Banking Law

• Citation: (2017) 18 SAL Ann Rev 87
• Date: 01 December 2017
• Publication year: 2017
• Published date: 01 December 2017

Bank's remedies against guarantor of loan

5.1 The case of Pereira, Dennis John Sunny v United Overseas Bank Ltd1 (“Pereira v UOB”) concerned guarantees for bank loans that were secured by mortgages over two properties. The main question that arose was whether a court had the power to stay an execution of an order for the sale of mortgaged property until an open-ended date. The Court of Appeal highlighted that where a mortgagee is entitled to possession of property under a mortgage, a court generally has no power to refuse an order for possession.2 The only exception to this principle is that a court can adjourn a summons for possession or stay an execution of an order for possession for a short period to allow the mortgagor a chance to redeem the mortgage in full, provided that there is a reasonable prospect that the mortgagor would be able to do so.3 The Court of Appeal expressed the view that this applies equally whether a creditor is seeking to enforce security provided by the mortgagor or by the guarantor,4 but emphasised that this is a very limited power that is subject to all the parameters mentioned in the previous sentence. Further, a court's jurisdiction to grant a short adjournment in this situation can only be exercised once, after which it would be spent, so that any further reasonable prospects of the mortgagor being able to redeem the mortgage in full would be irrelevant.5

5.2 Another interesting aspect of Pereira v UOB concerned the reinforcement by the Court of Appeal of the principle that “a creditor with several remedies at his disposal can choose which one to enforce, at what time, in which order, and in whatever way, subject only to the rule

that he cannot recover more than [what] is due to him”.6 It follows from this that where one has guaranteed another person's debt, the guarantor has no right to require the creditor to proceed against the principal or against any security provided for the guaranteed debt before proceeding against himself.7 No argument to the contrary appears to have been mounted against this well-established legal principle in Pereira v UOB, and it was applied as a matter of course by the Court of Appeal. This is a principle that any potential guarantor would do well to keep in mind. It stands side by side with the basic and more-often mentioned legal principle that a traditional bank guarantee imposes only secondary liability, and not primary liability, on a guarantor. The interaction of the two legal principles results in the position whereby although the secondary liability of a guarantor means that he will not be liable unless the principal debtor defaults on the loan, once such default has taken place, the creditor has a free choice whether to proceed against the principal debtor or the guarantor first. As Pereira v UOB shows, there is no requirement that a creditor must first exhaust its remedies against the debtor before proceeding against the guarantor. This poses a real risk for the guarantor in cases where the guarantor has deeper pockets than the principal debtor who may be in financial difficulties, as the creditor bank would naturally choose to proceed against the guarantor first, leaving the guarantor to enforce its own remedies against the principal debtor.

Requirements for bank merger under Banking Act

5.3 It is relatively unusual for questions of banking regulation to come before the Singapore courts. The Court of Appeal decision of Jacob Agam v BNP Paribas SA8 (“Jacob Agam v BNP”) was one such case, where an issue of banking regulation was relevant to determine the rights of the parties in a contract law dispute between a bank and the guarantors of certain bank loans. The facts of this case were that BNP Paribas Wealth Management (“Wealth Management”), through its Singapore branch, loaned €61.7m to the appellants' companies which were secured by personal guarantees from the appellants. When the loans were not fully paid on maturity, Wealth Management sued the appellants in the Singapore High Court to recover approximately €30m

under the guarantees. Subsequently, there was a merger effected under French law between Wealth Management and its parent company, BNP Paribas SA (“Paribas SA”), and Paribas SA applied to the Singapore International Commercial Court (“SICC”) (to which the main proceedings had been transferred) to be substituted as a plaintiff in the proceedings originally brought by Wealth Management. SICC granted the application at first instance and the appellants appealed to the Court of Appeal.

5.4 The appellants argued that the substitution should not be allowed. The main argument related to the use of the word “subrogated” in the merger agreement. The appellants argued that the word should be given its common law meaning, which meant that Wealth Management would survive as a legal person in a way that permitted Paribas SA to sue in Wealth Management's name. This argument was dismissed by the Court of Appeal as such a reading would contradict the whole substance of the merger agreement, which envisaged that Wealth Management would be dissolved and its assets transferred to Paribas SA.9

5.5 The appellants' other arguments were based on ss 55B–55C and 14A–14C of the Banking Act.10 Section 55B(1) sets out the conditions under which a bank may transfer the whole or part of its business to a transferee which is licensed to carry on business in Singapore. These conditions include the consent of the Minister or his certification that consent is not required, and the approval of the court for the transfer. Section 55B(2) goes on to provide that subsection (1) is without prejudice to the right of a bank to transfer the whole or any part of its business under any law. By rejecting the appellants' reading of the words “without prejudice” in s 55B(2), the Court of Appeal implicitly agreed with the court below that these words meant that a bank could transfer its business under any law without “any adverse operation that might otherwise apply by virtue of s 55B(1)”.11 In other words, s 55B(1) need not be satisfied if the merger was taking place under s 55B(2), meaning that no court approval was required. The Court of Appeal was satisfied that court approval was not required to ensure that the transferee was not an unsatisfactory entity who might affect Singapore's standing as an international banking and financial centre because s 55B only allowed transfer to a transferee which is licensed to carry on banking business in Singapore. Such an entity would already have satisfied MAS that it met the requirements for a licence. The Court of Appeal also decided that the phrase “under any law” in s 55B(2) meant under any law in the world and did not mean Singaporean law. This is to be contrasted with

the phrase “any written law” which refers to the Singapore Constitution and to Singapore legislation.12 The appellants also argued that once Wealth Management decided not to apply to the court under s 55B, it should have applied to the Minister under s 14A which provides for ministerial approval of applications for the mergers of banks and their wholly owned subsidiaries. The Court of Appeal rejected this argument, as it was of the view that the procedures under ss 14A and 55B(1) are not mandatory but permissive and a transferor need not chose one or the other but may proceed “under any law” if it wishes.13 Whilst the Court of Appeal's interpretation of the merger provisions in the Banking Act might seem to be permissive in that a merger of a bank in Singapore with another bank can take place under foreign law without the approval of the court or ministerial approval in Singapore, the controls are very much in place as such mergers are by definition only possible between entities that have a licence in Singapore14 and have therefore been approved by MAS for that purpose.

Post-dated cheque given as collateral

5.6 Several interesting questions relating to the law of cheques were discussed by the High Court in Millenium Commodity Trading Ltd v BS Tech Pte Ltd 15 (“Millennium v BS Tech”). The plaintiff (an investment company in Hong Kong) and defendant (a company incorporated in Singapore) entered into a financial joint venture agreement whose purpose was for the defendant to procure a standby letter of credit in favour of the plaintiff. Pursuant to this agreement, the plaintiff transferred €400,000 to the defendant, €200,000 of which was credited into the defendant's bank account and the other €200,000 to the personal bank account of the defendant's managing director, Tahir. Upon receipt of these amounts, the defendant drew a post-dated cheque for $678,016.94 in the plaintiff's favour, which, as agreed under cl 2 of the agreement, was to be returned to the defendant when the transaction was completed. Under the agreement, the defendant was supposed to procure a standby letter of credit in the plaintiff's favour by a certain date, but failed to do so. The plaintiff responded by presenting the cheque for payment, but it was dishonoured. The plaintiff brought an action on the cheque and sought summary judgment but failed as the assistant registrar granted the defendant conditional leave to defend the

claim. On appeal by the plaintiff, the High Court upheld the assistant registrar's decision.16

5.7 One of the arguments raised by the defendant was that the cheque was not a bill of exchange under s 3 of the Bills of Exchange Act17 (“the Act”) because its delivery was conditional within the meaning of s 21(3)(b) of the Act as under cl 3 of the agreement, the defendant delivered the cheque to the plaintiff on condition that it be returned to the defendant upon completion of the transaction.18 This argument conflated two different issues, which the court unpacked. The decision clarifies that the two sections of the Act are focused on different aspects of conditionality: s 3(1) on the conditionality of the payment order made to the drawee, and s 21(3)(b)...