Lin Securities Pte ((in Liquidation)) and Others v Royal Trust Bank (Asia) Ltd

• Jurisdiction: Singapore
• Judgment Date: 22 November 1994
• Date: 22 November 1994
• Docket Number: Civil Appeal No 58 of 1994
• Court: Court of Appeal (Singapore)

Lin Securities Pte

Plaintiff

and

Royal Trust Bank (Asia) Ltd

Defendant

[1994] SGCA 130

Yong Pung How CJ

,

M Karthigesu JA

and

L P Thean JA

Civil Appeal No 58 of 1994

Court of Appeal

Insolvency Law–Avoidance of transactions–Unfair preferences–Shares hypothecated to various creditors–Subsequent physical delivery of shares to and sale by one creditor–Whether delivery of shares constituted fraudulent preference–Section 329 Companies Act (Cap 50, 1994 Rev Ed)

The first appellant, Lin Securities Pte (“Lin”), was a stockbroking firm, and the respondent, Royal Trust Bank (Asia) Ltd (“RTB”), was a merchant bank. Lin had made arrangements with RTB and 20 other banks to obtain credit facilities secured by hypothecation of shares in its possession. The hypothecated shares were not set aside and demarcated for each of the banks separately and were charged to various banks simultaneously.

As a result of the dramatic downturn in the stock markets of Singapore and Malaysia, Lin subsequently became insolvent. The banks started to demand delivery of the shares charged to them but Lin managed to resist the demands, except two, including that of RTB, which succeeded in obtaining physical delivery of the shares charged to it. Lin had an arrangement with RTB that the shares charged to RTB were to be handed to it to be kept in its custody each afternoon when trading closed, and returned to Lin the following morning when the share market opened to enable it to carry on its business. Subsequently, Lin wrote to the banks to inform them that it would be discontinuing its practice of hypothecating shares. Thereafter, on one occasion, when Lin tried to retake delivery of the shares in RTB's custody, RTB refused to return the shares to Lin. Lin went into liquidation. RTB sold the shares in its custody and after satisfying the amount owing to it, RTB paid the surplus of the sale of proceeds to the liquidators. The liquidators sought a declaration that the delivery of the shares by Lin to RTB was a fraudulent preference and was therefore void as against the liquidators. The High Court held that the liquidators failed to establish that Lin had, in delivering the shares to RTB, intended to prefer RTB over the other creditors. The appellant appealed.

Held, dismissing the appeal:

(1) The question was whether in all the circumstances, Lin had acted with a view to preferring RTB over all the other creditors. The mere fact of a preference was not, without more, tantamount to proof that the debtor had acted “with a view” to prefer: at [25].

(2) Considering the circumstances in which Lin came to let RTB have overnight possession of the shares, pressure had been exerted on Lin: at [26].

(3) In delivering the shares to RTB, Lin did not expect RTB to exercise its right to retain the shares when trading resumed and did not intend that those shares should be kept by RTB to satisfy the latter's debts. There was thus no intention on its part to prefer RTB over the other creditors: at [32].

FLE Holdings Ltd, In re [1967] 1 WLR 1409 (folld)

F P and C H Matthews Ltd (in liquidation),In re [1982] Ch 257 (distd)

Ho Mun-Tuke Don v Oslo Finans AS [1990] 1 SLR (R) 326; [1990] SLR 398 (folld)

M Kushler, Limited, In re [1943] Ch 248 (folld)

T W Cutts (a bankrupt), Re; Ex parte Bognor Mutual Building Society v Trustee in Bankruptcy [1956] 2 All ER 537 (folld)

Bankruptcy Act (Cap 20,1985 Rev Ed)s 53

Companies Act (Cap 50,1994 Rev Ed)s 329 (consd)

Bankruptcy Act 1914 (c 59) (UK)s 44 (1)

Eben W Hamilton QC, Randolph Khoo and Thio Shen Yi (Drew & Napier) for the appellant

George Lim and Roslina Baba (Wee Tay & Lim) for the respondent.

Judgment reserved.

L P Thean JA

(delivering the judgment of the court):

The background

1 The first appellants, Lin Securities Pte (Lin), are a stockbroking company in liquidation, and the second, third and fourth appellants are the liquidators. The respondents are a merchant bank. In June 1982, the respondents extended to Lin a short term revolving facility to the extent of $4m, secured by: (a) a charge over a portfolio of quoted shares; and (b) joint and several guarantees of all the directors of Lin. To constitute the charge, an instrument called “letter of hypothecation” dated 3 August 1982 was executed by Lin, and the instrument was registered with the Registry of Companies. Under the terms of the letter of hypothecation, the respondents had, inter alia, the right to call for the physical deposit of the shares charged to them and take possession of them, and in the event of a breach of a term thereof or a default in payment of any money due, the respondents had the right to dispose of such shares and apply the net proceeds in or towards payment of the entire amount due and owing to them.

2 On 4 August 1982, Lin began to utilise the facility granted by the respondents. Since then and until 21 January 1986, as required by the respondents, Lin had without fail submitted to the respondents weekly “certificates of hypothecation” stating the quantity, counter, unit price and value of the shares held in their possession and charged to the respondents; but the numbers of the certificates in which the shares were comprised were not stated. Lin retained at all times possession of all the shares which were charged to the respondents. As it transpired, Lin had similar arrangements with 20 other banks which had also granted facilities to Lin. In favour of all these banks similar letters of hypothecation were executed, and all these instruments contained substantially the same or similar terms. Each asserted that certain shares described in daily or weekly certificates (as the case may be) to be furnished by Lin were in the physical custody of Lin and were charged to the bank in question. All the banks appeared to be contented with this form of security and they did not interfere with Lin's practice of retaining the shares and freely trading in them. Under each letter of hypothecation, Lin delivered to the bank concerned daily or weekly certificates, as the case may require, of the shares in their custody which were said to be charged or “hypothecated” to the bank. Like the certificates submitted to the respondents, these certificates stated only the quantity, counter, unit price and value of the shares as of the dates of the certificates, and did not state the numbers of the certificates in which the shares were comprised. Furthermore, all the shares held in Lin's possession and charged to the banks (including the respondents) under the letters of hypothecation were not set aside separately and demarcated for each of the banks respectively. All the shares so charged formed a common pool. Lin had, in fact, charged the same shares to various banks simultaneously.

3 In November 1985 or thereabout, there was a dramatic downturn in the stock markets of Singapore and Malaysia. On 2 December 1985, trading on The Stock Exchange of Singapore Ltd (“SES”) was suspended for a few days owing to the collapse of the company called Pan Electric Industries Ltd. When trading on the SES resumed, the values of most of the shares plummeted to an unprecedented level. As a result, the value of Lin's assets, as represented by the shares in their possession, was severely and adversely affected. To compound the situation, Lin had a great number of shares in companies connected or associated with Pan Electric Industries Ltd and the values of these shares fell even more sharply than others in the wake of the collapse of the latter. At this time, Lin were heavily involved in “forward contracts” on these shares. Many “forward contract” parties defaulted and failed to make payment to and take delivery of the shares from Lin. Saddled with these huge irrecoverable debts, Lin were not able to honour their obligations to the sellers under the “forward contracts”. In consequence, Lin became insolvent and were clearly so from December 1985 onwards.

4 Thenceforward until about mid-February 1986, the creditor banks of Lin, one after another, demanded immediate delivery of the shares charged to them. The first bank to do so was The Development Bank of Singapore Ltd. By a letter dated 2 December 1985 they demanded from Lin immediate delivery of the shares charged to them. Lin resisted the demand, and there followed a further exchange of letters between them. In their letter of 27 January 1986, Lin audaciously offered to pay off the outstanding amount owing to the bank by 30 April 1986 which the bank accepted. At about this time, several other banks also made similar demands. The Industrial & Commercial Bank Ltd by a letter dated 22 January 1986 also demanded immediate delivery of the shares charged to them. Lin similarly refused to do so and subsequently also reached agreement with that bank to pay off the outstanding amount by 30 April 1986. Arrangements were also made by Lin with Banque Paribas and Dresdner Bank Aktiengesellschaft, who had similarly demanded for the shares, to settle the amount owing to them respectively by or about late February 1986.

5 At about that time, the Monetary Authority of Singapore (“MAS”) and the SES were...