Malayan Banking Bhd v Bakri Navigation Company Ltd

• Jurisdiction: Singapore
• Judge: Steven Chong JA,Woo Bih Li J,Judith Prakash JA
• Judgment Date: 29 April 2020
• Neutral Citation: [2020] SGCA 41
• Year: 2020
• Date: 29 April 2020
• Published date: 07 May 2020
• Hearing Date: 20 November 2019
• Plaintiff Counsel: Prem Kumar Gurbani (instructed) and Wu Lennon Leong Chong (Gurbani & Co LLC)
• Citation: [2020] SGCA 41
• Defendant Counsel: Bazul Ashhab bin Abdul Kader, Nora Jessica Chan Kai Lin and Wesley Aw Ming Xuan (Oon & Bazul LLP)
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 87 of 2019

Judith Prakash JA (delivering the judgment of the court):Introduction

The main issue in this appeal is whether certain actions by a Malaysian shipbuilding company had the effect of crystallising a floating charge over its assets and undertaking, and thereby created a fixed charge over a vessel under construction identified in the shipyard as Hull 1118. The appellant-bank had provided financing to the shipbuilder on the security of a debenture that created a fixed and floating charge over the shipbuilder’s undertaking, including Hull 1118 which was then in the process of being constructed for the first respondent. By way of a novation, the second respondent eventually became the buyer of Hull 1118 and acquired title to it in 2011. The shipbuilder defaulted on its repayment obligations to the appellant in 2013 and the appellant then enforced its debenture.

Before the High Court Judge (“the Judge”), the appellant claimed that its interest in Hull 1118 was superior to that of the second respondent for various reasons. Alternatively, the appellant claimed that there was a conspiracy between the shipbuilder and the respondents to deprive the appellant of its security in the vessel. Upon conclusion of the trial, the Judge found that the floating charge only crystallised after the second respondent gained title to the vessel, and that the second respondent’s interest was superior to that of the appellant. In this regard, in interpreting the automatic crystallisation clause in the debenture, the Judge declined to follow a Malaysian judgment involving the same shipyard, the same bank, and the same debenture, which the appellant had relied on as proof of Malaysian law. The Judge also rejected the claim in conspiracy.

The key issues in the appeal relate to the crystallisation of the floating charge, the priority of interests between the appellant and the second respondent, and the question of whether the requisite intention to establish conspiracy had been proved below. The crystallisation issue throws up interesting points. One of these is whether the Judge was bound to follow the Malaysian judgment and hold that the automatic crystallisation clause of the debenture had been triggered, given that the debenture was governed by Malaysian law. The other is whether a transaction outside the ordinary course of the shipbuilder’s business would be a crystallising event by operation of law.

Facts

The facts are primarily drawn from the Judge’s findings in the decision Malayan Banking Bhd v ASL Shipyard Pte Ltd and others[2019] SGHC 61 (“the Judgment”), and from the parties’ cases.

Parties to the dispute

The relationships between the parties are encapsulated in the following diagram and described in further detail below.

The appellant is Malayan Banking Bhd (“MBB”), a bank incorporated in Malaysia. MBB extended credit facilities to the shipbuilder, NGV Tech Sdn Bhd (“NGV”), between 2004 and 2012 for the purpose of its ordinary business which was to build vessels for sale at its shipyard in Malaysia. NGV is not a party to the action.

The first respondent is Bakri Navigation Company Ltd (“Bakri”), the original buyer of Hull 1118 and its sister vessel, Hull 1117, pursuant to two shipbuilding contracts with NGV entered into in August 2007. These shipbuilding contracts were novated to Red Sea Marine Services Ltd (“Red Sea”), the second respondent, on 12 December 2007. Bakri and Red Sea are part of the Bakri group of companies. They have the same registered address, and are incorporated in Saudi Arabia. Bakri owns and operates ships, while Red Sea manages ships.

The Debenture and Assignments

The credit facilities extended by MBB to NGV were secured by six debentures executed by NGV in favour of MBB. It is not necessary to distinguish between the six debentures, their terms being identical, and hence the court below referred to them collectively as “the Debenture”.

Clause 3.1(b) of the Debenture created a floating charge in favour of MBB over, inter alia, all of NGV’s movable and immovable property and other assets. The Debenture provided two mechanisms for the crystallisation of the floating charge:MBB could crystallise the floating charge by notice in writing to that effect to NGV (cl 4.2); andThe floating charge would crystallise automatically if NGV “encumbered” in favour of a third party any property which was subject to the floating charge (cl 4.3). Clause 4.3 is also referred to as the “automatic crystallisation clause”.

The word “encumbrance” played a significant part in MBB’s claim. The word is defined in cl 1.2 of the Debenture:1.2Further definitions

In this Debenture each of the following expressions has … the meaning shown opposite it:-

…

Encumbrance any mortgage, pledge, lien, charge (whether fixed or floating), assignment, hypothecation, deposit, sale with right of retention or other security interest of any kind (including without prejudice any title retention, assignment or transfer by way of security, sale and lease-back and/or sale and repurchase on credit terms) or any other arrangement having substantially the same economic and legal effect as any of the foregoing …

[emphasis in original in underline, emphasis in italics added]

The Debenture was expressly governed by Malaysian law (cl 22.14). However, the parties agreed in the court below to proceed on the basis that the court would be able to refer to cases from Singapore, Malaysia and other Commonwealth jurisdictions in order to determine any question of Malaysian law arising in connection with the Debenture. Accordingly, no expert evidence on Malaysian law was required or adduced in the court below.

To repay MBB for sums advanced, NGV assigned the proceeds of all its shipbuilding contracts to MBB by way of agreements for assignment executed in 2008 and 2010 (referred to collectively as the “Assignments”). The Debenture and the Assignments were duly registered at the Malaysian Registry of Companies in order to preserve their enforceability in the event of the liquidation of NGV.

The shipbuilding contracts

The relationship between NGV (as a shipbuilder) and Bakri (as a purchaser of vessels) led to the construction of four vessels, ie, Hulls 1090, 1091, 1117 and 1118. Hulls 1090 and 1091 were commissioned in late 2006, while Hulls 1117 and 1118 were commissioned in August 2007. The price to be paid for Hulls 1117 and 1118 was US$6.33m each.

The mode of payment for vessels commissioned from NGV changed over time. From December 2005 to March 2006, the shipbuilding contracts provided that payment for vessels was to be by way of fixed instalment payments. From 2006 to 2010, the relevant shipbuilding contracts provided for what we refer to as the “New Mode”. Under the New Mode, payment was to be made in one lump sum on completion and delivery of the vessels by irrevocable letters of credit issued by the respondents’ bank (“Riyad Bank”) against, inter alia, a statement from MBB (“the Statement”) stating that:The letters of credit for the vessels had not been assigned or transferred by MBB to any other party or bank;MBB agreed with the delivery of the vessels to the buyer; andMBB did not have a charge, mortgage, encumbrance, interest or lien over the vessels and the materials, equipment and machinery thereon.

The New Mode of payment applied to Hulls 1117 and 1118.

The Impugned Transactions

Unbeknownst to MBB, several transactions were entered into by NGV and Red Sea between 2009 and 2012. MBB asserted that the net result of these transactions was that Red Sea secured title and possession of Hulls 1117 and 1118, without making payment to NGV. These transactions were impugned by MBB in the action as being outside the ordinary course of business and/or fraudulent and were used as a basis for its submissions on crystallisation and conspiracy. Red Sea relied on the same transactions to claim its status as bona fide purchaser of legal title for value without notice. The transactions are collectively referred to in the Judgment as the “Impugned Transactions”, and we adopt the same usage here.

First, in April 2009, NGV and Red Sea entered into agreements to reduce the purchase price of Hulls 1117 and 1118 by US$1.5m each, the shipbuilding contracts having been novated to Red Sea in late 2007. The respondents alleged in the trial that the reduction was made for the purpose of providing “full and final compensation” from NGV to Bakri for NGV’s delay in delivering Hulls 1090 and 1091. It was asserted that as a result of the delay, NGV had become liable to pay Bakri liquidated damages.

Despite the price reduction, Red Sea continued from 2009 until 2012 to procure extensions of the letters of credit for Hulls 1117 and 1118 at the full contract price of US$6.33m each. According to MBB, it was not aware of the price reduction until after the commencement of the action below.

Second, in January 2011, NGV entered into two agreements (“the Agency Agreements”) with Quoin Island Marine WLL (“QIM”). Under the Agency Agreements QIM was appointed NGV’s agent to take over the construction of Hulls 1117 and 1118. By subsequent addenda to the Agency Agreements, QIM was further authorised to agree to the terms of the delivery of the vessels to Red Sea and empowered as NGV’s attorney to deliver title and possession of the vessels.

Third, according to Red Sea, it paid US$16.8m directly to NGV’s subcontractors in order for them to complete construction of Hulls 1117 and 1118 (“Direct Payments”). Evidence of this includes meeting minutes that were signed in January 2013 by NGV acknowledging this debt to Red Sea, as well as a variety of invoices and other documents.

NGV then allegedly agreed to set off its debt for the Direct Payments against the purchase price of Hulls 1117 and 1118, the net result being that Red Sea became entitled to take...