THE EXERCISE OF DISCRETION BY JUDICIAL MANAGERS
In an ex tempore judgment, the Court of Appeal in Yihua Lifestyle Technology Co, Ltd and another v HTL International Holdings Pte Ltd and others [2021] SGCA 87 dismissed the Shareholders’ appeal to displace the discretion exercised by the Company’s judicial managers in choosing to sell the asset in question to the first respondent instead of another prospective buyer.
The appellants are the direct and ultimate shareholders (“the Shareholders”) of HTL International Holdings Pte Ltd (“the Company”), which is presently under judicial management (at [2]).
The Company’s judicial managers (“JMs”) exercised their discretion in choosing to sell the Company’s interests in its subsidiaries (“the Asset”) to the first respondent, Golden Hill Capital Pte Ltd (“Golden Hill Capital”), instead of another prospective buyer.
The Shareholders applied under s 227R of the Companies Act (Cap 50, 2006 Rev Ed) (“CA”) (now s 115 of the Insolvency, Restructuring and Dissolution Act 2018 (Act 40 of 2018)) for the court to displace the discretion exercised by the JMs of the Company and the High Court dismissed the Shareholders’ application.
The Court of Appeal held that there was no merit in the Shareholders’ appeal (at [3]).
Material facts. The Company was the holding company of a group of companies. Its subsidiaries consisted of HTL Manufacturing (“HTLM”) and a number of PRC-incorporated subsidiaries (“PRC subsidiaries”) (at [5]).
The original founders of the Company were the second and third respondents, who are the beneficial owners of Golden Hill Capital (at [6]).
When the Company was placed under interim judicial management, the interim judicial managers (“IJMs”), on behalf of the Company, entered into a share purchase agreement (“SPA”) with Golden Hill Capital to sell the Asset for US$80m (at [7]). To facilitate the transfer, the IJMs transferred all of the Company’s shares in its PRC subsidiaries to a newly incorporated wholly-owned subsidiary of the Company, HTL Capital Pte Ltd (“HTLC”), and the second respondent extended two bridging loans to the Company.
On 1 July 2020, the Company was placed under judicial management (at [8]).
Nine days before the SPA’s completion date, another entity, Man Wah Holdings (“Man Wah”), made an offer to purchase the Asset for US$100m and provide an additional working capital facility of US$20m to HTLC and HTLM post-completion (at [9]).
The JMs invited both Golden Hill Capital and Man Wah to provide “anything further” they wished to communicate in relation to their respective offers (at [10]). Man Wah wrote to court to seek an order for the JMs to provide it with a full set of the Company’s financial accounts (“Financials”) to which the JMs did not accede to.
On 31 August 2020, both Golden Hill Capital and Man Wah submitted their revised offers (at [11]).
Golden Hill Capital offered US$100m with an additional US$20m working capital facility to be made available to HTLM and HTLC post-completion (“Golden Hill Capital’s 31 August Offer”).
Man Wah offered the same, except that it was prepared to offer US$10m more than any offer made by Golden Hill Capital, and was also prepared to provide interim financing of US$20m up front to be set off against the consideration payable on completion (“Man Wah’s 31 August Offer”).
After considering the parties’ respective offers, the JMs accepted Golden Hill Capital’s 31 August Offer and the sale was completed on 7 September 2020 (at [12]). The next day, Man Wah conveyed a further improved offer for the Asset which was not accepted.
As Man Wah was the Shareholders’ preferred buyer, the Shareholders commenced the suit seeking relief under s 227R of the CA on the basis that the JMs had acted in a manner that was “unfairly prejudicial” to their interests (at [13]).
Test for unfair prejudice. The Court of Appeal stated at [17] that under s 227R of the CA, a two-stage test ought to be applied to determine whether a judicial manager has acted or proposed to act in a manner which would unfairly harm the interests of the applicant, as per Four Private Investment Funds v Lomas and others [2008] EWHC 2869 (Ch) at [34] and [37].
The Court of Appeal stated that “Since the Shareholders do not claim to be the subject of differential treatment, the threshold for intervention in the present case is that of perversity. We do not think that this threshold has been crossed”.
There were two key planks to the Shareholders’ case (at [14]).
First, the Shareholders submitted that the JMs erred in concluding that Golden Hill Capital’s offer would yield higher shareholder returns than Man Wah’s offer with reference to various alleged flaws (at [19]).
The Court of Appeal found the contentions to be “entirely without merit” (at [20]). Amongst others, the Court of Appeal saw “no reason to doubt the JMs’ explanation that the Company’s debt of US$12m to [the second respondent] had already been accounted for as part of the Company’s liabilities. In this connection, … even the Shareholders’ expert … was unwilling to challenge the JMs’ assessment of the shareholder returns generated by Golden Hill Capital’s 31 August Offer, as it accepted that the JMs were more familiar with the terms of that offer as well as the bridging loans provided by [the second respondent].”
In addition, “the JMs disclosed advice from their Hong Kong legal counsel which showed that Man Wah’s 31 August Offer would likely take between two and six months to complete. … Given the Company’s circumstances, it was entirely reasonable for the JMs to take the view that the entire US$20m facility would be completely drawn down within the time required for the completion of Man Wah’s offer, and that, furthermore, it would not be able to generate income for the Company in the interim.” (at [21])
The Court of Appeal considered the Shareholders’ contentions and saw “no reason to disagree with the Judge that the JMs correctly assessed that Golden Hill Capital’s 31 August Offer yielded a higher shareholder return than Man Wah’s 31 August Offer.” (at [24])
Second, the Shareholders submitted that the JMs’ refusal to provide Man Wah with the Financials prevented Mah Wah from improving its offer in terms of shortening the time to completion and increasing the amount of credit facility (at [25]).
The Court of Appeal found both arguments to be “speculative and without basis” (at [26]). Amongst others, the Shareholders did not provide any substantiation that Man Wah could potentially have increased the amount of the US$20m interim facility if it had been provided with the full set of Financials and it was merely a “bare and speculative assertion” (at [29]).
Conclusion. The Court of Appeal agreed with the High Court that the JMs did not act in an unfairly prejudicial manner by selecting Golden Hill Capital’s 31 August Offer over Man Wah’s 31 August Offer as the conditions under s 227R of the CA were not satisfied (at [30]).
This decision reiterates that judicial managers have a wide discretion in performing their functions. As per [16] of the judgment, “the court would only interfere with the JMs’ decision if it could be shown that their conduct had been plainly wrongful, conspicuously unfair or perverse” and this is a “high threshold”. In the exercise of its “wide discretion, JMs would be justified in weighing the interests of creditors over those of the members or shareholders of the company”.
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