Rainforest Trading Ltd and another v State Bank of India Singapore

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 21 March 2012
• Neutral Citation: [2012] SGCA 21
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 107 of 2011
• Published date: 12 April 2012
• Year: 2012
• Hearing Date: 20 January 2012
• Plaintiff Counsel: Samuel Chacko, Charmaine Chan and Yeo Teng Yung Christopher (Legis Point LLC)
• Defendant Counsel: Pradeep Pillai and Koh Junxiang (Shook Lin & Bok LLP)
• Citation: [2012] SGCA 21

Andrew Phang Boon Leong JA (delivering the grounds of decision of the court): Introduction

This was an appeal against the decision of the judge (“the Judge”) in State Bank of India Singapore v Rainforest Trading Ltd and another [2011] 4 SLR 699 (“the Judgment”). We dismissed the appeal and now give the detailed grounds for our decision.

Factual background

The facts relevant to the resolution of this appeal are not disputed (see the Judgment at [3]–[35]) and are set out briefly below.

The parties

The Respondent is a banking institution governed and regulated by the Monetary Authority of Singapore.

The First Appellant is a company incorporated in the British Virgin Islands. The Second Appellant is a private company incorporated in Singapore and a wholly owned subsidiary of the First Appellant. Mr Vikas Goel (“Mr Goel”) was previously the majority shareholder of the Second Appellant (see below at [7]), holding 99.99% of the issued share capital of the Second Appellant.

Teledata Informatics Limited (“Teledata”) is a publicly listed company incorporated in India. Mr P K Padmanabhan (“Mr Padmanabhan”) is the founder and managing director of Teledata.

Baytech Inc (“Baytech”) is a company incorporated in the British Virgin Islands and is a wholly owned subsidiary of Teledata.

The Facility Agreement

On 10 November 2006, Teledata expressed to the Second Appellant its interest in investing in the Second Appellant. A share subscription agreement (“SSA”) dated 29 November 2006 was entered into between Mr Goel, the Second Appellant and Teledata.¹ The SSA basically provided for a share swap arrangement. The First Appellant was to be incorporated for the purposes of the SSA. Mr Goel was to transfer his majority shareholding in the Second Appellant to the First Appellant in return for a 49% shareholding in the First Appellant. Teledata would invest approximately US$65m in equity in the First Appellant and would extend a further loan of US$40m to the First Appellant. The First Appellant would, in turn, use the monies and extend loans of up to US$60m to the Second Appellant. After payment of the requisite sums, Teledata would hold 51% of the shares in the First Appellant.

The SSA was subsequently amended four times.² Under the amended SSA, Baytech was to be appointed as Teledata’s nominee for the purposes of subscribing to shares in the First Appellant pursuant to the SSA.

Around December 2006, Teledata decided to obtain financing from the Respondent. Upon the conclusion of negotiations, the Respondent entered into a Facility Agreement dated 22 February 2007 (“the Facility Agreement”) with Baytech.³ Under the Facility Agreement, the Respondent agreed, inter alia, to provide a US$80m loan facility to Baytech. Clause 3.1 of the Facility Agreement states that the purpose of the Facility Agreement was for Baytech to use the monies borrowed under the Facility to obtain majority shareholding in the Second Appellant by acquisition of 51% of the shares in the First Appellant.

Numerous securities were provided to the Respondent pursuant to clause 4 of the Facility Agreement. Crucially, under clause 4(vi) of the Facility Agreement, 10,200,000 shares in the Second Appellant (representing 51% of the Second Appellant’s share capital) (“the Pledged Shares”) were to be “pledged” by the First Appellant to the Respondent. Clause 4(vi) states as follows:⁴ 4 Security

The facility shall be secured by the following:

...

vi) Pledge of 51% of the paid up share capital of [the Second Appellant] to be acquired out of the facility, which pledge shall be completed and duly registered as a charge in favour of the Lender within 30 days of the execution of this Agreement. The Pledged Shares

On 23 February 2007, Baytech fully drew down on the US$80 million facility.⁵

By a letter dated 5 April 2007 addressed to the Respondent,⁶ the First Appellant delivered 5 share certificates representing the Pledged Shares (“the Share Certificates”) to the Respondent.⁷ The First Appellant also sent a signed blank share transfer form with a cover letter dated 5 April 2007 to the Respondent.⁸ The Second Appellant sent a letter to the Respondent on 5 April 2007, indicating that it had noted the Respondent’s interest in the Register of Members.⁹ On 10 December 2007, the First Appellant and Baytech each registered a charge over the Pledged Shares in favour of the Respondent.¹⁰

Subsequently, Baytech failed to make payment on US$13 million due and owing to the Respondent on 20 February 2009. By a letter dated 25 March 2010 to Baytech, the Respondent declared that an event of default had occurred under the Facility Agreement and that all outstanding sums became immediately due and payable within seven days of receipt of that letter.¹¹

Baytech did not pay within the prescribed period. The Respondent sought to enforce its security over the Pledged Shares by commencing Originating Summons No 958 of 2010 (“the OS”).

The parties involved in the present dispute have also commenced proceedings against or with each other in other jurisdictions. It should be noted that the Respondent is not involved in any of these proceedings.

In the course of proceedings in India, Mr Padmanabhan filed an affidavit¹² exhibiting a version of the SSA¹³ and claimed in his affidavit that this version was the basis for the Facility Agreement. The Appellants claim that they first became aware of this version of the SSA through this affidavit and that this version of the SSA was a forgery. The Appellants allege that Teledata submitted this version to the Respondent to obtain the Facility Agreement, and the Respondent was put on notice and was complicit in an alleged fraud perpetrated on the Appellants. The Appellants argued that the OS should be converted to a writ Action because of these allegations of fraud.

The decision below

The Judge refused to convert the OS to a writ Action (see [37] of the Judgment). He opined that, upon consideration of the allegations of fraud made by the Appellants, there was no reason why the matter could not be disposed of through the OS. He comprehensively addressed and rejected the Appellants’ various allegations of fraud (see [47]–[77] of the Judgment).

The Judge held that an equitable mortgage carrying an implied power of sale was created over the Pledged Shares in favour of the Respondent through the deposit of the Share Certificates and the signed blank share transfer form with the Respondent. An event of default had occurred under the Facility Agreement and the Respondent could therefore exercise its power of sale in compliance with the Second Appellant’s articles of association.

Consequently, the Judge granted the following declarations: An event of default had occurred pursuant to, inter alia, clause 21 of the Facility Agreement. The Respondent was entitled to enforce its security by selling the Pledged Shares subject to the provisions of the Second Appellant’s articles of association.

The Judge directed that a valuation of the Pledged Shares was to be conducted and that the parties were to agree on the joint appointment of an independent auditor within three weeks of 4 August 2011 and, failing such agreement, the parties were at liberty to seek the court’s assistance to appoint an auditor on behalf of the parties. The Judge awarded the costs of the OS to the Respondent.

The parties’ arguments The Appellants’ arguments

The Appellants appealed against the Judge’s decision on two points. Firstly, they argued that the equitable mortgage over the Pledged Shares was invalid and unenforceable because the consideration provided for the mortgage was past consideration. This is a new point that was not raised before the Judge. Secondly, the Appellants argued that the OS should be converted to a writ Action and that the Judge was wrong in not allowing a conversion.

In so far as the first point was concerned, the Appellants argued that the equitable mortgage was not supported by valid consideration and was hence invalid. The consideration furnished by the Respondent, namely the entrance into the Facility Agreement or alternatively the disbursement of the loan, was past consideration because the equitable mortgage was created on 5 April 2007, after the Respondent entered into the Facility Agreement on 22 February 2007 and the loan facility was fully drawn down on 23 February 2007. The exception to the rule against past consideration established in the Hong Kong Privy Council decision of Pao On and others v Lau Yiu Long and others [1980] AC 614 (“Pao On”) was not applicable on the facts. In particular, the first and second conditions of the exception were not established on the facts of the case. The grant of and entrance into the loan facility by the Respondent was not done at the request of the First Appellant. The First Appellant was never involved in any negotiations or discussions regarding the loan facility and had no dealings with the Respondent before 5 April 2007, when the Share Certificates and signed blank share transfer form were deposited with the Respondent. There was no understanding between the First Appellant and the Respondent when the Facility Agreement was entered into and when the loan facility was fully drawn down that the First Appellant would grant the equitable mortgage to the Respondent.

In so far as the second point was concerned, the Appellants submitted, firstly, that disputes of fact and triable issues exist as to whether the First Appellant intended to create an equitable mortgage over the Pledged Shares as well as to the exact nature and extent of the security provided by the First Appellant. Secondly, a perusal of the version of the SSA obtained from the Indian proceedings alone should have put the Respondent on notice. Thirdly, the issue as to whether there had been complicity on the part of the Respondent with Teledata in...