Securities and Financial Services Regulation

AuthorHans TJIO LLM (Harvard), MA (Cambridge); Advocate and Solicitor (Singapore); Barrister (Middle Temple); Professor, Faculty of Law, National University of Singapore.
Publication year2021
Citation(2021) 22 SAL Ann Rev 748
Date01 December 2021

27.1 The eclectic nature of securities regulation can be seen in the selection of cases discussed in this Annual Review. There were few traditional Singapore cases involving insider trading or prospectus disclosure1 but important ones about a restructuring of a business trust in the US which concerned a Singapore real estate investment trust (“REIT”), Eagle Hospitality Trust, as well as a case dealing with an old company law principle that prevents a shareholder from claiming for damages for loss to its value of shares while it has not rescinded the contract through which it purchased those shares. Both show the difficulties of applying corporate and securities laws to entities which have some but not all the attributes of the modern-day registered company.2

I. Bond and business trust restructuring

27.2 It has been argued elsewhere that there is now renewed conflict between shareholders and creditors given the amount of share repurchases and dividends paid to shareholders even when a company may not be doing well.3 Where the former is concerned, previous Annual Reviews examined both the High Court and Court of Appeal decisions in Enterprise Fund III Ltd v OUE Lippo Healthcare Ltd4 which had held

that a transaction (including the provision of a credit facility) carried out for the purposes of allowing International Healthway Corp Ltd (“IHC”, a company listed on the Catalist board of the Singapore Exchange (“SGX”)) to purchase shares in itself to counter a short-selling attack was void pursuant to s 76A(1A) of the Companies Act.5 This was because it had not obtained the necessary shareholder/creditor approvals for the buyback. In Crest Capital Asia Pte Ltd v OUE Lippo Healthcare Ltd,6 the Court of Appeal allowed IHC's action to hold the Crest Entities and IHC's former officers liable for damages suffered by IHC in connection with the void transaction.

27.3 The world also waits with bated breath the UK Supreme Court judgment in BTI 2014 LLC v Sequana7 (“BTI”) which has heard a drawn-out appeal from the Court of Appeal decision that a dividend paid to a holding company by its subsidiary when the subsidiary had a large contingent liability for environmental clean-up costs was a conveyance at an undervalue intended to defraud creditors even though the subsidiary was not insolvent at that time. In that case, the subsidiary became insolvent only ten years after the dividend payment, but the Court of Appeal also held that its directors, whose duty is to act in the best interest of the company, had to take into account creditor interests at the time where there was a “real, as opposed to a remote, risk of insolvency”,8 which was not the case here. In any case, that duty did not give rise to any right on the part of creditors to bring an action against the directors. Any wrong caused by the wrongful payment was to the company, and it was the proper plaintiff to bring an action against the directors. It has been highlighted9 that Rose J at first instance in BTI had acknowledged that there may have been a separate duty owed by directors under the proper purpose rule that may have been of assistance to the claimants, but this was not followed up by counsel in the Court of Appeal.

27.4 COVID-19 has tipped the balance even further in favour of shareholders in many countries with, for example, the suspension of wrongful trading rules which are intended to stop a company incurring further debts when there is no reasonable possibility of repaying them.10 As the leading UK corporate law academic Paul Davies has said, however, “continued trading in the vicinity of insolvency might be absolutely the right thing”.11 At the same time, in Australia, the continuous disclosure rules for listed companies have been relaxed due to COVID-19. In May 2020, the federal government introduced the requirement that listed companies would only be liable if they knew or were reckless or negligent with respect to whether information would, if it were generally available, have a material effect on the price or value of their securities. Then, in December 2020, the Australian Parliamentary Joint Committee Report recommended that this change be made permanent to align the standards with those in the US and UK. Their continuous disclosure regime is otherwise based on what the reasonable investor needs to know regardless of the issuer's state of mind, but with COVID-19 this was seen to set too high a standard. Singapore had studied the extant Australian position during the drafting of the Securities and Futures Act 200112 (“SFA”) in 2001 and the initial consultation bill had a somewhat similar position. However, as enacted in 2002, s 203 of the SFA set the standard for civil penalty or liability as one of negligence, and criminal sanction fraud or recklessness. While this shows that so far the right balance has been obtained, and COVID-19 has increased the imperative (rightly so) to preserve existing businesses, the Ministry of Law13 has said that they are monitoring the balance to make sure that it is maintained in the longer term. Too much protection for management, especially in insider-type companies where they are tied to the controlling shareholder, can create moral hazards.

27.5 It may be too simplistic to say that correlation is not causation, as there is clearly increased probability that the bond defaults that are being witnessed everywhere has some link to these changes. This leads to bond workouts and restructurings as haircuts and variation of bondholder

rights are needed. In Singapore, there has been a significant number of defaults on wholesale bonds listed on the SGX since 2016, which includes those of many foreign entities, as well as some companies and business trusts set up in Singapore. Then, in 2018, the first retail perpetual securities issued by Hyflux (which the restructuring court found ranked pari passu with an earlier tranche of preference shares, and may thus have required the consent of those earlier preference shareholders under s 74(6) of the Companies Act 1967)14 defaulted. In Singapore, most restructurings have taken the form of formal schemes of arrangement, which since the Companies (Amendment) Act 201715 (now Insolvency, Restructuring and Dissolution Act 201816 (“IRDA”) which came into force in July 2020) has some elements of Chapter 11 woven into it. Previous Annual Reviews have discussed the success of this phenomenon (although it failed in Hyflux which then entered into judicial management at the end of 2020).

27.6 Where the restructuring of REITs and business trusts (as opposed to companies) are concerned, however, the issue has been with respect to jurisdictional basis for such schemes. It is ostensibly O 80 r 2 of the Singapore Rules of Court17 (“ROC”) or Pt 64 of the UK Civil Procedure Rules18 which gives the court supervisory jurisdiction over trusts. In the restructuring of Soilbuild, however, at the court hearing approving the scheme, Vinodh Coomaraswamy J reportedly expressed “great interest in a separate question as to where the legal basis of a REIT trust scheme can be found” and said that it was “mindful of the fact that (it had) doubts about the basis on which the rights of unitholders can be expropriated, even under a trust scheme”.19 This was so even though in the earlier decision of Re Croesus Retail Asset Management Pte Ltd,20 the High Court analogised the listed business trust there with the corporate form for restructuring purposes and said that it was “apparent that the proposed orders largely paralleled that in an application for a scheme of arrangement under section 210 of the Companies Act”.21

27.7 While this issue has not been fully resolved in the Singapore appellate courts, useful guidance can be gained from the Delaware

Bankruptcy Court which decided on the Chapter 11 restructuring of the US assets (which were in effect all the assets) of Eagle Hospitality Real Estate Investment Trust (“EH-REIT”),22 an authorised collective investment scheme under the SFA. This had its initial public offering and listing in May 2019. Problems arose with its prospectus disclosure made exclusively to non-US investors in relation to the lack of financial information in relation to six hotels in the EH-REIT stable of assets of 19 US hotels. Further continuing disclosure breaches are still under investigation.23 With the onset of COVID-19 affecting the hospitality industry, the counter was suspended in March 2020 without having paid any dividend to its unitholders. The gearing ratio of 45%/50% prescribed by the Code of Collective Investment Scheme was also waived as its debts grew. In December 2020, the REIT manager was removed by the REIT trustee pursuant to a directive of the Monetary Authority of Singapore. In January 2021, the Singapore High Court gave various orders to assist EH-REIT in that although it had not been able to appoint a replacement REIT manager, the REIT trustee was empowered to take any action it deemed “necessary for the management and administration of [EH-REIT] and its business”.24 In particular, the REIT trustee sought and obtained power to take immediate action on behalf of EH-REIT to join the Chapter 11 cases that had been commenced with respect to its special purpose vehicle (“SPV”) affiliates in the US. Almost immediately, Chapter 11 proceedings in respect of EH-REIT itself commenced in the US Bankruptcy Court in the District of Delaware. The basis for the court assuming jurisdiction under Title 11 US Code was, however, challenged by a major creditor on the basis that EH-REIT was not a “business trust” registered under the Business Trusts Act 200425 (it was stapled to an inactive trust that was) and that it was not a separate entity needed for filing for bankruptcy protection. Title 11 US Code provides that only “a person … may be a debtor” under Chapter 11. It goes on, however, to state that this includes a “corporation” which in turn includes a “business...

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