Re Design Studio Group Ltd and other matters

• Jurisdiction: Singapore
• Judge: Aedit Abdullah J
• Judgment Date: 23 July 2020
• Neutral Citation: [2020] SGHC 148
• Plaintiff Counsel: Chua Sui Tong and Wong Wan Chee (Rev Law LLC)
• Docket Number: Originating Summonses Nos 73—78 and 431 of 2020 and Summonses Nos 1867 and 1911 of 2020
• Date: 23 July 2020
• Hearing Date: 19 February 2020,28 May 2020
• Subject Matter: Insolvency Law,Super-priority financing,Roll-up
• Year: 2020
• Court: High Court (Singapore)
• Citation: [2020] SGHC 148
• Published date: 30 July 2020

Aedit Abdullah J: Introduction

These brief grounds of decision explain my decision to allow an application to grant super-priority to a debt arising from rescue financing under s 211E of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”). The application was not opposed, but I am of the view that issuing these grounds may assist counsel and parties in similar cases in future, at least to indicate possible lines of reasoning. I will also touch briefly on related applications for sealing orders.

Background

The first applicant, Design Studio Group Ltd, is the holding company of the second to sixth applicants (collectively the “DSG Group”).¹ The DSG Group is collectively involved in the construction, upgrading, and interior fit-out industries.² The six applicants had previously filed HC/OS 73/2020–78/2020 and obtained moratoriums pursuant to s 211B of the Companies Act. They sought extensions of these moratoriums in the present case (via HC/SUM 1770/2020–1773/2020, 1775/2020 and 1776/2020).³ Only one creditor objected, while 49 creditors supported the extension.⁴ Having considered what was before me, I was satisfied that the moratoriums previously granted should be extended, though for a shorter period of four months rather than the six months sought.⁵ The issue concerning the moratoriums will not be further discussed herein.

The primary focus of these grounds of decision is the fifth applicant’s application under HC/OS 431/2020 for super-priority to be given to the debt arising from rescue financing to be provided by the DSG Group’s sole secured lender, Hongkong and Shanghai Banking Corporation (“HSBC”), and the first applicant’s major shareholder, Depa United Group PJSC (“DEPA”).⁶ The application was originally made only under s 211E(1)(b) of the Companies Act,⁷ which would grant the rescue financing debt priority over all unsecured debts, and preferential debts specified in ss 328(1)(a) to (g) of the Companies Act. However, at the hearing, the applicants sought leave to seek, as an alternative, an order under s 211E(1)(a) of the Companies Act, which provided for the rescue financing debt to be treated as part of the costs and expenses of winding up, should the company be wound up;⁸ I granted leave for this alternative application.⁹

The fifth applicant and HSBC also applied under HC/SUM 1867/2020 and HC/SUM 1911/2020 for sealing orders pertaining to certain documents,¹⁰ which will be discussed further below.

The fifth applicant’s arguments

The fifth applicant argued that the requirements under ss 211E(1)(a) and/or 211E(1)(b) of the Companies Act were met, and that the court should grant super-priority to the debt arising from the proposed financing.¹¹

First, the intended financing fell under the definition of “rescue financing” under s 211E(9) of the Companies Act,¹² as it was necessary for the survival of the fifth applicant and the DSG Group as going concerns; it would allow the restructuring process to continue, by injecting urgently needed funds.¹³

Although the financing would be a “roll-up”, this did not disqualify it from being considered as rescue financing.¹⁴ A roll-up refers to the practice of using newly input post-petition finances to pay off existing pre-petition debt, such that the pre-petition debt is effectively paid off and “rolled up” into the super-priority post-petition debt.¹⁵ The US courts in numerous cases have approved rescue financing loans containing roll-ups,¹⁶ such as in In re Lyondell Chemical Company, et al 402 BR 596 (Bankr, SDNY, 2009) (“Lyondell”). The fifth applicant noted that there were objections in the US to roll-ups, but distinguished them, as the objections were due to a US-specific statutory priority scheme which applies to reorganisation (or restructuring) proceedings under US law, and would not apply in Singapore as Singapore’s statutory scheme of creditor priorities only applies in the context of a liquidation and not a scheme of arrangement.¹⁷

In addition, roll-ups should not be disqualified from constituting “rescue financing” as:¹⁸ s 211E(9) of the Companies Act imposes no such restriction; the statutory framework for rescue financing is meant to be flexible; and the court in Re Attilan Group Ltd [2018] 3 SLR 898 (“Attilan”) held that s 211E(9) does not prohibit a rescue financier from stipulating conditions for the grant of rescue finance. Endorsement of the roll-up in this case would not amount to endorsement of all roll-ups as each rescue financing offer has to be considered on its own facts.¹⁹ In the present case, the roll-up should not disqualify the loan from constituting rescue finance as not all of the loan was refinance – part of it would be fresh working capital.²⁰

Second, the factors supporting the exercise of the court’s discretion to grant super-priority, as set out in my previous decision in Attilan, were met. Reasonable attempts had been made to secure financing from alternative sources which would not require conferring of super-priority, but these were unsuccessful.²¹ There were no alternative financing options or better offers.²² The terms of the proposed rescue financing were fair, reasonable and adequate; they were negotiated in good faith, at arm’s length, and with the exercise of sound and reasonable business judgment.²³ The rescue financing was in the best interests of the DSG Group and its creditors.²⁴

HSBC’s arguments

HSBC supported the application to grant the debt arising from the rescue financing super-priority status,²⁵ and submitted as follows.

First, the proposed financing constitutes rescue financing under s 211E(9) of the Companies Act.²⁶ It is necessary for the survival of the fifth applicant as a going concern, and necessary to achieve a more advantageous realisation of its assets than on a winding up.²⁷

Although the proposed rescue financing would be a roll-up, such roll-ups are permitted under s 211E as they can fall within the scope of “rescue financing” under s 211E(9), and such an interpretation would promote the policy objectives undergirding the rescue financing regime, which is to incentivise financial institutions to provide rescue financing to distressed companies.²⁸ A restrictive interpretation of “rescue financing” is not needed as super-priority is discretionary and the court can consider a multitude of factors to decide whether to grant super-priority to rescue financing.²⁹

In addition, debts from roll-ups have been given super-priority status in US cases such as Lyondell ([7] supra).³⁰ The factors considered by the court in Lyondell in deciding whether to grant super-priority to a roll-up debt were similar to those in Attilan ([8] supra).³¹

Although the present case did not involve cross-collateralisation, it was pointed out for completeness that US courts have allowed cross-collateralisation in some limited circumstances.³² Cross-collateralisation refers to the granting of the debtor’s assets as collateral for both the new and pre-existing loans.³³ In cross-collateralisation cases, the factors applied to determine if super-priority should be granted were similar to the factors applied in roll-up cases.³⁴

Although there were US cases prohibiting cross-collateralisation, the reasons for the objections were not applicable in Singapore given the different language of s 211E as compared to the relevant US provision.³⁵ Section 364 of the Bankruptcy Code 11 USC (US) was interpreted to allow super-priority only for post-petition debts, whereas s 211E(1)(b) of the Companies Act allows super-priority for debts “obtained or to be obtained”, and would include pre-petition debt.³⁶ Further, US has a statutory priority scheme for reorganisations, whereas Singapore does not, as the statutory priority provisions in s 328 of the Companies Act only apply in winding up situations.³⁷ Alternatively, these decisions should not be followed in Singapore.³⁸

Second, the fifth applicant would not have been able to obtain rescue financing from any party unless super-priority was given.³⁹ This fulfils the requirement under s 211E(1)(b) of the Companies Act.⁴⁰

Third, the court should exercise its discretion to grant the super-priority as:⁴¹ the fifth applicant has been unable to find financing on more favourable terms from other sources; the proposed financing arrangement was negotiated in good faith and at arm’s length; the terms were fair, reasonable and adequate in light of the circumstances; and no creditors have opposed the application.

The Decision

I was satisfied that super-priority should be granted to the debt under s 211E(1)(b), for the reasons that follow.

Requirements to grant super-priority Section 211E

Section 211E is titled “Super priority for rescue financing”, and allows the court to make various orders which have the general effect of giving the debt arising from rescue financing priority over existing debts. The fifth applicant applied for super-priority under ss 211E(1)(a) and 211E(1)(b), which read:

Super priority for rescue financing

211E.—(1) Where a company has made an application under section 210(1) or 211B(1), the Court may, on an application by the company under this subsection, make one or more of the following orders: (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 be treated as if it were part of the costs and expenses of the winding up mentioned in section 328(1)(a); (b) 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;

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