Electro Magnetic (S) Ltd (under judicial management) v Development Bank of Singapore Ltd

• Jurisdiction: Singapore
• Judge: Goh Joon Seng J
• Judgment Date: 03 March 1994
• Neutral Citation: [1994] SGCA 33
• Docket Number: Civil Appeal No 41 of 1993
• Date: 03 March 1994
• Year: 1994
• Published date: 19 September 2003
• Plaintiff Counsel: Philip Jeyaretnam and Paul Wong (Helen Yeo & Pnrs)
• Citation: [1994] SGCA 33
• Defendant Counsel: K Shanmugam and Paramjit Singh Gill (Allen & Gledhill)
• Court: Court of Appeal (Singapore)
• Subject Matter: Companies,ss 227C(b), (c), 227D(4)(c) & (4)(d) Companies Act (Cap 50, 1990 Ed),Whether the right of set-off gave rise to a floating charge,'Proceedings','Steps _ taken to enforce any _ security','Property',Words and Phrases,'Security',Whether assertion by the lien holder of a right to retain constituted the taking of steps to enforce his security,ss 227B(11), 227C(b) & 227D(4)(d) Companies Act (Cap 50, 1990 Ed),Judicial management order,Receiver and manager,ss 227C(c) & 227D(4)(c) Companies Act (Cap 50, 1990 Ed),Whether right of set-off constituted 'security',Effect of judicial management order on creditor's lien on bills of exchange,Whether exercising the right of set-off amounted to commencing 'proceedings' against the property of the company,Effect of judicial management order on the right of set-off,ss 227C(b) & 227D(4)(d) Companies Act (Cap 50, 1990 Ed)

Cur Adv Vult

The material facts that have given rise to this appeal are briefly as follows. At all material times, the respondents were one of the bankers of the appellants, and had granted to the appellants short term banking facilities and also a term loan. On 3 December 1990, the appellants applied to court by way of petition for an order that the appellants be placed under judicial management, and, by an order of court made on the following day, the appellants were placed under interim judicial management. As at the date of the presentation of the petition, there were due and owing from the appellants to the respondents large sums of money, and the appellants on that date also had certain accounts with the respondents which had credit balances in favour of the appellants. On 4 December, the respondents demanded from the appellants payment of all sums due and, on 5 December 1990, the appellants, through their judicial managers, closed their account with the respondents.

Prior to the presentation of the petition, the appellants had, pursuant to the terms of the banking facilities, sent to the respondents several bills of exchange for collection (`the bills`). By their letter dated 6 December 1990, the appellants through their judicial managers requested the respondents to forward all the proceeds of the bills which the respondents had collected to their account with Lee Wah Bank Ltd. To that, the respondents through their solicitors replied claiming `a lien on those bills and on the proceeds thereof` and stating that the respondents would not be making any payment to the appellants of the proceeds upon receipt thereof until and unless all the liabilities and indebtedness of the appellants to them were paid or discharged in full. That set in motion a series of letters in exchange between the parties concerning the lien claimed by the respondents on the bills and their rights of set-off in respect of the moneys held by them on the appellants` account against the appellants` liabilities to them. Then, on 21 January 1991, the appellants` solicitors demanded (i) the return of all the bills, the proceeds of which had not been collected, and (ii) the payment of the proceeds of all the bills which had been collected. The solicitors for the respondents reiterated the stand previously taken and refused to accede to the demand. The respondents, therefore, retained the bills and presented them as and when they matured and collected the proceeds and applied them in reduction or discharge of the appellants` liabilities to them.

In the meantime, on 21 December 1990, a judicial management order was made in relation to the appellants. Subsequently, a scheme of arrangement was proposed between the appellants and their creditors and the scheme was approved by the court on 13 November 1992 and, consequent on such approval, was implemented. The terms of the scheme provided, among other things, that, after the implementation of the scheme, the appellants would be placed under compulsory liquidation.

On 26 February 1993, the appellants took out an originating summons, No 177 of 1993, seeking, among other things, two declarations to the effect that the respondents were not entitled to exercise any lien over the appellants` property held by them and/or exercise any right of set-off against any moneys belonging to the appellants, and that the respondents, by exercising their lien over the appellants` property and the right of set-off in respect of the appellants` moneys since the date of presentation of the petition for a judicial management order, have breached or acted contrary to Part VIIIA of the Companies Act (Cap 50, 1990 Ed)(`the Act`). The appellants also sought a consequential order that the respondents account to them all moneys properly belonging and owed to the appellants and for payment of such moneys.

The originating summons was heard before Sinnathuray J, and he dismissed the application. The learned judge held that the respondents were not in breach of s 227D(4)(d) of the Act as that provision has no application to the facts. He accepted that the respondents were secured creditors of the appellants and that, whilst it was true that the respondents could not take steps to enforce the security, it was really for the judicial managers to invoke their powers under s 227H of the Act to apply to court for an order to deal with secured property. If that had been done at the proper time, the court would have made an order under s 227H. Against his decision, this appeal has been brought.

The appeal concerns the following sums:

(1) US$5,937.52 held in a US$ current account;

(2) [times ]5,127,230 held in a Yen fixed deposit;

(3) US$358,016.21 being proceeds from the bills sent for collection and collected prior to 21 January 1991 but after 4 December 1990; and

(4) US$266,242.19 being proceeds of the bills sent for collection and collected after 21 January 1991.

A distinction is made between the amount in item (3) and that in item (4): the first represented the total amount of proceeds collected from those bills pursuant to instructions given by the appellants to the respondents, whereas the second was the total amount of proceeds collected from the bills after the judicial managers had demanded the return of the bills. The amounts in items (1), (2) and (3) concern the right of set-off of the respondents and the amount in item (4) concerns the respondents` lien over the bills.

It is not in dispute that the respondents have a right of set-off. Apart from their right at common law, they have been conferred a right of set-off under the terms of the banking facilities and the term loan. The terms of the banking facilities which were accepted by the appellants contain, inter alia, the following provision:

The borrower acknowledges that DBS Bank has a right to set-off for all sums of money held by it on the borrower`s account (in Singapore or abroad) towards the immediate satisfaction of all the borrower`s liabilities to DBS Bank, whether contingent, unliquidated or joint, and whether expressed in a currency different from the currency of the account.

The agreement for the term loan contains an even more comprehensive provision on the respondents` right of set-off, which is as follows:

(2) In addition to any lien, right of set-off or other right which DBS may have, DBS may combine or consolidate all or any of the accounts and liabilities of the borrower with or to the bank anywhere, whether in the Republic of Singapore or outside the Republic of Singapore, or set off or transfer any sum or sums standing to the credit of one or more of such accounts in or towards satisfaction of any of the liabilities of the borrower to the bank on any other account or accounts whether in the Republic of Singapore or outside the Republic of Singapore or in any other respect, whether such liabilities be actual or contingent, primary or collateral, several or joint, notwithstanding that the credit balances on such accounts and the liabilities on any other accounts may not be expressed in the same currency and DBS is hereby authorized to effect any necessary conversions at the bank`s own rate of exchange then prevailing.

The issue is whether, while the appellants were under judicial management, the respondents were entitled to exercise their right of set-off, which they did, without leave of the court. The appellants relied on ss 227C(b) and 227D(4)(d) of the Act and contended that the respondents have breached or acted contrary to these powers. These provisions, in so far as relevant, are as follows:

Section 227C

During the period beginning with the presentation for a judicial management order and ending with the making of such an order or the dismissal of the petition -

...

(b) no steps shall be taken to enforce any charge on or security over the company`s property or to repossess any goods in the company`s possession under any hire-purchase agreement, chattels leasing agreement or retention of title agreement, except with leave of the Court and subject to such terms as the Court may impose; ...

Section 227D

(4) During the period for which a judicial management order is in force -

...

(d) no steps shall be taken to enforce security over the company`s property or to repossess any goods under any hire-purchase agreement, chattels leasing agreement or retention of title agreement except with the consent of the judicial manager or with leave of the Court and (where the Court gives leave) subject to such terms as the Court may impose.

The crux of the issue here is whether the respondents` right of set-off is a security within the meaning of these statutory provisions. The term `security` has not been defined in the Act; it should therefore bear the natural and ordinary meaning. A security over a property consists of some real or proprietary interest, legal or equitable, in the property as distinguished from a personal right or claim thereon. A right of set-off is a personal right; it is a right given by contract or by law to set one claim against the other and arrive at a balance. In this case, the respondents, being a bank, have a right under their contracts with the appellants to set off the credit balance of the appellants in one account against their debit balance in the other or to combine the two and net the balance. Aside from this right, the respondents have no interest or claim on the balance standing to the account of the appellants. Professor RM Goode in his book Legal Problems of Credit and Security (2nd Ed, 1988) has this to say on the nature of a contractual right of set-off, at p 4:

A deposits money with B Bank under an agreement which empowers B Bank to set off against its deposit liability any claim it has against A on any other account. Exercise of this contractual right of set-off will, of course, result in B Bank being paid its claim up to the

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