Brightoil on lockup agreements and classes in Singaporean schemes
21 March 2022
For the first time, the Singapore High Court has considered the effect of a lock-up agreement on creditor classes in a scheme of arrangement in Re Brightoil Petroleum.
By reference to UK and Hong Kong jurisprudence, the High Court set out three, non-exhaustive, principles for determining whether creditors who enter into lock-up agreements should be in a separate class:
- Was the benefit conferred so sizeable that it would have a significant influence on the decision of a reasonable creditor when voting on the proposed scheme?
- Was the lock-up agreement made available to all creditors, on substantially the same terms?
- Was the use of the lock-up agreement bona fide (e.g. not misleading)?
On the question of whether the benefit has a significant influence on voting, the relative size of the consent fee (or benefit) compared to the forecasted returns to creditors under the scheme and the estimated recovery in liquidation is relevant. The comparison is not, however, merely numerical. The other reasons why a reasonable creditor might vote for the scheme are also relevant.
In this case, the lock-up agreement was pursued for the bona fide purpose of introducing certainty into the restructuring process and it did not mislead creditors as to the anticipated recoveries under the scheme. The consent fee of 1% of the creditor’s admitted debt was not so sizable as to have a significant influence when compared to the potential recovery of 12% under the scheme and a 0.2% recovery in liquidation. A considerably better return expected under the scheme than in liquidation offered a clear reason for a reasonable creditor to vote for the scheme, quite apart from the consent fee.
This bears similarities to the position taken in Australia. In Re Wiggins Island Coal Export Terminal Pty Ltd [2018] NSWSC 1342, the court accepted that consent fees which are relatively small compared to the size of the outstanding debt are unlikely to influence a creditor. It has also been accepted that a consent fee does not raise any issue of collateral benefit where the opportunity is offered to all creditors (Re David Jones Ltd (No 3) [2014] FCA 753).
Interestingly, one of the locked up creditors in Re Brightoil had signed a modified version of the lock up agreement. That creditor's agreement to vote in favour of the scheme was conditional not only on payment of the consent fee, but also on payment of US$1.25 million by the scheme company's parent to the creditor in respect of a guarantee liability. On this issue, the court formed the view that the payment to the parent would not change the relevant creditor's rights in respect of the scheme company. Accordingly, that creditor did not form a separate class.
The absence of a termination clause in the lock up agreement in the event of a material adverse change in the company's financial position was also cause for comment. Some UK decisions suggest that a clause of this nature is appropriate. The Singapore High Court expressed the tentative view that such a clause might go to the question of bona fides, but it was not a mandatory requirement. A conclusive position will require full arguments on the question in an appropriate case.
Authors: Camilla Clemente, Partner; Alinta Kemeny, Partner; Rob Child, Partner.
