judicial management_cpe (final)(presentation)

Judicial Management:The Key Issues, Processes and Administration

12010 Deloitte & Touche Financial Advisory Services Pte Ltd

Content


1. The Judicial Management (“JM”) Process

• Application• Effects of a Judicial Management Order• Statement of Proposal

2. Conducting a JM Administration

• Practical Experiences• Outcomes of Judicial Management

1. The Judicial Management Process


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Potential Outcomes of Insolvent Companies

There are various options in the Companies Act that offers possible routes that

directors can choose:

Debt Restructuring

Receivership

Winding Up

Judicial Management

Objectives of JM


To help achieve the survival of the company, or the whole or part of its

undertaking as a going concern

To ensure a more advantageous realization of the company’s assets compared

to a winding up situation

To seek a compromise or arrangement under S210 of the Companies Act,

Chapter 50 (“CA”)

1

2

3

Court grants JM application

Overview of a JM Process


Application Court Hearing Application Dismissed

Statement of Proposal

Scheme of Arrangement

Creditors’ Meeting

Accepted Rejected

Court Sanction Revise Scheme of Arrangement or apply to Court to wind up the Company

Creditors’ Meeting

• Basis of making a JM application


When to Apply for JM

Where a company or where a creditor or creditors of the company consider that –

1) The company is or will be unable to pay its debts; and

2) There is reasonable probability of rehabilitating the company and preserving

all or part of its business as a going concern; or that interests of creditors

would be better served than by resorting to winding up

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• Definition of inability to repay debts


There are 3 ways in which a company can be deemed unable to pay its debts:

1. Company owns a sum exceeding $10,000 and;

• Have been served with a statutory demand and Company has neglected to

pay the sum after 21 days

2. Execution of Judgment in favor of a creditor is returned unsatisfied in

whole or in part

3. The Court is satisfied that the Company is unable to pay its debts. The

Court will consider all contingent and prospective liabilities

When to Apply for JM


Company

Usually via its directors, who will file an affidavit to support the application

Who can Apply for JM

CreditorsCreditors include contingent and prospective creditors. Notice of petition

must be given to the company and debenture holders secured by fixed or floating charges

OR


Who can be appointed as Judicial Manager

A person who is a public accountant, but not an auditor of the company

Court reserves the right to reject the nomination of the applicant

Where a nomination is made by the company, the creditors may oppose the

nomination during the Court hearing

2. Effects of a Judicial Management Order


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Any receiver is to vacate office, no receiver may be appointed

Moratorium will be granted

Any petition to wind up the company shall be dismissed

Creditor cannot enforce security or repossess goods under hire-purchase, except

with the leave of court or the consent of the Judicial Manager


General Effects

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Functions and powers of the board of directors are transferred to the Judicial

Manager

The directors must submit a statement of affairs to the Judicial Manager within 21

days

Judicial Manager may apply to court to summon any officer or any person to assist

in the JM process


Effects on Directors

Do all such things as may be necessary for the management of the affairs, business,

property of the company

Power to run the day to day operations of the company

Judicial Manager is not able to discharge debts without Court sanction unless he

does so via a Scheme or compromise

Judicial Manager has the power to do all the necessary set-offs unlike in a winding

up process


Powers of the Judicial Manager

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The Judicial Manager also has the power to:

Take over the custody and control of all property, including books and records of

the company

Manage the company in accordance to the Statement of Proposal

Revise the proposals on his own discretion


Floating Charges

Judicial Manager is entitled to dispose the property as if it were not subjected

to the charge

The asset can be sold, with the proceeds used to discharge the sums secured by

such properties

Floating charge will still be ranked above unsecured debts



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Fixed Charges

• The Judicial Manager may apply to court to dispose the property as if it is not

subject to security

• The Court will grant the request if it is satisfied that the disposal is likely to

promote one or more of the purposes specified in the JM Order

• Proceeds from the sale of the secured properties (assets), must be used to

discharge the sums secured by such properties (assets)



Judicial Manager acts as an agent of the company

Owes a duty to the company to act with reasonable skill, care and diligence

Judicial Manager may apply to Court for directions

Judicial Manager shall be personally liable to new or adopted contracts, unless he

disclaims personal liability under that contract via notification to the other party

Judicial Manager to examine all contracts and decides whether to adopt the term

within 28 days of the JM Order


Duties of the Judicial Manager

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3. Statement of Proposal


Statement of Proposal The Judicial Manager has 60 days to send to members and creditors of the

company his proposal for the achievement of the purposes for which the order was

made

• To help achieve the survival of the company, or the whole or part of its

undertaking as a going concern

• To ensure a more advantageous realization of the company’s assets compared

to a winding up situation

• To seek a compromise or arrangement under s210 Companies Act


Statement of Proposal The Judicial Manager will also call for the submission and adjudication of Proof of

Debt

Thereafter, the Judicial Manager is to convene a Creditors’ Meetings with not less

than 14 days notice to seek approval for the Statement of Proposal

Agenda for First Creditors’ meeting include reporting of significant matters to date,

professional remunerations and appointment of the Committee of Creditors

In a statement of proposal, the Judicial Manager will set out how the Judicial

Manager intends to achieve one or more of the Aims and will be put to vote at the

first Creditors’ Meeting


Statement of Proposal At the Creditors’ Meeting, the statement of proposal will only be deemed to be

approved if the majority of creditors present, personally or by proxy, vote in favour

of the Proposal

A majority vote both in terms of value and the number of creditors is required for

approval

The statement of proposal will usually encompass a brief summary of the current

situation of the Company, the financial position and the Judicial Manager’s

proposal to achieve one or more of the JM objectives

Other items that may be presented in the statement of proposal (Optional):

Estimated fund available for distribution and the estimated dividend rate to

creditors222010 Deloitte & Touche Financial Advisory

Services Pte Ltd

Committee of Creditors

The committee of creditors shall comprise of no less than 5 members and no more

than 7 members and must include an employee and a shareholder


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4. Scheme of Arrangement


Scheme of Arrangement (“SOA”)

• A SOA is a compromise or arrangement between a Company and some or all of its

creditors governed by s210 of CA

• At any time when a JM order is in force in relation to a Company under JM, s210

shall apply as if for the following clauses which will substitute s210(1) and

s210(3):

– Where a compromise or arrangement is proposed between the Company and its

creditors, the Court may on the application of the Judicial Manager order a

meeting of creditors to be summoned in such manner as the Court directs;

– Obtain 75% in value of the creditors present and voting, either in person or by

proxy, at the meeting

• The Judicial Managers have no power during JM to distribute any proceeds of

realization of the Company’s assets, save by way of a SOA sanctioned by the Court252010 Deloitte & Touche Financial Advisory

Services Pte Ltd


• The SOA will be binding on the scheme creditors when:

1. 75% in value of the scheme creditors present and voting either in person or by

proxy at the meeting agree to the Scheme;

2. The Court subsequently makes an Order approving the Scheme; and

3. An office copy of that Order is delivered to the Registrar of Companies for

registration

• There are no rigid rules set out for SOA; rather each scheme is tailored to the

individual circumstances of the Company in respect of which it is proposed to

maximize the benefits it may produce

• A SOA and an accompanying explanatory statement have to be provided to each

scheme creditor 262010 Deloitte & Touche Financial Advisory

Services Pte Ltd


• Contents inside a SOA (may vary on circumstances):

- Introduction and background of the Company

- What is a SOA

- Who are the Scheme Creditors

- Cash position and working capital requirements

- The claims and proofs of debt received

- The proposed timeline

- The dividend rate

- Method of payment (cash, equity, assets or a combination)

- Termination of Scheme


5. Practical Issues in a JM Administration


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Judicial Management

AdministrationEmployees

Control

NotificationFinancial Review

Operations Review

Subsidiaries & Related Co.

Others

Practical Issues

30

Administration Appointment of legal counsels

Identify secured creditors and their respective charges (Fixed, Floating, Hire-

Purchase, Retention of Title etc.)

Establish contact with essential suppliers

Review (short term) cash flow projection and consider whether trading operations

can be continued. Evaluate immediate critical payments which have to be made

Take possession of cash and cheque books and inform the banks

Review of production orders & ongoing contractual commitments


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Identify major suppliers and customers and meet them to address their concerns

Meet key employees to understand the trading operations & business structure

Determine if an industry expert is required (e.g. shipping, aerospace, property etc)

Review major contracts and any legal matters with solicitors

Administration


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Employees Obtain detailed information of employees

Retention of key employees

Establish control procedures

Recall of corporate cards, credit cards, tokens given to employees

Brief employees on the status of the company/ the JM process

Streamline employees headcount if necessary;

Depends on several factors such as:

• Job scope and functions

• Volume of business


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Case StudyIdentity of Employer

Some employees may be employed pursuant to a letter of employment issued by

one of the subsidiaries

The employees were carrying out tasks instructed by JHT

Letters of promotion were issued by JHT

Question: Who would be considered as the employer of these employees?


Case StudyTermination of pregnant employees

As part of the administration, the JM would terminate all employment contracts and

offer new contracts to those employees whom would be retained

There could be instances where the terminated employees consist of pregnant ladies

having their maternity leave

Question: Is the JM empowered to terminate employees who are on maternity leave?


Control Secure assets, property, books and records, including;

• Safes and petty cash

• Title deeds, Leases and Securities, etc

• Cars, mobile phones, credit cards, laptops etc

Information of all properties

Stock take of inventory



Movements of goods to obtain JM approval

Data imaging of electronic records (emails, SAP records, financial records,

computers and servers etc)

Insurance coverage for all assets for public liabilities, fires and thefts

Engage external security services if necessary

Control


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Notification and Communication

Notifications are to be sent to all known creditors, debtors, auditors,

government authorities (IRAS, GST, MOM etc) and shareholders, on the status

of the company

All correspondences must state that Company is in JM

Communication to Creditors: -

• Need to be transparent and independent

• Need to provide regular reporting and status updates

• To consider the formation of steering committee


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Assess profitability of existing contracts and work in progress

Assess viability of business operations in subsidiaries and related companies

Review Balance Sheet, Profit and Loss Statement & Cashflow Statements

Understand the financial position of the Company, with assessments on its income

stream and burn rate

Financial Review


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Identify assets which can be sold and explore the best method to realize them

Conduct valuation of property, plant & machinery and other assets

Prepare Information Memorandum

Financial Review


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Operations Review


Understand nature of business and company’s business model & structure

Identify key suppliers & customers

Debt recovery process:

• Ensure ability to continue operations

• Ability to procure additional businesses

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Case StudySet-offs

Company A is both a debtor and creditor

Question: Are set-offs allowed in a Judicial Management as well as in a winding up

scenario?


Proof of debt


Proof of Debt has to be submitted by all Creditors

Adjudication process could be complicated depending on the nature of claims:-

• Ensure sufficient time is allocated for adjudication

• To consider the need to engage the relevant experts for the adjudication of debts

Quantum of claims could change in special circumstances

Admit or reject (Full or Partial) claims

Rejection of claims via writing and creditors can only appeal in Court within 21

days from the notice of rejection

Subsidiaries & Related Companies


Identify all subsidiaries and related companies

Prepare financial and viability studies of these subsidiaries & related companies

Special care to be taken on cross border issues

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Other Issues


Stigmatism: Suppliers and Customers will have low confidence when they deal

with the Company, hence affecting trading prospects

This stigma will likely still follow even if a new entity is set up to take over the

profitable businesses of the Company

Bank facilities are likely to be frozen

Trading may be reduced to a cash basis

Difficulties in retaining employees

Difficulty in recovering new money for the Company’s operations

Consider options available including compromise under s210 and/or prepare

Statement of Proposal to be sent to creditors

Commence marketing and search for potential investor / white knight

Possible need for the extension of JM Order

Adhere to listing requirements (if Company is listed)

• Announcement of all material records

• Ensure monthly updates are made

Other Issues


6. Review of Past Transactions


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Review of Past Transactions The Judicial Manager has the power to review and set aside transactions which are:

• Deemed unfair preference to certain stakeholders; and/or

• Transactions at an undervalue amount


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Unfair Preference


An unfair preference is said to be given if a creditor is put in a better position

than winding up as a result of the debtor’s desire to prefer.


Unfair Preference


2 Separate Stages of Analysis

Stage 1 – Preference in Fact

• Objective Test; and

• Whether the transaction had

the effect of putting the

creditor in a better position

in the event of the

Company’s winding up or

JM.

Stage 2 – The desire to prefer

• Subjective Test; and

• The Company was influenced

by as desire to confer a

preference on the creditor.

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The ‘Desire’


Judicial Manager must prove that the Company’s decision to enter into the

transaction was influenced by a subjective desire to put the creditor in a better

position

Courts often state that the existence of the requisite desire may be inferred from the

circumstances of the case

The ‘Desire’


The mere presence of the desire will not be sufficient

Must show that the desire had influenced the decision to enter into the transaction

The relevant desire need only be an influence. It need not be the dominant or

decisive factor


S99 of the Bankruptcy Act imported by S227T of CAThe Judicial Manager may apply to court if:

(i) Preference was given, (a) Within 2 years before commencement of winding up

to an Associate (b) Within 6 months before commencement of winding

up to an Non-Associate(ii) Company was insolvent/became insolvent as a result of

the transaction(iii) Company was influenced by a desire to prefer

Applying to Court

Exception: The Company was influenced by proper commercial considerations

Definition of Associates


S329CA imports S101 of the Bankruptcy Act which provides that an associate

includes:

• Spouses, Relatives

• A director or shadow director of the company

A company shall be regarded as an associate of another company if:

(a) The same person has control of both companies; or

(b) A group of 2 or more persons has control of each company and such groups either

consist of the same persons or could be regarded as consisting of the same persons

by treating a member of either group as replaced by a person of whom he is an

associate.

Determining Insolvency

Insolvency can be determined using the following methods:

• Cashflow Insolvency

“Can the company pay its obligations as it is due?”

• Balance Sheet Insolvency

“Does Liabilities exceed Assets?”


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Undervalue Transaction


A transaction is undervalued when the disparity of margin is of such

magnitude that it could not be explained by commercial practice.


Undervalue Transaction


S98(3) Bankruptcy Act imported by S227T CAA transaction is considered undervalued if the Company:

(a) Enters into a transaction where no consideration is received; or

(b) Enters into a transaction for a consideration of which is significantly less than the value of the consideration provided by the other party


Applying to Court


S100(1) BA - The Judicial Manager can apply to court to set aside the transaction if:

1. The transaction was entered within 5 years ending with the date of making the

winding up application

2. The company was insolvent or became insolvent as a result of the transaction

For an associate, the company is assumed to be insolvent at the time of the transaction

or became insolvent as a result of the transaction



Successful Judicial Management Administrations

Barings Futures (Singapore) Pte Ltd

Van Der Horst Ltd

Alliance Technology & Development Ltd

Amcol International Corp

Citiraya Industries Pte Ltd


Question & Answer


About the Speaker

Justin LimJustin has more than 13 years experience in the areas of corporate restructuring and business recovery and dispute resolution work. He had led teams in some of Singapore largest corporate restructuring and business recovery engagements covering a spectrum of industries including construction, manufacturing, energy & resources, retail and the hospitality sectors.

Justin is also involved in forensic investigations and litigation support work involving fraud, commercial disputes and insolvency-related matters.

DirectorReorganisation Services

Direct: +65 6216 3269Email: [email protected]: www.deloitte.com/sg

mailto:[email protected]

http://www.deloitte.com/sg


About the Speaker

Lydia KohLydia has more than 8 years of professional experience in Singapore and UK, specializing in corporate restructuring, business recovery, litigation support and forensic investigation. She was extensively involved in some of Singapore’s largest corporate restructuring projects, providing turnaround consulting and developing workable and effective restructuring and reorganization proposals for listed and major non-listed clients. Lydia has also been involved in various insolvency and forensic investigations within the region.

Associate DirectorReorganisation Services

Direct: +65 6216 3193Email: [email protected]: www.deloitte.com/sg

mailto:[email protected]

http://www.deloitte.com/sg

judicial management_cpe (final)(presentation)

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