Thai Chee Ken and others (Liquidators of Pan-Electric Industries Ltd) v Banque Paribas

• Judge: Chao Hick Tin J
• Judgment Date: 15 May 1993
• Neutral Citation: [1993] SGCA 38
• Citation: [1993] SGCA 38
• Defendant Counsel: Helen Yeo and Shireena Woon (Helen Yeo & Partners)
• Published date: 19 September 2003
• Plaintiff Counsel: Wong Meng Meng and Dilhan Pillay (Wong Meng Meng & Partners)
• Date: 15 May 1993
• Docket Number: Civil Appeal No 35 of 1992
• Court: Court of Appeal (Singapore)
• Subject Matter: s 131(3)(c) Companies Act (Cap 50),Stocks and shares,Whether transaction in reality a loan and conveyance made by way of security,Companies,Sale and repurchase of shares,Whether transaction in reality transaction a loan and conveyance made by way of security,Lending and security,Charge,Sale and repurchase of shares as mode of financing,True nature and substance of transaction,Whether transaction void for non-registration as charge over shares,Banking,Court's approach where no allegation made that transaction is a sham

Cur Adv Vult

This is an appeal by the liquidators of Pan Electric Industries Ltd (`Pan El`) as appellants against the dismissal by Lai Kew Chai J of their application for a declaration that Banque Paribas (`the respondent`) is not the beneficial owner of the 24 million shares in Orchard Hotel (Singapore) Pte Ltd (`OH`) presently registered in its name (`the subject shares`). The material facts of the matter are as follows.

In 1985, Pan El was the owner of all the share capital in OH save for the subject shares which were owned by Ambassador Hotel Ltd (`Ambassador`). In February that year, Pan El contracted to purchase Ambassador`s shareholding at the price of $16.5m. Completion was to take place on 31 August 1985.

In the same year, Pan El planned a $80m rights issue and they appointed three banks to manage and underwrite the issue. One of those banks was Bank Paribas South East Asia (`PSEA`), the merchant banking arm of the respondent. The proceeds of the rights issue were to be utilized to finance the purchase of the subject shares and to reduce Pan El`s gearing. A few weeks before completion of the contract with Ambassador was to take place, it became clear that the rights issue would not be completed in time and there were discussions between Pan El, PSEA and the respondent about financing for the completion of the purchase. Subsequently, Pan El`s financial director, Tan Kok Liang (`Tan`), approached the respondent for a short term bridging loan to enable Pan El to complete the purchase. The result of the negotiations was a letter dated 23 August 1985 from the Singapore branch of the respondent to its head office in Paris. The purpose of the letter was to seek approval for the proposed loan as the amount involved exceeded the authority of the Singapore branch. The proposal in the letter was for a loan of USD7.5m with interest at 1.25% over cost of funds, repayable on 31 December 1985 and secured by a pledge of the subject shares. The letter strongly recommended the loan principally because of the security provided, Pan El`s proposed rights issue, the short term exposure and the commercial desirability of cultivating the respondent`s relationship with Pan El. Head office approved the proposed loan by telex dated 28 August 1985.

When Wong Soon Yum (`Wong`), then the assistant general manager of the respondent and the officer authorized to negotiate the loan on its behalf, informed Tan of the approval, Tan rejected the proposed loan as the requirement of security would cause Pan El to infringe the negative pledge which it had given to its other creditor banks, including the respondent. Additionally, it would not have been in Pan El`s interest to have its liquidity problems widely known. Tan and Wong then discussed the financing options open to Pan El. Eventually, it was agreed by an agreement dated 30 August 1985 (`the sale agreement`) that the respondent would buy the subject shares from Pan El for USD7,306,417.28 on 31 August 1985. By another agreement of the same date, Pan El agreed to buy back the shares for USD7,544,233.02 on the completion of the rights issue or on 31 December 1985, whichever was the earlier (`the repurchase agreement`). It was a condition of the respondent`s agreement to purchase the shares that Pan El execute the repurchase agreement contemporaneously with the sale agreement and this was made an express term of the latter. Pan El also agreed to bear all legal costs and stamp fees incurred in the sale. The execution of the two agreements was approved by Pan El`s board by a resolution dated 30 August 1985.

The sale agreement was fairly simple and straightforward, and we need not elaborate on it. The repurchase agreement provided as follows. By cl 2, the respondent agreed to sell and Pan El agreed to buy back all the shares. Clause 3 provided for the consideration of US$7,544,233.02. Clause 4 provided for completion and for matters related to completion. By cl 5, Pan El agreed that as security for the performance of the repurchase agreement, it would assign all rights, title and interests belonging to Bedokville Development Pte Ltd, a subsidiary of Pan El, in and to the proceeds of the sale of the units in a development known as `Bedok Court` to the respondent. Furthermore, by cl 6, Pan El agreed to pay default interest on any sum not paid when due. The repurchase agreement also provided that Pan El was to bear any taxes incurred as a result of the repurchase agreement and the risk of any exchange loss in respect of sums payable under the repurchase agreement.

The purchase of the subject shares was subsequently recorded in the respondent`s books as a loan. The respondent explained this anomaly by stating that its standard internal documents at the material time did not cater for a financing transaction in the form of a sale and repurchase transaction and no thought was given to the question of adapting the standard forms to the transaction in issue. On 1 October 1985, the respondent wrote to Pan El seeking reaffirmation that part of the proceeds from the latter`s impending rights issue would be utilized towards the repurchase of the shares. Pan El confirmed that such was its intention. However, the rights issue failed to get the approval of the Stock Exchange of Singapore and Pan El eventually, on 30 November 1985, went into receivership. On 7 December 1985, the respondent registered itself as owner of the subject shares and on 26 December 1985 sought, and obtained on 10 January 1986, the appointment of Wong onto the board of OH. The respondent`s explanation for not seeking earlier representation on the board of OH was that it contemplated that it would be holding the subject shares only until 31 December 1985 at the latest. On 2 January 1986, Pan El`s receivers gave notice that the company would not be repurchasing the OH shares. The respondent then took steps to correct its internal documentation to show the disbursement of the purchase price as an investment in OH shares. On 16 January 1986, the bank wrote to the Monetary Authority of Singapore about the arrangements.

On 13 March 1986, the receivers challenged the respondent`s right to the shares. The originating summons for the declaration sought and for consequential relief was taken out on 3 February 1988, after Pan El went into liquidation on 9 October 1986. The basis of the liquidators` challenge was that the transaction was intended only as a loan although it was formally labelled a sale and repurchase arrangement. They therefore contended that the transaction had to be registered under s 131(3)(c) of the Companies Act (Cap 50, 1985 Ed) as a charge created over shares in a subsidiary company. Since it had not been registered, it was void against them as the liquidators of Pan El. Counsel for the appellants stressed that it was not the appellants` case that the subject agreement was a sham in the legal sense of that term and that no fraudulent intent was attributed to the respondent.

The applicable approach

It is important in a case such as the present appeal, where the question is whether a financing transaction which involves conveyance of the legal title to property creates a relationship of vendor and purchaser or that of debtor and creditor, to bear in mind the words of Romer LJ in Re George Inglefield Ltd [1933] Ch 1 at p 27:

The only question that we have to determine is whether, looking at the matter as one of substance, and not of form, the discount company has financed the dealers in this case by means of a transaction of mortgage and charge, or by means of a transaction of sale; because, of course, financing can be done in either the one way or the other, and to point out that it is a transaction of financing throws no light upon the question that we have to determine.

Where there is no evidence that the real agreement reached between the parties was wholly different from that recorded in the documents before the court, or that there was an independent contract apart from the documents before the court, the court has to look at the documents themselves to ascertain the nature and substance of the transaction.

Lord Hanworth MR in the same case at p 19 said:

We have, therefore, to look at these written documents as containing the contracts made between the parties, and we cannot ignore them on the ground that, apart from those documents, some other agreement has been made between the parties. That being so, we have ... to look at the documents to ascertain the substance of the transaction, and see what are the rights and obligations of the parties to be derived from the consideration of the whole agreement as recorded.

This was the approach adopted by the majority of the High Court of Australia in Gurfinkel & Anor v Bentley Pty Ltd [1966] 116 CLR 98 See particularly Windeyer J at p 114, where he also said:

A court will now ordinarily take at their word persons who execute agreements for sale at a price with an option to repurchase within a stipulated time. Of course if it can be shown by parol evidence that both parties to a document adopted the form they did as a disguise, then their true intent and not the form will prevail.

In this case, there is no suggestion that the documents, ie the sale and repurchase agreements were a sham or a disguise. Counsel for the appellants specifically disavowed any such suggestions. This being the case, what we have to do is to ascertain from the documents themselves what was the true nature and substance of the transaction between the parties. Counsel for the respondent submitted, in our view correctly, that this should be the approach to the question. Of course, the court does not consider a document in a vacuum. It does so against the surrounding circumstances in which the document came into being. It is thus that evidence of the circumstances is of assistance.

While the court should be scrupulous to ensure that parties do not evade the...