Re EG Tan & Company (Pte)

• Judgment Date: 31 October 1990
• Date: 31 October 1990
• Docket Number: Companies Winding Up No 212 of 1986
• Court: High Court (Singapore)

Re EG Tan & Co (Pte)

[1990] SGHC 82

Lai Kew Chai J

Companies Winding Up No 212 of 1986

High Court

Credit and Security–Charges–Company depositing share certificates and transfer forms in designated safe as security for banking facilities under share memorandum with bank–Safe installed in company's premises and marked with names of company and bank–Movement of shares in and out of safe recorded–Company and bank each holding key to safe–Whether share memorandum created floating charge or pledge

The company, EG Tan & Co (Pte) (“EG Tan”), was a firm of stock and share brokers. They entered into an agreement (“the share memorandum”) with the respondent bank, Chase Manhattan Bank NA (“Chase”), under which Chase extended banking facilities to EG Tan on condition, inter alia, that EG Tan deposit share certificates and transfer forms in a designated safe as security. Any movement of share certificates in and out of the designated safe would be recorded. The parties agreed that EG Tan would ensure that at all times sufficient shares were kept in the safe to comply with the agreed financing margin. The safe was installed in EG Tan's premises and marked with Chase's name and both EG Tan and Chase each held a delocking key to the same.

The applicants as EG Tan's liquidators sought declaratory reliefs from the court that: (a) Chase had no interest in the shares listed in Exh QSB 6 in the affidavit of Quek Soo Beng other than as unsecured creditors of the company; (b) the share memorandum created a floating charge over the shares listed in Exh QSB 5 of the affidavit of Quek Soo Beng; and (c) the floating charge was void for non-registration under the Companies Act (Cap 50, 1990 Rev Ed).

Chase argued in response that the deposit of the share certificates and transfer forms did not create a floating charge but a common law pledge which was not registrable under the Companies Act (Cap 50, 1990 Rev Ed).

Held, allowing the applicants' application:

(1) By cl 1 of the share memorandum, which was the only operative clause so far as the creation of any security interest was concerned, EG Tan had thereby charged the shares deposited or to be deposited and any substituted shares as continuing security for the banking facilities granted by Chase. In the context, “the securities” in that clause included the shares physically deposited with Chase as well as those to be kept at the designated safe. Throughout the memorandum, it was clear that the rights which attached to the shares or the choses in action, and not mere share scrips, were to be charged by way of security to Chase in respect of the banking facilities. In the context of a firm of stockbrokers seeking financing over marketable shares, which were its stock-in-trade, it would be rather unusual for a bank to be content to accept the pledge of the paper relating to the shares and not security over the rights or choses in action attaching thereto. Clause 4 of the memorandum was not free-standing by itself in the sense that it did not create and did not purport to create any security interest or a pledge. The use of the words “so pledged” in that clause was not sufficient to displace the clear intention of the parties to create a charge over the securities as expressed in cl 1: at [15].

(2) The main characteristics of a floating charge were clearly present so far as the shares kept in the designated safe were concerned. EG Tan was not “put out of them” and was free or would have been free to deal with them. They could have given good title over them to anybona fide purchaser provided such disposal was carried out in the ordinary course of their business: at [20].

[Observation: Cases which have considered the nature of security interest created by the deposit by a borrower with a lender of a marketable share certificate and a duly completed blank transfer form have demonstrated the courts' readiness to infer an agreement on the part of the depositor to make an equitable mortgage. The courts pragmatically and with a great deal of commercial and common sense thought that it could not be that the deposit was merely to give the depositee the power to sell only the paper which does not confer any right to the interest attaching to the shares. It appeared therefore that the courts would more readily infer from a deposit of marketable shares an agreement to create an equitable mortgage. This readiness has no bearing in this case where the terms of the share memorandum and the context has to be considered. However, that if it were clear beyond any peradventure that what the documentation shows was an evident intention to create a pledge over marketable shares, there is nothing in law against its creation, even if its “negative” value may be questionable: at [22].

If there was intended a pledge at law, the requirement for possession was satisfied as Chase had sufficient control and therefore possession of the share documents: at [26].]

Askrigg Pty Ltd v Student Guild of the Curtin University of Technology [1990] 1 ACSR 40 (refd)

Carter v Wake (1877) 4 Ch D 605 (refd)

City Securities Pte, Re [1990] 1 SLR (R) 413; [1990] SLR 468 (folld)

Colonial Bank v Cady and Williams (1890) 15 App Cas 267 (refd)

Harrold v Plenty [1901] 2 Ch 314 (refd)

Hilton v Tucker (1888) 39 Ch D 669 (refd)

Lin Securities (Pte) Ltd, Re;Chi Man Kwong Peter v Asia Commercial Bank [1988] 1 SLR (R) 220; [1988] SLR 340 (folld)

Panama, New Zealand & Australian Royal Mail Company, In re (1870) 5 Ch App 318 (refd)

Stubbs v Slater [1910] 1 Ch 632 (refd)

Wrightson v McArthur and Hutchisons (1919) Limited [1921] 2 KB 807 (refd)

Companies Act (Cap 50,1990Rev Ed)

Timothy Lloyds QC and Susan Kong (Shook Lin & Bok) for the applicants

JM Chadwick QC and Eugene Lim (Donaldson & Burkinshaw) for the respondent.

Judgment reserved.

Lai Kew Chai J

1 This case arose out of the financing of a firm of stock and share brokers which dealt with stocks and shares for their own account. The question is whether the shares and transfer forms were pledged or charged under a floating charge, seeing that the arrangements were made pursuant to a share memorandum and where shares and transfer forms were kept in a designated safe to which both the firm of brokers and their bankers each held a delocking key. The applicants as joint and several liquidators of EG Tan & Co (Pte) (hereinafter referred to as “the company”) are seeking from this court the following declaratory reliefs against the respondents:

(a) that the respondents have no interest at all other than as unsecured creditors of the company in relation to the shares listed in Exh QSB 6 in the affidavit of Quek Soo Beng and detailed by way of an amendment on pp 6 to 8 of the schedule to the amended summons in chambers No 7967/1987; and

(b) that the relevant share memorandum had created a floating charge over the other shares listed in the said schedule and set out in Exh QSB 5 of the affidavit of Quek Soo Beng and that the floating charge is void for want of registration under the Companies Act (Cap 50, 1990 Rev Ed) (“the Act”).

2 The respondents are owed $19,393,283.11 by the company in connection with banking facilities extended by the respondents to the company prior to its liquidation. They claim security in respect of that indebtedness by way of a common law pledge over the share certificates and transfer forms held in the designated safe at the company's premises at close of business on 27 February 1986. Such share certificates are those listed in the company's letter dated 27 February 1986, a copy of which is exhibited as “QSB 5” in the affidavit dated 9 February 1989 of Quek Soo Beng, a bank officer of the respondents. If the respondents' claim of a pledge over the share certificates and the transfer forms, as such and as pieces of paper as distinct from the rights and interest attaching to those shares, is right, it necessarily follows that the applicants as liquidators would not be able to marshal in and convert into cash the rights and interest in those shares for the purposes of the winding up and liquidation of the company. The shares in question would be dealt with outside the liquidation of the company. I now set out the banking relationship and practices between the company and the respondents in connection with the financing of the company's dealing in marketable shares. In June 1978, the respondents granted the company banking facilities up to $5m which were secured by the physical deposit of share certificates and blank transfer forms at the respondents' premises. Until September 1982, the deposit of the share certificates was on the terms set out in three memoranda of deposit signed by the company on 27 June 1978, 20 November 1978 and 27 February 1979. Each such memorandum of deposit, which was substantially in the respondents' usual form, created a charge over the shares and blank transfers which were or would be deposited with the respondents. The charges created under the three memoranda of deposit were registered under the Act and except that their reference is by way of background nothing in this case turns on those memoranda nor the fact of the registration of the charges created thereunder.

3 The banking facilities were implemented as follows. The company, which was a company of stock and share brokers, in the course of its business had bought and sold shares for its own account. The company would also buy shares which were then charged to and physically delivered into the possession of the respondents. These shares were sold and new shares were bought by the company. In practice, the respondents would release shares to the company in exchange for the deposit of new shares of the type and value acceptable to them. In practice, such exchanges had taken place between authorised personnel from both sides on several occasions in a day, with the company's officers manually taking shares to the...