Total Adjudicated Debt of Unsecured Scheme Creditors present and voted at the Scheme Meeting 397,398,41 5 (Item 5) 281,850,819 (B) [231] Premised on the above, the Applicants, particularly the 2nd Applicant would not meet the statutory requirement of 75% with respect of the approval of the IJSB Scheme. Taking into consideration the tabulation above, the actual percentage value of creditors present and voting for the IJSB Scheme, if at all, should read as falling on 62.42% or at best 73.20%. Accordingly, it was contended that this Court ought to dismiss the Applicants’ application for sanction of the IJSB Scheme annexed in Annexure A2 of Enclosure 83. Court’s deliberations [232] Notwithstanding what was stated by Justice V K Rajah JA in TT International, it would seem that the discounting of the votes of wholly owned subsidiaries creditors is not a universal approach by 98 all Courts. Indeed, there is no absolute rule, nor is there any exact mathematical formula, for the votes of intercompany creditors and/or related party creditors to be discounted or disregarded. [233] In UDL Holdings, there were separate schemes of arrangement for the restructuring of 7 companies under the UDL group. Each scheme had just one class of unsecured creditors. A group of creditors brought the argument that the ‘internal creditors’ of the UDL group should not be classed together with the other unsecured creditors and should have been treated as a separate class. [234] The Hong Kong Court of Final Appeal dismissed this argument, holding that the test for classification was based on the similarity or dissimilarity of legal rights against the company. The Court also upheld the decision of the courts below not to discount the votes of the subsidiaries of the scheme company, even though a significant number of these subsidiaries were wholly owned. The relevant paragraphs are set out below: ‘The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings. … Internal creditors. The contention that internal creditors should have been treated as a separate class is contrary to the decisions in Re Jax Marine Pty Ltd and Re Landmark Corporation Ltd which were in accordance with principle and which I have no 99 doubt were rightly decided. The internal creditors, and particularly the companies which were putting their own Schemes forward, undoubtedly had a special interest in promoting the Schemes, but this did not disqualify them from being treated as ordinary creditors. The Court was bound to take their presence into account when considering whether to exercise its discretion to sanction the Schemes, but it was not debarred from doing so.’ [235] UDL Holdings was applied by our Court in Transmile which was later upheld in the Court of Appeal (see [2012] 3 MLJ 679). In Transmile, one of the creditors argued that certain creditors had other interests in voting for the scheme because it would benefit them in a related scheme as monies would then be pumped into that related scheme. The Court, following UDL Holdings, held that the unsecured creditors were correctly placed in one class in so far as their legal rights are concerned, and there was no ‘special interest’ or benefit. The relevant paragraphs are set out below: ‘[46] However in the Re UDL case (supra) it was further held that the mere fact that a group of shareholders stands to receive a benefit under the scheme by virtue of occupying some other position vis a vis the company, such as the status of a creditor, does not warrant their being treated for voting purposes as a class separate from the those who do not occupy that additional position. Lord Millet at p. 182 of the case referred to and cited a passage from the case of Re Jax Marine Pty Ltd [1967] 1 MSWR 145: ...The fact that this group have an additional interest from the ordinary creditors does not, however, appear to me to go to the length of making their rights so dissimilar from those of the 100 ordinary creditors as to make it impossible for them to consult together... The existence of this motive or personal interest does not, in my view, preclude the Smithson group from membership of the class of ordinary unsecured creditors... … The finding of the court that the entire group of unsecured creditors are to rank pari passu places them in one class in so far as their legal rights are concerned and the issue of a 'special interest' or benefit neither arises on the factual matrix here nor warrants separate classification. It cannot be reasonably concluded that such unfairness or oppression on the part of the majority has been demonstrated so as to warrant the withholding of sanction.’ [236] The English High Court in Re Lehman Brothers International Europe (in administration) [2018] EWHC 1980 (Ch) (‘Lehman’) has elucidated the approach to be adopted to the discounting of insider creditors’ votes. Having surveyed various authorities on this issue, Hildyard J was of the view that the Court may either (a) discount the weight given to the majority vote and consider the fairness of the scheme without adopting any particular presumption in favour of the majority or (b) altogether disregard the relevant votes of “special interest” creditors so that the relevant votes are void, and do not count at all towards the statutory majority, in which case if the requisite majorities are not achieved the scheme must fail. [237] In Hildyard J’s view, the Court has always been, and should always be, especially disposed to guard against coercion of a minority by a self-interested majority. In addressing allegedly unrepresentative votes, the Court discretion is to be exercised according to all the circumstances of the case, including (often most importantly) the 101 level of support from unconnected creditors and the Court’s view of the balance of benefit offered by the scheme. [238] In that case, the scheme was approved by the requisite majorities of each class at the creditor voting meetings. At the sanction hearing, the Court assessed whether the members of the Wentworth Group, who comprised a significant proportion of the Higher Rate Creditors, had “special interests” that were different from the other members of that class, which motivated their voting. [239] The Court in Lehman declined to exercise its discretion to disregard the votes of the Wentworth Group or to refuse to sanction the scheme on fairness grounds. Hildyard J accepted that the interests of the Wentworth Senior Creditors were not only 'special interests', but were also in a sense 'adverse' to the interests of other Higher Rate Creditors. However, the Court found that the special interests of the Wentworth Group were not their dominant reason for voting in favour of the scheme. The scheme's overriding objective, namely the speedy distribution of the surplus to creditors, again featured in the Court's reasoning and was recognised as the driving force behind the creditors' voting. This reasoning was borne out by the voting results themselves, which showed that an overwhelming majority of the “independent” Higher Rate Creditors had also voted in favour of the scheme. [240] To my mind, whether the votes of intercompany creditors and/or related party creditors are to be discounted or disregarded is a matter of discretion for the Court when considering whether or not 102 to sanction the scheme based on the particular facts of the case before the Court. [241] In the exercise of the discretion, the Court will consider whether the benefits that the creditors would likely derive from the scheme are clearly better than the alternative liquidation scenario, whether there is any clear and obvious likelihood of the creditors achieving a better scheme, whether the exercise of the votes by the intercompany creditors and or related party creditors was driven by any special or ulterior interest that was ‘adverse’ to the interests of the creditors, whether the opposing creditors pressing for the votes of the intercompany creditors and or related party creditors to be discounted or disregarded have any self-interest and or ulterior motive, whether the adjudicated debts of the intercompany creditors and or related party creditors are genuine or questionable and whether the percentage of independent creditors who had voted in the scheme is such that it reflects a desire on the part of an overwhelming majority in value and in number of the scheme creditors wanting the scheme. [242] In our instant case, the opposing creditors have not demonstrated to this Court that the Scheme Creditors would be better off without the IJSB Scheme and or that there is a good possibility that the Applicants were in a position to significantly improve on the current scheme. Whilst it is always true that there are risks that even after sanction is granted for the schemes, there are possibilities that the schemes could not be implemented, there is little evidence that the Applicants and the White Knight are otherwise than genuine and bona fide in their commitments to see through the schemes. 103 [243] The fact that the intercompany creditors and the Related Company Creditors may have a separate and or ‘special interests’ to see the continuity of the TBCB Group as a going concern, this alone without more, cannot be a reason to disregard their votes. Although there are concerns as regards the correctness of the quantum adjudicated as debts due to the Related Company Creditors given that the audited financial statements for the TBCB Group have not been prepared, there is no evidence to suggest that these debts are not genuine debts. In any case, an appropriate order can be made to address the concerns on the accuracy of the adjudicated debts. [244] More specifically, there is no evidence that the ‘special interests’ of the intercompany creditors and or Related Company Creditors are adverse to the interests of the other scheme creditors. I have also taken on board the fact that a high majority in value and number of the independent creditors in the present case had voted in favour of the IJSB Scheme. [245] As such, I would respectfully decline to follow TT International and would reject the contention by the Opposing Scheme Creditors to disregard the votes of the intercompany creditors and Related Company Creditors. [246] Indeed, it is difficult to appreciate the distinction between wholly owned subsidiaries and other ‘related party’ creditors when considering the issue of discounting their votes. In TT International, the Singapore Court of Appeal held at [158] and [165] that the votes of related creditors who are wholly-owned subsidiaries of a scheme company would be discounted to zero whilst at [170] it held that 104 where a creditor is related to the company by virtue of its shares in the company, its vote shall be discounted by the value of these shares as at the ascertainment date i.e. a partial discount. [247] I am not persuaded that an approach based on the percentage of shareholding of a related company is the way to go. Indeed, in the subsequent Singapore Court of Appeal case of SK Engineering Construction Co Ltd v Conchubar Aromatics Ltd and another appeal [2017] SGCA 51 (‘SK Engineering’), the Court of Appeal re-visited this issue and held at [41] that: ‘it is not possible to proffer a definitive statement of what would constitute a related creditor as the objectivity of a creditor can be undermined in a variety of ways. Whether or not a particular creditor is a related creditor of a scheme company ultimately involves a fact-sensitive and fact-intensive analysis.’ [248] Whilst it did not lay down a definitive rule, the Singapore Court of Appeal set out at [41] the following list of non-exhaustive factors that may establish a related creditor: a) The scheme company controls the creditor or vice versa; or they share a common controlling shareholder (i.e. more than 50% shareholding). b) The creditor and scheme company have common shareholder(s) who hold less than 50% but more than de minimis stake in both companies. 105 c) The creditor and scheme company have common director(s), in particular, director(s) who propose or support the scheme. d) The creditor or scheme company do not have common shareholder(s), but their controlling shareholder(s) are either (i) related by blood, adoption or marriage; or (ii) where the controlling shareholder(s) are corporate entities, these are in turn controlled by individual(s) who are related by blood, adoption or marriage. e) The creditor is related by blood, adoption or marriage to the controlling shareholder(s) or director(s) of the scheme company. [249] After outlining the non-exhaustive factors for establishing what constitutes a ‘related party’, the Singapore Court of Appeal proceeded to indicate, in obiter dicta, that a partial discount as adopted in TT International is unlikely to be adopted in Singapore. In particular, the Court of Appeal had observed that: a) no jurisdiction other than Singapore (in TT International) has applied a partial discount on the votes of related creditors: see [66]. b) partial discount is "inevitably arbitrary and subjective, and not amenable to definitive guidance" in light of the variety of scenarios in which a creditor may be related to the scheme company: see [67]. 106 c) a more principled approach is to wholly discount the votes of the creditor once it is found to be related to the scheme company: see [67]. Andrew Phang JA drew the analogy that if ink had spilled into a glass of water, then the entire water content would be tainted; there is no difference whether the spill was a few drops of ink or the entire bottle of ink, which the Chief Justice concurred. [250] Thus, to my mind, the focus ought to be on the manner in which the related party creditor had exercised its vote rather than its percentage of shareholdings in the applicant company. [251] Accordingly, for the reasons which I have set out above, I am not inclined to disregard the votes of any of the intercompany creditors and or the Related Company Creditors in the present case. Whether commercial and reasonable man would approve schemes [252] We come to the final third element for sanction, namely, whether the Applicants’ schemes of arrangement are ones that any commercially minded and reasonable man would approve of. [253] On this point, I agree with learned counsel for the Applicants that this element too has been satisfied for the reasons set out below: