550/2016 to be placed under judicial management. At the same time, BCE applied in HC/OS 551/2016 for a moratorium under s 210(10) of the CA. According to the Berau Group, it was working towards developing a restructuring plan that might prove acceptable to its creditors.In November 2016, the Berau Group was ready to put forth a new restructuring proposal for consideration by its creditors. Accordingly, BCR and BCE withdrew HC/OS 550/2016 and HC/OS551/2016 and commenced HC/OS 1175/2016 and HC/OS 1180/2016 respectively, under s 210(1) of the CA seeking leave to convene a creditors’ meeting to consider the new proposal. However, these proceedings were discontinued prior to the final hearing when it seemed that the proposed scheme would fail as a result of creditor opposition.

On 9 April 2017, Empire Capital filed the present application under s 210 of the CA seeking, amongst other things, leave to convene a creditors’ meeting to consider the Proposed Scheme and, if they thought fit, to approve it with or without modification. This is the Berau Group’s fourth set of restructuring proceedings in Singapore. While all prior applications were filed by BCR and BCE in respect of the 2015 and the 2017 Noteholders separately (thereby contemplating that these noteholders should vote in different classes), the present application is the first to be filed by Empire Capital as a guarantor of those notes, and the first to propose...