Case Summaries

Malayan Banking Bhd v Bakri Navigation Company Ltd [2020] SGCA 41 Civil Appeal No 87 of 2019

SUPREME COURT OF SINGAPORE

29 April 2020

Case summary

Malayan Banking Bhd v Bakri Navigation Company Ltd [2020] SGCA 41
Civil Appeal No 87 of 2019

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Decision of the Court of Appeal (delivered by Judith Prakash JA):

Outcome: Court of Appeal dismisses the appeal by the appellant. The floating charge in question did not crystallise by virtue of certain transactions entered into by the chargor, even if those transactions were outside the chargor’s ordinary course of business. In interpreting the automatic crystallisation clause in the debenture, the Judge below was entitled to decline to follow a Malaysian judgment involving the same shipyard, the same bank, and the same debenture, which the appellant had relied on as proof of Malaysian law.

Introduction

Background to the appeal

The parties

1 The appellant is Malayan Banking Berhad (“MBB”), a bank incorporated in Malaysia. MBB extended credit facilities to the shipbuilder, NGV Tech Sdn Bhd (“NGV”), between 2004 and 2012 for the purpose of its ordinary business which was to build vessels for sale at its shipyard in Malaysia. The first respondent is Bakri Navigation Company Ltd (“Bakri”), the original buyer of Hull 1118 and its sister vessel, Hull 1117, pursuant to two shipbuilding contracts with NGV. These shipbuilding contracts were novated to Red Sea Marine Services Ltd (“Red Sea”), the second respondent, in December 2007. Bakri and Red Sea are part of the Bakri group of companies. They have the same registered address, and are incorporated in Saudi Arabia. Bakri owns and operates ships, while Red Sea manages ships.

The Debenture and the Assignments

2 The credit facilities extended by MBB to NGV were secured by six debentures with identical terms, executed by NGV in favour of MBB. Clause 3.1(b) of the Debenture created a floating charge in favour of MBB over all of NGV’s movable and immovable property and other assets. The Debenture provided two mechanisms for the crystallisation of the floating charge: (a) by MBB giving notice in writing to that effect to NGV (cl 4.2); and (b) by automatic crystallisation if NGV “‘encumbered”’ in favour of a third party any property which was subject to the floating charge (cl 4.3, the “automatic crystallisation clause”).

3 The Debenture was governed by Malaysian law. However, the parties agreed in the court below to proceed on the basis that the court would be able to refer to cases from Singapore, Malaysia and other Commonwealth jurisdictions in order to determine any question of Malaysian law arising in connection with the Debenture. Accordingly, no expert evidence on Malaysian law was required or adduced in the court below.

4 To repay MBB for sums advanced, NGV assigned the proceeds of all its shipbuilding contracts to MBB by way of agreements for assignment executed in 2008 and 2010 (referred to collectively as the “Assignments”). The Debenture and the Assignments were duly registered at the Malaysian Registry of Companies in order to preserve their enforceability in the event of the liquidation of NGV.

The shipbuilding contracts

5 The relationship between NGV (as a shipbuilder) and Bakri (as a purchaser of vessels) led to the construction of four vessels, ie, Hulls 1090, 1091, 1117 and 1118. Hulls 1090 and 1091 were commissioned in late 2006, while Hulls 1117 and 1118 were commissioned in August 2007. The price to be paid for Hulls 1117 and 1118 was US$6.33m each.

The impugned transactions

6 Unbeknownst to MBB, several transactions were entered into by NGV and Red Sea between 2009 and 2012. MBB asserted that the net result of these transactions was that Red Sea secured title and possession of Hulls 1117 and 1118, without making payment to NGV. These transactions are collectively referred to as the “Impugned Transactions”.

7 First, in April 2009, NGV and Red Sea entered into agreements to reduce the purchase price of Hulls 1117 and 1118 by US$1.5m each. The respondents alleged in the trial that the reduction was made for the purpose of providing “full and final compensation” from NGV to Bakri for NGV’s delay in delivering Hulls 1090 and 1091. Despite the price reduction, Red Sea continued from 2009 until 2012 to procure extensions of the letters of credit for Hulls 1117 and 1118 at the full contract price of US$6.33m each. According to MBB, it was not aware of the price reduction until after the commencement of the action below.

8 Second, in January 2011, NGV entered into two agreements (“the Agency Agreements”) with Quoin Island Marine WLL (“QIM”). Under the Agency Agreements, and subsequent addenda, QIM was appointed NGV’s agent to take over the construction of Hulls 1117 and 1118, authorised to agree to the terms of the delivery of the vessels to Red Sea and empowered as NGV’s attorney to deliver title and possession of the vessels.

9 Third, according to Red Sea, it paid US$16.8m directly to NGV’s subcontractors in order for them to complete construction of Hulls 1117 and 1118 (“Direct Payments”). NGV then set off its debt for the Direct Payments against the purchase price of Hulls 1117 and 1118, the net result being that Red Sea became entitled to take delivery of the two vessels without any payment to NGV.

10 Fourth, in May 2011, NGV and Red Sea executed two contracts (known as the “Completion Contracts”) which provided for transfer of title to, and possession of, Hulls 1117 and 1118 to Red Sea.

11 Fifth, in July 2012, NGV informed Red Sea that it was unable to complete construction of Hulls 1117 and 1118. NGV then physically transferred the partly-completed Hulls 1117 and 1118, with Red Sea’s consent but without MBB’s knowledge, to shipyards in Singapore and Batam to be completed.

12 NGV defaulted on the credit facilities granted by MBB – as of February 2013, it owed MBB in excess of RM698m. In March 2013, MBB served two notices in writing on NGV, pursuant to cl 4.2 of the Debenture, to crystallise its floating charge. In May 2013, on the application of a creditor unrelated to this dispute, NGV was ordered to be wound up in Malaysia.

Proceedings in Singapore

13 The Judge accepted that the Debenture did indeed create a floating charge over NGV’s assets, including Hull 1118, but held that the floating charge did not crystallise by operation of the automatic crystallisation clause (cl 4.3) in the Debenture. This was because, in the view of the Judge, the Price Reduction Agreements and transfer of possession of and title to Hull 1118 to Red Sea did not amount to “encumbering” Hull 1118.

14 The Judge declined to follow the decision of the High Court of Malaya at Kuala Lumpur (“HC Malaya”) in NGV Tech Sdn Bhd (receiver and manager appointed) (in liquidation) and another v Ramsstech Ltd and others [2015] 1 LNS 1017 (“Ramsstech”), a case which involved NGV and the same debentures in favour of MBB. The case concerned a shipbuilding contract between NGV and a buyer that provided that the price was to be paid directly to NGV. The HC Malaya in Ramsstech held that the transaction did trigger the identical automatic crystallisation clause on 6 March 2010 as, when executed on that date, the shipbuilding contract constituted an “encumbrance”. Ramsstech was upheld on appeal to the Malaysian Court of Appeal but without grounds being delivered. The Judge disagreed with Ramsstech, holding that it was only an authority with, at the most, persuasive effect and was not evidence of Malaysian law.

15 MBB relied on two grounds of appeal. First, MBB argued that it has an interest in Hull 1118 that is superior to that of Red Sea. Second, MBB argued that its claim in conspiracy in respect of Hull 1118 should have succeeded.

The Court of Appeal’s decision

16 The Court of Appeal dismissed the appeal.

17 MBB sought to argue in the appeal that the effect of the holding in Ramsstech that the shipbuilding contract was an encumbrance was that, on and from 6 March 2010, the floating charge became fixed and attached to all NGV’s assets at that time, including Hulls 1117 and 1118. Therefore, MBB’s interest in Hull 1118 preceded Red Sea’s as the latter came into existence, at the earliest, in 2011. The Court of Appeal disagreed. The parties had agreed that evidence of Malaysian law could be led by way of submissions, without the need for an expert on Malaysian law to testify, as no difference between Malaysian and Singapore law had been pleaded. There was no pleading that, as laid down in Ramsstech, the floating charge in the Debenture had crystallised in fact three years before MBB gave notice to NGV that it was crystallising the floating charge. Indeed, by paragraph 18 of the Statement of Claim, MBB had pleaded that the notice issued in March 2013 was the crystallising event. Although all parties were aware that MBB would be relying on Ramsstech, the impression was that such reliance was for the purpose of establishing Malaysian legal principle, rather than to establish the fact of crystallisation of the Debenture on a specific date. Accordingly, the Court of Appeal agreed with the respondents that they would be prejudiced if MBB were allowed to present the argument for the first time at the appellate stage. Thus, the Court of Appeal proceeded on the basis that the Debenture did not crystallise on 6 March 2020 due to NGV’s dealings with Ramsstech Ltd: at [58].

18 Furthermore, the Court of Appeal held that Ramsstech was evidence of Malaysian law, and the reference to MIMB (No 2) indicated that Ramsstech was not a decision purely on interpretation, but was also a case affirming a certain principle in Malaysian law. Nonetheless, the court was not bound to follow Ramsstech. Although the high degree of factual similarity between Ramsstech and the present case rendered it significant relevant evidence of Malaysian law, the persuasiveness of Ramsstech was lessened by the lack of reasons given in the judgment: at [59] to [63].

19 Given the parties’ agreement that Malaysian and Singapore law could be relied on, the Court of Appeal held that it was not incorrect for the Judge to apply a contextual approach to contractual interpretation by considering the commercial objectives of the parties regarding the use of the floating charge, in line with Singapore cases. In fact, as MBB had agreed that it was not going to rely on any aspect of Malaysian law that was different from Singapore law, MBB could not complain that Ramsstech was not treated as the final word on the matter: at [65].

20 MBB argued, alternatively, that NGV’s sale of Hull 1118 while retaining possession of it amounts to a “sale with right of retention” (and was therefore an “encumbrance” under cl 1.2). However, even if it is assumed that “sale with right of retention” refers to a right to retain possession, the mere fact that Hull 1118 remained in the possession of NGV did not mean NGV had the right to retain such possession. No evidence has been relied on by MBB to show that any such legal right existed, and the Court of Appeal rejected this argument: at [68].

21 The Court of Appeal accepted that there exists a category of crystallising events which relates to the crystallisation of a floating charge on the occurrence of an event which is incompatible with the continuance of trading by the chargor company as a going concern, and this is known as “crystallisation as a matter of law”. There are two types of events that can bring about “crystallisation as a matter of law”: (a) Winding up of the company; and (b) De facto cessation of trading, which includes disposal of, in substance, the whole of a company’s undertaking or trading assets with a view to cessation of trading. Accordingly, the Court of Appeal held that MBB’s argument – that transactions that are merely outside of the ordinary course of the charger’s business crystallise the floating charge as a matter of law – was not supported by academic writings or case authority: at [73] to [75] and [78].

22 The Court of Appeal held that the Impugned Transactions were not outside NGV’s ordinary course of business. Simply because the Impugned Transactions were “extraordinary” was insufficient to take them outside the ordinary course of business. There was also no evidence to show that the Impugned Transactions wrongfully preferred Bakri and Red Sea over other creditors and were liable to be avoided in NGV’s liquidation. Even assuming that there was wrongful preference, that circumstance alone would not necessarily take the Impugned Transactions outside the ordinary course of business. Given the high threshold of the test to determine when a transaction is outside a company’s ordinary course of business, it is also clear that simply because the Impugned Transactions might not have been necessary does not render them outside the ordinary course of business: at [89].

23 The Court of Appeal disagreed with MBB’s argument that if fraudulent transactions were not crystallising events, that would be an absurd result. If these transactions fall outside the ordinary course of business, the chargee’s interest would still rank first. In a floating charge, the chargee is incapable of asserting any proprietary or possessory right to any specific asset even if dispositions of the assets are made outside the chargor’s ordinary course of business or in breach of the terms of the debenture. Because of this, the chargee typically protects itself via guarantees (as is provided for in the Debenture). This simply recognises that the framework allows the creditor to protect itself in other ways if it so chooses. In fact, MBB has commenced action against the personal guarantors of the financing facilities granted by MBB to NGV: at [90].

24 The Court of Appeal rejected MBB’s argument that NGV was no longer operating as a trading concern because NGV no longer retained management powers after the Agency Agreements and the addenda were entered into. Trading as a going concern does not require the powers of management to remain with the directors: at [91].

25 The Court of Appeal further rejected MBB’s argument that the Judge had erred in relying on the appointment letter issued by MBB’s monitoring accountant in finding that the Ministry of Defence contract was successfully secured by NGV. There was no ground on which to disturb the Judge’s finding of fact, it being based on his assessment of the evidence before him: at [92].

26 MBB did not sufficiently plead its assertion that (a) the Impugned Transactions amounted to breaches of the Debenture; and (b) the extension of letters of credit after Red Sea obtained title amounted to conspiracy to defraud. Therefore, it was not permitted to rely on these arguments: at [94], [96] to [99].

27 The appeal on the conspiracy claim was rejected by the Court of Appeal. There was no legal or factual basis for MBB’s argument that the respondent had entered into the Impugned Transactions with the intention or predominant intention of injuring MBB: at [103], [105], [107], [108] and [101].

This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.

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