RHTLaw Taylor Wessing Managing Partner Tan Chong Huat and Head of Capital Markets Ch’ng Li-Ling authored an article titled “Why did board not consider JM or creditor scheme before winding up move?” for The Business Times
The article was first published in The Business Times dated 3 August 2016.
Why did board not consider JM or creditor scheme before windingup move?
Source: The Business Times © Singapore Press Holdings Ltd.
Date: 3 August 2016
Author: Tan Chong Huat & Ch’ng Li-Ling
ON July 28 2016, the Singapore market reacted to the shocking news that Swiber Holdings Ltd, a mainboard-listed offshore and marine business, had applied to the High Court of Singapore to voluntarily wind up the company. Swiber had also announced the appointment of provisional liquidators and the resignation of three executive directors. Subsequently, on 29 July 2016, Swiber announced it and its subsidiary, Swiber Offshore Construction Pte Ltd, have taken out applications to place themselves under judicial management.
The news on 28 July badly affected the share prices of offshore and marine companies listed on the Singapore Exchange and caused banks such as DBS and UOB to release public statements on their exposure to Swiber’s default.
For any company (not least a publicly traded company), liquidation is almost always the avenue of last resort, after the management has exhausted all other possibilities. Winding-up leaves all stakeholders in a worse-off position: employees lose their jobs, creditors seldom recover the full value of the monies owed, and shareholders (who rank last in distribution of the company’s assets) likely lose the value of their investments. For a publicly traded company, the shock of the liquidation news also hurts market sentiment and investors’ confidence in the sector in which the company operates.
The publicly available financial information on the Swiber Group does not paint a picture dire enough to lead one to surmise that liquidation is the best way out, even in the face of legal claims, statutory demands and impending payments to noteholders. Based on the group’s results announcement for its first quarter ended 31 March 2016, the Swiber Group had close to US$2 billion in assets (including cash and cash equivalents of US$130 million, trade receivables of US$525 million, and property plant and equipment of US$677.7 million), while its total liabilities stood at US$1.43 billion (including bank borrowings of about US$323 million and amount due to bondholders of US$556 million).
While listed companies have filed for members’ voluntary winding-up or sought shareholders’ approval to wind up the company (eg listed companies on the SGX watchlist), it has been relatively rare for a listed company to apply to Court for a winding-up order under section 254(1)(e) of the Companies Act, namely on the basis that it is unable to pay its debts.
The legal regime in Singapore provides companies in financial distress with less drastic options, which give such companies a lifeline to revive its fortunes and to forestall liquidation, in the interest of shareholders and creditors:
Judicial management enables a company to be placed under the management of a court-appointed judicial manager, where there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up. This option preserves the company’s assets from depletion due to claims, and gives a company breathing space to rehabilitate its business by placing a stay on claims and legal proceedings by creditors; and
A scheme of arrangement allows a distressed company and its creditors to rearrange the rights of the creditors. Such a scheme typically enables a company to work out a compromise with creditors on the deferment of payments, on some form of discount on outstanding amounts due to the creditors, and on alternative payment forms (eg payment in shares), while allowing the company to carry on its business.
The suddenness of Swiber’s winding-up application underscores how unprepared the market and investors were for such a development. It raises concerns whether Swiber had been timely, complete and accurate in its disclosures on significant developments, which have a material impact on its business and financial position.
A listed company has to ensure that it abides by the overarching principle to announce any information known to it or any of its group companies which “is necessary to avoid the establishment of a false market” – in its securities or which – “would be likely to materially affect the price or value of its securities”.
The SGX Listing Manual requires announcements to be balanced and fair, and to avoid “presentation of favourable possibilities as certain, or as more probable than is actually the case”.It also requires a company’s announcements to, among others, explain the consequences or effects of the information on its future prospects. If the consequences or effects cannot be assessed, the company should explain why.
For example, on 8 July 2016, Swiber announced that due to weakness in the oil and gas sector since the latter half of 2014, its US$710 million offshore field development project in West Africa had not been able to progress in accordance with its original schedule. No further details on the timeline of this project or an elaboration on how the delay would affect Swiber’s operations were given.
Other than the disclosure obligations under the SGX Listing Manual, directors also have to adhere to their legal duties, chief of which is the fiduciary duty of a director, under section 157 of the Companies Act, “at all times to act honestly and use reasonable diligence in the discharge of the duties of his office”.
Following the market’s shock reaction to the news of Swiber’s liquidation plans on 28 July, Swiber then announced a day later that its Board of Directors and its provisional liquidators had, on 28 July, had discussions with Swiber’s major financial creditor who indicated that they are supportive of an application for Swiber to place itself into judicial management instead of liquidation. Swiber also clarified, among others, that Leonard Tay had only resigned as an executive director of the company, but continues to remain as the chief financial officer of the Swiber Group.
The swift turn of events and the company’s clarification announcements suggest that there might not have been adequate deliberation by the board of directors on its courses of action and the implications of its decisions.
As investigations commence into the circumstances leading to Swiber’s winding-up application and now its plans to go under judicial management, it is likely that more details will come to light, for regulators and investigators to determine if there was any lapse in corporate disclosure. This may ultimately prove to be scant comfort for Swiber’s shareholders (approximately 10,000 as at 14 March 2016). It is also a sobering reminder to listed companies and directors of such companies that transparency and timeliness in public disclosures are paramount for ensuring market stability and investors’ confidence.