Case Note

Citation(2014) 26 SAcLJ 750
Published date01 December 2014
Date01 December 2014

THE AVOIDANCE OF UNREGISTERED CHARGE AND EXTENSION OF TIME TO REGISTER

media Development Authority Of Singapore V Sculptor Finance (md) Ireland Ltd [2014] 1 SLR 733

This case note argues that the decision of the Court of Appeal in Media Development Authority of Singapore v Sculptor Finance (MD) Ireland Ltd[2014] 1 SLR 733 in effectively overruling Ng Wei Teck Michael v Oversea-Chinese Banking Corp Ltd[1998] 1 SLR(R) 778 has provided much needed clarification on the concept of commencement of winding up. But the concept of the statutory trust over the assets of a company in liquidation that the latter espoused has some merit in providing the proprietary basis for the avoidance of an unregistered charge against a chargor in liquidation. It also argues that current practice on the registration of charges out of time where the chargor's insolvent liquidation is likely has failed to give sufficient weight to the avoidance policy underlying registrable but unregistered charges.

I. MDA v Sculptor Finance

1 In Media Development Authority of Singapore v Sculptor Finance (MD) Ireland Ltd1 (“MDA v Sculptor Finance”), RSM Group Pte Ltd (“RGPL”) granted fixed and floating charges (“Charges”) to Sculptor Finance (MD) Ireland Ltd (“Sculptor Finance”), a company incorporated in Ireland, as security for the moneys that RGPL owed to companies in the Sculptor Finance group. The Charges were required to be registered, under s 131(1) of the Companies Act2 within 30 days of their creation. Henceforth all references of statutory provisions are to this Act, unless otherwise stated. Sculptor Finance claimed that it did not register the Charges because it did not have advice on Singapore law when the Charges were created and was not aware of the need for registration. It

only became aware of the need for registration when it appointed solicitors in Singapore in May 2012.

2 At that time, RGPL was in dire straits. The Media Development Authority of Singapore (“MDA”), an unsecured creditor of RGPL,3 had taken proceedings against it and a judicial management application had been filed against it. Sculptor Finance filed an application to register its Charges out of time (“Application”) in July 2012 under s 137. Pending the hearing of the Application, the judicial management application was withdrawn and a winding-up application was filed against RGPL. Overriding MDA's objection, Tay Yong Kwang J followed the current English approach and granted an extension of time under the “inadvertence” and “just and equitable” grounds subject to two provisos to protect the interests of the creditors of RGPL.4 The Charges were duly registered and shortly after the company was wound up. MDA appealed against Tay J's decision.

3 The Court of Appeal (“CA”) held that the appeal raised two issues and held against MDA on both of them. On the first issue, it held that MDA did not have locus standi to oppose the Application on the ground that the Charges were void against it under s 131(1). It has been held in Ng Wei Teck Michael v Oversea-Chinese Banking Corp Ltd5 (“Ng Wei Teck”) that on the presentation of a winding-up petition or, under current terminology, the filing of a winding-up application, a statutory trust arises to give an unsecured creditor sufficient interest in the subject matter of the unregistered charge to qualify as a “creditor” for the purposes of s 131(1). The CA disagreed with Ng Wei Teck, holding that the trust arises only on the making of the winding-up order. On the subsidiary issue of the nature of the statutory trust, the CA approved Power Knight Pte Ltd v Natural Fuel Pte Ltd6 (“Power Knight”) and leaned in favour of the English position that such a trust is a purpose trust with the beneficial interests in suspense, but in any event the trust did not confer on the unsecured creditors any proprietary interest in the company's assets.7 MDA thus had no locus standi to oppose the Application before Tay J. The second issue was whether Tay J

erred in exercising his discretion to allow the Application despite finding that there was a real possibility that RGPL would be wound up. The CA dealt with this issue very briefly. It noted the division of judicial opinion on whether an extension of time may be allowed where winding up was imminent and held that whichever approach was preferred, the court's decision was a matter of discretion and not of law.8 The CA held that Tay J's approach was eminently sensible and practical, and struck a balance in protecting the interests of Sculptor Finance and the general body of creditors.9 There was thus no reason for the CA to interfere with his decision.

4 This note analyses the trilogy of Ng Wei Teck, Power Knight and MDA v Sculptor Finance and argues as follows. First, while in principle it is possible to develop the statutory trust as espoused in Ng Wei Teck consistently with the principles and rules on the assets and liabilities of a company, it is certainly open to the CA to reject that option and hold that the unsecured creditors have no beneficial interests in the assets of a company in liquidation. Secondly, the CA's exposition on commencement of winding up rectifies the mistake in earlier cases which treated the commencement of winding up as a uniform concept that applies equally to compulsory and voluntary winding up. Its significance extends well beyond s 131(1). Thirdly, the current English approach on the exercise of discretion to allow registration out of time when the company is insolvent and liquidation is likely is probably inconsistent with the avoidance policy of s 131(1). This author submits that the English approach should not be followed.

II. The avoidance law in s 131(1)

5 Section 131(1) renders a registrable but unregistered charge void against two parties — the liquidator and any creditor of the company. It will be convenient to refer to them as the “liquidator ground” and “creditor ground” respectively. The CA in obiter dicta said that when a company was in liquidation the proper party to invoke s 131(1) to avoid a charge for non-registration was the liquidator.10 It should be noted that this does not necessarily mean that the cause of action is vested in the liquidator. In Smith v Bridgend County Borough Council,11 the House of Lords held that void against the liquidator meant void against the company in liquidation. On the facts in MDA v Sculptor Finance,

the “liquidator ground” was clearly inapplicable at both the hearing of the Application and in the appeal. In the former no liquidator had yet been appointed, while although a liquidator was in office in the latter, the Charges were already registered before RGPL was in liquidation.

6 With regards to the “creditor ground”, it is equally necessary to consider separately its applicability at the Application stage and in the appeal. Tay J did not address this issue, as the CA noted.12 The reason might be because MDA's arguments were concerned with how the court's discretion to extend time for registration should be exercised when winding up was imminent or very likely. Hence, the only reference to Ng Wei Teck by Tay J was for the purpose of considering the impact of the case on the exercise of his discretion. In that regard Tay J said that Ng Wei Teck and Power Knight did not come into play if there was no winding up; thus, if the winding-up application was dismissed, an extension of time would not prejudice the unsecured creditors of RGPL.13

7 Before commenting on the CA's treatment of Ng Wei Teck, it is necessary to explain the “creditor ground” and the context against which Ng Wei Teck was decided. Section 131(1) is descended from English and Australian provisions all of which trace their origin to s 14(1) of the Companies Act 1900.14 All those provisions provided that if a registrable charge is not registered within a specified time, it is “void against the liquidator and any creditor of the company”. It is established law that the word “creditor” means a creditor who has acquired a proprietary right to or an interest in the subject matter of the unregistered charge. In other words, an unregistered charge is not void against an unsecured creditor. Two reasons have been given for this restrictive interpretation of the word “creditor”. First, when the company is a going concern, an “unsecured creditor could not have intervened to prevent payment being made to the lender whose charge was not registered”.15 Secondly, an unsecured creditor could not have prevented the company from granting a new charge, duly registered, to substitute the unregistered charge.16

8 The restrictive interpretation of “creditor” is consistent with the legislative intention behind the enactment of s 14(1) of the Companies Act 1900. The reason given for requiring registration “is to take care that

publicity is given to any mortgages which exist”.17 Registration is not an essential element for a charge to be created. An unregistered charge is perfectly valid between the company and the chargee before the company's liquidation. This must therefore mean that “creditor” can only mean a creditor with a proprietary interest in the subject matter of the unregistered charge. Further, if an unregistered charge is void against an unsecured creditor outside of liquidation, it will be otiose to provide further that the charge is void against the liquidator, who acts primarily in the interests of the unsecured creditors in an insolvent liquidation.

9 It is more difficult to explain the rationale for the “liquidator ground”, an avoidance provision. However, it is obvious that the “liquidator ground” is very different from typical avoidance provisions such as unfair preference or transaction at an undervalue. Sir Roy Goode QC acknowledged as much when he said that the “liquidator ground” does not fulfil the four minimum conditions which he has identified must be satisfied for a transaction entered into by a company to be upset under insolvency law.1...

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