Judicial Management - CPE (Final) (Presentation)

Judicial Management:
The Key Issues, Processes and Administration
2010 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
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
1 To help achieve the survival of the company, or the whole or part of its
undertaking as a going concern
2 To ensure a more advantageous realization of the companys assets compared

to a winding up situation
3 To seek a compromise or arrangement under S210 of the Companies Act,

Chapter 50 (CA)
Overview of a JM Process
Application Court Hearing Application Dismissed
Court grants JM application Statement of Proposal Creditors Meeting
Scheme of Arrangement Creditors Meeting Accepted Rejected
Court Sanction
Revise Scheme of Arrangement or apply to Court to wind up the Company

2010 Deloitte & Touche Financial Advisory Services Pte Ltd 6
When to Apply for JM

Basis of making a JM application
Where a company or where a creditor or creditors of the company consider that 1) 2) The company is or will be unable to pay its debts; and 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
When to Apply for JM

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
Who can Apply for JM

Company Usually via its directors, who will file an affidavit to support the application
OR Creditors
Creditors include contingent and prospective creditors. Notice of petition must be given to the company and debenture holders secured by fixed or floating charges
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
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2. Effects of a Judicial Management Order
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General Effects
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
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Effects on Directors
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
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Powers of the Judicial Manager

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
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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
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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)
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Duties of the Judicial Manager

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
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3. Statement of Proposal
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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 companys assets compared
to a winding up situation
To seek a compromise or arrangement under s210 Companies Act
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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
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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 Managers 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 creditors
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
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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 Companys assets, save by way of a SOA sanctioned by the Court

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

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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Practical Issues
Administration Others Employees
Subsidiaries & Related Co.
Judicial Management
Control
Operations Review
Notification Financial Review
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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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Administration
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
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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 Study
Identity 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?
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Case Study
Termination 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?
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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
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Control
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
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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
37
Financial Review
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
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Financial Review
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
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Operations Review
Understand nature of business and companys 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 Study
Set-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?
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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
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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 Companys operations
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Other Issues
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
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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 debtors desire to prefer.
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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 Companys 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 Companys 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
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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
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Applying to Court
S99 of the Bankruptcy Act imported by S227T of CA The 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 Exception: The Company was influenced by proper commercial considerations
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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.
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Undervalue Transaction
S98(3) Bankruptcy Act imported by S227T CA A 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
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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
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Successful Judicial Management Administrations

Barings Futures (Singapore) Pte Ltd Van Der Horst Ltd
Alliance Technology & Development Ltd

Amcol International Corp Citiraya Industries Pte Ltd
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Question & Answer
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About the Speaker
Justin Lim
Justin 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.
Director Reorganisation Services Direct: +65 6216 3269 Email: juslim@deloitte.com Website: www.deloitte.com/sg
Justin is also involved in forensic investigations and litigation support work involving fraud, commercial disputes and insolvency-related matters.
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About the Speaker
Lydia Koh
Lydia 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 Singapores 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 Director Reorganisation Services Direct: +65 6216 3193 Email: lkoh@deloitte.com Website: www.deloitte.com/sg
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Judicial Management:

The Key Issues, Processes and Administration

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

1. The Judicial Management Process

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Potential Outcomes of Insolvent Companies

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2 To ensure a more advantageous realization of the companys assets compared

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

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Court grants JM application Statement of Proposal Creditors Meeting

Scheme of Arrangement Creditors Meeting Accepted Rejected

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

When to Apply for JM

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

When to Apply for JM

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Who can Apply for JM

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Who can be appointed as Judicial Manager

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2. Effects of a Judicial Management Order

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Moratorium will be granted

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

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Powers of the Judicial Manager

property of the company

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Powers of the Judicial Manager

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Powers of the Judicial Manager

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

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Powers of the Judicial Manager

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

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Duties of the Judicial Manager

Judicial Manager may apply to Court for directions

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

To ensure a more advantageous realization of the companys assets compared

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

professional remunerations and appointment of the Committee of Creditors

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Scheme of Arrangement (SOA)

Scheme of Arrangement (SOA)

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

Scheme of Arrangement (SOA)

5. Practical Issues in a JM Administration

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Subsidiaries & Related Co.

Notification Financial Review

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

Purchase, Retention of Title etc.)

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd

2010 Deloitte & Touche Financial Advisory Services Pte Ltd