Rainforest Trading Ltd v State Bank of India Singapore

• Jurisdiction: Singapore
• Judgment Date: 21 March 2012
• Date: 21 March 2012
• Docket Number: Civil Appeal No 107 of 2011
• Court: Court of Appeal (Singapore)

Rainforest Trading Ltd and another

Plaintiff

and

State Bank of India Singapore

Defendant

[2012] SGCA 21

Chao Hick Tin JA

,

Andrew Phang Boon Leong JA

and

Tay Yong Kwang J

Civil Appeal No 107 of 2011

Court of Appeal

Civil Procedure—Originating processes—Applying to convert originating summons into writ action

Contract—Consideration—Past consideration—Loan agreement executed and loan amounts disbursed before creation of equitable mortgage of shares—Whether consideration provided for equitable mortgage of shares was past consideration

Credit and Security—Mortgage of personal property—Stocks and shares

In 2006, Teledata Informatics Limited (‘Teledata’) decided to invest in the second appellant. Teledata and the second appellant entered into a share subscription agreement, pursuant to which the first appellant was incorporated and held 51% of the second appellant's share capital and under which Teledata was to acquire 51% of the shares in the first appellant.

Teledata decided to obtain financing from the respondent bank. On 22 February 2007, the respondent entered into a facility agreement with Baytech Inc (‘Baytech’), a wholly owned subsidiary of Teledata, whereby the respondent agreed, inter alia, to provide a loan of US$80 m to Baytech. The purpose of the facility agreement was for Baytech to use the monies borrowed to obtain majority shareholding in the second appellant by acquiring 51% of the shares in the first appellant. Under cl 4 (vi) of the facility agreement, 51% of the share capital of the second appellant (‘the Pledged Shares’) was to be provided by the first appellant to the respondent as security within 30 days of the execution of the facility agreement.

On 23 February 2007, Baytech fully drew down on the loan facility. On 5 April 2007, the first appellant deposited the share certificates representing the Pledged Shares and a blank signed share transfer form with the respondent. Subsequently, Baytech failed to repay the loan to the respondent.

The respondent sought to enforce its security over the Pledged Shares by commencing Originating Summons No 958 of 2010 (‘the OS’). The first and second appellants (‘the appellants’) argued that the OS should be converted to a writ action on the basis of various allegations of fraud. The judge in the court below (‘the Judge’) refused to convert the OS to a writ action and held that an equitable mortgage carrying an implied power of sale was created over the Pledged Shares in favour of the respondent and an event of default had occurred under the facility agreement, such that the respondent could therefore exercise its power of sale.

The appellants appealed against the Judge's decision on two grounds. Firstly, the appellants argued that the consideration furnished by the respondent for the equitable mortgage of the Pledged Shares was past because the equitable mortgage was created after the respondent entered into the facility agreement and the loan facility was fully drawn down. The appellants argued that the exception to the rule against past consideration established in Pao On v Lau Yiu Long[1980] AC 614 (‘Pao On’) was not applicable on the facts because the grant of and entrance into the loan facility by the respondent was not done at the request of the first appellant as the first appellant was never involved in any negotiations or discussions regarding the loan facility and had no dealings with the respondent, and there was no understanding between the first appellant and the respondent that the first appellant would grant the equitable mortgage to the respondent. This was a new point not raised in the court below. Secondly, the appellants argued again that the OS should be converted to a writ action.

Held, dismissing the appeal:

(1) The court was in just as advantageous a position as the court below to consider the issue of past consideration raised by the appellants. It was also clear that no new evidence was required to be adduced: at [28].

(2) It was fundamentally inconsistent for the appellants' counsel to argue that the equitable mortgage granted over the Pledged Shares should be unenforceable because the consideration provided was past while stating simultaneously that the first appellant had no negotiations and discussions with the respondent whatsoever. If the first appellant had nothing whatsoever to do with the respondent, the appellants' argument had to fail since any argument based on past consideration had to necessarily be premised on what would otherwise have been a separate contractual relationship between, inter alia,the first appellant and the respondent. Although there was no evidence of an express contract between the appellants and the respondent, an implied contract with the respondent would also falsify the first appellant's claim that it had nothing whatsoever to do with the respondent: at [29].

(3) The conditions laid down in Pao On were satisfied on the facts. The very nature of the contractual relationship between the appellants and the respondent viewed in its context would necessarily assume that there was both a request by the appellants that the respondent enter into the facility agreement with Baytech and that there was a common understanding between the parties that the entry into the facility agreement by the respondent would be compensated for by, inter alia, the grant of an equitable mortgage over the Pledged Shares by the first appellant. Clause 4 (vi) of the facility agreement clearly demonstrated that the equitable mortgage over the Pledged Shares was to be granted pursuant to and only after the entrance into and execution of the facility agreement. The appellants' letters to the respondent underscored and confirmed this analysis as they clearly demonstrated that the first appellant deposited the share certificates with the respondent pursuant to the facility agreement and that the second appellant knew the same. It was clear beyond peradventure that the appellants understood, as the respondent did, that the deposit of the share certificates and signed blank share transfer form was made pursuant to the facility agreement. It had to also be emphasised that, by the very nature of the contract between the parties, the grant of an equitable mortgage over the Pledged Shares by the first appellant could only have taken place after the entry by the respondent into the facility agreement with Baytech. The substance and reality of the matter was that the relevant consideration and promise constituted part of a single transaction between the parties. This analysis was wholly consistent with the commercial purpose of all the contracts concerned: at [31].

(4) The issue of whether the OS should be converted to a writ action was dealt with in meticulous detail by the Judge. The court agreed with the reasons given by the Judge and found no merit whatsoever in the arguments proffered by the appellants: at [41].

[Observation: It would generally be difficult for a party to successfully argue that a perfectly sensible and legitimate commercial transaction was unenforceable simply because the consideration provided for the promise was past. The courts would be reluctant to invalidate otherwise perfectly legitimate and valid commercial transactions on as technical a basis as consideration. A strictly chronological approach in determining whether consideration was past or not was deeply unrealistic and unnecessarily restrictive; it also undermined the freedom of contracting parties as well as the sanctity of commercial transactions. The court looked to the substance rather than the form of the transaction. If the earlier act which was said to constitute the consideration for the later promise was part of substantially one and the same transaction and there was a common understanding between the parties that the former was to be compensated for by the latter, the consideration was valid and hence the later promise was enforceable, notwithstanding the fact that, in strictly chronological terms, the consideration was provided before the promise was made. This would often be the case for many commercial arrangements. Arguments based on past consideration would invariably be looked upon by the courts with great circumspection and even scepticism when they were raised in the context of legitimate, sensible and commonplace commercial transactions: at [38].

While a writ action would usually be more appropriate when allegations of fraud were made, it could not be the case that a conversion had to be ordered the moment allegations of fraud were made by a defendant, for this would allow defendants to unnecessarily prolong and complicate otherwise straightforward and legitimate claims against them. Woon Brothers Investments Pte Ltd v MCST Plan No 461[2011] 4 SLR 777 did not stand for the overly broad proposition that an originating summons had to be converted the moment there were allegations of substantial disputes of fact, allegations of fraud or both. The alleged disputes of fact as well as allegations of fraud had to be accompanied by at least a credible matrix of facts and had to be relevant to the dispute at hand: at [42].]

Affin Bank Bhd v Precision Tube Product (Malaysia) Sdn Bhd [2010] MLJU 119 (refd)

Ang Sin Hock v Khoo Eng Lim [2010] 3 SLR 179 (refd)

Casey's Patents, Re [1892] 1 Ch 104 (refd)

Cheong Kim Hock v Lin Securities (Pte) [1992] 1 SLR (R) 497; [1992] 2 SLR 349 (refd)

Chwee Kin Keong v Digilandmall.com Pte Ltd [2004] 2 SLR (R) 594; [2004] 2 SLR 594, HC (refd)

Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] 1 SLR (R) 502; [2005] 1 SLR 502, CA (refd)

Eastwood v Kenyon (1840) 11 Ad & E 438; 113 ER 482 (refd)

Gay Choon Ing v Loh Sze Ti Terence Peter [2009] 2 SLR (R) 332; [2009] 2 SLR 332 (refd)

GBH Ceramics Sdn Bhd v How It @ Low Aik [1989] 2 CLJ 427 (refd)

Guthrie Waugh Bhd v Malaippan Muthucumaru [1972] 1 MLJ 35, HC (refd)

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