Soon Kok Tiang and others v DBS Bank Ltd and another matter

JudgeChan Sek Keong CJ
Judgment Date02 November 2011
Neutral Citation[2011] SGCA 55
CourtCourt of Appeal (Singapore)
Docket NumberCivil Appeal No 6 of 2011 and Summons No 2274 of 2011
Published date09 November 2011
Hearing Date27 May 2011
Plaintiff CounselSiraj Omar, Dipti Jauhar and Rachel Tan Swee Hua (Premier Law LLC)
Defendant CounselDavinder Singh SC and Una Khng (Drew & Napier LLC)
Subject MatterContract
Citation[2011] SGCA 55
Chan Sek Keong CJ (delivering the judgment of the court): Introduction

The appellants (“the Appellants”) are a group of 21 investors in derivative credit-linked notes called “DBS High Notes 5” (“the HN5”) which were issued by the respondent, DBS Bank Ltd (“the Respondent”). In Originating Summons No 774 of 2009 (“the OS”), they brought proceedings against the Respondent, on behalf of themselves as well as 192 other plaintiffs listed in the Schedule to the OS (“the 192 other plaintiffs”), for the refund of the entire capital sum which they and the 192 other plaintiffs had lost in investing in the HN5 (less the amount of interest received thereon) consequent upon the bankruptcy on 15 September 2008 of Lehman Brothers Holdings Inc (“Lehman”), one of the reference entities to which the HN5 were linked. The High Court judge (“the Judge”) dismissed the Appellants’ action (see Soon Kok Tiang and others v DBS Bank Ltd and another matter [2011] 2 SLR 716 (“the HC Judgment”)). The Appellants then brought the present appeal. We should mention, as a preliminary point, that prior to the hearing of this appeal, two of the 192 other plaintiffs withdrew from the appeal. The Appellants accordingly applied to this court (via Summons No 2274 of 2011) for leave to amend the OS by deleting the names of those two plaintiffs from the Schedule to the OS. We allowed the application (which the Respondent consented to) with costs to the Respondent fixed at $300.

Background The launch of the HN5

The material facts as pleaded by the parties are not in dispute. The Respondent launched the sale of the HN5 on 30 March 2007 in two tranches, one in Singapore dollars (“the SGD Tranche”) and one in US dollars (“the USD Tranche”). The Respondent’s offer of the HN5 was expressed to be made on the basis of the information contained in a 93-page pricing statement dated 29 March 2007 (“the Pricing Statement”) and a 168-page base prospectus dated 22 December 2005 as amended by a supplementary base prospectus dated 5 April 2006 (collectively referred to hereafter as “the Base Prospectus”). These documents set out in great detail, inter alia: (a) the terms and conditions applicable to the HN5; (b) the manner in which the Respondent and its related entity, Constellation Investments Ltd (“Constellation”), would use the funds of purchasers of the HN5 (“HN5 holders”); and (c) the risks involved in investing in the HN5.

The sale of the HN5 was effected by the Respondent accepting applications made by prospective HN5 holders on prescribed application forms (“Application Forms”). Each Application Form contained an acknowledgement by the prospective HN5 holder that he: “agreed [to] the Terms and Conditions on the reverse of this form and the Terms and Conditions set out in … [the] Pricing Statement”;1 and “ha[d] assessed [the] suitability of the product against [his] risk attitude, financial means, and investment objectives”.2 At the time the HN5 were marketed, it was not possible to assess the probability of default by any of the reference entities to which the HN5 were linked, except on the basis (since discredited) of the credit ratings given to them by the credit rating agencies relied on by the Respondent, viz, Standard & Poor’s, Moody’s and Fitch.

The nature and structure of the HN5

The Pricing Statement described the HN5 as “structured notes”3 and warned prospective HN5 holders that “if a Credit Event [as defined at [8] below] … occur[red] before the Maturity Date [viz, 16 November 2012], [they might] lose their entire investment and [might] not receive any principal amount on the [HN5]”4 [emphasis in original omitted]. The circumstances in which and the reasons why this might happen were not clarified or explained. Prospective HN5 holders were also warned that the purchase of the HN5 involved certain risks, and that they should:5

… ensure that they understand the nature of the [HN5] and should carefully study the matters set out in the Base Prospectus (and in particular, the section on “Risk Factors” in the Base Prospectus) and the contents of [the] Pricing Statement (and in particular, the section on “Risk Factors” in [the] Pricing Statement) before they invest in the [HN5]. [emphasis in original omitted]

The Pricing Statement described the HN5 as “5.5-year structured credit notes designed for investors seeking enhanced yield by providing exposure to a first-to-default basket of geographically diversified investment grade credits”.6 The credit basket (“the HN5 credit basket”) consisted of seven banks and one sovereign entity as follows: Malayan Banking Berhad; Bank of China Limited; Macquarie Bank Limited; Merrill Lynch & Co, Inc; Morgan Stanley; The Goldman Sachs Group, Inc; Lehman; and Malaysia. These eight reference entities (collectively, “the Reference Entities”) were stated to have been selected with the following objectives:7 reducing the likelihood of a Credit Event by choosing only investment grade credits; reducing mark-to-market risk by selecting highly rated [r]eference [e]ntities, as investment grade rated credits typically tend to be more stable, compared to sub-investment grade credits; enhancing the basket yield by selecting higher yielding reference obligations (by choosing less senior debts, especially for banks/investment banks) of these highly rated [r]eference [e]ntities; and reducing liquidity risk by selecting [r]eference [e]ntities whose debt securities are among the more commonly traded in the credit market as opposed to choosing higher rated [r]eference [e]ntities whose debt securities are less liquid and do not trade commonly thereby resulting in wider bid/offer spreads.

The HN5 were structured such that the Respondent would use the funds raised from the sale of the HN5 to purchase two structured notes issued by Constellation, a special purpose Cayman Islands trust company established by the Respondent in 2003. These two structured notes (collectively, “the Reference Notes”) were: Structured Retail Notes Series 75 (“SRN Series 75”) vis-à-vis the SGD Tranche of the HN5; and Structured Retail Notes Series 76 (“SRN Series 76”) vis-à-vis the USD Tranche. The Pricing Statement explained Constellation’s role and the function of the Reference Notes as follows:8

Constellation is a special purpose trust company established by [the Respondent] in 2003. It is owned by a charitable trust and incorporated under the laws of the Cayman Islands. Its primary objective is the issuing of various credit-linked and other structured notes to both retail and institutional investors.

Constellation uses the funds raised in issuing notes to invest in high quality bonds or structured securities with a rating of AA or better (as rated by Standard & Poor’s, Moody’s or Fitch) to secure its obligations under its notes and enters into derivative contracts with [the Respondent] in order to generate the relatively high yields under its notes. Constellation has issued 70 different structured notes to investors in Hong Kong over the past 4 years under its US$5,000,000,000 Limited Recourse Structured Note Programme (the Constellation Programme). To date, no credit event has occurred in respect of any of its issuances and all interest payments under its notes have been paid in full to investors.

The proceeds of the [HN5] will be used to purchase … the Reference Notes … to be issued by Constellation under the Constellation Programme. The performance of the [HN5] is directly linked to the Reference Notes. Therefore, in addition to the Reference Entities [as defined at [5] above], the [HN5 holder] is exposed to the credit risk of Constellation in relation to the Reference Notes, in particular, to the high quality bonds or structured securities purchased by Constellation to secure its obligations under the Reference Notes.

[emphasis in original omitted]

It should be noted that although the Pricing Statement stated that Constellation would use the funds raised from the issue of the Reference Notes (“the Reference Notes funds”) to invest in “high quality bonds or structured securities with a rating of AA or better (as rated by Standard & Poor’s, Moody’s or Fitch)”9 to secure its obligations under the Reference Notes, it did not say that those funds would be used to purchase, specifically, what we will hereafter term “the Reference Obligations” (ie, the bonds or structured securities issued by the Reference Entities as set out in Appendix D of the Pricing Statement), all of which were rated lower than “AA” (or the equivalent). The Pricing Statement also did not explain what bearing Constellation’s investments would have on the risks undertaken by HN5 holders. To date, the Appellants have no knowledge of the identity of the actual high-quality bonds and/or structured securities purchased by Constellation to secure its obligations under the Reference Notes.

The Pricing Statement stated that HN5 holders would receive: quarterly interest of 5% per annum and 6.5% per annum for, respectively, the SGD Tranche and the USD Tranche of the HN5 until 16 November 2012, which was the scheduled maturity date of the HN5 (“the Maturity Date”); and on the Maturity Date, 100% of the principal amount invested. The Pricing Statement stated that the aforesaid payments would be made unless, inter alia, a “Credit Event” – ie, an event of default in respect of any of the Reference Entities – occurred prior to the Maturity Date. If a Credit Event occurred, the Reference Notes (which were stated to be linked to the performance of the Reference Entities) would terminate, and would also cause the HN5 to terminate. HN5 holders would then receive an amount equivalent to what the Respondent would receive as the “Credit Event Redemption Amount” (“CERA”) under the Reference Notes. This was explained in the Pricing Statement as follows:10

If a Credit Event...

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