The Singapore High Court decision in Re HTL International Holdings Pte Ltd  SGHC 86 dealt with an unfair prejudice claim made against judicial managers. The decision confirms the high threshold to show the decision of the judicial managers was plainly wrong, unfair or perverse. This decision is very persuasive authority for Malaysia judicial management law.
Summary of Case and Significance
Judicial managers were appointed over a Company, being the holding company of the HTL Group of companies. The HTL Group is involved in the furniture trade. As part of the judicial management, the judicial managers were going to sell the Company’s interests in all its subsidiaries.
There were two interested purchasers: Golden Hill Capital and Man Wah Holdings. Both the offers were close in terms of the quantum of the purchase price. Golden Hill Capital was an unconditional offer. Man Wah Holdings’ offer was higher, but subject to longer approval time due to the likelihood of requiring its shareholders’ approval.
The shareholders of the Company preferred the Man Wah Holdings’ offer. Golden Hill Capital was also linked to the original founders of the HTL Group. There was some history of a shareholders’ dispute between the shareholders of the Company and the original founders.
The judicial managers accepted Golden Hill Capital’s offer. This resulted in the shareholders filing an application seeking unfair prejudice relief under the judicial management provisions. The shareholders sought an order to declare that the sale to Golden Hill Capital was null and void and a direction requiring the judicial managers to accept the Man Wah Holdings’ offer.
The Singapore High Court dismissed the application. It is the first reported Singapore decision interpreting the unfair prejudice provisions. The Singapore High Court referred to the similar unfair prejudice provisions under English administration law.
The Court held that judicial managers need to exercise their business acumen and rely on their business experience in their attempt to achieve their statutory objectives. Courts are reluctant to second-guess the decision of the judicial managers.
In May 2020, the Company was placed into interim judicial management. During the interim judicial management, the interim judicial managers carried out an internal restructuring of the Company. All of the Company’s overseas subsidiaries were consolidated into a new wholly-owned subsidiary. Therefore, after this internal restructuring, the Company owned two subsidiaries. The object was to sell the Company’s shares in these two subsidiaries.
Later in May 2020, the interim judicial managers entered into a share purchase agreement with Golden Hill Capital. It was intended to sell the shares in the two subsidiaries for US$80 million.
In July 2020, the Company entered judicial management. The interim judicial managers were appointed as the judicial managers.
In mid-August 2020, Man Wah Holdings made an offer to purchase the same shares. There were then counter-offers by the two interested purchasers.
Golden Hill Capital’s final offer was US$100 million, an additional US$20 million in working capital and a further draw down of the remaining US$3 million under a bridging loan.
Golden Hill Capital was linked to the original founders of the HTL Group. A related company of Golden Hill Capital was also the largest external creditor of the Company. Prior to this, there was a dispute between the shareholders of the Company and the individuals linked to Golden Hill Capital.
On the other hand, Man Wah Holdings’ offer was for US$100 million and with a promise of US$10 million more than the offer from the group linked with Golden Hill Capital. Man Wah Holdings would also provide US$20 million post-completion working capital and an interest-free US$20 million interim credit facility to be set off against the consideration sum.
However, the judicial managers obtained legal advice that Man Wah Holdings might require two to six months to complete the acquisition. This was due to the need for Man Wah Holdings to hold a shareholders’ meeting under the Hong Kong listing rules.
The shareholders of the Company preferred Man Wah Holdings’ offer. In the end, the judicial managers proceeded to accept Golden Hill Capital’s final offer. The judicial managers decided that the Golden Hill Capital offer was more certain and could be completed quickly. This was against the risk of the subsidiaries collapsing without a deal in the months it would take to complete any sale to Man Wah Holdings.
The shareholders filed an application under the unfair prejudice provisions. The shareholders sought an order declaring that the sale to Golden Hill Capital was null and void, a direction requiring the judicial managers to accept the offer from Man Wah Holdings, as well as an order to restrain the judicial managers from proceeding with any steps to wind up the company.
The shareholders argued that the term unfairly prejudicial relates to unfair harm that can arise from the judicial managers’ decision to sell at an undervalue. They argued that the sale to Golden Hill Capital could not be justified as the shareholder returns from the sale to Man Wah Holdings were superior. They argued that the judicial managers’ general conduct lacked transparency, was unfair to the shareholders, and was thus perverse.
Principles on Unfair Prejudice in Judicial Management
The shareholders applied for relief relying on section 227R of the Singapore Companies Act. This provision is now similar to section 115(1)(a) and (b) of Singapore’s Insolvency, Restructuring and Dissolution Act 2018. The Singapore section 227R is identical to Malaysia’s section 425 of the Companies Act 2016.
Singapore’s 227R (and Malaysia’s section 425) reads:
(1) At any time when a judicial management order is in force, a creditor or member of the company may apply to the Court for an order under this section on the ground —
(a) that the company’s affairs, business and property are being or have been managed by the judicial manager in a manner which is or was unfairly prejudicial to the interests of its creditors or members generally or of some part of its creditors or members (including at least himself) or of a single creditor that represents one quarter in value of the claims against the company; or
(b) that any actual or proposed act or omission of the judicial manager is or would be so prejudicial
The Singapore High Court referred to English case law interpreting section 27 of the UK Insolvency Act 1986 and now paragraph 74 of Schedule B1 of the same Act. Both these UK provisions govern administrators, the English equivalent to judicial managers, and contain identical wording to section 227R.
The guiding principles may be summarised as:
- In bringing unfair prejudice, there must be something more than bare prejudice. Most, if not all, commercial decisions of a company in judicial management will probably cause detriment or prejudice to one or other of the members and creditors. It would be rare for a commercial decision of such a company to be one that is uncontroversial or spares everyone pain and loss.
- The court will not second guess the decision of the judicial manager unless the pain to the applicant is wholly unrequired or the decision is one that is not at all commercially justifiable.
- The judicial manager is justified in weighing the interests of the creditors more than that of the members or shareholders. Where a company is insolvent or is close to being insolvent, creditors’ interests should come to the fore.
- Apart from unequal or differential treatment, unfair prejudice can also arise where the unfair conduct has affected everyone within a class. A sale at an undervalue will prejudice all creditors, and can constitute unfair prejudice if the decision to sell that asset is not logical or is perverse. However, a sale at an undervalue alone will not necessarily show any perversity. The court will generally not look behind the judicial manager’s determination unless there is something particularly lacking on the surface.
In summary, the court will not interfere with a decision of the judicial manager unless it can be shown that the judicial manager committed plainly wrongful conduct, has been conspicuously unfair or has been perverse.
Application of the Principles to the Facts
In this case, the judicial managers were justified in deciding that Mah Wah Holdings’ offer would yield lower shareholder returns than Golden Hill Capital’s offer.
While Man Wah Holdings offered US$10 million more than any other offer, this was to be weighed against the longer period for completion. There was urgency to complete the sale due to the precarious financial position of the Chinese subsidiaries. Time was of the essence. Golden Hill Capital’s offer could be implemented swiftly given that there was already a legally binding agreement. Man Wah Holdings’ offer required several weeks, if not several months, to obtain its shareholders’ approval.
Even if Mah Wah Holdings’ offer was close to or better than Golden Hill Capital’s offer, the judicial managers were not required to get the best price. The judicial managers are entitled to exercise their commercial expertise and judgment in the particular circumstances. The Court will rarely second guess their decision if there are exigencies and other factors present. The key factor on the minds of the judicial managers was the urgency of the sale.
First, this decision is the first judicial management decision dealing with the unfair prejudice provision. With the identical wording in Malaysia’s judicial management provisions, this decision would be of great assistance in future cases in Malaysia as well. Malaysia and Singapore would be guided by the UK cases interpreting the unfair prejudice provision in administration.
Second, the Court reiterated how the Court would be generally slow to second-guess the decision of an insolvency practitioner such as a judicial manager. A judicial manager would have to balance various commercial considerations.
Third, the case is also useful in showing the wide reorganisation powers of the judicial manager. Even under the tenure of the interim judicial managers, the interim judicial managers already carried out a corporate reorganisation to streamline the shares and business of the HTL Group. This would allow for the eventual judicial managers to be able to sell the assets of the Company via the entire business parked under the two wholly-owned subsidiaries.
We also see these express powers in the Ninth Schedule of the Companies Act 2016, paragraph (o) – to establish subsidiaries of the company, and paragraph (p) – to transfer to subsidiaries of the company the whole or any part of the business and property of the company.
Fourth, the case sets out the practical steps that a judicial manager should take when there are competing offers on the table.