Singapore: When restructuring and insolvency regimes collide

Singapore's economy is expected to see slower growth in 2023 after its rapid recovery from the pandemic in 2022, with the Ministry of Trade and Industry recently narrowing the GDP growth forecast for the year.¹  As industries continue to feel the pinch of high inflation and interest rates, creditors and debtors alike may be considering appropriate solutions for companies which struggle to pay their debts. 

In this article, we discuss a recent case which reflects how the Singapore Courts favour the restructuring of businesses while giving regard to creditors' interests. In Yap Sze Kam v Yang Kee Logistics Pte Ltd [2023] SGHC 43,²  the Singapore High Court had the opportunity to consider an interesting interplay between the judicial management and receivership regimes. The Court declined to grant judicial management orders, on the basis that this would not be in the interests of the creditors considered as a whole, given the progress which have been made by the receivers and managers appointed over shares in the holding company. 

Lam Zhen Yu from Withers KhattarWong's restructuring and insolvency team assisted Maybank in successfully opposing the judicial management applications in Court. The arguments we raised were adopted and cited by the Court as important considerations in reaching its decision. 

Update: The significance of this case (Yap Sze Kam v Yang Kee Logistics Pte Ltd [2023] SGHC 43) was recognized in the Benchmark Litigation APAC Awards 2024 as one of the Impact Cases of the Year.  

Summary of facts

The case concerned the Yang Kee group of companies, including the parent holding company (the "HoldCo"), the logistics business arm (the "LogCo") and the property holding arm ("PropCo"). Following default on convertible bonds previously issued by the Group, receivers and managers (the "Receivers") were appointed by the bondholders over shares in HoldCo and PropCo, which were charged as security for the bonds. Upon their appointment, the Receivers had effective management control over the whole Group, and appointed their nominees to act as directors of the companies.

The Receivers then took steps to realise the undertaking of the Yang Kee Group and conducted a sale process which culminated in the Receivers deciding to proceed with one of two offers put forward by interested parties (the "Deal"). The Deal did not involve the sale of the entire undertaking of the Group, but primarily concerned the sale of shares in the PropCo held by HoldCo, together with a refinancing/waiver of outstanding arrears and guarantees owed by other companies in the Group. The Receivers also took steps to conduct a separate sale process of the LogCo's business and assets.

Separate judicial management applications were filed against the HoldCo and LogCo, in which the applicants voiced certain concerns, including the following key concerns: 

1. The Deal would result in the Group being realised on a piecemeal basis, and Yang Kee would no longer be an integrated end-to-end logistics solutions provider, which would arguably fetch a lower value for the creditors; 
2. The Receivers (and the directors nominated by them) were acting in the interests of the bondholders rather than in the interests of the creditors of the HoldCo and LogCo generally; and 
3.  If judicial managers were appointed, there would be a real prospect of obtaining a better deal for the creditors of HoldCo and LogCo from the other interested party, compared to the present Deal. 

Summary of the Court's decision

In dismissing both judicial management applications, the Court was not convinced that there was a real prospect that the statutory purposes of judicial management will be achieved. The Court considered that the making of judicial management orders would not be in the best interests of the creditors considered as a whole, for the following key reasons: 

1. There was at present, no evidence of a real prospect of a better deal forthcoming from the other interested party. The applicants were advancing, at best, a possible, speculative, hoped for outcome, the likelihood of which, given the experience of the past few years (multiple failures in restructuring the Group) was relatively low; 
2. The making of judicial management orders would mean that any prospective buyer will then have to deal with three sets of insolvency professionals (judicial managers of 2 companies and the Receivers), which will be of no advantage to any potential sale process; 
3. There is no evidence to suggest otherwise that the Receivers have not been objective, professional and diligent in their efforts in securing the Deal. In fact, creditors (such as Maybank) were in support of the Deal; and
4. Notwithstanding that the Receivers are accountable to the bondholders, the bondholders are in fact the largest creditors of HoldCo, and it is also apparent that the Deal will bring benefit to the LogCo creditors generally (as confirmed by Maybank). 

Judicial management or restructuring? 

While much judicial and academic material on judicial management applications focus on the "insolvency" requirement to prove that the company is (or is likely to become) unable to pay its debts, this decision is a timely reminder that applicants ought to remember that there is an equally important requirement to prove that there is a reasonable probability of achieving one or more of the statutory purposes of judicial management.

Potential applicants for judicial management should therefore first consider carefully and be advised by lawyers on whether the evidence make out a reasonable probability of achieving the statutory purposes of judicial management. Even when the "insolvency" requirement is made out, the Singapore Courts have exercised the discretion to refuse to grant a judicial management order when there is an existing restructuring process (such as receivership in this case), or even a consensual restructuring (such as in Deutsche Bank AG v Asia Pulp & Paper Co Ltd [2003] SGCA 19). It is therefore suggested that the applicant will have to demonstrate why a judicial management will achieve a better outcome than the existing restructuring in place.

This decision has also demonstrated that the Singapore Courts will be slow to disrupt a company's restructuring efforts, which is reassuring for companies seeking to restructure their businesses and/or have undertaken restructuring processes during this critical time in the economy that their restructuring efforts will not be easily jeopardised. 

In fact, the decision has already been cited in the subsequent case of Point72 Ventures Investments LLC v FinLync Pte Ltd [2023] SGHC 122. While the outcome was opposite (a judicial management order was granted), such outcome was achieved by considering similar factors, including the relative merits of the proposals put before the Court and the importance of the views of the creditors.

Please feel free to contact our restructuring and insolvency team if you have any inquiries.