NUS PRACTICE LAW SEMINAR

Transcription

1 NUS PRACTICE LAW SEMINAR 1 August 2018 Security in Bank Lending/Trade Financing: Refresher and Case/Legislation Update Alex Wong Commissioners for Oaths Notaries Public 30 Raffles Place #11-00 Chevron House

2 Key Purpose of Security Cut queue and avoid the threats posed by : * Other Creditors The first creditor to execute his judgment against particular assets wins the rest must look elsewhere. * Liquidator When a company goes into winding-up, its assets will pass out of its control and the direct reach of creditors and into the hands of a liquidator who will apply them for the benefit of all creditors, and all that an unsecured bank can hope for is a payment by the liquidator of a proportion of the debt owed. The main purpose of taking security is for a bank to avoid the above two threats by being first in line. A secured bank can stand outside of the liquidation of its insolvent customer and enforce its security. 1

3 Security Devices Four types of security devices known to Singapore law (the pledge, the lien, the mortgage and the charge (fixed and floating)). Whether a charge is fixed or floating is a matter of law, so that the label which the parties have placed on the transaction or documentation will not be determinative. If the court finds that the Company can freely deal with the charged assets, then it will characterise the charge as floating. A fixed charge will not be appropriate for certain assets which a Company needs to manage, deal with, or sell in the ordinary course of business, for eg stock-in-trade, receivables and cash. If a fixed charge is given, the Company will have to seek the consent of the banks each time it wishes to deal with the charged assets. A Company can continue to trade freely even after it has given a floating charge over all its assets. 2

4 Key legal consequences: * a floating charge given by an insolvent company within 6 months of its winding-up is invalid: Section 330 CA * a holder of a floating charge ranks behind preferential creditors in a winding-up, for eg. liquidators, employees, and IRAS: Section 328(5) CA The above 2 consequences (i) are the reason for the number of litigation on whether a charge is fixed or floating, and (ii) should be advised by lawyers to banks taking a floating charge. 3

5 Creation of Security Creation of security predicates 3 distinct legal facts. Security must attach. The assets must be ascertained and identified at the time the security is meant to attach to them. Security must be perfected. 3 methods of perfection: * Possession (as in the case of the pledge). * Registration. For eg, where a charge to which Section 131 CA applies is created by a company there shall be lodged with the Registrar in the prescribed manner for registration, within 30 days after the creation of the charge, a statement containing the prescribed particulars of the charge, and if Section 131 CA is not complied with in relation to the charge the charge shall, so far as any security on the company s property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company. Specific registration requirements for security over specific assets for e.g. Merchant Shipping Act (registered ships in Singapore), Land Titles Act (registered land in Singapore). 4

6 * (in the case of security over receivables, debts or choses-in-action) Notice to the debtor. Under the rule in Dearle v Hall, priority goes to the first assignee of the debt or other chose-in-action to give notice to the debtor, subject to the qualification that a later assignee only gains priority over an earlier assignee if he has made his advance without notice of the prior assignment. Security must have priority over other claims. Perfection gives maximum efficacy to the security interest, but does not guarantee priority over later interests/claims. That is a matter to be resolved by priority rules. The basic principle of priority between security interests is that the first in time to be created wins (Nemo Dat Quod Non-Habet). However the rules determining the priority of charges are fairly complex and there are numerous exceptions to the Nemo Dat Rule. 5

7 Selected Qn/Eg 1: Charge A is dated 1 August and registered on 8 August. Charge B is dated 2 August and registered on 7 August. Which Charge has priority? Selected Qn/Eg 2: Debtor Factors/Sells its existing and future receivables to Bank A. Thereafter, Debtor gives a fixed Charge over its receivables to Bank B. Which Bank has priority over the receivables? Selected Qn/Eg 3: Debtor gives a fixed Charge over receivables to Bank A, and also undertakes to pay the proceeds of those receivables into an account with Bank A. Thereafter, Debtor collects in the receivables and pays/deposits the monies instead into its Overdrawn account with Bank B. Which Bank has priority over the monies? 6

8 2017 Case Update Pars Ram Brothers (Pte) Ltd (in creditors voluntary liquidation) v ANZ Banking Group & Others [2017] SGHC 38 Facts: Debtor-Company was in the spice/commodity trade, and had obtained trade financing from various banks to finance the purchase and storage of pepper stocks. Identified pepper stocks were pledged to the banks by transfer of bill of lading, and the banks released the pepper stocks to the Debtor-Company under a trust receipt. Debtor- Company, in breach of its undertakings, commingled the financed pepper stock by stacking them together without segregation which made it impossible to identify which pepper stocks (or bags of pepper stock) were financed by a particular bank. Debtor-Company went into liquidation. 7

9 Issue: Would a commingling of goods or failure to segregate the goods (such that identification is not possible anymore) extinguish the security interests in them? If so, the pepper stock (or their sales proceeds) will go into the general pool of creditors. First decision of its kind where the Singapore High Court considered whether the commingling of goods in which one bank had a security interest with goods in which another bank had security interest extinguished the respective security interests. Held/Authority for: A security interest will survive the commingling of goods. Thus the mixed pepper stock (or their sales proceeds) will be divided among the secured banks in proportion to their respective contributions. 2 noteworthy points: * Prior to the mixture of goods, the banks had a valid and perfected security interest in the goods. * The evidential difficulty of ascertaining the respective bank s interests in the pepper stock was caused by the Debtor-Company s breach of its undertaking to segregate the pepper stock, and thus must be resolved against the Debtor-Company and any unsecured creditors claiming through the Debtor-Company. 8

10 Decision gives some assurance to trade financing banks which are always concerned/face the risk that their customers will mix/commingle the goods financed by them. Banks are advised to appoint a warehouse/collateral manager to ensure that their financed goods are properly segregated. However for short-term financing, it may not be feasible or practical for cost reasons to do so. In such a situation, the banks should ensure and monitor that their customers keep proper records (such as warehouse ledgers and trust receipts showing invoice no., bill of lading no., and description of goods financed) so that their financed goods/shipments can as far as possible be identified. In this case, the liquidators were able to at least identify the incoming stock by reference to the warehouse ledgers, and the banks which had financed specific shipments by reference to the shipping documents and trust receipts. 9

11 Duncan, Cameron Lindsay v Diablo Fortune Inc [2017] SGHC 172 Facts: Singco was engaged in commercial vessel operations and chartered a vessel from a Greek shipowner. The Charter provided that shipowner has a lien over sub-freights (ie freight payable to the charterer by a sub-charterer), the governing law of the Charter was English law, and any dispute would be referred to arbitration in London. Singco entered into a pooling agreement with another party whereby a portion of earnings from the pooling arrangement would be paid to the Singco as charter hire (sub-freight). Singco went into liquidation. Greek Shipowner commenced arbitration against Singco in London. The liquidator subsequently obtained an order from the London High Court recognising the Singapore liquidation and staying the London arbitration, and applied to the Singapore High Court to determine whether the shipowner s lien over sub-freights is void against them as it was not registered under S131 CA. Issue: Whether a lien over sub-freight is a registrable charge. First Singapore decision on the juridical nature of a contractual lien over sub-freights. 10

12 Considerations: In the shipping industry, it is not unusual for shipowners to have a contractual lien over sub-freights. The Court took into account the competing concerns in the areas of admiralty and insolvency - (i) Registration of the contractual lien as a charge may be inconvenient and impracticable to shipowners/admiralty practitioners especially if the charterparty is of short duration or for only one voyage, and (ii) Registrations would give third parties (such as banks) notice of lien which will help them better decide whether to extend credit or enter into any transaction with the charterer. A shipowner with an unregistered contractual lien should not rank in priority to other creditors. Held/Authority for: A maritime contractual lien falls within the meaning of a charge under S131 CA as a floating charge or a charge on book debts and has to be registered to be valid against the liquidator. This decision is in line with English authorities. Ultimately it should be left for the legislature to determine whether to exclude contractual liens from the registration requirements. In Hong Kong, such lien has been statutorily excluded from the requirement of registration. Pending similar legislative action in Singapore, a prudent cautious shipowner will register its contractual lien with ACRA, to prevent them from being void against the liquidator in a winding up of its charterer. Companies (Amendment) Bill No. 27/2018 was read the first time on 9 July

13 Though the focal point was the Singapore High Court s analysis of the contractual lien on sub-freights, the case contained other important rulings/confirmations: * The law governing registration of charges, the priorities of security interests and the distribution of assets in insolvency proceedings is to be determined by the law of the country where the winding up is commenced (Lex Fori Concursus), and not the governing law of the contract. * A dispute arising under S131(1) CA is non-arbitrable. The arbitration of claims arising upon insolvency would be contrary to the objectives of the insolvency regime. * First Singapore decision on application for extension of time to register a charge after the company was wound up. Although it has never been the case or industry practice for maritime liens to be registered and the lienee (shipowner) was thus unaware of any registration requirements under Singapore law, the court declined to grant an extension of time for registration as it was not persuaded it was just and equitable to do so after the lienor (company) was wound up, as it will prejudice unsecured creditors. 12

14 2017 Companies Act Amendments To better equip Singapore to compete with traditional jurisdictions for debt restructuring (US and England) and be an international centre for debt restructuring. Retain Judicial Management and Scheme of Arrangement (based on English law model with variations derived from Australian Legislation) and incorporate key features of Chapter 11 of US Bankruptcy Code (which made US the world s leading debt restructuring centre). In a liquidation, a secured creditor is not caught by the moratorium and may still enforce its security. For Judicial Management, before the 2017 Companies Act Amendments, CA already provides for an automatic moratorium upon the filing of an application; and a secured creditor may not enforce its security. For Scheme of Arrangement, the 2017 CA Amendments introduced an automatic 30 day moratorium upon the filing of an application; and a secured creditor now may not enforce its security. 13

15 The 2017 CA Amendments allow the courts to confer super priority for rescue financings (ie financing which is necessary for the survival of the company as a going concern or to achieve a more advantageous realisation of the assets of the company than in a liquidation). Debts/loans arising from rescue financing may: * Be on par with winding up expenses; * Have super priority over preferential debts; * Be secured by a security interest which is subordinate to an existing security; or * Be secured by a security interest on par or higher than an existing security. Re Attilan Group Ltd [2017] SGHC 283 * First High Court decision on super priority for rescue financing. * Court held that super priority should not be ordinarily resorted to and should only be granted where strictly necessarily given that it disrupts the expected order of priority of creditors. 14

16 NUS PRACTICE LAW SEMINAR 1 August 2018 Thank You for your time. Alex Wong Tel: Commissioners for Oaths Notaries Public 30 Raffles Place #11-00 Chevron House Singapore wonglk@tpclaw.com.sg Website: Tel: Fax: Web: