An Intersection of Cryptocurrency and Insolvency laws: Singapore Extends Creation of Administrative Convenience Classes to Pre-packaged Schemes

Where a company proposes a scheme of arrangement with its creditors under section 1122 of the US Bankruptcy Code, the general rule requires classification based on the nature of the claims or interests classified and permits inclusion of claims or interests in a particular class only if the claim or interest being included is substantially similar to the other claims or interests of the class.  Under section 1126, a class of claims has accepted a plan if such plan has been accepted by creditors, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors. A class of interests has accepted a plan if such plan has been accepted by holders of such interests, that hold at least two-thirds in amount of the allowed interests of such class held by holders of such interests,. Section 1122(b), in turn, provides that an arrangement may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for ‘administrative convenience’, referred to colloquially in bankruptcy circles as the debtor’s ‘convenience class.’

The class consists of unsecured claims below a certain threshold amount, which, as a result of their ‘convenience claim’ status, may often be paid quickly, in cash, in full—even though their larger-sized counterparts in other unsecured classes may receive an entirely different treatment under the plan. Debtors use convenience classes to ease the administrative burden that would be imposed on them were they forced to process many smaller claims in the same manner as the larger ones. 

In a proceeding under section 71 of Singapore’s Insolvency, Restructuring and Dissolution Act 2018, Re Zipmex Pte Ltd and other matters [2023] SGHC 88 (Zipmex), the General Division of the High Court of Singapore (SGHC) last year grappled with the intricacies of insolvency law in the context of the burgeoning cryptocurrency industry. The companies sought an extension of moratoria and approval for proposed schemes related to their cryptocurrency trading operations. During the voting exercise for the schemes, the applicants created an ‘Administrative Convenience Class’ within the ‘Customer Creditors’ class, consisting of customers with withheld assets below US$5,000, who were automatically excluded from voting unless they opted in. The dispute centers around the permissibility of creating this class and whether it was justified to exclude certain customers from the voting process based on the value of their withheld assets, raising concerns about fairness and transparency in the scheme's approval process. It is a significant ruling for recognizing the concept of the ‘administrative convenience class’ within the framework of Singapore insolvency laws.

The Zipmex Group operates a cryptocurrency platform, accessible through an application known as the ‘Zipmex App’, on which various cryptocurrencies are traded.  The Zipmex Group faced a challenge since a considerable segment of their creditor pool consisted of clients with rather small claims. Even if a very small group of creditors held the supermajority in the debt's worth, Zipmex's customer creditors would have been solely responsible for determining the headcount requirement.

In practice, this meant that in order to push through the pre-packaged scheme, Zipmex had to either skip the pre-packaged scheme entirely and hold a regular scheme meeting or get the agreement of the majority of the customers who had minor claims through lockups or written commitments. Both strategies would have required an immense administrative effort, been disproportionately expensive, and probably reduced the assurance of execution. As a remedy, Zipmex Group suggested establishing an administrative convenience class.

The Zipmex Group sought the SGHC’s sanction of these pre-packaged scheme of arrangement. The Court considered the proposal by the Zipmex Group to create an administrative convenience class, drawing parallels with US jurisprudence and historical practices in pre-Code US bankruptcy cases. It evaluated the rationale behind such a class, emphasising the need to balance administrative efficiency with fairness to creditors. Despite initial reservations, the Court acknowledged the practical necessity of streamlining creditor classification and voting procedures in complex restructuring scenarios, particularly within the cryptocurrency industry. 

The creation of administrative convenience classes comprising of low value creditors is intended to reduce the administrative burden on the restructuring entities.  Moreover, for the benefit of potential applicants dealing with cryptoassets with large numbers of unrepresented creditors, engagement under pre-packed schemes is preferable over tedious and complicated litigation. The SGHC approved the pre-packaged schemes of arrangement, endorsing the utilisation of the administrative convenience class. The Court affirmed its satisfaction that the prerequisites outlined in section 71 of the Insolvency, Restructuring and Dissolution Act (IRDA), 2018 had been duly fulfilled. These prerequisites encompassed the disclosure of pertinent information and the attainment of statutory majority requirements in the virtual tabulation of votes. The Court underscored the significance of properly classifying scheme creditors, citing relevant case law under section 210 of the Companies Act 1967, notably referencing Re DSG Asia Holdings Pte Ltd [2021] SGHC 209. This analysis by the Court highlights its meticulous consideration of legal requirements and precedents in granting approval for the restructuring schemes, ensuring adherence to statutory provisions and procedural fairness.

In advocating for the establishment of an administrative convenience class, the applicants drew upon jurisprudence surrounding the US Bankruptcy Code. This practice mirrors historical precedents where pre-bankruptcy Code case law allowed for the segregation of smaller claims, thereby facilitating their full payment and alleviating the restructuring entity of administrative burdens. The applicants contended that this practice aligns with the objective of relieving administrative burdens on restructuring entities, where debtor companies may opt to exclude smaller creditors by satisfying their claims in full. The SGHC considered pre-Code US cases and the rationale behind creating such classes, emphasising the benefits of streamlining administration for the debtor's estate and other creditors.

Although the SGHC recognised the relevance of US jurisprudence, it deemed the reasoning less applicable within the Singaporean context. However, it acknowledged the illustration provided by US case law, emphasising the occasional necessity to compromise strict rights and equitableness to ensure the efficacy and feasibility of restructuring processes. The SGHC notably underscored the impracticality of conducting a poll or voting exercise involving a substantial number of creditors, emphasising the need to mitigate undue prejudice. It deemed the applicants' provision for a quid pro quo, such as full payment and the opportunity for creditors in the administrative convenience class to vote if desired, as crucial safeguards against prejudice.

Addressing the need for a statutory basis to sanction the administrative convenience class, the SGHC turned to section 210(3AB) of the Companies Act 1967. By invoking relevant provisions and interpreting legislative intent, the Court established the legal basis for its decision, ensuring compliance with statutory requirements while addressing practical concerns in the restructuring process. Notably, the Court highlighted the necessity of balancing efficacy and feasibility without unduly prejudicing creditors' rights, emphasising the need for fairness and equity in restructuring proceedings. These provisions stipulate that a scheme requires approval from a majority number of creditors unless the Court directs otherwise. Leveraging this statutory discretion, the Court asserted its authority to waive the headcount requirement, enabling the approval of the pre-packaged scheme even without the affirmative consent of the administrative convenience class creditors. This legal interpretation affirmed the Court's power to adapt procedural requirements in alignment with the practicalities of insolvency proceedings, ensuring fairness and efficacy in restructuring endeavours.

Concluding Comments

The recognition of an administrative convenience class offers a valuable mechanism for navigating the complexities of restructuring, particularly in industries like cryptocurrency, where debtor entities may contend with a multitude of users or account holders holding assets below a certain threshold. The SGHC's decision in this case, endorsing the creation of such a class, demonstrates a pragmatic approach to insolvency proceedings, ensuring efficiency without compromising procedural fairness. The Court expedited the restructuring process by eschewing the requirement for a cumbersome voting exercise involving thousands of creditors, aligning with the exigencies of time-sensitive market conditions. However, debtors should exercise caution in presuming automatic approval for administrative convenience classes, as each case will be evaluated based on its merits. Nevertheless, the salient lessons from this judgment underscore the importance of equitable treatment for creditors and the imperative of adapting legal frameworks to meet the evolving demands of complex restructuring scenarios. In sum, this decision underscores Singapore's legal system's adaptability and responsiveness to the practical needs of ever evolving commercial enterprises in navigating intricate debt restructuring endeavours.

Kartikey Mahajan is a Partner at Khaitan and Co., Singapore.

Bhavya Chengappa is a Senior Associate at Khaitan and Co., Bangalore.

Aayushi Singh is an Associate at Khaitan and Co., New Delhi.