TRUST FUNDS, ASCERTAINABILITY OF BENEFICIAL INTEREST AND INSOLVENCY SET-OFF

Citation(1996) 8 SAcLJ 489
Published date01 December 1996
AuthorLEE ENG BENG
Date01 December 1996

Good Property Land Development Pte Ltd v Societe Generale 1

To the growing list of recent significant cases on insolvency set-off2 may be added the decision of the Singapore Court of Appeal in Good Property Land Development Pte Ltd v Societe Generale3 The appellants had obtained a syndicated loan, secured by a mortgage over their property, as well as various unsecured bridging loans, from a syndicate of banks of which the respondents were the lead manager and agent. The appellants defaulted on the syndicated loan and the respondents sold the mortgaged property and applied the proceeds of sale in discharge of the syndicated loan. There were surplus proceeds of sale amounting to $2.24m which the respondents earmarked for the purpose of discharging their statutory obligations pursuant to section 68(1) of the Land Titles (Strata) Act.4 In essence, this provision declares that the money received by a mortgagee who has exercised his power of sale is held on trust to be applied in the following manner: first, in payment of the costs of the sale; second, in discharge of the liability secured by the mortgage; third, in payment of subsequent mortgages and charges in the order of their priority; and fourth, to be paid over to the person who appears from the land-register to be entitled to the mortgaged property.5

The appellants were put into liquidation by the respondents and, subsequently, the respondents set off a total of $1.68m of the surplus proceeds against amounts outstanding on the bridging loans. The respondents contended that, notwithstanding the fact that the surplus funds in their hands were impressed with a trust, they had by virtue of the

predecessor6 of section 88 of the Bankruptcy Act7 the right to effect the set-offs. Section 88 reads:8

  1. (1) Where there have been any mutual credits, mutual debts or other mutual dealings between a bankrupt and any creditor, the debts and liabilities to which each party is or may become subject as a result of such mutual credits, debts or dealings shall be set-off against each other and only the balance shall be a debt provable in bankruptcy.

  2. (2) There shall be excluded from any set-off under sub-section (1) any debt or liability of the bankrupt which —

    1. (a) is not a debt provable in bankruptcy; or

    2. (b) arises by reason of an obligation incurred at a time when the creditor had notice that a bankruptcy petition relating to the bankrupt was pending.

In the High Court,9 Chao J held that the surplus proceeds held on trust by the respondents for the appellants could be set off against other unsecured indebtedness of the appellants. The Court of Appeal allowed the appeal and ruled that the set-offs were invalid. Their Honours, however, based their decision on grounds which had not been considered by Chao J and proceeded on the assumption that trust funds could be set off.10 Plausibly, therefore, Chao J’s decision remains authoritative in Singapore. It is thus necessary to examine both the first instance and appellate judgments.

Set-off of trust funds?

Chao J, after a detailed review of the case law, concluded that there was the requisite mutuality between the parties, notwithstanding the fact that the respondents held the proceeds on trust for the appellants. It is clear, however, that the learned Judge did not decide that, as a general rule, trust

funds may be set off by the trustee against a debt owed to him by the beneficiary. There is quite formidable authority that trust funds cannot be set off against a debt owed by the trustee to the beneficiary because there is no mutuality.11 Chao J, therefore, must have been concerned only with the particular situation of the set-off of surplus proceeds of sale by a mortgagee against other indebtedness of the mortgagor. That there may be set-off of trust funds in this special context appears to be supportable on the English authorities.12

However, this proposition bears careful re-examination. It is difficult to see why the existence of a trust negates mutuality in all other situations but not with respect to a trust of surplus proceeds of sale of a mortgaged property. The mortgagee is a trustee of the surplus for the debtor company and his claim is only a simple contract debt against the debtor company; their rights are not rights of equal degree.13 Yet English law seems to insist, contrary to the very nature of a trust, that there is mutuality and that there may be set-off. Wood’s attempt at rationalisation is that, where a creditor realises his security, the Courts generally treat the debtor as having a money claim for the surplus which is consequently available for set-off14 (as opposed to a property claim which would not be capable of being set off).15 This is so notwithstanding that, pursuant to common law and statute, the mortgagee holds the surplus on trust for the debtor, as ‘trust language may not mean what it says in relation to the question of the mortgagor’s claim for a surplus’.16 But, as is probably intended by Wood, this is more an excuse than a justification. The truth, as noted by Derham, is that the authorities are in an unsatisfactory state.17

Furthermore, the English authorities are not uncontradicted,18 In particular, they must be considered in the light of the important decision of the Appeal Division of the Supreme Court of Victoria in Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division,19 which was unfortunately not cited to Chao J, In this case, a bank made three separate loans to a company and took mortgages in respect of each of them. Upon default by the company, the bank realised its security in respect of all three loans; in two cases, there were surpluses while in the third, there was a deficiency. The only question was whether the bank could set off the surpluses against the deficiency pursuant to the Australian insolvency setoff provision.20 After full consideration of the issue, the Court unanimously decided that there could be no set-off since the surplus were held on trust for the mortgagor. It was held that the mutual credits, debts and dealings referred to in the set-off provision must not only be between the same persons but also be between them in the same interests, and money in the hands of a trustee in that capacity is not held in his interest as a party to dealings on his own account with the debtor;21 the existence of the trust affecting the two surpluses in the bank’s hands thus destroyed the mutuality which was a prerequisite of the right to set off.22 The logic and consistency with fundamental principle exhibited by this decision stands in sharp contrast to the unsatisfactory state of the English authorities. It is submitted that it should and does represent the modern and correct stand on the issue.

A final objection is a simple one based on justice to the mortgagor’s general creditors. The law should endeavour to ensure that assets held on trust for the mortgagor are preserved in order to meet the claims of its general creditors, rather than to permit the mortgagee-trustee to unilaterally resort to the trust assets to satisfy his unsecured claim against the mortgagor. To allow this is to allow a preference.23 While it is true that the purpose of insolvency set-off is to do substantial justice between the parties,24 justice must also extend to the other unsecured creditors.25

The reasoning of the Court of Appeal

The Court of Appeal did not allow the appeal on the basis that the surplus proceeds of sale were held on trust and could not be set off. Instead, the Court adopted a line of reasoning which can be conveniently broken down into three steps. Firstly, mutuality for the purposes of set-off is determined at the date of the commencement of winding up, that is, the date of the presentation of the winding up petition,26 though the actual account may take place later. Secondly, in order for set-off to apply, each claimant must, on this date, beneficially own the claim which is owed to him by the other claimant and his ownership interest in that claim must be clear and ascertained without inquiry. Thirdly, if the interest in the company’s claim becomes ascertained or ‘crystallised’ only after the commencement of winding up, there is no mutuality because such claim would vest in the liquidator of the company while the creditor’s claim would be against the company.

On the facts, the company’s interest in the surplus funds became clear and ascertained only after all the superior claims under the statutory trust had been met from the surplus funds; this took place after the commencement of the winding up and thus, in the Court’s opinion, no set-off could be permitted.

The relevant date: commencement of winding up or date of winding up order?

The Court of Appeal’s decision that the relevant date for determining whether there is mutuality between the parties is the date of the commencement of winding up, though supported by some English cases,27 is in disagreement with the more recent and, it is submitted, more authoritative English decisions28 as well as the Australian position.29 With respect, the Court’s reliance on section 255 of the Companies Act as rendering the local position different from that in England (and, presumably, Australia) may not be incontrovertible, as a very similar provision has at all material times existed in both the English30 and Australian legislation.31

Further, to fix the relevant date as the date of the commencement of winding up is, to an extent, inconsistent with the notion that set-off is but a rule with regard to debts provable.32 The date for determining the provability and value of the claims against the company is the date of the winding up order.33 Thus, interest on a debt may be proved up to the date of the winding up order.34 For set-off to be effected, it is necessary to determine whether the claim sought to be set off by a creditor...

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