UNSECURED CREDITOR VERSUS UNREGISTERED CHARGE

• Published date: 01 December 1998
• Date: 01 December 1998
• Author: LEE ENG BENG
• Citation: (1998) 10 SAcLJ 241

Michael Ng Wei Teck v Overseas-Chinese Banking Corporation Ltd 1

A company granted an equitable mortgage of a property to the respondent bank and the latter obtained an order of court for enforcement of the security. The mortgage was not registered as required by section 131(1) of the Companies Act2 and hence, in the words of the statute, was ‘void against the liquidator and any creditor of the company’. Before the sale took place, the second appellants, an unsecured creditor bank of the company, presented a winding up petition against the company and the first appellants were appointed receivers and managers of the company. Ignoring the appellants’ protests, the respondents proceeded with and completed the sale. Less than a month later, a winding up order was made and the first appellants were appointed liquidators of the company.

The appellants subsequently applied for a declaration that the defendant’s mortgage was void for want of registration and for an order that the respondents pay over the proceeds of sale to the first appellants. At first instance, Goh Joon Seng J refused the application.3 His Honour decided that the mortgage was not void against the first appellants as liquidators since, at the time they were appointed liquidators, the charge had ceased to exist. It could not be argued that the appointment or the powers of the first appellants were somehow backdated to the date of the presentation of the winding up petition. Further, the charge was not void as against the second appellants as they were mere unsecured creditors; section 131(1) could be relied upon only by a creditor who had acquired a property right or interest in the subject matter of the unregistered mortgage.

The Court of Appeal reversed Goh J’s decision. While agreeing with Goh J that the unregistered mortgage was not void as against the first appellants,4 the Court decided that it was void against the second appellants even though they were mere unsecured creditors. The Court reaffirmed the rule that, while the company is a going concern, an unregistered security granted by the company is not void against an

unsecured creditor of the company.5 The Court held, however, that this will not be the case when a winding up petition has been presented against the company. Upon the presentation of a winding up petition, the unsecured creditors of a company become in the nature of a cestui que trust with beneficial interests extending to all the company’s property including the subject matter of the unregistered charge. This interest is sufficient to allow an unsecured creditor to invoke section 131(1) and the unregistered security will then be void against him.

Undoubtedly, the ultimate result of the Court of Appeal’s decision is correct. If Goh J’s decision had stood, the only way for an unsecured creditor to prevent the holder of an unregistered security from realising his security would be to procure the appointment of a liquidator. This would have led to a most undignified race between the security holder and the unsecured creditor. The security holder would endeavour to realise his security before the unsecured creditor could cause a liquidator to be appointed, while the latter would strive to achieve the reverse order of events. Such a position would be highly unsatisfactory. Not only would it be an arbitrary and somewhat uncivilised means of determining the parties’ rights, it would encourage the holder of an unregistered security to behave aggressively and realise the security as soon and as clandestinely as possible. Further, it seems indisputable that the policy behind section 131(1) is that a registrable security granted by a company is of no effect in the liquidation of the company unless it is duly registered. It cannot be right, then, that this policy may be defeated and the unsecured creditors unceremoniously deprived of their intended rights, simply because there is a procedurally inevitable time gap before the company may be formally placed in liquidation and a liquidator appointed. The Court of Appeal’s decision firmly rejects such an outcome and, for this reason, should be welcomed.

However, this commentator is not entirely comfortable with the Court’s reasoning that, upon the presentation of a winding up petition, an unsecured creditor acquires some sort of proprietary interest in the company’s assets which is sufficient to confer on him the locus standi to invoke section 131(1). Such a conclusion appears unwarranted by the authorities cited by the Court. It is true that

Re Anglo-Oriental Carpet Manufacturing Co 6 and Re Resinoid & Mica Products Ltd7 stand for the proposition that unsecured creditors acquire rights in respect of the company’s property upon the commencement of winding up, but these were cases dealing with a voluntary winding up. In a voluntary winding up, there is only one critical date: the date of the passing of the winding up resolution, which the statute fixes as the commencement of the voluntary winding up.8 The unsecured creditors acquire an interest in the assets of the company upon the commencement of a voluntary winding up because, upon the passing of a resolution for voluntary winding up, the assets of the company are held on a statutory trust for the creditors.9 In contrast, the initiation of compulsory winding up proceedings has two important stages: the presentation of the winding up petition and the making of the winding up order. While the former is statutorily deemed the commencement of the compulsory winding up,10 it is the latter which, in this context, bears a closer analogy to the winding up resolution in a voluntary winding up. A long line of authority holds that, upon the making of a winding up order, the assets of the company become impressed with a statutory trust the purpose of which is to apply the assets in discharge of the company’s liabilities.11 It has also been said that the effect of a resolution for voluntary winding up being passed is, apart from procedural differences, the same as the making of a winding up order; it brings into operation the statutory scheme for dealing with the assets of the company.12 The same is suggested in a passage cited by the Court from R v Registrar of Companies, ex pane Central Bank of India,13 where Dillon

LJ stated that ‘on a winding up order being made, the statutory scheme for distribution of a company’s assets among its creditors comes into operation’. It is therefore submitted that, on the state of the authorities, it is only upon the making of the winding up order, not the presentation of a winding up...