Unfair prejudice

In arriving at its decision, the High Court considered English case law, interpreting the equivalent provision under English law. The touchstone is the term ‘unfair prejudice’. It must be shown to the court that there must be some form of prejudice to the interests of its creditors or members, and more importantly, this prejudice must be ‘unfair’. As to what constitutes ‘unfair prejudice’, mere prejudice or detriment will not be sufficient. The High Court observed that 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.

The general rule, in line with the English position, is that the court will not interfere with the decisions of the JMs unless it is shown that the JMs have committed plainly wrongful conduct, have been conspicuously unfair or have been perverse. It is only where the ‘pain’ to the applicant is wholly unrequired, or the JMs’ decision is one that is ‘not at all commercially justifiable’, that the court may consider invoking its powers under section 227R of the CA.

Key pointers

Other key pointers from this decision:

1. JMs are justified in weighing the interests of creditors more than those of members or shareholders.
2. Exigencies of the situation is a valid consideration in weighing competing offers, such as the time taken to complete a rescue transaction where the target is in dire financial straits.
3. When considering competing offers, even if the price obtained was not the best, this on its own would not conclusively establish ‘unfair prejudice’. Even in a case of an undervalue sale, that in itself may not be sufficient to show perversity which persuades the courts to second-guess the commercial decision of JMs.
4. Competing bidders have to be clear on the terms of their offer. The JMs have no duty to uncover and clarify ambiguities associated with any offer put forth.

JMs step into the shoes of directors in a judicial management scenario, and the same principles apply where the courts would ordinarily be very reluctant to second-guess the commercial decisions of these managers and stewards, except in the most egregious of circumstances. This decision is a welcome pronouncement on the operation of section 227R CA (now section 115 IRDA) and its test of ‘unfair prejudice’.

Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.