Audrey Lim JC:
The Liquidators of the plaintiff Pars Ram Brothers (Pte) Ltd (“the Company”) applied under s 310(1)(a) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Companies Act”) for the court to determine the method of distribution with regard to the sale proceeds of four categories of pepper stock held on trust by the Liquidators for the Company’s creditors, the defendants. This application raises the question of the appropriate method of distribution when assets have been commingled into a mixed bulk and are insufficient to satisfy all the claims made in respect of it by claimants (none of whom is a wrongdoer towards another) who have a security interest in the mixed bulk.
Background
Prior to its liquidation, the Company was in the spice business, trading primarily in pepper and cashew nuts. It financed its import of stock mostly through trade financing facilities granted by banks. Typically, lending banks would disburse funds directly to the relevant supplier of stock upon being furnished with proof of the Company’s purchase. As security for the loan, the Company would pledge the shipping documents (eg, the bill of lading) for the financed stock to the relevant bank. Thereafter, to enable the Company to sell the stock to its end-customers, the bank would release the relevant shipping documents to the Company. In consideration for this release, the Company would execute a trust receipt on terms that the Company held the financed stock or its proceeds of sale on trust for the bank. The trust receipts typically identified the financed stock with reference to their corresponding bill of lading number, invoice number and/or a description of the financed stock.
After the Company became insolvent, the Liquidators were informed of stock in the Company’s possession which was held in a warehouse in Singapore, which included 17 different categories of pepper. As they were perishable, the plaintiff proposed to sell the stock and hold the proceeds on trust for the creditors pending the determination of their claims. None of the creditors objected to this proposal.
On 7 February 2017, Steven Chong J (as he then was) heard the plaintiff’s application under s 310(1)(a) of the Companies Act for the court to determine whether the gross sale proceeds of 12 categories of pepper stock should be (a) held for the benefit of the general pool of the Company’s creditors; or (b) paid to the defendant lenders who could assert a security interest in the pepper stock which they financed. Chong J found that the gross sale proceeds of the pepper stock should be paid (in proportions to be resolved separately) to those defendants who could assert a security interest in the underlying stock which they financed, save for the proceeds for four categories of pepper stock (“the Disputed Categories”) in which the general creditors were also entitled to assert an interest in certain quantities of the stock. The grounds for his decision can be found in Pars Ram Brothers (Pte) Ltd (in creditors’ voluntary liquidation) v Australian & New Zealand Banking Group Ltd and others [2017] 4 SLR 264 (“Pars Ram”).
All of the Company’s stock, save for the Disputed Categories, has been accounted for or distributed. The Disputed Categories consist of:
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| Categories | Sales proceeds |
| Category 11 (875 bags of Black Pepper Lampong ASTA 575 G/L) | $482,539.75 |
| Category 13 (915 bags of Sarawak Black Pepper Yellow Label 540 G/L) | $350,336.39 |
| Category 15 (150 bags of White Pepper Vietnam Double Washed) | $85,793.60 |
| Category 17 (5144 bags of White Pepper Muntok FAQ) | $3,757,186.25 |
The claims in respect of the stock under the Disputed Categories exceed their respective sale proceeds. It is also undisputed that stock for the Disputed Categories have been commingled into a mixed bulk. This brings me to the present application, where the parties sought a determination on the method of distribution to be adopted for the sales proceeds of the Disputed Categories of pepper. The underlying legal question is this: when assets commingled into a mixed bulk are insufficient to satisfy all claims made in respect of the said assets by claimants (none of whom is a wrongdoer towards another) who have a security interest in them, what method of distribution should be used?
The various methods of distribution
The foreign case authorities have identified a number of possible approaches to the distribution of mixed funds where such funds are insufficient to satisfy every claim. This includes the “first in, first out” approach, the pari passu approach (or what the Liquidators termed as the single-block method) and the rolling charge approach (or what the Liquidators termed as the multi-block method). The parties had confirmed that they were not advocating for the “first in, first out” method. The second defendant, Bank of Baroda, submitted that the rolling charge method should be used whilst the fifth and sixth defendants, DBS Bank Ltd and Indian Bank, argued for the pari passu method to be applied. The rest of the defendants, whilst they had previously informed the Liquidators of their preferred approach, did not attend and make submissions in court. The Liquidators maintained a neutral position although they supported the rolling charge method. In the Annex to this Grounds of Decision, I have inserted a table (produced by the Liquidators and not disputed by the defendants) illustrating how the selection of the method of distribution affects the defendants’ share of the sale proceeds.
Having heard the submissions, I determined that the rolling charge method, rather than the pari passu method, should be adopted. Given the paucity in local case authority on this issue, it would be useful to discuss the various methods that the courts have considered before coming to the reasons for my decision.
The “first in, first out” method
The “first in, first out” approach was set out in Devaynes v Noble [1814-23] All ER Rep 1, more commonly known as Clayton’s Case. Essentially, “when sums are mixed in a bank account as a result of a series of deposits, withdrawals are treated as withdrawing the money in the same order as the money was deposited” (Barlow Clowes International Ltd (in liq) and others v Vaughan and others [1992] 4 All ER 22 (“Barlow Clowes”) at 35).
The scope of application for the rule in Clayton’s Case is rather limited. For one, it is questionable whether it has any application out of a banker-customer relationship (Barlow Clowes at 44; Re Diplock’s Estate, Diplock v Wintle [1948] 1 Ch 465 (“Re Diplock”) at 555; Re Ontario Securities Commission and Greymac Credit Corp (1986) 55 OR (2d) 673 (“Greymac”) at 688). In Q & M Enterprises Sdn Bhd v Poh Kiat [2005] 4 SLR(R) 494 (“Q & M Enterprises”) at [56], Andrew Phang JC (as he then was) observed that the rule was applied almost invariably in the context of running accounts as such accounts are, ceteris paribus, ideal situations for the application of the rule. While Phang JC posits that there was no reason to treat any debtor-creditor relationship involving a running or current account differently, he also notes the judicial limitation of the applicability of the rule in Clayton’s Case, which can be attributed to the rule’s perceived arbitrariness. The effect of the rule is that it favours later contributors over earlier contributors. Citing the dicta of Learned Hand J in Re Walter J Schmidt & Co, ex p Feuerbach (1923) 298 F 314 at 316, Woolf LJ in Barlow Clowes agreed that the fiction of the “first in, first out” method apportioned a “common misfortune through a test which has no relation whatever to the justice of the case”, and that it led to “capricious consequences” (at 35).
It is observed that the courts have in various subsequent cases distinguished or disapplied the rule in Clayton’s Case in favour of a method that would produce a more just and equitable outcome. In Re Diplock, Lord Greene MR characterised the rule as “really a rule of convenience based on so-called presumed intention” (at 554). In Barlow Clowes, Woolf LJ held (at [42]) that if the application of the rule would be impracticable or result in injustice between the investors it will not be applied if there is a preferable alternative or if the application of the rule would be contrary to the express, inferred or presumed intention of the investors. In Russell-Cooke Trust Co v Prentis [2003] 2 All ER 478 at [55], Lindsay J, in rejecting the use of the rule in Clayton’s Case and adopting the pari passu method instead, held that the modern approach in England is not “to challenge the binding nature of the rule but rather to permit it to be distinguished by the reference to the facts of the particular case”, and for the rule to be “displaced by even a slight counterweight” such that it would be more accurate to call it the exception (rather than the rule) in Clayton’s Case. Phang JC suggested at [56] in Q & M Enterprises that the rule could be an “evidential presumption and no more”.
It also bears mention that the rule in Clayton’s Case would be displaced when there are mixed funds made up of contributions from a beneficiary and a fiduciary, as the operative presumption would be the one that works best in favour of the claimant and against the fiduciary (Graham Virgo, Principles of the Law of Restitution (Oxford University Press, 3rd Ed, 2015) at 622, citing Re Hallett’s Estate (1880) 13 Ch D 696 and Re Oatway [1903] 2 Ch 356). Finally, whether Clayton’s Case is even applicable in the context of tracing remains unresolved (for differing views, see Barlow Clowes at 44; Q & M Enterprises at [56]; Greymac at 684; O’Connor Rosamund Monica v Potter Derek John [2011] 3 SLR 294 at [47]).
The cases therefore suggest that save for exceptional cases, the rule in Clayton’s Case is not the appropriate method to be applied to the resolution of claims made by multiple claimants...
