Singapore court considers whether lock-up agreements alter the classification of creditors
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Lock-up agreements typically involve the company's creditors committing in advance to vote at the relevant class meeting in favour of the contemplated scheme. Lock-up agreements serve an important commercial purpose of either securing support or giving an indicator as to likely support for the scheme before the parties incur the time and expense in finalising the negotiation process of the scheme. While lock-up agreements are not required under scheme legislation, they are a common feature in English schemes of arrangement, and are becoming increasingly common in the Singapore context.
Re Brightoil Petroleum (S'pore) Pte Ltd [2022] SGHC 35 is the first Singapore decision published on whether creditors who enter into lock-up agreements should be placed in a separate class from other creditors in voting on a scheme of arrangement.
Lock-up agreements
Lock-up agreements typically involve the company's creditors committing in advance to vote at the relevant class meeting in favour of the contemplated scheme. Lock-up agreements may also include a waiver by the creditor of its rights to take enforcement action under the finance documentation, subject to the company's agreement to meet certain performance targets or to provide certain information. In return, the creditors are typically offered a consent fee fixed as a percentage of the face value of debt held by the creditor.
The consent fee raises the question of whether creditors who enter into lock-up agreements should be treated as a separate class from other creditors voting on a scheme of arrangement who would ordinarily be in the same class.
Decision
In Brightoil, lock-up agreements were offered to all the unsecured scheme creditors. Three of the 12 creditors eventually entered into lock-up agreements, comprising 57.32% of the total debt value amongst the votes that were cast.1
In coming to its decision on whether the three scheme creditors which entered into lock-up agreements should be treated as a separate class, the court looked to the "dissimilarity principle" first laid out in the seminal case, TT International2: "those creditors whose rights are so dissimilar to each other's that they cannot sensibly consult together with a view to their common interest must vote in different classes".3 The court also looked to English and Hong Kong precedents.
The court concluded that the entering into lock-up agreements by creditors does not, in itself, fracture a class, subject to certain requirements as set out below:
1. Size of benefits: The consent fee or other benefits provided should not be so large that it would have a significant influence over the decision of a reasonable creditor when voting for the proposed scheme. To this end, the court cited English and Hong Kong cases indicating consent fees ranging from 0.5%4 to 2%5 were relatively insubstantial, and consent fees of even 5%6 were not unusually large so as to alter the classification of creditors.
In Brightoil, the consent fee amounted to 1% of the scheme creditor's admitted debt. The court deemed the consent fee to be insignificant as compared to the potential recovery of 12% under the scheme and 0.2% in the case of liquidation. The court reasoned that even without the consent fee, it would be foreseeable that a reasonable creditor would have voted for the scheme.
2. Equal rights: The lock-up agreement must have been made available to all scheme creditors within the relevant class such that they were given equal rights to enter into the agreement. The lock-up agreements must also be made on substantially the same terms.
In Brightoil, the lock-up agreement was offered to all of the unsecured scheme creditors, and the court deemed all offers to have been made on the same terms.7
3. Bona fide: The lock-up agreements must be made bona fide without misleading the scheme creditors.
In Brightoil, the court concluded that the lock-up agreements were a bona fide attempt to introduce certainty into the restructuring process. Moreover, the eventual recovery rates were "not too far off" from the expected recovery rates stated under the lock-up agreements, suggesting that the scheme creditors were not misled.8
Discussion
Lock-up agreements are an important commercial tool that promote certainty and time-efficiency in the process of negotiating schemes of arrangement. This Singapore High Court's decision provides important guidance as to the requirements of lock-up agreements if they are to be deployed without fracturing the class makeup of the creditor group.
This decision also signals the willingness of Singapore courts to promote schemes and the restructuring process. The court notably echoed the Singapore Court of Appeals in TT International to caution that in relation to the dissimilarity principle, "[one] must be careful not to fracture a class too easily without a clear dissimilarity of rights such that minority creditors in another class would have a disproportionate right to veto".9 TT International reminds courts to take a pragmatic approach to uphold the purpose of schemes as a "practical alternative to other insolvency measures" and to avoid the "impractical mushrooming of classes that could potentially result in the creation of unjustified minority vetoes".10
It is clear from this decision that lock-up agreements, including their commercial terms, require careful negotiation and formulation so as to not alter the classification of creditors. For example, although not provided for in the Brightoil lock-up agreements, the court tentatively suggested that the provision of a right to terminate in the event of a material adverse change to the company's financial position would further support that the arrangement is bona fide and fair. This is to avoid irrevocably binding the creditors in all circumstances.
1 Id. at 25.
2 The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213.
3 Brightoil at 27.
4 See e.g., id. at 32 and 34.
5 See e.g., id. at 40.
6 See e.g., id. at 41.
7 Id. at 53.
8 Id. at 51.
9 Id. at 45.
10 Id. at 27.
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