Pars Ram Brothers (Pte) Ltd (in creditors' voluntary liquidation) v Australian & New Zealand Banking Group Ltd and others

• Jurisdiction: Singapore
• Judge: Steven Chong J
• Judgment Date: 02 March 2017
• Neutral Citation: [2017] SGHC 38
• Docket Number: Originating Summons No 1232 of 2016
• Date: 02 March 2017
• Published date: 23 March 2017
• Plaintiff Counsel: Pradeep Pillai, Joycelyn Lin and Chng Yan (Shook Lin & Bok LLP)
• Defendant Counsel: Edwin Tong SC, Loong Tse Chuan and Chua Xinying (Allen & Gledhill LLP),Chooi Yue Wai Kenny (Yeo-Leong & Peh LLC),Ho Zi Wei (Rajah & Tann Singapore LLP),Namazie Mirza Mohamed and Ong Ai Wern (Mallal & Namazie),Ng Yeow Khoon and Claudia Marianne Frankie Khoo (KhattarWong LLP)
• Court: High Court (Singapore)
• Hearing Date: 07 February 2017
• Subject Matter: Companies,Credit and security,Trust receipts,Remedies,Pledges and pawns,Winding up

Steven Chong J:

This was an application by the liquidators of Pars Ram Brothers (Pte) Ltd (“the Company”) under s 310(1) of the Companies Act (Cap 50, 2006 Rev Ed) 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 can assert a security interest in the pepper stock which they financed. I shall refer to these 12 categories as the “Disputed Categories”. The Disputed Categories, and the parties with competing interests in each category, are set out in the Annex.

Background

By way of background, the Company was engaged in the spice business and financed its import of pepper stock through trade financing facilities granted by the 1st to 13th defendants and a term loan facility granted by the 14th defendant.¹ Although the trade financing facilities were executed pursuant to each bank’s standard terms, the broad terms of the financing arrangements were as follows:² Upon being furnished with proof of purchase of certain stock, the bank would disburse funds for the purchase directly to the relevant supplier. As security for the loan, the Company would furnish the shipping documents (ie, the bill of exchange, bill of lading and/or airway bill) for the financed stock to the bank under a pledge. 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 bill of lading number and/or a description of the goods.³ Several of the trust receipts had an express term that that the Company should hold or store the goods in a manner capable of separate identification: see Clause 2.9(a)(vii) of the Trade Terms of the Australian and New Zealand Banking Group Limited, paragraph 3 of CIMB Bank Berhad’s Trust Receipt, Clause 11 of Indian Bank’s Trust Receipt, Clause 6(c) of Indian Overseas Bank’s terms for Advances Against Invoice, Clause 3(a) of RHB Bank Berhad’s Master Trust Receipt Agreement, and Clause 5 of Standard Chartered Bank (Singapore) Limited’s Trust Receipt.⁴ Where such an express term was absent, there was at least an obligation to hold and store the goods in the bank’s name or to pay the proceeds of sale of the underlying goods into a designated account: see Clause 1 of Bank of Baroda’s Trust Receipt, Clause 6 of Bank of India’s Trust Receipt, Clauses 1 and 5 of Habib Bank Ltd’s Trust Receipt, Clause 10 of the Trust Receipt Bills Application Form Terms and Conditions for DBS Bank Ltd, and Clauses 2.1 and 2.3 of Malayan Banking Berhad’s General Trade Terms.⁵

As the 10th, 13th and 14th defendants did not have trust receipts executed in their favour, it was not disputed that they should be treated as unsecured creditors.⁶ To avoid confusion, I shall refer to the banks with trust receipts (ie, the 1st to 9th defendants and the 11th and 12th defendants) as “the Lenders”, or individually as a “Lender”.

The complication arose from the manner in which incoming and outgoing shipments were handled by the warehouse in which the pepper stocks were stored.⁷ Incoming bags were stacked together with existing goods of the same description without segregation. As such, it has become impossible to identify the stock financed by each Lender because it has been commingled in mixed bulks with stocks financed by other Lenders. However, goods of different descriptions were placed in separate stacks and form the separate “categories” of which we now speak.

The liquidators were able to identify the specific shipments comprising the mixed bulk in each category by referring to the incoming shipments notified on the warehouse’s ledger after the last “NIL” balance. They were also able to identify the Lenders who had financed these specific shipments by correlating the shipment details to the particulars of the trust receipts. On this basis, they have identified the Lenders asserting interests in each category, as set out in the Annex.⁸ However, due to outgoing shipments prior to liquidation, the available quantity of stock in each category is insufficient to meet each Lender’s claims in full. To fulfil outgoing shipments, bags had been removed for delivery randomly from the stacks of corresponding description. The central issue is therefore to identify the specific Lenders who are entitled to claim the proceeds of sale of the remaining bags in each category.

It was not seriously disputed that the Lenders have security interests in the proceeds of sale of the pepper stock financed by them, by reason of the original pledge of the shipping documents; the trust receipt maintains the bank’s security in the pledged pepper stocks despite the bank releasing the bill of lading to the Company. To fully appreciate the analysis below, it is perhaps useful to clarify at the outset the nature of the Lenders’ interest. Ewan McKendrick explains in Goode on Commercial Law (LexisNexis, 4th Ed, 2009) at p 1124 that “the letter of trust is to be regarded as a means of securing the continuance of the pledge rather than as an independent security device”. In a similar vein, the English court in In re David Allester, Limited [1922] 2 Ch 211 observed at 216:

The pledge rights of the bank were complete on the deposit of the bills of lading and other documents of title. These letters of trust are mere records of trust authorities given by the bank and accepted by the company stating the terms on which the pledgors were authorized to realize the goods on the pledgees’ behalf. The bank’s pledge and its rights as pledgee do not arise under these documents at all, but under the original pledge …

[emphasis added]

The trust receipt merely makes it clear that the goods are regarded as security and not the absolute property of the pledgee despite the redelivery of physical possession to the pledgee. Hence, it is a legal possessory security interest that the Lenders are asserting in the proceeds of sale.

The parties did not contest that this security interest survives the Company’s insolvency. The point of contention is that in respect of each of the Disputed Categories, the stocks have been mixed. The Lenders cannot identify their cargo because it has been commingled with cargo financed by other Lenders. This commingling is strictly a breach of the Company’s contractual obligation under the trust receipts to segregate the stock financed by the respective banks (see [2(b)] above). As such, the issue is whether this commingling affected the Lenders’ security interests so as to preclude each Lender from asserting its interest in the proceeds of sale, in priority to the pool of general creditors.

Security interests in commingled stock

The authorities cited to me largely deal with ownership interests in commingled stock. These cases suggest that the commingling of stocks in a mixed bulk does not extinguish the proprietary interests of the contributors. It was held in Indian Oil Corporation Ltd v Greenstone Shipping SA (The “Ypatianna”) [1987] 3 All ER 393 (“Indian Oil Corp”) at 907 that the equitable solution is for the contributors to hold the mixed bulk as co-owners in proportion to their respective contributions. Any doubt about the quantity contributed was to be resolved in favour of the innocent party who did not cause the mixture. Where a mixture came about through no fault of either of the parties whose property comprised the mixture, the position was stated as such in Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680 (“Sandeman”) at 694–695:

Neither owner has done anything to forfeit his right to the possession of his own property, and if neither party is willing to abandon that right the only equitable solution of the difficulty, and the one accepted by the law, is that [both parties] become owners in common of the mixed property.

This principle in Sandeman was applied by the New South Wales Court of Appeal in Hill & Anor v Reglon Pty Limited [2007] NSWCA 295 to not only mixtures of different oil parcels but also to “cases where items or goods become so inextricably mixed that they cannot be distinguished one from the other” (at [100]). Glencore International AG and others v Metro Trading International Inc (No 2) [2001] 1 Lloyd’s Rep 284 (“Glencore”) stands for the same proposition. This was a case where the storage terminal had commingled oil owned by various suppliers. The storage terminal went into insolvency and there was a shortfall in the amount of oil in its possession. It was said that as long as the owners could identify their own oil as a constituent of the mixed bulk, the bulk was co-owned in proportion to the quantity and value of the oil contributed (at 331). Title to the mixed bulk therefore did not pass to the storage terminal.

If commingling does not affect ownership, is there any legal reason why it should affect security interests? In this respect, Mr Edwin Tong SC, appearing for the 2nd and 12th defendants, directed my attention to the decision of the New Zealand High Court in Gibson and Stiassny v StockCo Limited and ors [2011] NZCCLR 29 (“Gibson”). Mr Tong suggested this was a case where the parties were asserting a security interest in the mixed herd of livestock and the court applied the same principles in Indian Oil Corp.

Upon closer examination of the...