MBf International Ltd v Royal Trust Merchant Bank Ltd

• Jurisdiction: Singapore
• Judge: Warren Khoo L H J
• Judgment Date: 09 June 1993
• Neutral Citation: [1993] SGHC 128
• Citation: [1993] SGHC 128
• Defendant Counsel: Fong Kwok Jen (Haridass Ho & Partners)
• Published date: 19 September 2003
• Plaintiff Counsel: Gan Choon Beng (Chu Chan Gan & Ooi)
• Date: 09 June 1993
• Docket Number: Suit No 457 of 1989
• Court: High Court (Singapore)
• Subject Matter: Mitigation,Contract,Breach thereof,Whether legally enforceable right resulting from breach,Excessive sale of shares,Oral agreement,Mortgage of personal property,Breach,Loss incurred by plaintiffs,Credit and Security,Stocks and shares,liability,Security for credit facilities,Whether manner in which shares were repurchased reasonable,Duty of mortgagees in exercising power of sale in event of default by borrowers not to sell more than necessary to discharge borrowers

Cur Adv Vult

The plaintiffs, a company in the MBf group of companies, claim against the defendants damages for breach of duty as mortgagees in connection with the sale of shares mortgaged by the plaintiffs to the defendants to secure credit facilities granted to MBf Leasing (`the borrowers`), another company in the MBf group. The plaintiffs also allege breach of an oral agreement not to sell some 3.3 million shares in MBfI (Australia) Ltd, being part of the shares subject to the mortgage, without giving the plaintiffs sufficient notice to enable them to redeem these shares.

The first issue revolves around the construction of the relevant contractual documents and a consideration of the general law relating to the duties of mortgagees. The second issue is essentially an issue of fact as to what transpired in a telephone conversation alleged to have taken place some time in the middle of April 1988 between officers of the parties.

The relevant contractual documents are (a) a facility agreement dated 4 March 1987; (b) a mortgage of shares dated 4 March 1987; and (c) a guarantee issued by the defendants in favour of the United Overseas Bank Ltd (`UOB`) dated 12 October 1984.

The facility agreement of 4 March 1987 was a replacement of an earlier facility letter dated 1 November 1984, which had been issued at a time when there was a joint venture between the MBf group and the then owners of the defendants, who were then known as Arbuthnot Latham Asia Ltd. The new facility was negotiated as part of the settlement to terminate the joint venture of the two groups. The new facility agreement was entered into by a syndicate of banks in the Royal Trust group of which the defendants were one, the defendants also acting as agents for all the lending banks. Under this facility agreement, the banks agreed to provide (a) a short-term revolving facility and/or guarantee facility of up to an aggregate principal sum of $6.1m; and (b) a standby facility of up to an aggregate principal sum of $10m. The revolving facility was referred to in evidence and is sometimes referred to herein as the loan facility.

By a letter dated 5 May 1987, it was agreed that the defendants were to be treated as the sole lender of the short-term revolving facility and/or guarantee facility of $6.1m, and the other banks were to be treated as the lenders of the standby facility. This suit involves only the defendants and the $6.1m facility; it does not involve the other banks in the syndicate, or the standby facility.

The guarantee of 12 October 1984 issued by the defendants in favour of UOB was for a limit of $1m principal sum and interest to secure the overdraft facilities granted by UOB to the borrowers.

By cl 1, the defendants were liable on demand to pay all sums which were from time to time owing from the borrowers to UOB. Clause 2 made it clear that it was a continuing guarantee. Clause 13 allowed the defendants to terminate the guarantee by giving 14 days` notice in writing. It was provided, however, that during the period of the notice UOB could continue to accommodate the borrowers as if no such notice had been given and any money due from the borrowers to UOB at or after the expiry of the notice would form part of the moneys payable by the defendants under cl 1.

It is common ground that the guarantee was part of the facility granted under the facility agreement of 4 March 1987 as well as the earlier facility letter of 1 November 1984.

The $6.1m short-term facility, comprising this guarantee facility and the loan facility, was secured by a mortgage of shares dated 4 March 1987, and by a deed of assignment dated 5 March 1987. Under the mortgage of shares, the plaintiffs mortgaged in favour of the defendants: (a) 1,490,000 ordinary shares in MBf Leasing Sdn Bhd; (b) 2 million ordinary shares in MBf Finance Bhd (formerly known as Malaysia Borneo Finance Corporation (M) Bhd); and (c) 1.5 million non-voting shares and 99,998 voting shares in MBf Leasing (HK) Ltd. Under the deed of assignment dated 5 March 1987, the borrowers assigned by way of security in favour of the defendants the benefits of certain leasing and hire-purchase agreements.

By a supplemental deed dated 17 September 1987, the shares in MBf Leasing (HK) Ltd set out in (c) above were replaced by 3.3 million shares in MBfI (Australia) Ltd. It is the eventual sale of these 3.3 million shares which is the subject of the controversy between the parties in these proceedings. They were the vehicle by which the MBf group controlled the Australian entity. The MBf people regarded them as a strategic stake. Mr Wong Hock Seng, the managing director of the borrowers described the position thus:

The 3.3 million Australian shares were what we call controlling or substantial block of shares, representing 11 % of the total issued capital of the Australian company. As such, the block was important to the MBf group, to the plaintiffs, from the control point of view.

These shares were referred to in evidence and are for convenience referred to in this judgment as the Australian shares. The shares in MBf Finance Bhd were and are referred to as the Finance shares.

Events leading to recall of facility

It was a term of the facility agreement of 1987 that the borrowers were to maintain the value of the mortgaged shares at 140% of the amount of the credit facilities outstanding. Following the stock market crash of October 1987, with values of shares greatly diminished, the borrowers had difficulty maintaining the required security margin, although they had no difficulty servicing the loan in terms of payment of interest, fees and charges. This state of affairs caused concern to the defendants and their head office in London to whom the Singapore office reported. The London head office kept a close touch with this account, and was anxious to have it put in order.

On 12 November 1987, the defendants by letter drew the attention of the borrowers to the fact that the security margin had fallen below the required limit of 140%. Between that date and 25 April 1988, there were many discussions between the borrowers and the defendants regarding this question, and the question of the extension of time for the repayment of the loan, the term of which expired on 4 March 1988.

On 7 April, the defendants by letter agreed to extend the repayment of the loan by 60 days from 4 April subject to certain conditions, including the following:

(a) deposit of $1.5m worth of Finance shares on 11 April;

(b) cash payment of $l.5m on 25 April against release of Finance shares to the equivalent value;

(c) cash payment of $2m on 4 May against release of Finance shares to the equivalent value;

(d) cash payment of not less than $1.5m to clear the balance of the loan.

The borrowers failed to deposit the $1.5m worth of Finance shares on 11 April; they did not do so until 20 April. The borrowers also failed to make the cash payment of $l.5m on 25 April.

On 26 April, the defendants served a notice on the borrowers the relevant paragraph of which reads:

As one of the conditions for the grace period of 60 days to repay the original sum has now been breached, we regret to advise that our agreement to extend the repayment period as stated in our letter dated 7 April 1988 is now considered null and void. We hereby declare that the total loan of $4,982,311 (principal + interest) is immediately due and payable. We shall proceed to dispose of the securities without further reference to you.

It is not in dispute that the amount of the loan portion of the facility as of this date was only $3,982,311. The figure of $4,982,311 mentioned in this letter included the $1m contingent liability under the UOB guarantee. It is also not disputed that as of this date, the actual liability in the sense of the amount of the UOB overdraft facilities actually utilized by the borrowers was only $518,895.62.

As of the date of this letter, 26 April, the defendants held the following security in pursuance of the facility agreement:

(a) 1,490,000 ordinary shares in MBf Leasing Sdn Bhd;

(b) 6,185,000 Finance shares;

(c) 3,300,000 Australian shares; and

(d) assignment of certain equipment leases and hire-purchase agreements.

Sale of shares

On the same day, the defendants commenced selling of the Finance shares. Between 26 April and 17 June, the defendants sold all the 6,185,000 Finance shares. On 20 June, 1.8 million Australian shares were sold, and on 21 June the balance 1.5 million Australian shares were sold. The 1.49 million shares in MBf Leasing Sdn Bhd were not sold, neither were the leases and hire-purchase agreements resorted to. They were all eventually returned to the borrowers in October 1988.

The plaintiffs` case

The plaintiffs contend (and I quote from their written submission) that by selling the Australian shares in the manner they did the defendants (a) failed to comply with the plaintiffs` instructions and/or acted in breach of an oral agreement not to sell the Australian shares without giving the plaintiffs sufficient notice to enable the plaintiffs to redeem those shares; and (b) were in breach of a duty as mortgagees to take reasonable care not to sell any more of the Australian shares than were necessary to discharge the liabilities of the borrowers.

Agreement to inform MBf

The evidence for the plaintiffs on the alleged oral agreement by telephone was given by Mr BK Wong. He was either the borrowers` senior manager or the general manager. I am not sure which position he was holding at the time. He was in any event the person who was dealing with the defendants on all important matters relating to the facility. The person he was dealing with was Francis Lee, who was also a senior man on the defendants` side.

BK Wong said that in the middle of April, he was told by his head office that it was important that the Australian shares should not be sold. On instructions, he telephoned Francis Lee...