NO SECURITY FOR THE UNSECURED CREDITOR — The Asiatic Enterprises (Pte) Ltd v United Overseas Bank Ltd

• Date: 01 December 2000
• Published date: 01 December 2000
• Citation: (2000) 12 SAcLJ 218
• Author: VICTOR C S YEO

Banks and finance companies sometimes offer to their favoured clients credit facilities on an unsecured basis. This practice is especially prevalent where there is an economic boom and lenders are flushed with cash and competing aggressively for customers. As a form of protection, however, the standard terms for such unsecured credit generally provide either, that the customer agrees not to give security to others or to take out further loans without the lenders consent (the ‘negative pledge’), or that the lender would be entitled to attach the borrower’s properties to all outstandings upon default. The local courts recently ruled on the legal nature of the latter arrangement in the case of The Asiatic Enterprises (Pte) Ltd v United Overseas Bank Ltd1

The Facts

The facts of this case (which were not disputed by the parties) involved a typical credit facility arrangement between a financier and a corporate customer. On 8 December 1997, the Asiatic Enterprises (Pte) Ltd, the defendant in the case and the appellant on appeal (‘the appellant’), obtained banking facilities from United Overseas Bank Ltd (‘the respondent’) on terms that included the respondent’s Standard Terms. Clause 10 of the Standard Terms, which was the main provision that featured in the case, provided, inter alia, that on the occurrence of stipulated events of default,

‘(i) the Bank shall cease to be under any further commitment to you and all outstandings under the entire credit line (‘the Outstandings’) shall become due and payable immediately; (ii) the Bank shall, in addition to the rights set out herein, be entitled (as equitable chargee) to attach the Outstandings to any property of yours (whether real or personal) and to lodge a caveat against any real property that may now or hereafter be registered in your name whether singly or jointly…’ (hererafter referred to as ‘Clause 10’)

The appellant defaulted on the facility in March and April 1998 and the respondent, on 16 June 1998 exercised its rights under Clause 10 and demanded repayment of all outstanding sums due. The appellant failed to make the repayment. Consequently, the respondent on 9 July 1998 lodged a caveat against the appellant’s three properties pursuant to section 115(1) of the Land Titles Act (Cap 157, 1994 ed). The caveats lodged claimed an ‘estate or interest’ as ‘equitable chargee’ pursuant to the terms of the facility arrangement (ie Clause 10) and the appellant’s default under

the arrangement. The respondent thereafter on 15 July 1998 proceeded to register their ‘charge’ pursuant to section 131(1) of the Companies Act (Cap 50, 1994 ed) declaring in the registration forms the date of creation of the charge to be 16 June 1998 (ie the date on which the respondent sent its letter of demand to the appellant). A certificate of registration was duly issued on 16 July 1998. The respondent then took out an originating summons on 29 July 1998 for an order for its equitable charge over the appellant’s properties to be enforced by sale.

The appellant had, prior to the registration of their charge, borrowed various sums from other creditor-banks exceeding US$32 million. These arrangements were subject to standard negative pledge clauses stating that the facilities were granted on the basis that the appellant had not created and would not in the future create any security of whatever nature in favour of any creditor. Several of these creditors had in fact conducted searches at the Registry for the purposes of determining the charged status of the appellant’s assets. The appellant was subsequently wound up on 30 October 1998 on the petition of another creditor-bank. The respondent, however, was granted leave to proceed with their originating summons notwithstanding the winding-up order. The appellant (through its liquidators) opposed the application.

The Decision of the Courts

The High Court decided the case in favour of the respondent2. The learned judge found, inter alia3, that Clause 10 created an interest in favour of the respondent. Its particulars should thus have been registered pursuant to section 131 of the Companies Act within 30 days of its creation (ie within 30 days of 8 December 1997, the date of the grant of the facility under the facility letter). It was further held that, although the respondent failed to register the charge in time, the subsequent issue of the certificate of registration on 16 July 1998 precluded the court from setting aside or invalidating the charge for failure to comply with the 30 day requirement under section 1314.

The learned judges in the Court of Appeal overturned the decision of the trial judge and ruled in favour of the appellant. They held that neither Clause 10 nor the subsequent events led to any security being taken over

the appellant’s properties. Accordingly, the money advanced by the respondent under the facility agreement was, and remained, unsecured.

The decisions of both the learned High Court judge and the learned judges in the Court of Appeal raise several interesting issues in relation to the law pertaining to corporate charges. The determination of these issues has an impact on the efficacy of Clause 10 — type of clauses and how parties who wish to continue to use such clauses should treat them in practice.

Did Clause 10 create a charge that is registrable under section 131 of the Companies Act?

Clause 10 is a common feature in credit facility arrangements of the kind entered into between the parties to the case both locally and in other jurisdictions5. The learned trial judge and judges in the Court of Appeal had different views on the matter. Parties intending to use such clauses will have to approach the matter differently depending on the view that is taken.

Was a floating charge created?

Relying on the definition of the characteristics of a floating charge in Re Yorkshire Woolcombers Association Ltd6, the learned trial judge found that Clause 10, having met those characteristics, was in essence a floating charge7. For ease of reference, the definition relied upon by the learned trial judge is set out below:

“The characteristics of a floating charge are:

1. (1) it is a charge on a class of assets of a company present and future;

2. (2) the class is one which, in the ordinary course of business of the company, would be changing from time to time; and

3. (3) it is contemplated by the charge that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on business in the ordinary way as far as concerns the particular class of assets.”

The judges of appeal disagreed with the learned trial judge and held that the clause did not create a floating charge. The Court of Appeal instead ruled that, given its ordinary and natural construction, Clause 10 ‘gives to the respondent a right or entitlement at some future date, upon

occurrence of any of the events of default, by unilateral action on its part to assert or to impose a security on the property of the respondent’8. The Court, however, did not comment on the learned trial judge’s application of the definition in Re Yorkshire to Clause 10.

This commentator agrees with the Court of Appeal that Clause 10 did not create a floating charge over the appellant’s assets. While Clause 10 appears to confer the rights as set out in Re Yorkshire, a major aspect of the nature of a floating charge was not sufficiently highlighted by the learned trial judge. This is that a floating charge is a present security and not one that takes effect in the future9. At the time a floating charge is created, the chargee already has a security in the assets charged. The chargor, however, is permitted to continue to deal with the assets in the ordinary course of business until such time as the charge crystallises. While the attachment of the charge takes place in the future upon the happening of a contingency, the security is created at the time the floating charge is granted.

The wording of Clause 10, in contrast, does not mention or refer to any grant of security at the time the facility arrangement is entered into. Such right to take security (if any) would arise upon default. The security would then arise only in the event that the respondent asserts its right to impose a charge on the appellant’s property. This being so, the intended security can only take effect in the future. The Court of Appeal’s ruling that Clause 10 did not create a floating charge is entirely consistent with the principle that a floating charge is a present security10.

Was there a need to comply with section 131 of the Companies Act?

In addition to holding that Clause 10 created a floating charge in favour of the respondent and was therefore registrable under section 131(3)(g) of the Companies Act, the learned trial judge made an alternative ruling. He observed that the word ‘charge’, under section 4 of the Act, is defined as including ‘any agreement to give or execute a charge or mortgage whether upon demand or otherwise’. The learned judge was of the opinion that Clause 10, in entitling the respondent to attach the outstanding debt to any property of the appellant, gave the respondent an ‘option’ to take

or create a charge. This, in his view, was no different from ‘agreeing to give or execute a charge’11. He then went on to rule that the clause, read together with the extended meaning given to the word ‘charge’ in section 4 of the Act, fell within section 131(3)(e), ie an agreement to give a charge on land. Consequently the particulars of Clause 10 should have been registered pursuant to section 131(1).

The Court of Appeal did not deal with this aspect of the trial judge’s decision. Indeed, there was no need for the Court to do so and, as shall be seen later, a determination of the issue would not have made any difference to the Court’s ruling in the case. It is nevertheless important to examine the learned trial judge’s...