Rothstar Group Ltd v Leow Quek Shiong and other appeals [2022] SGCA 25 Security given by an insolvent security provider can be challenged as an undervalue transaction if the security provider receives consideration which is significantly less than the consideration which it provides. The Singapore Court of Appeal recently dis charged a mortgage given by a third party security provider as an undervalue transaction.
Facts
The recent case of Rothstar Group Ltd v Leow Quek Shiong and other appeals [2022] SGCA 25 concerns a dispute between Rothstar Group Ltd (the “Lender”), the private trustees of a Mr. Ng Say Pek (“Mr. Ng”) appointed on his bankruptcy, and the liquidator of Pictorial Development Pte Ltd (“Pictorial”). Mr. Ng and Pictorial had granted a legal mortgage in favour of the Lender for the loan taken by Agritrade International (Pte) Ltd. The private trustees sought to challenge this grant of security on the basis that it constituted a transaction at an undervalue,
which raised the issue of when and whether a grant of fresh security for an existing indebtedness can constitute a transaction at an undervalue.
Decision
The Singapore Court of Appeal (the “Court”) held that the grant of fresh security by an insolvent party for its existing indebtedness may not amount to a transaction at an undervalue, where its net assets remain unchanged. However, it clarified that this principle cannot extend to the grant of fresh security for another party’s existing debt.
In the Court’s assessment of whether a transaction at an undervalue exists, it considered that a comparison of value provided by the grantor to the lender and vice versa is necessary and highlighted the merit of establishing and quantifying the value of consideration in monetary terms (i.e., money or money’s worth). Ultimately, the Court ruled in favour of the private trustees and the liquidator.
Learning Points
This case is a timely reminder to lenders on the risk of taking security from an insolvent security provider especially if it secures the existing debt of another party. Lenders should consider the following pointers: –
- Legislation – there are avoidance provisions (including undervalue transactions and unfair preference) in the Insolvency, Restructuring and Dissolution Act 2018 of Singapore, which can affect the validity of security given by an insolvent security provider.
- Due diligence – due diligence should be done on the solvency of a security provider as well as the relationship of the various parties in order to make an informed decision on the security arrangement.
- Quantify the benefit – the benefit received by the security provider in money or money’s worth should be expressly quantified to the extent possible.
- Corporate resolutions – a mere mention of the existence of benefit in the corporate resolutions may not be sufficient. The existence of benefit is a question of fact.
- Attribution of benefit to related parties – the courts will likely take a strict approach in relation to the attribution of benefit among related parties. The benefit to a family member of a security provider may not be attributable to the security provider. Likewise, the benefit to a shareholder or a sponsor of a security provider may also not be attributable to the security provider.
In addition to the above relating to undervalue transactions, there are also other factors that may affect the validity of security such as legislative, constitutive and contractual restrictions, lack of corporate approvals, noncompliance with processes, improper execution, and fraud and multiple financing.
For further information, please contact:
Liew Kai Zee, Partner, ShookLin & Bok
kaizee.liew@shooklin.com
