INTERIM JUDICIAL MANAGEMENT UNDER THE INSOLVENCY, RESTRUCTURING AND DISSOLUTION ACT
This brief update highlights some of the points raised by the Singapore High Court in the brief grounds issued in Re KS Energy Ltd and another matter [2020] SGHC 198 (“Re KS Energy”) concerning the grant of an order for interim judicial management under the Insolvency, Restructuring and Dissolution Act (the “IRDA”).
The framework. The Court stated that the Court’s power to make an order for interim judicial management under s. 91 IRDA is predicated on the Court being satisfied that ([10] Re KS Energy):
a. The company is or is likely to become unable to pay its debts (s. 91(1)(a) IRDA); and
b. The making of the order would be likely to achieve one, or more, of the purposes of judicial management under s. 89(1) IRDA (s. 91(1)(b) IRDA).
The Court then noted that neither s. 89, 91 nor 92 IRDA provides express guidance as to the precise circumstances on when interim judicial management should be ordered ([12] Re KS Energy).
The Court held that therefore reference should be had to caselaw, and that “… As the IRDA provisions and their predecessor provisions under the Companies Act (Cap 50, 2006 Rev Ed) are in pari materia, the principles and caselaw governing the latter continue to be applicable.”
The caselaw. The Court then addressed the caselaw and the following points are important to note:
a. An order for an interim judicial management would be appropriate where “… there is a prima facie case for the making of a judicial management order, and where the assets or business of the company are in jeopardy” ([14] Re KS Energy);
b. However, “… it is not a prerequisite [to such an order] that all the criteria for the granting of a judicial management order are satisfied” ([14] Re KS Energy);
c. Usually, such orders are made when there is “an immediate danger” to the company’s assets, such as when there is fraud or an abandonment of the company by its management ([15] Re KS Energy).
d. However, the categories of cases in which such an order may be made are not closed, nor should the discretion under s. 92 IRDA be “unduly limited” ([15] Re KS Energy).
The Court highlighted at [16] Re KS Energy that reference should be made to the “raison d’être of interim relief”, that the “protection of the assets and business of a company are central consideration”, and that the Court will have regard to the “… nature and imminence of the risks facing the company’s business and assets.”
Analogy to appointment of provisional liquidators. The Court held at [17] Re KS Energy that a “useful comparison” may be drawn with the appointment of provisional liquidators, and that applying the approach, it served as a further indication that the categories of cases in which an interim judicial management may be appropriate should not be unduly limited.
Balance sheet insolvency plus super-majority creditor. On the facts of the case, where there is a clear case of balance sheet insolvency, and when the application is sought by a substantial or super-majority creditor such that any judicial management order is likely to be passed, any refusal of an order for interim judicial management would “merely be postponing the highly likely or inevitable outcome, and in the meantime would put the companies’ assets at risk”. The Court therefore granted the order ([18] – [19] KS Energy). We set out the relevant passages below as they are important:
“18 In situations as in the present, where there is a very clear case of balance sheet insolvency, even if not cash flow insolvency, and the application is sought by a substantial or super-majority creditor, meaning that any contrary scheme proposal would probably not pass muster, then a JM order would seem highly probable, if not almost inevitable, short of a miracle. While miracles can sometimes happen even in commercial settings, some evidence would typically need to be provided of a “white knight” on the verge of coming to the rescue. In particular, figures and specific proposals should be placed before the court to show that the company will be able to answer an application for judicial management. In the present case, however, the companies would essentially require the cooperation of the very creditor seeking the IJM orders, and the likelihood of any rescue independent of that creditor is highly unlikely. Counsel for the companies rightly recognised that in all likelihood, the companies would have to engage with the applicant, and that any attempt at a scheme of arrangement without the applicant’s support would likely fail.
19 Refracted through that lens, any refusal of an order for IJM would merely be postponing the highly likely or inevitable outcome, and in the meantime would put the companies’ assets at risk of further deterioration because of the current insolvency. I was therefore satisfied that, considering the entirety of the circumstances, and the fact that denying IJM on the facts would merely postpone the inevitable and potentially cause deterioration to the companies’ assets, an order for IJM was appropriate.”
(emphasis added)
Conclusion. We highlight that Re KS Energy is not only relevant to parties who are considering whether to seek an interim judicial management order.
As highlighted by the Court at [18] Re KS Energy, this decision is also relevant for companies who are seeking to respond to an application to place the company under interim judicial management order: there is a need for the company to put forward “figures and specific proposals” in order to meet such an application, even in a “white knight” situation.
Given that the IRDA has been in force only recently, and given the present difficult circumstances, Re KS Energy is to be welcomed as a guidance on how the Courts would view applications for interim judicial management under the IRDA.
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