26 October, 2018
Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others v BP Singapore Pte Ltd and another matter [2018] SGHC 215 (“Jurong Aromatics”)
The Singapore High Court recently considered the effect of a prohibition against assignment clause on assets subject to a charge. The decision confirms that, while such a prohibition is effective to prevent an assignment of assets, it did not restrict a charge on the asset.
The High Court also held that there was no required mutuality of debts for insolvent set- off to occur, if the debt was charged to another party.
Facts of Jurong Aromatics
The joint venture Jurong Aromatics Corporation (“JAC”) was tasked with the development of the Jurong Aromatics Plant on Jurong Island (“Plant”). Glencore Singapore Pte Ltd (“Glencore”) and BP Singapore Pte Ltd (“BP”) were suppliers to JAC under their respective feedstock supply agreements, and also customers of JAC under their respective product offtake agreements. Glencore also entered into an agreement with JAC, to set-off Glencore and JAC’s mutual claims (“Set-Off Agreement”) under their feedstock supply agreement and product offtake agreement.
JAC was financed by a syndicate of banks and financial institutions (“Senior Lenders”), whose loans to JAC were secured by way of a debenture entered between JAC and the Senior Lenders’ security agent, BNP Paribas Singapore Branch (“BNP Paribas”), comprising:
(a) a first fixed charge over JAC’s present and future book debts; and
(b) a first floating charge over all of JAC’s present and future assets.
There was also an assignment between JAC and BNP Paribas, under which receivables payable to JAC under the Glencore feedstock supply agreement and product offtake agreement (among other agreements) were assigned to the Senior Lenders.
Subsequently, when JAC encountered financial difficulties, receivers and managers were appointed by BNP Paribas, who took control of and managed the assets of JAC. Thereafter, JAC entered into a tolling agreement (“Tolling Agreement”) with the defendants, to enable the Plant’s operations to resume while a buyer was sought. When a buyer, ExxonMobil Asia Pacific Pte Ltd, was found, it entered into respective agreements with JAC and the defendants (“Transition Agreement” and “Transitional Supplemental Agreement”) to enable the Plant to be sold without shutting it down. The Tolling Agreement, Transition Agreement and Set-Off Agreement contained prohibition against assignment clauses.
JAC, with its receivers and managers, then sought to claim the charged receivables due from Glencore and BP (collectively the “Defendants”). The Defendants sought to set-off these claimed amounts against debts owed by JAC under their respective feedstock supply agreements with JAC (“feedstock debt”).
Issues
Apart from the High Court’s statements on the nature of a charge and decrystallisation, its findings on the following issues are particularly noteworthy:
(a) does a prohibition against assignment clause preclude a charge?;
(b) what is the impact of a prohibition against assignment clause on an encumbrance created before the prohibition, and on an encumbrance created after the prohibition?; and
(c) is there a right of insolvent set-off against debts which are charged?
Decision
On the first issue, the High Court confirmed that a contractual prohibition against assignment of assets did not, on its own, prevent a party from taking a charge over these assets, subject to the actual text of the prohibition and contrary intentions of parties in the context of the transaction. As the plain meaning of the prohibitions did not preclude a charge, and there was insufficient evidence that parties intended for charges to fall within the prohibitions, the fixed charge and crystallised floating charge held by the Senior Lenders were not precluded by the prohibitions.
On the second issue, it appears that even if a prohibition were construed to cover a charge, it would only affect encumbrances created after the prohibition, and not the ones already operating against the asset. In Jurong Aromatics, the charges were already operational by the time the prohibition came into being – as soon as the receivables were due to JAC, they were subject to the fixed charge and crystallised floating charge; there was no point at which the prohibition could operate. The receivables which arose out of the Tolling Agreement (“tolling fee debt”), Transitional Supplemental Agreement (“final payment amount debt”) and Set-Off Agreement (“Set- Off Agreement debt”), which were concluded subsequent to the debenture, were already caught by the fixed charge and crystallised floating charge, which were expressed to include future assets of JAC.
On the third issue, the High Court held that there was no required mutuality of debts for insolvent set-off to occur if the debt was charged to another party. The Defendants did not have a right to set-off against the charged assets (ie the tolling fee debt, the final payment amount debt, and the Set-Off Agreement debt) as the mutuality requirement of insolvent set-off was not satisfied – the Defendants’ claims (ie the feedstock debt) were qua JAC, whereas the equitable interest of the charged assets (against which the feedstock debt was sought to be set-off) lay with the Senior Lenders (qua debenture holders of JAC’s assets).
Conclusion
Jurong Aromatics confirms that a prohibition against assignment clause did not, on its own, restrict the creation of security by way of a charge over those assets. While an assignment is a stronger form of security compared to a charge, the charge is still a security interest which will improve the position of the lender, especially in an insolvency.
Further, while Jurong Aromatics suggests that a prohibition against assignment clause affects only encumbrances created after the prohibition, lenders would do well to exercise caution, and give effect to the prohibition whether or not it came before or after creation of the security.
Finally, the High Court did not find that there was the required mutuality of debts for insolvent set-off to occur, as the debt was charged to another party. This is a curious angle, given that the High Court recognised that a charge, unlike an assignment, did not transfer ownership rights in an asset, but vested beneficial interest of the asset to the satisfaction of a debt. Based on the reasoning of Jurong Aromatics, vesting of such equitable interest in the debt by way of a charge (and not transfer of ownership by way of an assignment) was sufficient to destroy mutuality of debts required for insolvent set-off to occur. While this finding would be welcomed by lenders, as a charge may now potentially shield debts from insolvent set-off, it bears noting that this proposition remains to be tested in the Court of Appeal.
