Diablo Fortune Inc. v Duncan, Cameron Lindsay

• Court: Court of Appeal (Singapore)
• Judge: Sundaresh Menon CJ,Andrew Phang Boon Leong JA,Judith Prakash JA,Tay Yong Kwang JA,Steven Chong JA
• Judgment Date: 21 May 2018
• Docket Number: Civil Appeal No 151 of 2017
• Date: 21 May 2018

Diablo Fortune Inc

and

Duncan, Cameron Lindsay and another

[2018] SGCA 26

Sundaresh Menon CJ, Andrew Phang Boon Leong JA, Judith Prakash JA, Tay Yong Kwang JA and Steven Chong JA

Civil Appeal No 151 of 2017

Court of Appeal

Insolvency Law — Avoidance of transactions — Unregistered charges — Lien over sub-freights and sub-hire — Whether lien over sub-freights or sub-hire constituted floating charge — Whether lien had to be registered — Section 131(1) Companies Act (Cap 50, 2006 Rev Ed)

Held, dismissing the appeal:

(1) The principal objection to the view that the Lien created a sui generis right to intercept the sub-freight analogous to a right of stoppage in transitu was the absence of any direct contractual relationship between the shipowner and the sub-charterers. This meant that the right conferred under the lien would be unenforceable for lack of privity. The contractual analysis would also not explain why payment to the shipowner would discharge the sub-charterer's debt to the charterer: at [26] and [29].

(2) This problem of privity became more pronounced when a chain of charters was involved, and when each of these charterparties was analysed separately as two-party contracts (between the shipowner and the charterer, the charterer and the sub-charterer, and so forth): at [30].

(3) The Lien should be characterised as a floating charge. The Lien created an equitable assignment of sub-freights earned by the Company to Diablo, and such an assignment was one by way of security and not absolute. Diablo had a dormant right to claim the sub-freights in fulfilment of the Company's obligations under the Bareboat Charter; such right was exercisable after notice of the Lien was given; and the Company was free to deal with the sub-freights as its own for its own business operations prior to Diablo's notice: at [36], [37] and [58].

(4) The lien holder was unable to trace into sub-freights paid and its proceeds before the right of lien was exercised not because the lien holder lacked any right of property but because the lien no longer applied to freight which had been paid over: at [39] to [41].

(5) In practical terms, the floating chargee's position (before crystallisation) was not materially different from that of a lien holder. The chargee was incapable of asserting any proprietary or possessory right to any specific asset even if dispositions of the assets were made outside the chargor's ordinary course of business or in breach of the terms of the debenture creating the floating charge. Moreover, there was considerable latitude in determining the scope of a party's “ordinary course of business”: at [46].

(6) On a conceptual level, while a floating charge conferred an immediate security interest, the chargee enjoyed a proprietary interest in the charged assets only after the event of crystallisation. The floating charge created an immediate, unattached security interest in the fund of charged assets, such fund being distinct from its components; it was only after crystallisation that the charge attached specifically to the assets within the fund. This view was consistent with the “hovering” (and then “attaching”) nature of the floating charge, and the inchoateness and narrowness of the rights enjoyed by the floating charge prior to crystallisation. That liens on sub-freights did not confer a proprietary right until the lien was exercised accorded with the operation of floating charges: at [47], [49], [52] and [55].

(7) The characterisation of rights conferred was to be carried out with an emphasis on substance, not form. It did not turn on the subjective intentions of the parties or the labels used. It therefore mattered not that there was no use of the word “charge” or the like in cl 18 of the Bareboat Charter: at [57] and [58].

(8) The Lien should not be characterised as an agreement to create a charge on a future contingent event. The language of cl 18 did not permit the clause to be construed as such. There was no indication that a security would only be asserted on the occurrence of a contingent event: at [61] and [63].

(9) If the Lien was an agreement to create a charge, it would only be registrable when the lien was exercised in response to a default by the charterer. By this time, the charterer would likely be in a parlous financial situation. Allowing the shipowner to impose a charge over the charterer's sub-freights would be tantamount to allowing the shipowner to steal a march on the other creditors, who would be adversely affected if they had dealt with the charterer on an unsecured basis prior to the contingency, and without knowledge of the shipowner's lien: at [65].

(10) Even if the Lien was an agreement to create a charge, it would fall within the definition of “charge” under s 4 of the Companies Act and thus would be registrable: at [66].

(11) Given that the Bareboat Charter was entered into on 6 June 2008 and that the charge remained unregistered, the 30-day period for registration had long expired, and the Lien was void against the Liquidators and any creditors of the Company: at [69].

[Observation: The issue of registration for such liens had remained submerged locally even though the settled English legal position had been that such liens operated as registrable charges. The reason for this long hiatus in Singapore was that the issue would only arise for judicial determination when at least the following five principal facts were aligned. First, a Singapore-incorporated charterer was involved. Second, that charterer became insolvent during the performance of the charterparty. Third, the freight due from the third-party sub-charterer had not been paid over, and was therefore amenable to the exercise of the lien by the shipowner. Fourth, the insolvent charterer had to be a substantial operator justifying the expense for the appointment of a liquidator. Finally, the validity of the lien was challenged by the liquidator so appointed: at [2].

The requirement for registration for liens on sub-freights was hugely inconvenient and impracticable. It was also undeniable that the need for registration might have a negative impact on the local shipping industry. Therefore, in order to maintain Singapore's competitive edge as a leading maritime hub, it might be appropriate to examine suitable legislative reform to carve liens on sub-freights out from the reach of s 131 of the Companies Act: at [77].]

Case(s) referred to

Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 (not folld)

Annangel Glory Compania Naviera SA v M Golodetz Ltd, Middle East Marketing Corp (UK) Ltd and Clive Robert Hammond (The Annangel Glory) [1988] 1 Lloyd's Rep 45 (folld)

Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch) (refd)

Asiatic Enterprises (Pte) Ltd, The v United Overseas Bank Ltd [1999] 3 SLR(R) 976; [2000] 1 SLR 300 (distd)

Caisse populaire Desjardins de Val-Brillant v Blouin [2003] 1 SCR 666 (refd)

Care Shipping Corp v Latin American Shipping Corp [1983] 1 QB 1005 (folld)

City Securities Pte, Re [1990] 1 SLR(R) 413; [1990] SLR 468 (folld)

DBS Bank Ltd v Tam Chee Chong [2011] 4 SLR 948 (refd)

Dearle v Hall (1828) 3 Russ 1 (refd)

Dry Bulk Handy Holding Inc v Fayette International Holdings Ltd (The Bulk Chile) [2012] EWHC 2107 (Comm); [2012] 2 Lloyd's Rep 594 (folld)

Evans v Rival Granite Quarries, Ltd [1910] 2 KB 979 (folld)

Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1979] AC 757 (folld)

G & N Angelakis Shipping Co SA v Compagnie National Algerienne de Navigation (The Attika Hope) [1988] 1 Lloyd's Rep 439 (folld)

Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd [2017] WASC 152 (refd)

Illingworth v Houldsworth [1904] AC 355 (folld)

Jurong Data Centre Development Pte Ltd v M+W Singapore Pte Ltd [2011] 3 SLR 337 (folld)

Lehman Brothers International (Europe), Re [2012] EWHC 2997 (Ch) (folld)

Lin Securities (Pte) Ltd, Re; Chi Man Kwong Peter v Asia Commercial Bank [1988] 1 SLR(R) 220; [1988] SLR 340 (folld)

Media Development Authority of Singapore v Sculptor Finance (MD) Ireland Ltd [2014] 1 SLR 733 (refd)

Murphy v Wright (1992) 5 BPR 11, 734 (distd)

Property Edge Lettings Ltd, Re [2018] 1 BCLC 291 (refd)

Smith v Bridgend County Borough Council [2002] 1 AC 336 (refd)

Spectrum Plus Ltd, Re [2005] 2 AC 680 (refd)

Tagart, Beaton & Co v James Fisher & Sons [1903] 1 KB 391 (folld)

Tradigrain SA v King Diamond Shipping SA (The Spiros C) [2000] 2 Lloyd's Rep 319 (folld)

United Overseas Bank Ltd v The Asiatic Enterprises (Pte) Ltd [1999] 2 SLR(R) 671; [1999] 4 SLR 226 (refd)

Welsh Irish Ferries Ltd, Re [1986] 1 Ch 471 (folld)

Western Bulk Shipowning III A/S v Carbofer Maritime Trading APS (The Western Moscow) [2012] 2 Lloyd's Rep 163 (folld)

Yorkshire Woolcombers Association Ltd, Re [1903] 2 Ch 284 (folld)

Facts

The appellant (“Diablo”) owned the V8 Stealth II (“the Vessel”) and chartered it out to Siva Ships International Pte Ltd (“the Company”) pursuant to a BIMCO Standard Bareboat Charter (“the Bareboat Charter”) that the Company entered into with Diablo on 6 June 2008. Clause 18 of the Bareboat Charter provided that Diablo would have a lien upon all cargoes, sub-hires and sub-freights belonging or due to the Company or any sub-charterers. The Company subsequently entered into a pooling arrangement, under which it sub-chartered the Vessel to V8 Pool Inc (“V8”). V8 paid the Company monthly distributions based on the actual earnings from the pooling arrangement divided by the number of pool participants and after deducting a management fee.

The Company subsequently incurred substantial losses and was unable to pay its debts. On 21 December 2016, the Company's directors notified Diablo that it had filed a winding-up application in Singapore. Upon receiving this notification, Diablo sought to exercise a lien on the sub-freights due from V8 to the Company (“the Lien”) pursuant to cl 18 of the Bareboat Charter. At that point, the monthly distribution for December 2016...