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

• Jurisdiction: Singapore
• Judge: S Rajendran J
• Judgment Date: 04 March 1994
• Neutral Citation: [1994] SGHC 58
• Docket Number: Originating Summons No 45 of 1992
• Date: 04 March 1994
• Published date: 19 September 2003
• Year: 1994
• Plaintiff Counsel: Raj Singam, Mohan Pillay and Randolph Khoo (Drew & Napier)
• Citation: [1994] SGHC 58
• Defendant Counsel: George Lim (Wee Tay & Lim)
• Court: High Court (Singapore)
• Subject Matter: Whether delivery of hypothecated shares made with dominant view to prefer creditor over others,Insolvency Law,Unfair preferences,Avoidance of transactions

The plaintiffs seek a declaration that the delivery of certain shares to the defendant by Lin Securities (Pte) (`Lin`) on 21 February 1986 was void because:

(a) it is a fraudulent preference under s 329 of the Companies Act, and/or

(b) the memorandum of deposit dated 21 January 1986 pursuant to the terms of which the shares were allegedly handed over, is void and/or invalid and unenforceable.

At the hearing of the summons Mr George Lim, counsel for the defendant, indicated that the defendant would not be relying on the terms of the memorandum of deposit but would be relying solely on its rights under a letter of hypothecation dated 3 August 1982 executed by Lin. No arguments were therefore advanced in respect of the validity or otherwise of the memorandum of deposit.

Background

By a letter dated 29 June 1982, the defendant extended to Lin a short term revolving facility of $4m to be secured by:

(a) a hypothecation over a portfolio of quoted shares acceptable to the lender (`security shares`), such shares to be held by the borrower in trust for the lender;

(b) joint and several guarantees of Mr Lin Tah Hwa, Mrs Kathryn Tan nee Lin Shun Ching, Miss Lin Ai Ling, Mr Lin Cheang Hwa, Mr Ho Weng Meng and Mr Lin Jo Yan.

As required by the facility letter, the defendant, on 3 August 1982, executed a letter of hypothecation and from 4 August 1982, began to utilize the facility. The relevant provisions of the letter of hypothecation were:

3 Charge

(3) .1 As a continuing security for our performance of our obligations under the facility letter and the payment of the secured amounts, we hereby charge, transfer and assign to the bank all our rights, title and interest in and to the security shares and the additional security (whether such security shares are beneficially owned by us or charged or mortgaged to us by the owner thereof).

5 Undertakings

We hereby undertake to the bank that we will:

...

(b) transfer, assign, charge or in any other way deal with the security shares and the additional security only in such manner as the bank may from time to time direct or approve in writing.

...

(f) allow the bank or its representatives to inspect and (if the bank so requires) to take possession of all certificates and other documents of title to the security shares as and when the bank shall deem fit and necessary, and for that purpose to enter upon any premises where any of such certificates and documents may be;

(g) on demand and at our cost and expense, deliver or cause to be delivered to the bank or as the bank may direct the certificates relating to the security shares and all transfers and documents relating thereto and do all such acts and things as the bank may require to perfect or to protect the security hereby created.

Clauses 7.1 and 8.1 of the letters of hypothecation empowered the bank to sell, or otherwise dispose of, the shares for breach of any of the terms of the facility letter and to apply the proceeds towards the discharge of sums due to the defendant from Lin. From 4 August 1982 Lin utilized the facility.

Up to 21 January 1986, Lin, as required by the defendant, submitted to the defendant a weekly certificate of hypothecation stating the quantity, counter, unit price and value of the shares held in its possession and hypothecated to the defendant. From the outset Lin was allowed by the defendant to retain possession of the shares and to deal with the shares.

The letter of hypothecation was a device relied upon not only by the defendant but by 21 other banks which had extended facilities to Lin. The letters of hypothecation with all these banks were broadly in similar terms. Each asserted that shares which were in the physical custody of Lin, were `hypothecated` to that bank. The banks did not interfere with Lin`s practice of retaining the shares and freely trading in the shares so said to be hypothecated. Indeed, it eventually came to light that Lin had even `hypothecated` the shares given as security to one bank, to various banks simultaneously.

Towards the end of 1985, as a consequence of a dramatic downturn in the stock markets of Singapore and Malaysia, Lin found itself in an extremely precarious financial position. On 2 December 1985, trading on the Stock Exchange of Singapore (`SES`) was suspended owing to the Pan Electric crisis. The value of shares at this time fell sharply. As a result, the value of Lin`s assets, as represented by the shares in its possession, was adversely affected. In particular, Lin had a great number of Pan Electric, GIH, Supreme Corporation and Sigma Metal shares whose values fell sharply in the wake of the Pan Electric crisis. At this time, Lin was heavily involved in `forward contracts` involving these shares. Many `forward contract` parties defaulted and failed to make payment and take delivery of the shares. As a result, Lin was not able to honour its obligation to the sellers under the `forward contracts`. Lin became saddled with immense debts. As a result Lin became insolvent and was so from December 1985 onwards. This was not in dispute.

From December 1985 to late February 1986, the creditor banks, one after another, began to demand immediate delivery of the hypothecated shares. Of the 21 banks that had letters of hypothecation with Lin, only two banks, namely, the defendant herein and United Malayan Banking Corporation (`UMBC`), obtained physical delivery of the hypothecated shares.

By a letter dated 22 February 1986 which appears to have been sent to the banks on 24 February 1986, Lin unilaterally discontinued the practice of hypothecating shares. In the letter Lin stated:

Dear Sirs

We would like to inform you that our letter herein supersedes our certificate of hypothecation to you dated ... [date varies from bank to bank].

With effect from the date hereof, we wish to inform you that we have decided to discontinue the practice of hypothecating shares to you.

The reason for this sudden development is that arising from the case of Standard Chartered v City Securities , certain of our bankers have seen it fit to threaten us with an application to court to seize possession of the shares hypothecated to them. As you know, all our bankers rank pari passu and we are sure you would not like to be put in a position inferior to them should they so decide to act. At the same time, if we were to give all the shares to all the bankers on a physical deposit basis, frankly we would find it administratively impossible to carry out our business as stockbrokers.

We therefore intend now to discuss with you how we can continue our relationship with you on another basis. Should our discussions result in no agreement between us then we intend to settle our account with you in full before 30 April 1986, which is the deadline we have agreed upon with several of our bankers.

We hope to hear from you in due course.

Between 24 February 1986 and 27 February 1986, triggered no doubt by the contents of this letter, 18 banks commenced proceedings against Lin seeking the delivery of the shares hypothecated to the banks. In each of these proceedings, although the respective plaintiffs obtained almost immediately ex parte interim injunctions for the delivery of the shares, they were not able to obtain physical possession of the shares.

On 25 February 1986, officers of the Commercial Affairs Division raided the premises of Lin and seized all share certificates found. On 28 February 1986, three of the creditor banks presented a winding-up petition and M/s Peter Chi, Bobby Chin and Michael Ng were, on that day, appointed provisional liquidators. Lin was subsequently wound up on 18 July 1986 by an order of court made in Companies Winding Up No 183 of 1986.

In the case of Re Lin Securities (Pte); Peter Chi Man Kwong & Ors v Asia Commercial Bank & Ors, the liquidators of Lin sought the determination by the court of the legal effect of each of the letters of hypothecation and the priorities as between the various banks. On 21 March 1988, Chao Hick Tin J held that the letters of hypothecation were floating charges and hence valid securities.

The arrangements with the defendant

The circumstances under which Lin agreed to give physical custody of the shares under hypothecation to the defendant were enumerated in an affidavit filed by the defendant. On Friday, 17 January 1986, Laura Hwang (the then managing director of the defendant) and Wong Chin Kheng, the executive director, met with Lin Tah Hwa of Lin at Lin`s office. At this meeting they informed Lin Tah Hwa that the bank`s principals in London were concerned about the securities furnished by Lin and they requested Lin Tah Hwa to arrange for the shares hypothecated to the defendant to be kept in the custody of the defendant each afternoon, from 4.30pm to the next morning, 9am. Lin Tah Hwa agreed to this request. On Monday, 20 January 1986, the defendant confirmed this arrangement in writing. An `additional safeguard` requested Lin to execute a memorandum of deposit and charge but as noted earlier, no arguments were raised on the validity or otherwise of this memorandum of deposit and charge.

Between 21 January 1986 and 21 February 1986, Lin and the defendant acted on the arrangements agreed to on 17 January 1986. However, by 21 February 1986, rumours were rife that Lin was in a difficult financial position. Also, at a meeting on 20 February 1986, the Monetary Authority of Singapore (`MAS`) had indicated that banks were at liberty to make their own commercial decisions regarding securities held by them. In the event, shortly after the shares were deposited with the defendant by Lin on the evening of Friday, 21 February 1986, the defendant decided to exercise its rights under cll 5(b) and (f) of the letter of hypothecation to retain possession of the shares. Accordingly, on the morning of Monday, 24 February 1986, when a representative of Lin came, as usual, to take possession of the...