23 August, 2017
Duncan, Cameron Lindsay and another v Diablo Fortune Inc and another matter [2017] SGHC 172
The Singapore High Court considered for the first time the juridical nature of a contractual lien on sub-freights. The Court held that such a lien is indeed registrable both as a charge on book debts and a floating charge within the meaning of Section 131 of the Singapore Companies Act. In a watershed case that is testament to the complex interplay between shipping practice and insolvency law, Shook Lin and Bok LLP’s Partner Debby Lim acted for the liquidators who succeeded in avoiding the unregistered charge. The Court also refused the shipowner’s application to extend time to register the charge.
Facts
The Company was engaged in commercial vessel operations. On 6 June 2008, it entered into a BIMCO Standard Bareboat Charter with Diablo in respect of the Vessel (the “Bareboat Charter”) under which Diablo agreed to charter the Vessel to the Company for five years. The Bareboat Charter was concluded in Singapore and subsequently extended for a further five years. The Company sub-chartered the Vessel out to V8 Pool Inc. pursuant to a vessel pooling arrangement.
A winding up application was filed by the Company on 19 December 2016. Subsequently, the Company was wound up pursuant to an Order of Court dated 6 January 2017.
On 30 December 2016, Diablo sent a notice to V8 Pool purporting to exercise its lien under Clause 18 of the Bareboat Charter. On 13 January 2017, a second lien notice was issued by Diablo to the sub-voyage charterers of the Vessel, Repsol Petroleo SA.
As a result of the lien notices, V8 Pool chose not to pay the Company until the dispute over the validity of Diablo’s lien was resolved. Around 19 January 2017, Diablo notified the Liquidators that it had commenced arbitration proceedings against the Company in London, pursuant to Clause 30(a) of the Bareboat Charter.
The Liquidators then applied to the Singapore Court for a determination that Diablo’s lien over sub-freights or sub-hire, due from V8 Pool to the Company, was void against the Liquidators pursuant to s 131(1) of the Companies Act (Cap 50, 2006 Rev Ed) (the “CA”) for want of registration.
Issues
The Court had to determine the following issues:
(a) whether a stay should be granted in favour of arbitration;
(b) whether Singapore law should govern the registration of charges and priorities in insolvency matters;
(c) whether the lien over sub-freights or sub-hire is a charge within the meaning of s 131(1) of the CA and should therefore be registered; and
(d) whether an extension of time should be granted to Diablo to register the lien under s 137 of the CA.
The Decision
The Court refused to stay the Liquidators’ application in favour of the London arbitration. The Court took the view that the dispute relating to whether the lien was a charge that was void against the Liquidators for want of registration was non-arbitrable. The issue of the validity of the lien as against the Liquidators in the present case could only be pursued in the course of the liquidation of the Company. Diablo had also admitted that its arbitration proceedings did not include the determination of the Liquidators’ application under s 131 of the CA. The Court also accepted the Liquidators’ argument that Diablo had taken a step in the proceedings by applying to extend time to register the charge since this was not done merely to preserve the status quo.
The Court held that the law of the State in which the insolvency proceedings were commenced (or lex fori concursus) governed the priority of security interests and distribution of assets in the insolvency of the Company. As the Company was incorporated in Singapore, the requirements under s 131 of the CA would apply even though
English law governed the Bareboat Charter.
The focal point of the judgment is the High Court’s analysis of the nature of a lien on sub-freights, which has been the subject of much academic debate in other common law jurisdictions. In considering the competing views, the Court reviewed the relevant authorities and concluded that the lien clause created an assignment by way of charge, agreeing with the prevailing views expressed by a series of first instance English cases. The Court rejected the views espoused by Lord Millett in the Privy Council decision of Agnew v Commissioners of Inland Revenue (and buttressed by Professor Oditah’s academic writing) that a lien on sub-freights is a personal contractual right to intercept the freights before they are paid and there is no tracing remedy for the lienee. The Court held that a lien on sub-freights possesses the characteristics of a floating charge and therefore should be classified as such. If the owner gives notice to the sub-charterer before payment, the lien crystallises and the owner acquires a proprietary interest in the sub-freight so that the owner can claim the amount due from the sub-charterer even if they have paid it to the charterer or a third party. If the sub-freight is paid before the owner has given such notice, then this inchoate right ceases to exist.
The Court also held that sub-freights and sub-hire due to a charterer can constitute the charterer’s book debts (which are debts that arise in the ordinary course of business of a company) and that charges can be created on book debts. It was common ground between the parties that the sub-freights and sub-hire would constitute book debts.
Lastly, the Court denied Diablo’s application for an extension of time to register the charge. The issue was whether the court should allow an application for extension of time where the Company (i.e. the chargor) had been wound up. As there were no reported Singapore cases on this point, the Court considered the English authorities. The Court accepted that Diablo’s non-awareness of the requirement for registration sufficed as inadvertence. However even though Diablo had satisfied one of the limbs in s 137 of the CA, this in itself was insufficient to obtain an extension of time as Diablo still had to go on to persuade the Court to exercise its discretion in Diablo’s favour. The Court concluded that where a company has been wound up, an order extending time would not ordinarily be made save in an exceptional case, such as fraud. In respect of this last issue, because Diablo had not demonstrated that there were any exceptional circumstances in the present case, the Court refused the application for the extension of time.
Commentary
Unlike a lien on cargo, a lien on freight is not a possessory lien – i.e. it is not a right to retain possession of something already in the owner’s possession – but rather a right to intercept monies which are moving from a third party to the charterer. The Court’s decision is likely to be confined to non-possessory liens (as in the present case).
This case reaffirms the Singapore Courts’ ‘substance over form’ approach to defining security interests. Liens on sub-freights are captured because it is evident that a shipowner is in substance using the lien to secure the payment due under the charter through the right to attach to sub-freights payable to the charterer. To enforce the security interest, shipowners should register lien clauses on, or shortly after, conclusion of the charterparty when a Singapore-incorporated charterer is involved.
This issue highlights the tension between maritime and insolvency practitioners. From the vantage point of admiralty practitioners, there is no commercial reason why contractual liens should be registered, as registration is impracticable and inconvenient. However, from the perspective of insolvency practitioners, the registration of contractual liens would give creditors notice of the lien, which would in turn help them better decide whether to extend credit or enter into transactions with the chargor. More importantly, a shipowner with a contractual lien should not, without registering its security interest, be able to arrogate priority to itself and steal a march on other creditors upon the winding up of the charterer.
The Court found that there was no clear contemplation of the Singapore Parliament to reduce or limit the effect of the general words of s 131 of the CA; this is unlike the Hong Kong Companies Ordinance, which expressly carves out contractual liens from being regarded as a charge for purposes of registration. Ultimately it should be left for the legislature to determine whether to exclude contractual liens from registration requirements. It could well be that insolvency’s triumph over admiralty in this scenario may not be for long.
As for the extension of time requirement, the Court accepted that not being aware of the requirement for registration suffices as inadvertence for the purposes of s 137 of the CA. This was specifically because there were no decided cases in respect of the requirement to register the lien in Singapore under s 131 of the CA. However, now that there is a reported decision on this very issue, the Court might be less sympathetic in future cases as to whether that had been inadvertence.
While this issue has yet to be ventilated before the English Court of Appeal, the first instance English decisions and now this Singapore High Court decision are likely to be regarded as the leading common law authority on this area in the meantime.
Ship owners are therefore advised to carry out due diligence on the solvency of their charterers and to seek proper legal advice in the jurisdiction of incorporation of their charterers. It may also be prudent to obtain parent company guarantees from more solvent companies where appropriate.
