INVISIBLE AND SPRINGING SECURITY INTERESTS IN CORPORATE INSOLVENCY LAW
Citation | (2000) 12 SAcLJ 210 |
Date | 01 December 2000 |
Author | Lee Eng Beng |
Published date | 01 December 2000 |
No doubt the recent decision of the Singapore Court of Appeal in The Asiatic Enterprises (Pte) Ltd v United Overseas Bank Ltd1 will be greeted with relief by the banking community. However, while the decision is certainly right in result, this note will respectfully suggest that it is wrong in reasoning with potentially serious ramifications.
Asiatic Enterprises involved the effect of a clause in banking documentation which allowed the bank, upon default by the borrower, to ‘be entitled (as equitable chargee) to attach the Outstandings to any property of [the borrower] (whether real or personal) and to lodge a caveat against any real property that may now or hereafter be registered in [the borrower’s] name whether singly or jointly’. The chronology of relevant events is as follows. On 8 December 1997, the borrower accepted banking facilities from the bank on certain terms and conditions, including the above clause (‘Clause 10’). On 16 June 1998, a notice of default and a demand for payment were served on the borrower by the borrower. On 9 July 1998, the bank lodged caveats against three properties owned by the borrower and, on 16 July 1998, registered an equitable charge with the Registry of Companies. The certificate of registration stated that the charge had been created on 16 June 1998. On 30 October 1998, a winding up order was made against the borrower as a result of a winding up petition presented by another bank creditor.
The central issue was whether the security asserted by the bank over the three properties was valid. Before the High Court,2 it was held that Clause 10 created a floating charge on 8 December 1997. While this meant that under section 131(1) of the Companies Act, it ought to have been registered within 30 days of 8 December 1997, the charge was nevertheless conclusively deemed nto have been duly registered because of the certificate
of registration issued by the Registrar of Companies. Tay Yong Kwang JC relied on section 134(2) of the Companies Act, which provides that the certificate of registration is conclusive evidence that the requirements as to registration had been complied with. Thus, no challenge could be raised against the security on the ground that in fact it had been registered after 30 days of its creation. Tay JC then concluded that the security was valid.
On appeal, the Court of Appeal reversed the decision. The critical aspect in which the Court of Appeal departed from the views of Tay JC was that Clause 10 in fact did not create a floating charge or any other type of security. Rather, Clause 10 merely gave the bank the right, upon the borrower’s default, to create or impose a charge on any property of the borrower and to lodge a caveat against any real property owned by the borrower. With respect to the former, the Court held that the charge could not be created by the unilateral action of the bank, as the Clause did not specifically provide for the mechanism for creating the security interest, and the bank could only have relied on such mechanism as the law provided. With respect to the latter, the Court held that the mere act of lodging a caveat could not ipso facto create a security interest over land. In the circumstances, there was no valid security interest held by the bank over the borrower’s properties. It should be noted that the Court reached this conclusion after considering a line of Australian authority3 holding to the contrary, that is, that a clause in terms similar to Clause 10 created an option over Torrens land in favour of the lender which could be exercised by the lender lodging a caveat.
It is not difficult, however, to see why the Court of Appeal decided to allow the appeal. Tay JC’s decision appeared to sanction the creation of registrable security interests over land which need not be registered until the borrower went into default. The other creditors of the borrower would therefore discover that the assets of the borrower which they previously thought were unencumbered had in fact been subject to security granted in favour of another creditor. The Court of Appeal thus had good reason to soothe the anxiety of lenders and assure them that no such invisible security interests could be created under Singapore law.
The Court of Appeal chose to do so by deciding that on its correct interpretation, Clause 10 did not create any present security interest, but only conferred on the bank the right to create a security interest by availing to itself the mechanisms available under the general law. This is a plausible interpretation of Clause 10, of course, but the Court’s reasoning raises two issues.
Firstly, the Court’s ruling is based solely on the wording of Clause 10. Apparently Clause 10 did not work because it did not provide for a mechanism to create or impose the charge, and therefore the bank could only rely on the mechanisms available under the general law. This leaves open the possibility that a more felicitously-worded clause may have the effect of allowing the creation of present security interests which attach upon default or by the lodging of caveats against Torrens land. For instance, a reincarnation of Clause 10 in a more robust form could read:
On the occurrence of an event of default, the Bank shall be entitled to an equitable charge over all property of the Borrower and the Borrower hereby unconditionally and irrevocably agrees that such equitable charge shall be deemed to be granted to the Bank immediately upon the occurrence of the event of default, without the need for any further consent, agreement, conduct or act on the part of either party and, further and in any event, that the lodgment of a caveat against any real property registered in the name of the Borrower shall effectively and validly create such equitable charge over the real property.
Such a clause, if caught in a dispute like its predecessor, could well find itself before the scrutiny of the Court of Appeal again. In terms of policy, of course, such a clause is as objectionable as Clause 10 and should be jettisoned like Clause 10. But the reasoning of the Court of Appeal may not be wide enough to...
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