11. Credit & Security

Security

Credit

Credit & Security

Credit and Security

OUTLINE

(i) Mortgages· Sale & Requisition

(ii)Life

Insurance· Trust Policies – s73 CLPA

(iii) Lien, Pledge, Hypothecation and Charges

(iv) Debentures (Fixed charges, floating Charges and Receivership)

(v) Letter of Guarantee

(vi) Banking· Crossed Cheques & Forgeries

(vii) Documentary Letters of Credit

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PART ONE: MORTGAGE

GENERAL:

Mortgage is a form of security involving the transfer of ownership of the asset of the debtor to the creditor to secure payment of the debt on the express or implied condition that the asset should be reconveyed to the debtor when the sum owed has been paid.

Giving security on real property involving transfer of ownership of the asset of the debtor to the creditor to secure payment of the debt with express condition that asset should be reconveyed to the debtor upon payment of moneys owned.

Valued form of security because of scarcity of land. Due to dual system of Land registration – type of mortgage created would depend on the system of

land registration. Equitable mortgages can be created in two circumstances:

First, where the mortgagor himself has only an equitable interest in the land.

Second, where the formalities of the legal mortgage have not been complied with, e.g. deposit of title deeds with the creditor.

A mortgage of land is now in the form of a charge by way of a legal mortgage or a demise for a term of years absolute.

For a mortgage, it is usual for the deeds of title to be delivered to the creditor. *NOTE: In Singapore, all chattel mortgages have to be registered under the Bills of Sale Act. Disposing/realising security of mortgage.

· Banks have to show that they are careful when they are carrying out a mortgagee sale.

DUTY OF A MORTGAGEE:

1. Obligation to obtain the best available market price:

There is an obligation to obtain the best available market price. The mortgagee’s duties are not limited only to the mortgagor but also to the guarantor where it

applies. This is based on the principle of Donaghue v Stevenson: duty of care.

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (Court of Appeal)Principle: Mortgagee owes a duty to the mortgagor to take reasonable care to obtain the true market value of

the mortgaged property prevailing at the date of the decision to sell (date of sale).

Facts: The plaintiffs charged land which they owed to the defendants by way of legal mortgage. The

plaintiffs had obtained planning permission on separate occasions to build either 100 flats or 35 houses on the charged land.

The defendant’s statutory power of sale later became exercisable and they went into possession and instructed auctioneers to sell the land.

o Preparations were made for sale by a public auction. Advertisements remarked on the planning permission for the 35 houses but made no mention of the planning permission for the flats. The plaintiffs drew that fact to the defendants’ attention and asked that the sale be postponed.

o The defendants did not do so, but they undertook to instruct the auctioneers to mention at the sale the existence of planning permission for flats.

The land was sold at £44,000 but the plaintiffs alleged that the land was worth £75,000 and brought an action claiming an account of the difference.

Held: Salmon L.J.: It is well settled that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the

power has accrued, the mortgagee is entitled to exerise it for his own purposes whenever he

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chooses to do so.o It matters not that the moment may be unpropitious and that by waiting a higher price

could be obtained. The mortgagee has the right to realize his security by turning it into money when he likes.

o Nor is there anything to prevent a mortgagee from accepting the best bid he can get an auction, even though the auction is badly attended and the bidding exceptionally low.

Provided none of these adverse factors is due to any fault of the mortgagee, he can do as he likes.

o If the mortgagee’s interests as he sees them, conflict with those of the mortgagor, the mortgagee can give preference to his own interests, which of course he could not do if he were a trustee of the power of sale for the mortgagor.

The mortgagee’s power of sale is however restricted by two duties:o First, the duty of acting in good faith .

The sale must be a sale by the mortgagee to an independent purchaser at a price honestly arrived at.

o Second, the duty to take reasonable care and precaution to obtain the true market value of the mortgaged property at the moment he chooses to sell it.

The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee.

If the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor.

If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket.

The proximity between a mortgagor and mortgagee where the latter is exercising his power of sale could scarcely be closer. Surely they are “neighbours”.

No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line .

Therefore, a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it.

Cross L.J.: On the one hand, the mortgagee, when the power has arisen, can sell when he likes, even though

the market is likely to improve if he holds his hand and the result of an immediate sale may be that instead of yielding a surplus for the mortgagor the purchase price is only sufficient to discharge the mortgage debt and the interest owing on it.

On the other hand, the sale must be a genuine sale by the mortgagee to an independent purchaser at a price honestly arrived at.

The position of a mortgagee is quite different from that of a trustee. o A trustee has not, qua trustee, any interest in the trust property, and if an agent

employed by him is negligent his right of action against the agent is an asset of the trust. o A mortgagee on the other hand, is not a trustee and if he sues the agent for negligence

any damages which eh can recover belong to him. Therefore, if any of the defendants or their agents (auctioneers) were guilty of negligence in

connection with the sale, the defendants were liable to compensate the plaintiffs for any damage which they had suffered as a result of that negligence.

Cairns L.J.: The defendants were guilty of negligence and had breached their duty to take reasonable care to

obtain a proper price for the land in the interests of the plaintiffs. o There was negligence in omitting the mention of the flats’ permission in the first place.

There was abundant evidence to support the finding that common prudence would have made it desirable that the land be advertised for sale as land which had planning permission for building flats.

In addition, it would have been the simplest thing in the world to mention the flats’ permission in the brochure, and it could have done no harm.

o Further, when the defendants realised their omission, it was negligent, and not merely

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an error of judgment, not to postpone the auction and re-advertise. o Whilst there were considerations of weight against postponement, they were not

sufficient to outweigh, in the mind of a reasonable man, the chance by postponement and re-advertising of getting a better price.

2. Obligation to advertise sale of property

Ng Mui Mui shows that it is not easy to sue banks for breach of mortgagee’s duty to obtain best available market price.

Further, Court of Appeal held that there was no obligation to either advertise first, or sell by public auction.

Ng Mui Mui v Indian Overseas Bank [1986] 1 MLJ 203 (Court of Appeal, Singapore) Facts: The plaintiff mortgagor sought damages from the mortgagee, alleging that the mortgagee had failed

to obtain a fair price when selling the property as a result of its default and negligence. The plaintiff alleged, inter alia, that the said property ought, before the sale, to have been put up for

sale by auction, or at least advertised for sale.

Held (FA Chua J): So far as mortgages are concerned the law is set out in Cuckmere Brick Co Ltd v Mutual Finance

Ltd, where it was held that a mortgagee, when exercising his power of sale, owed a duty to the mortgagor to take reasonable care to obtain a proper price.

In the present case, the onus was upon the appellant to prove on a balance of probabilities that the amount obtained by the mortgages was not the best price obtainable in the circumstances of this case and at the time in question.

o This the appellant (mortgagor) failed to do. The fundamental issue in this action was whether there was or was not a sale of the said property at

a negligent undervalue. o First, when the mortgages sold the property, was the market value of the property in

excess of the purchase price to such an extent that the sale must be considered as one made at an undervalue?

o Second, if so, was the sale at that undervalue the result of negligence? The court was not prepared to hold that the mortgages were not justified in accepting a fair offer for

the purchase of the said property until they had first put up the said property for sale by auction. o To hold that would be to limit the power give by s 24(1)(a) of the CLPA, which expressly

authorises a sale by public auction or by private contract. Further, the court was of the view that neither were the mortgages bound to adverse before

proceeding to a sale: Davey v Durrant (1857) 26 LJ Ch 830). The mortgagees had acted in a reasonable manner.

o At the time they received the offer to purchase, the amount due to them was very large and they held a second mortgage.

They would have more reason to be concerned that the first mortgagee over any postponement or delay in the exercise of their power of sale as the accruing interest on the first mortgage would in effect be eroding the security of the second mortgage.

o The mortgagor and her family were recalcitrant and determined to frustrate the mortgagees in their attempts to sell the said property.

The mortgagees were not bound to wait till a more advantageous sale could be effected.

The mortgagees had sold to the purchaser with the owner refusing to give possession. It was a sale without possession.

However, Lee Nyet Khiong represented a shift in the Courts’ position.

Although mortgagees are not required to advertise the sale pursuant to Ng Mui Mui, they are under an obligation to obtain the best reasonable price or the true market value and one way of obtaining such figures is through advertising.

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Lee Nyet Khiong v Lee Nyet Yun Janet [1997] 2 SLR 713 (Court of Appeal) Facts: The plaintiff mortgaged landed property to the defendant to secure repayment of a loan. The

property underwent renovation at the suggestion of the defendant. The defendant subsequently proceeded to exercise his power of sale. The sale by tender was

advertised in the Straits Times describing only the location, the land area and the nature of the property being freehold, no other particular of the property being given.

At the close of the tender, only one tender was received. The plaintiff subsequently informed the defendant that she had received another offer for more, the terms of which were not in compliance with the terms and conditions of the tender.

o The defendant agreed to accept the first tender and the sale was completed. The plaintiff brought an action for damages accruing from the defendant’s breach of duty to obtain

the best price.

Held : It is well settled that a mortgagee, in exercising his power of sale, has a duty to act in good faith and

also a duty to take reasonable care to obtain the true market value or the proper price of the mortgaged property at the date on which he decides to sell it.

In the circumstances, the question was not whether the price for which the property was sold by the defendant was reasonable but whether the defendant as a mortgagee, in exercise of the power of sale, had taken reasonable efforts to obtain the best price that was available in the circumstances.

o The fact that the ultimate purchase price was very near to the value provided in the valuation and was a reasonable price was quite irrelevant in this case.

The mortgagee had not discharged his duty. o The mortgagee’s efforts in advertising:

The advertisement gave but a bare minimum of the description of the property which was woefully inadequate. It did not provide any information as to the state and condition of the house on the property, and more particularly omitted to mention that the house had recently been extensively renovated.

The advertisement appeared only once. A short period of only two weeks was allowed for tenders to be submitted. This

was wholly unreasonable given that the property was worth a large sum of money and a decision to tender for it was not one which could be taken lightly.

o The mortgagee’s efforts in dealing with the two competing tenders: The mortgagee should have seriously considered the offer of the second

tenderer, which appeared to be genuine, and pursued the matter further. As the price offered was significantly higher than that offered by the first

tenderer, the mortgagee should not have discarded the second offerer’s offer simply on the ground that he did not want to contract on the mortgagee’s terms.

The mortgagee should have explored the alternative offer and entered into negotiation with the second offeror. No attempt at all was made.

Further, the mortgagee should also have indicated the second offer to the first offeror and enquired if the first offeror would be prepared to match or better that offer.

As there were two interested potential purchasers, the mortgagee should have brought them into competition so as to obtain the highest price.

o The hasty manner in which the mortgagee put the property up for sale, the inadequate description of the property that was advertised, the short period allowed for the tender, the summary and perfunctory way the mortgagee dealt with a competing offer, and in particular his failure to follow up that offer, led the Court inescapably to the conclusion that the mortgagee was only concerned with realising sufficient funds from the sale to pay off the debt owed to him and was not at all interested in securing a higher price for the property.

He was concerned solely with his own interest and ignored the interest of the mortgagor.

The conduct of the mortgagee reflected a calculated indifference to the position

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of the mortgagor, and in selling the property in the way and manner that he did he sacrificed the interest of the mortgagor, whilst his own interest was not in any way at risk.

Kian Choon Investments also represented a change in position taken by courts as they are more willing to uphold a mortgagor’s rights.

Though note that this case had to do with an interlocutory injunction, and was not a determination on the merits but only on the standard of “serious issue to be tried”.

Kian Choon Investments Pte Ltd v Societe Generale [1990] 2 MLJ 74 (LP Thean J)

Facts: Plaintiffs executed two mortgages in favor of the first defendant bank to secure banking facilities.

Upon mortgagors’ default in payment, the mortgagees took possession of the mortgaged property and took steps to sell the property as mortgagees.

The mortgagee negotiated a sale and purchase agreement with the 2nd defendant, the terms of which included a grant by the purchaser to the mortgagee of a lease 4 floors of the property and an option to repurchase 6 floors of the property.

The mortgagors applied for an interlocutory injunction restraining completion of the sale, claiming that the mortgagee bank in exercising their power of sale had not discharged their duties by: (a) not giving reasonable publicity of their intention to sell the property; and(b) obtaining benefits for themselves other than the purchase price for payment of the debt owned

by the plfs.

Held (LP Thean J): On the authority of Cuckmere Brick, a mortgagee in exercising the power of sale has 2 duties:

(a) duty to act in good faith; and(b) duty to take reasonable steps to obtain the best price available in the circumstances or, in the

words of Salmon L.J., the true market value thereof at the time of sale. In the present case, there was a conflict between the mortgagee’s interest to repurchase part of the

property at the lowest price and his duty to sell the entire property at the best price available. o The mortgagee would have to show that the sale was made in good faith and that he

had taken reasonable precautions to obtain the best price reasonably obtainable in the circumstances.

It appeared to the court that prima facie, what the mortgagee did went beyond mere failure to take reasonable steps to obtain the best price for the property and reflected a calculated indifference to the position of the mortgagor.

o There was no evidence that the mortgagee took any of these steps: To test the market; Advertise their intentions to sell the property; Invite tenders or bid for the property; Instruct estate agents to interest the investing public or stimulate enthusiasm or

interest of potential buyers for the property. o In addition, where proposals meriting serious consideration were made, a reasonable

step would be for the mortgagee to put or cause to be put these proposals into a competition. However, nothing of this kind appeared to have taken place with regards to the various offers made for the property.

The mortgagor had certainly established that there were serious questions to be tried. Therefore, an injunction could be granted.

In Sri Jaya, further developments and inroads were made on a mortgagee’s duties: o Mortgagee had to advertise adequately in order to be able to sell property at the true market

value. o Mortgagees can be found negligent if they had failed to put one offeror in competition with

another.

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Sri Jaya (Sendirian) Berhad v RHB [2001] 1 SLR 486 (Rajendran J)

Facts: Plaintiffs were the owners of a piece of property which they mortgaged to the defendants in

exchange for a loan to construct flats on the property. The defendants subsequently obtained a court order directing the property to be sold by them. The defendants did not advertise the sale for fear that the occupants of the flats would injunct the

sale; the only step it took was to inform its’ branches about it. The defendant had the property valued and it was valued on an en bloc vacant possession basis at

$5.85 million. The defendant eventually sold the property for $6.5 million. Within three months of the sale, the property was re-sold for $14 million, and the same day, re-sold again for $27 million.

The plaintiffs sued the defendant mortgagees, claiming that they had been negligent. Held: Where a power of sale has arisen, the mortgagee may sell the property by public auction or private

treaty: s 24(1)(a) CLPA.o An auction is not always the best way of securing a good price (How Seen Ghee).o The mortgagees are not obliged before a sale by private treaty to advertise the property

for sale (Ng Mui Mui). Although there is no requirement for a mortgagee to advertise the

property for sale, a mortgagee who chooses to proceed to sell has to take reasonable steps to obtain the best price possible in the circumstances (which may or may not involve advertising).

The mortgagees had not taken reasonable precautions to obtain the true market value of the property and their officers’ handling of the sale fell below the standard of care required of reasonable mortgagees handling a mortgagee sale.

o The defendants negligently failed to conduct the sale in a manner that would attract a wider pool of potential purchasers.

o Whilst there was concern over alerting the occupants, there were other ways the sale of the property could have been publicized.

Merely spreading the information by word of mouth through the defendants’ branches was not sufficient as banks are not in the property business and the pool of potential purchasers would be limited.

o The defendants also failed to put the offerors in competition with each other. The defendants’ officer, as a reasonable mortgagee, ought to have told the first

offeror that his bid had been matched by the purchaser and given him an opportunity to improve on his offer.

Whilst the defendant had been considering offers for some months, objectively, there was no real urgency to close the sale on the day when it was sold.

The damages suffered by the mortgagors as a result of the negligent manner in which the defendants sold the property was the difference between the actual price sold for and the price that the defendants would have obtained for the property had they properly marketed it.

Case of Bank of East Asia takes a sensible view: o Selling in a falling market is not wrong as long as the mortgagees take reasonable care to

obtain whatever is the true market value of the mortgaged property.

Bank of East Asia v Tan Chin Mong Holdings [2001] 2 SLR 193 (Selvam J) Facts: Mortgagees stipulated that they were prepared to permit a sale by the mortgagors as long as the

price was not < $5 mil. Mortgagors claimed that the mortgagees had breached their duties of good faith and to obtain the

best price because they insisted on a sale price of at least $5 mil., when the amount then outstanding on the facilities was only $4.9 mil.

o The mortgagors further claimed that the mortgagees had failed to obtain the best price as they had failed to property or adequately advertise the sale of the property.

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Held: The falls in property prices in the past decade and a half had spawned a plethora of reported cases

on mortagee’s power of sale. It would, therefore, be salutary to take stock and sum up the salient principles of law.

Salmon L.J.’s statement in Cuckmere Brick has become the beacon for all concerned. o It was thought at one time that the mortgagee did not owe the above duties to a surety

who did not provide any material security to the mortgagee. However, it was subsequently held that the mortgagee owed the duty not only to the mortgagor but to the surety as well: American Express International Banking Corp v Hurley [1985] 3 All ER 564.

The duty owed by the mortgagee in realizing the security is to prevent an abuse of the power of sale to the detriment of the mortgagor and the guarantor.

o As a general proposition, the mortgagee is not under a duty to exercise his power of sale over the mortgaged property at any particular time or at all.

It is settled law that a creditor-mortagee is not obliged to do anything for the benefit of a borrower or a surety under established equitable principles in relation to the recovery of the debt or realisation of the security.

The basis of the principle is this: it is the duty of the borrower and the guarantor to activate themselves and discharge their obligations. If they don’t then they bear the risk of a falling market.

It is not desirable to turn the right of the mortgagee into a duty. To do so would be baneful to the business of property financing.

The lender is entitled to sit tight and wait until he feels that he has to act in his interest.

o There are however some important exceptions to this general rule: Once he decides to realise the security, he must apply due diligence to obtain the best price which the circumstances of the case permit.

The law does not impose a duty on the mortgagee not to sell in a falling market. If it did, it would unduly interfere with his right to sit tight, and also encourage the borrower and guarantor to do nothing.

o Provided that the mortgagee observes the duties stated above, the courts would not rule against him even if the price affords but little relief to the mortgagor and guarantor.

o Selling in a falling market per se is not wrong , for more often than not, it is a falling market that triggers a default by the borrower and the consequent sale of the mortgaged property by the mortgagee.

However, the statement that the mortgagee has the right to decide whether to sell the mortgaged property and when to sell, must not be understood as an absolute entitlement or treated akin to strictly worded stipulations of a statute. The mortgagee’s power is subject to certain limitations.

o First, possession of the mortgaged property must not be sought with a hidden agenda , in disregard of the harm that it might cause to someone with a vested interest in it. This prohibition applies to the mortgagee as well as a surety who is subrogated to the power of sale.

o Secondly, in appropriate circumstances, the court may order sale against the wishes of the mortgagee: Palk v Mortgage Services Funding.

o Thirdly, in appropriate cases, the mortgagor should be given a reasonable opportunity to market the property: How Seen Ghee v Development Bank of Singapore.

o Fourthly, the court has no power to decline to make an order for possession when the mortgagor is in clear default and order instalments of the accrued debt.

The court must give judgment and order possession. The court, however, has power to postpone possession by ordering stay of

execution of the order for possession and at the same time order payment of the accrued debt by instalments: Hong Leong Finance v Tan Gin Huay.

The mortgagors and sureties were not in any way affected by the $5m stipulation. The facts of the case, therefore, did not make out the point that the mortgagees did not act in good faith.

o When the mortgagee stipulated the minimum price of $5m, it was not exercising a mortgagee’s power of sale. At that point of time, the power had not even arisen.

The defendants called valuers who put a higher value and contended that the plaintiffs sold below market value.

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o This was not their pleaded case. o In any event, as a matter of principle, where the mortgagees are not in breach of their

duties in relation to their power of sale, their liability cannot be measured on the basis of valuers’ opinions.

Expert evidence on value should be admissable against the mortgagees only in cases where they are at fault as in Cuckmere Brick Co v Mutual Finance.

3. Enforceability of mortgages

Solicitors acting for banks and/or mortgagors should be cautious to ensure that the mortgagor is acting with full capacity and not under the undue influence of another.

Sometimes the issue of undue influence comes up; people would try to argue that the wife had been forced by the husband to mortgage property.

Mother-son; father-son; wife-husband: relations where the argument of undue influence often arises. Wives are in a good position to claim undue influence.

Undue influence: the seminal case followed in Singapore is Royal Bank of Scotland v Etridge [2002] 2 AC 773.

Etridge requires you to be more careful; make sure wife is encouraged to get independent legal advice.

Of course there are cases of wives are professionals who refuse to get legal advice: make sure they sign a form stating that they have been informed of the need to get legal advice and have chosen not to.

OCBC v Tan Teck Hong [2005] 2 SLR 694 (Kan Ting Chiu J) Facts: The plaintiff’s predecessor-in-title had granted certain loans to P’s son in exchange for P’s execution of a

mortgage over her property in favour of the lender. When P executed the mortgage, she was not in good health, having previously suffered two strokes.

The first defendants were appointed the committee of her estate under the Mental Disorders and Treatment Act.

The plaintiff claimed against the defendants delivery of vacant possession of the mortgaged property, an order that the mortgage be enforced by the sale of the property and payment of the sum due under the mortgage.

o The first defendants claimed that they and P were not liable under the mortgage, alleging that the third defendant, P’s solicitor at that time, did not exercise reasonable care and diligence to ensure that P had the mental capacity to understand and execute the mortgage.

Held: The question of whether P had the mental capacity to execute the mortgage was a matter for which

medical evidence was necessary. In the absence of such evidence, the court could not make a finding on P’s mental condition at that date.

As regards the question of whether P was under undue influence of her son, the second defendant, when she executed the mortgage, it should be noted that when a person enters into a transaction, he may not be acting of his own free will. He may have been affected by the unacceptable conduct of others.

o When improper pressure or coercion, or influence or ascendancy is brought to bear on a person to obtain an unfair advantage from him, equity offers him relief.

o In these circumstances, the person is said to have acted under undue influence, and he can either apply to court to have the transaction declared null and void, or he can elect to affirm it.

Undue influence can be established by direct proof or by presumption, see Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 and Barclays Bank Plc v O’Brien [1994] 1 AC 180.

o In the first situation where the party alleging undue influence has to prove it affirmatively, the undue influence is referred to as Class 1 undue influence, or actual undue influence. This can be done in any situation, but it has to be proved.

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o The law also presumes undue influence in some situations. Presumed undue influence, described as Class 2 undue influence, falls into two types, Class 2(A) and Class 2(B). Undue influence is presumed:

Where there is a legally recognised relationship of trust and confidence or ascendancy between the complainant and the wrongdoer (eg, parent and child, solicitor and client, medical adviser and patient), and the transaction is not readily explicable by the relationship of the parties. This is Class 2(A) presumed undue influence; or

where although there is no relationship of the type within sub-para (a) above between the parties, there is a relationship of trust and confidence or ascendancy and a similar inexplicability for the transaction. This is Class 2(B) presumed undue influence.

o When a claim is made on the basis of the presumption, there must be proof of the existence of the relationship. When a Class 2(A) or Class 2(B) relationship is proved, and the transaction is not readily explicable, a presumption arises that undue influence has been exerted. The presumption is rebuttable. It only shifts the burden of proof to the alleged wrongdoer to offer a proper explanation for the transaction.

P and the second defendant were in a Class 2B situation. o The second defendant was P’s favourite son and enjoyed her trust and confidence.o At the time the mortgage was executed, the parent-child relationship between P and the

second defendant had largely been reversed. P was feeble through age and ill health whereas the second defendant was able

and energetic and was the only son who was close to her. She was staying with him and his wife, and he managed the family business. She was illiterate whereas he knew English.

She trusted him and was dependent on him.o On these primary facts, the transaction was manifestly one-sided and not readily explicable

by the mother-son relationship. The onus was on the second defendant to rebut the presumption that he had exerted undue influence on his mother.

The mortgage P executed was clearly beneficial to the second defendant and disadvantageous to her. She placed her property, the main asset she had, to secure loans granted to the second defendant alone.

There was no agreement between them on the use and repayment of the loans; she did not appear to have any say in these matters.

On the evidence, P executed the mortgage under the undue influence of the second defendant. The third defendant had not taken due care when she attended on P for the execution of the mortgage.

o A solicitor in the position of the third defendant who is acting for a client like P should have had a private meeting with her, should have explained the risks and liabilities she would be exposed to, and should have advised her that she had the right not to proceed with the transaction.

The third defenadnt did not have a private person-to-person consultation with Mdm Pang to ensure that she was acting on her own volition and that no undue influence had been brought to bear on her by the second defendant or anyone else. To the contrary, the second defendant was always present when she spoke with P.

o The manner in which the documents were explained to P before she executed them was also unsatisfactory.

The third defendant had arranged for a Hainanese interpreter, Mr Loh Lim, to be present. She handed him the documents and left him to explain them to P, without any input from her. This was not sufficient.

The third defendant should have explained the meaning and effect of the documents to P in a way that a lay person like P can understand, and have Mr Loh interpret that into Hainanese to P.

When a solicitor advises a client on a document, that is not accomplished by just reading it to the client. The documents must be explained in a manner the client can understand, and if the client has any queries, further explanation should be given.

The plaintiff’s claim that the third defendant was negligent is established, but its claim for substantive relief fails because its rights under the mortgage remained intact when the mortgage was affirmed by the first defendants. Consequently, it is only entitled to nominal damages against the third defendant.

o The first defendants affirmed the mortgage by seeking the second defendant discharge the

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mortgage. By taking that position, they were asserting that there was an existing mortgage to be discharged.

o They did not take any action to avoid the mortgage until they filed their counterclaim in this action, 21 months after they commenced their first action seeking P’s wills be declared void.

Where there are solicitors acting, a mortgagee bank should rely on the solicitors, and not rely on its own officers. When the same solicitor acts for all the parties in a mortgage, the bank is entitled to rely on that solicitor.

The mere exercise of influence, in and of itself, is not sufficient to amount to undue influence: something must have gone wrong with the exercise thereof.

Bank of East Aside v Mody Sonal [2004] 4 SLR 113 (Andrew Ang JC) Facts: The plaintiff bank extended overdraft facilities to a company of which the three defendants were

directors. As security, the company mortgaged an apartment to the plaintiff. The defendants also individually executed a joint and several guarantee to the plaintiff as security.

The property was subsequently sold at a public auction, and the plaintiff claimed the balance owing after deducting the net proceeds of sale of the property.

The first and third defendants, the daughter and wife of the second defendant respectively, pleaded that the guarantee was procured by the undue influence of the second defendant over them.

Further, the defendants collectively counterclaimed for damages, being the difference between the alleged prevailing market price of the property at the time of the auction, and the actual price fetched.

o The defendants alleged that the plaintiff, by selling the property at the auction despite being informed that there was a potential buyer willing to pay $1.45m (higher than the actual sale price of $1.14m), breached a duty owed to the Company as mortgagor and to themselves as guarantors, to act in good faith and take reasonable steps to obtain the best price obtainable at the time.

o The property was sold at the auction to the same prospective buyer who had allegedly been prepared to pay $.145 m, and was resold four months later for $1.36m.

Held: granting judgment for the plaintiffs,

It is usual, following the lead in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, to divide cases of undue influence as follows:

(a) Class 1 – Actual undue influence.

In these cases the person wronged needs to show affirmatively that he entered into the impugned transaction because of the undue influence exerted on him by the wrongdoer.

(b) Class 2 – Presumed undue influence.

In such cases, there is no requirement to prove actual undue influence. It is enough if the complainant demonstrates that (i) there was a relationship of trust and confidence between him and the wrongdoer; and (ii) the relationship was such that it could fairly be presumed that the wrongdoer abused the trust and confidence in procuring the complainant to enter into the impugned transaction.

(c) Class 2(A).

Certain relationships have been recognised by law as giving rise to such a presumption ipso facto. These include the relationships between solicitor and client, trustee and cestui que trust, and between doctor and patient. The relationship between husband and wife is not within this class: Bank of Montreal v Jane Jacques Stuart [1911] AC 120.

(d) Class 2(B).

Outside of these special categories, it is open to a complainant to raise such presumption as against a wrongdoer if he proves that there existed a relationship between them under which he generally reposed trust and confidence in the wrongdoer. Unless such presumption of undue influence is rebutted by proof otherwise, the complainant will succeed in setting aside the transaction without having to prove actual undue influence or that the wrongdoer abused the trust and confidence.

The foregoing considered the right of the complainant to set aside the impugned transaction as against

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the wrongdoer. In surety cases, however, the complainant seeks to avoid a transaction, not against the wrongdoer but against a creditor, such as the creditor bank in the present case.

o In such cases, the decisive question is whether the creditor bank had notice, actual or constructive, of such wrongdoing.

o Additionally, if the wrongdoer was acting as agent for the bank in obtaining the surety from the complainant, the transaction will also be set aside as the wrongful act of the agent will be attributed to the bank.

Neither O’Brien nor any of the passages in Etridge cited by the first and/or third defendant o In O’Brien, the wife secured the overdraft facilities of a company in which the husband, but

not the wife, had an interest. On its face, such a transaction was not to the financial advantage of the wife.

This factor, together with the fact that the relationship of husband and wife lent itself to the risk that the husband might have unduly influenced the wife, put the bank on inquiry.

Failing to take reasonable steps to satisfy itself that the wife’s agreement to stand surety had been properly obtained, the bank was fixed with constructive notice of the husband’s misrepresentation to the wife as to the true extent of her mortgage.

The bank was put on inquiry not merely because of the husband and wife relationship but also because the indebtedness secured was that of a company in which the husband, but not the wife, had an interests would avail them.

o Similarly, all the passages in Etridge which the first defendant and/or third defendant sought to rely on refer to factual situations where the indebtedness of the husband or father (of or a company in which he had an interest) was secured by the wife or daughter.

o Conversely in the present case, the personal guarantee of the first and third defendants were not given to secure the second defendant’s indebtedness or that of a company in which he held an interest.

While they held shares in the Company, he held none. Their guarantees were given as directors of the Company.

Contrary to their assertions that they had nothing to gain but everything to lose, they, as shareholders of the Company, of course stood to gain if the Company were to use the facilities to advantage.

In these circumstances, the Bank was not put on inquiry. Accordingly, it could not be fixed with constructive notice for not having taken steps to satisfy itself that the agreement of the first defendant and the third defendant to stand surety had been properly obtained.

In the present facts, it would be an exaggeration to castigate the father’s conduct as undue influence.As Prakash J in Rajabali Jumabhoy v Ameerali Jumabhoy said: “it is not enough to set aside a contract that one party tried to influence the other to efnter it. There must be something wrong in the way that the influence was exercised , i.e. some unfair or improper conduct, some coercion or some form of misleading”.

o Given what the court had learnt about the first defendant, it could hardly be said that the father, taking improper advantage of their relationship and of the daughter’s vulnerability, caused her to sign the guarantee.

By her own admission, she signed the guarantee because the loan was important to her parents.

The defendants’ counterclaim for damages in the amount of the difference between the alleged prevailing market price at the time of the auction and the actual price that the auction fetched was misconceived.

o Although the alleged breach of duty by a mortgagee could be used as a defence in equity to set off the alleged loss in the sale against the amount claimed under the guarantee, it cannot form the basis of a counterclaim . The guarantors as such have no right to the equity of redemption.

o The defendants had no interest in the equity of redemption in the Property to found their counterclaim.

In any event, on the facts, the court could not see how the second defendant could have alleged bad faith on the part of the plaintiff in exercising its power of sale. Neither had the defendants made out a case for saying the plaintiff did not use reasonable care to obtain the true market value of the property.

o As Selvam J pointed out in The Bank of East Asia Ltd v Tan Chin Mong Holdings (S) Pte Ltd [2001] 2 SLR 193, Lord Denning’s proposition in Standard Chartered Bank v Walker [1982] 1 WLR 1410 (that the duty of the mortgagee in the context of a mortgagee sale was but a

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particular application of the general duty of care to your neighbour which was stated by Lord Atkin in Donoghue v Stevenson [1932] AC 562) has been widely criticised.

o It was not wrong for the plaintiff to have pressed on with the auction. As early as June 2001, the company was already in default. Promises followed on

various occasions, on each occasion to gain an extension of time for repayment. They were not kept.

In these circumstances, the refusal of the plaintiff to believe the second defendant regarding the offer of $1.45m was understandable.

o Apart from obtaining valuations, the plaintiff also approached various property agents to find buyers for the flat.

o Further, the auction was preceded by seven newspaper advertisements placed by the auctioneers.

Accordingly, no right of set-off arose.

DUTY OF RECEIVERS : -

1. General information on receivers:

The lender will normally include a clause in the debenture which entitles it to appoint a receiver at any time.

o It is therefore important for the bank to monitor the position of the borrower and appoint a receiver at the right time before the floating assets of the company disappear.

To this will be added a provision which states that in any such event, the receiver shall be deemed to be the agent of the company and not the agent of the lender (who appointed him).

The right to appoint a receiver normally arises when the company fails to repay the balance due upon the month specified for repayment to the bank.

o A receiver can be appointed even where the winding up by the court has already commenced.

o In Singapore and Malaysia, receivership is usually found to be a preliminary step in winding up.

The main duty of a receiver is to protect the assets of the company and he will try his best to satisfy the following claims:

o His own remuneration and liabilities including debts he incurred by continuing to trade; o The claims of the preferential creditors as at the date of his appointment; o The debt due to the bank (with interest) as a debenture holder.

2. Local position

General approach locally seems to be that the duty of mortgagee and receiver in selling mortgaged property about the same

Roberto Building Material Pte Ltd v. OCBC and another [2003] 3 SLR 217 (Court of Appeal)

Facts: OCBC granted the plaintiff credit facilities that were payable upon demand. The facility was secured by

several forms of security: a mortgage of property and letter of guarantee, as well as a fixed and floating charge over its remaining assets.

OCBC gave notice to the plaintiff to repay the outstanding sum. o OCBC was informed by the Plaintiff’s auditors that a potential buyer was interested in

purchasing the mortgaged property and it would revert with an offer. o No indication of an offer was received and so OCBC went ahead and appointed a receiver

to realise the assets.

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o Subsequently the offer did come in but OCBC refused to revoke the appointment of the receiver and the deal later fell through, and the mortgaged property remained unsold.

The plaintiff claimed that OCBC and the receiver had breached their duties as lender and as receiver and manager respectively.

Held: Dismissing the plaintiff borrowers’ appeal, All that the law requires of the lender before exercising his power of appointing a receiver is that he

must act in good faith . o The lender is entitled to act in his own interest. There is no general duty of reasonable care

to consider or have regard to the interests of the debtor. While in most cases, the appointment of a receiver will not be in the interest of the

borrower company, that cannot defeat the right of the lender to make the appointment.

o In order to show bad faith, there must be dishonesty or improper motive on the part of the lender. Even where there is negligence, that fact per se would not be sufficient to establish dishonesty or improper motive.

In the present case, the Court did not see how it could be alleged that OCBC had acted dishonestly or that there was any bad faith. Furthermore, there was nothing to suggest that the bank had acted recklessly as to amount to bad faith.

o The bank was entitled to exercise the rights conferred upon it in its own interest after having given Roberto considerable time to put its house in order.

Whilst the bank could have granted further indulgence to Roberto by either not appointing the Receiver, or revoking the appointment, the fact that it refused to do so in its own self or commercial interest could not amount to dishonesty or bad faith.

o Even if the bank had not quite accurately assessed its own interest in refusing further indulgence, that could not turn a honestly held view into bad faith . Neither was a refusal to grant further indulgence, or to accept an alternative proposal (which had drawbacks), an act of bad faith.

As regards the duty of care owed by a receiver to the mortgagor company, from the authorities, it would appear that there is no general duty of care on the part of the receiver to the company.

o The primary duty of the receiver is to the debenture holders and not to the company . o There is no duty to exercise the power of sale. The mortgagee (thus the receiver) is not a

trustee of the power of sale for the mortgagor. The mortgagee or receiver is entitled to determine the time for sale so long as he acts in good faith.

In Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 (PC), Lord Templeman, delivering the judgment of the court, said at 315:

o Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. A receiver exercising his power of sale also owes the same specific duties as the mortgagee.

o But that apart, the general duty of a receiver and manager appointed by a debenture holder, as defined by Jenkins LJ in In re B Johnson & Co (Builders) Ltd [1955] Ch 634, 661, leaves no room for the imposition of a general duty to use reasonable care in dealing with the assets of the company.

The duties imposed by equity on a mortgagee and on a receiver and manager would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company.

The court in Medforth v Blake [2000] Ch 86 extended that duty of care to take reasonable steps to obtain a proper price to the situation where the receiver carried on the business of the company.

o The court would hasten to add that due diligence does not oblige the receiver to continue to carry on a business of the mortgagor or debtor, but if the receiver should choose to carry on the business, then he must exercise due care to run it properly and profitably.

It is settled law that in effecting a sale of mortgaged property, the receiver must exercise reasonable care as to the manner in which the sale is carried out so as to obtain its true market value .

o Just because the sale price obtained is 15% less than their book values is neither here nor there. That does not per se suggest a lack of reasonable care.

o It is the process of effecting the sale which is critical.

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As regards the method adopted by the receiver to effect the sale of the mortgaged property, which was by public auction, it did not lie in the mouths of the mortgagors to barely assert that he should have carried out the sale by private treaty.

o No expert evidence had been adduced to show that in respect of sale of building materials, it should be by private treaty.

o Moreover there is no principle of law which lays down that a sale by private treaty is to be preferred over public auction. If at all, one would imagine that sale by public auction is to be preferred as it provides a forum for open competitive bidding, thus ensuring transparency.

Medforth v Blake [2000] Ch 86Held: The primary duty of a receiver/manager is not to manage on the company’s behalf but to try to facilitate

the exercise by him, for the mortgagees, of the mortgagee’s power to enforce the security and obtain repayment.

Subject to this primary duty to enforce repayment of the debt, in managing and carrying on the mortgaged business, a receiver owes a duty to the mortgagor to manage the property with due diligence.

o The receiver is not obliged to carry on the business; he can decide not to do so. Provided that the receiver acts in good faith, he is entitled to sacrifice the interests of the mortgagor to obtain repayment of the mortgagee’s secured debt.

o However, if a receiver does decide to carry on the business due diligence requires steps to be taken in order to do so profitably.

Failure to recognise such a duty would mean that in a case of glaring managerial incompetence, receivers would have no liability to the mortgagor whose business they had, by incompetence, ruined.

Since the court recognises the duty of a receiver to take reasonable care to obtain a proper price when exercising the power of sale, there is no reason why the approach should be any different if what is under review is not the conduct of a sale but conduct in carrying out a business.

3. UK position

UK appears to take a somewhat more nuanced approach to the distinctions between a mortgagee and receiver’s duties.

Critical distinction between mortgagee and receiver appears to be that the receiver has a wider duty of management such that he cannot remain passive: Silven Properties.

o Nevertheless, the receiver still does not have an obligation when exercising the power of sale to effect improvements or stay his hand so as to achieve a better purchase price.

Silven Properties Ltd v. Royal Bank of Scotland [2004] 1 WLR 997 (Court of Appeal)

Issue: Whether the express appointment in the mortgage of receivers as agents of the mortgagor led to the

assumption by those receivers of duties that differed from those owed by mortgagees.

Facts: The claimants mortgaged properties to the bank to secure indebtedness. The bank pursuant to the

mortgages appointed the receivers as receivers of the mortgaged properties and between them the bank and the receivers sold all the properties. The mortgages (as is common form) provided that the receivers should be the agents of the claimants.

The claimants as mortgagors claimed damages against the bank as mortgagee and the receivers as receivers ("the defendants") alleging that in breach of duty they sold the mortgaged properties at an undervalue.

The complaint made by the claimants was that the receivers were under a duty not to sell the properties as they were.

o Instead they were under a duty before selling, in order to obtain the best price obtainable, to pursue planning applications for the development of the properties and (in the case of two of the properties, which were vacant or partially vacant, but in respect of which there were

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negotiations for grant of leases) to proceed with the grant of leases, and to defer a sale until these goals were achieved.

Held: The issue of law raised on this appeal is of some considerable practical importance.

o Earlier authorities have expressed the view that the duties of receivers appointed by mortgagees are the same as the duties of the mortgagees themselves in respect of the sale of mortgaged property and that mortgagees do not have the duties for which the claimants contend.

o But consideration is called for whether the express appointment in the mortgage of receivers as agents of the mortgagor leads to the assumption by receivers who accept such appointment of responsibilities and duties which differ from those owed by the mortgagees, and it is important that any doubt in this regard should be resolved in the interests of mortgagees, mortgagors and receivers.

Duties of mortgagee: o A mortgagee has no duty at any time to exercise his powers as mortgagee to sell, to take

possession or to appoint a receiver and preserve the security or its value or to realise his security. He is entitled to remain totally passive.

o If the mortgagee takes possession, he becomes the manager of the charged property. He thereby assumes a duty to take reasonable care of the property secured, and this requires him to be active in protecting and exploiting the security, maximising the return, but without taking undue risks.

o A mortgagee "is not a trustee of the power of sale for the mortgagor". In default of provision to the contrary in the mortgage, the power is conferred upon

the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed.

A mortgagee is at all times free to consult his own interests alone whether and when to exercise his power of sale.

The mortgagee's decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagor.

It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price.

The claimants contended that a mortgagee is not entitled to ignore the fact that a short delay might result in a higher price.

Contrary to this contention, the mortgagee is under no such duty of care to the mortgagor in respect of the timing of a sale and can act in his own interests in deciding whether and when he should exercise his power of sale.

o The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value. There is no obligation to take any such pre-marketing steps to increase the value of the property as is suggested by the claimants.

The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can "unlock" the potential for an increase in value of the property mortgaged (e g by an application for planning permission or the grant of a lease) and indeed (going further) he can proceed with such an application or grant.

But he is likewise free at any time to halt his efforts and proceed instead immediately with a sale.

o When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain "the fair" or "the true market" value of or the " proper price" for the mortgaged property at the date of the sale , and not (as the claimants submitted) the date of the decision to sell.

If the period of time between the dates of the decision to sell and of the sale is short, there may be no difference in value between the two dates and indeed in many (if not most cases) this may be readily assumed.

But where there is a period of delay, the difference in date could prove significant.

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The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off his debt.

He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale.

The remedy for breach of this equitable duty is not common law damages, but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption, not just for what he actually received, but for what he should have received

If the mortgagor requires protection in any of these respects, whether by imposing further duties on the mortgagee or limitations on his rights and powers, he must insist upon them when the bargain is made and upon the inclusion of protective provisions in the mortgage.

o In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and (save where statute otherwise requires) the court must give effect to them.

There could accordingly be no duty on the part of a mortgagee, as suggested by the claimants, to postpone exercising the power of sale until after the further pursuit (let alone the outcome) of an application for planning permission or the grant of a lease of the mortgaged property, though the outcome of the application and the effect of the grant of the lease may be to increase the market value of the mortgaged property and price obtained on sale.

o A mortgagee is entitled to sell the property in the condition in which it stands without investing money or time in increasing its likely sale value. He is entitled to discontinue efforts already undertaken to increase their likely sale value in favour of such a sale.

o A mortgagee is under a duty to take reasonable care to obtain a sale price which reflects the added value available on the grant of planning permission and the grant of a lease of a vacant property and (as a means of achieving this end) to ensure that the potential is brought to the notice of prospective purchasers and accordingly taken into account in their offers.

However, that is the limit of his duties. There is binding authority for the proposition that (again in default of agreement to the contrary) in the

exercise of the power of sale receivers owe the same equitable duty to the mortgagor and others interested in the equity of redemption as is owed by the mortgagee: they are both obliged to take care to obtain the best price reasonably obtainable.

o The critical issue however is whether the receiver (unlike the mortgagee) is under a duty of care in regard to the date of sale and to ensure that steps are taken (in particular in respect of planning and the grant of leases) to realise the full potential of the secured property before sale by obtaining permission or granting the leases.

In a number of respects it is clear that a receiver is in a very different position from a mortgagee. o Whilst a mortgagee has no duty at any time to exercise his powers to enforce his security, a

receiver has no right to remain passive if that course would be damaging to the interests of the mortgagor or mortgagee.

In the absence of a provision to the contrary in the mortgage or his appointment, the receiver must be active in the protection and preservation of the charged property over which he is appointed.

Thus if the mortgaged property is let, the receiver is duty bound to inspect the lease and, if the lease contains an upwards only rent review, to trigger that rent review in due time.

His management duties will ordinarily impose on him no general duty to exercise the power of sale.

But a duty may arise if e g the goods are perishable and a failure to do so would cause loss to the mortgagee and mortgagor.

o The critical issue raised is whether (as contended by the claimants) the wider management duties imposed on a receiver (but not on a mortgagee) may require a receiver (and in particular a receiver appointed the agent of the mortgagor) to postpone a sale until after steps have been taken (in this case proceeding with an application for planning permission and with the grant of a lease) calculated to increase the price obtainable in a sum greater than the cost of taking those steps plus the sum representing accrued interest over the period whilst those steps are being taken.

The peculiar incidents of the agency of a receiver who is appointed an agent of the mortgagor are significant. In particular:

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o First, the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver.

o Second, there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only.

o Third, the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver.

o Fourth, the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption.

The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty.

That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default

o Fifth, not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid.

o Sixth, the receiver is not managing the mortgagor's property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee.

In the context of a relationship such at the present, which is no ordinary agency and is primarily a device to protect the mortgagee, general agency principles are of limited assistance in identifying the duties owed by the receiver to the mortgagor.

o The core duty of the receiver to account to the mortgagor subsists, but (for example) the mortgagor has no unrestricted right of access to receivership documents.

o The mortgage confers upon the mortgagee a direct and indirect means of securing a sale in order to achieve repayment of his secured debt.

The mortgagee can sell as mortgagee and the mortgagee can appoint a receiver who likewise can sell in the name of the mortgagor.

o Having regard to the fact that the receiver's primary duty is to bring about a situation where the secured debt is repaid, as a matter of principle the receiver must be entitled (like the mortgagee) to sell the property in the condition in which it is in the same way as the mortgagee can and in particular without awaiting or effecting any increase in value or improvement in the property.

This accords with the repeated statements in the authorities that the duties in respect of the exercise of the power of sale by mortgagees and receivers are the same and with the holding in a series of decisions at first instance that receivers are not obliged before sale to spend money on repairs, to make the property more attractive before marketing it or to "work" an estate by refurbishing it.

In summary, by accepting office as receivers of the claimant's properties the receivers assumed a fiduciary duty of care to the bank, the claimants and all (if any) others interested in the equity of redemption.

o The appointment of the receivers as agents of the claimants having regard to the special character of the agency does not affect the scope or the content of the fiduciary duty.

o The scope or content of the duty must depend on and reflect the special nature of the relationship between the bank, the claimants and the receivers arising under the terms of the mortgages and the appointments of the receivers, and in particular the role of the receivers in securing repayment of the secured debt and the primacy of their obligations in this regard to the bank.

These circumstances preclude the assumption by, or imposition on, the receivers of the obligation to take the pre-marketing steps for which the claimants contend in this action.

o Further no such obligation could arise in their case (any more than in the case of the bank) from the steps which they took to investigate and (for a period) to proceed with applications for planning permission.

The receivers were at all times free (as was the bank) to halt those steps and exercise their right to proceed with an immediate sale of the mortgaged properties as they were.

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CONCLUSION:

It is clear that despite being a professional, a receiver does not owe a heavier duty than that owed by a mortgagee.

All that is required of a receiver is that he does not act in bad faith, and he must take reasonable steps to obtain a proper price for the property at the relevant time.

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PART TWO: LIFE INSURANCE

General:

Life policies may be given as security to bank and can be used to cover outstanding loads. Banks in Singapore and Malaysia are not unused to accepting absolute assignments or

mortgages of life insurance policies. However, it seems that this is not a very popular form of security.

Intrinsically however, there are good reasons to regard life insurance policies as good security. Banks accept these policies as security because of the surrender value attached to these policies.

What bankers should realise is that an insurance policy has an “intrinsic value” after a number of years because a certain “surrender value” attaches to it.

This surrender value increases from year to year and thus the longer the bank holds the policy, the more valuable it becomes.

Customers can assign policies to bank as beneficiaries. (Assignment by way of mortgage). Banks as beneficiaries will automatically get the money.

It should be remembered that some formality is required to make the security valuable. Thus the “mortgage” would in practice be effected by a document called an “absolute

assignment” which is a standard form agreement prepared by the bank.

Where bank takes a life policy as a security, they take subject to a statutory trust in favour of the children of the insured (though only the wife is named). Thus, banks will never touch life policies.

The dangers of an irrevocable trust under s 73 CLPA:

Caveat: *NOTE S73 CLPA which automatically creates a trust in favour of wife and children of the deceased.

Section 73 CLPA

Moneys payable under policy of assurance not to form part of the estate of the insured.73. —(1) A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named , and the moneys payable under any such policy shall not, so long as any object of the trust remains unperformed, form part of the estate of the insured or be subject to his or her debts.

CH v CI [2004] SGDC 131 (District Court)—commenting on s 73 CLPA: What these words mean is that when a person who takes out a life insurance policy names his spouse

and/or his children as beneficiaries of the life insurance policy, a statutory trust is automatically created on the policy.

o This means that if the policyholder dies, the monies payable on the policy will go to the spouse and/or the children who have been named as beneficiaries to the policy.

o The monies will not go to the estate of the policyholder, so they will not be liable to death tax. o Neither can his creditors get any share of the monies.

This means that without having to go through the usual expense and formalities of creating a trust (i.e. drawing up a trust deed and getting it signed and sealed), a policyholder can provide for his wife and children after his death, and the monies due to them will be protected both from the taxman and from his creditors.

Rationale for the section: The reason for the irrevocable nature of the Section 73 trust is to protect the spouse and children who

have been named as beneficiaries in the life insurance policy from being cut out by a capricious policyholder and thus left in the lurch upon his death.

For example, a case where the husband walks out on the family to live with his mistress, many years after taking out a life insurance policy naming the wife and children as beneficiaries.

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o For all the years when the husband was living with his family, he paid the premiums on this policy, spending money on the premiums which he could otherwise have spent in acquiring assets for the wife and children, or enabling them to have a higher standard of living.

o He then removes the wife and children as beneficiaries to the policy and nominates his mistress as beneficiary instead. He dies a year afterwards.

o In such a case, if the mistress receives the monies on the life insurance policy, it would, in a sense be a windfall for her—which has been made possible by some sacrifices on the part of the wife and children.

o The wife and children, on the other hand, are not compensated for the sacrifices which they have made in respect of the insurance premiums paid by the husband.

Section 73 would protect the wife and children in such a situation. The irrevocable nature of the Section 73 trust may do injustice, however, by preventing the policyholder

from removing or changing the beneficiaries even if he has good reasons to do so. There must surely be a way out for the policyholder in such a situation. But the irrevocable nature of the Section 73 trust seems to indicate that he can only surrender the policy

or let it lapse, and then take out a fresh one, naming the child as the sole beneficiary—but this may mean that years of premiums paid by him on the policy may go to waste, and any monies paid by the insurance company will benefit the trust in favour of the wife only, and may even be frozen for years.

Banks should not accept policies subject to a trust as security. Way to circumvent s73 CLPA:

(a) Involve wife in assignment if she is above 21 and of sound mind (Rationale: the Wife is already the beneficial owner).

(b) OLD POSITION : Note that in divorce situations – where the wife can claim even after divorce due to the automatic creation of trust in the wife’s favour.

NEW POSITION: The law has changed. Now, there is only an irrevocable trust created if children are named as the beneficiaries. No longer so for the Wife because of potential of divorce.

OLD POSITION:

In the Matter of Lim Yeow Seng [1995] 3 SLR 363 (Selvam J) Principle: As long as policy was taken out during the marriage with the object of creating a fund from which the

wife might benefit, the wife had obtained an immediate trust in her favour which was not defeated by subsequent divorce.

Facts: Whether the plf (ex-wife) was entitled to the proceeds of one of the insurance policies with her being

the named beneficiary. There was no specific bequest of the policy in the will, however, the residual clause allocated all the

deceased’s personal property not specifically disposed of’ to the deceased current fiancée.

Held (GP Selvam J): It did not make a difference even if the policy in the present case did not mention s73 CLPA as it was

not a requirement for the section to be mentioned to apply it. The fund generated by the policy went to the plf and did not form part of the estate of the deceased as

the object of the policy was to create a fund for which the plf might benefit. The automatic creation of trust sets in once the policy was taken out.

NEW POSITION:

No longer takes as favourable an approach towards the wife. Divorce can defeat the wife’s rights to the trust policy as long as she is not expressly named therein, but

is instead referred to by the generic identification as being the wife of the assured.

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CH v CI [2004] SGDC 131Facts: This case involved a husband who took out a life insurance policy in times when his marriage with his

wife was still reasonably happy. He named the wife as the beneficiary of the policy. Over the years, the relationship between the husband and wife soured, and the husband then applied

to the insurance company which issued the life insurance policy to remove the wife as beneficiary of the policy and to nominate a new beneficiary—a woman whom he was close to (and who has now become his wife), one A. He did not tell the wife what he had done.

The insurance company did not object to the change of beneficiary at the time. They even let A take out a couple of loans on the insurance policy.

Some years later, the husband filed for a divorce against the wife. Subsequently, when the husband had married A for some years, the insurance company informed

him that it was of the view that under the law, a trust had been created for the wife when he named her as beneficiary of the life insurance policy.

Therefore, in the event of his death, the wife would benefit, not A. In the meantime, A would not be able to alter, surrender or take a loan on the life insurance policy

without the wife’s written consent.

Held (on the issue of s. 73 CLPA): The law is that if the policyholder’s wife were originally named as a beneficiary to the life insurance

policy, being granted a divorce from the policyholder would not deprive her of her rights to the policy monies in the event of the policyholder’s death. This is clear from the High Court case of Eng Li Cheng Dolly v Lim Yeo Hua [1995] 3 SLR 363.

In this case, the husband had taken out a life insurance policy in which the wife had been specifically named as a beneficiary. Subsequently, the couple divorced. The husband died about 2 years later.

The wife then claimed for a declaration that she was entitled to the proceeds of the life insurance policy. The court allowed her application on the basis that the wife had obtained an immediate trust in her favour under Section 73, which was not defeated by the subsequent divorce.

If the beneficiary of the “Section 73 trust” consents, however, the policyholder can remove him or her as the beneficiary to the life insurance policy. (See the dicta in Saniah bte Ali & Ors v. Abdullah bin Ali [1990] SLR 584)

But if the wife is not specifically named as a beneficiary in the life insurance policy, but the beneficiary is only stated to be the “ wife ” of the policyholder , and the policyholder subsequently remarries, it seems that it is the wife at the time of the policyholder’s death who will benefit from the policy, and not the former wife (who may have died or been divorced from the husband).

This is not applicable in the present case, however, as the wife had been specifically named in the policy as a beneficiary

The policy contained the following clause “The Insured shall have the right…to revoke any such nomination and to name another Beneficiary.” This was not enough to prevent the Section 73 trust from arising.

It is not necessary to specifically invoke Section 73 in the life insurance policy documents in order for a Section 73 trust to be created.

The reason for the irrevocable nature of the Section 73 trust is to protect the spouse and children who have been named as beneficiaries in the life insurance policy from being cut out by a capricious policyholder and thus left in the lurch upon his death.

The availability for division as part of matrimonial assets:

In addition, another way in which the court can mitigate the harshness of s 73 is by removing the spouse beneficiary’s name in the life insurance policy as part of its power under s 112 WC to deal with ancillary matters on a divorce: CH v CI.

CH v CI [2004] SGDC 131. This case involved a husband who took out a life insurance policy in times when his marriage with his

wife was still reasonably happy. He named the wife as the beneficiary of the policy. Over the years, the relationship between the husband and wife soured, and the husband then applied

to the insurance company which issued the life insurance policy to remove the wife as beneficiary of

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the policy and to nominate a new beneficiary—a woman whom he was close to (and who has now become his wife), one A. He did not tell the wife what he had done.

The insurance company did not object to the change of beneficiary at the time. They even let A take out a couple of loans on the insurance policy. Some years later, the husband filed for a divorce against the wife.

Subsequently, when the husband had married A for some years, the insurance company informed him that it was of the view that under the law, a trust had been created for the wife when he named her as beneficiary of the life insurance policy. Therefore, in the event of his death, the wife would benefit, not A. In the meantime, A would not be able to alter, surrender or take a loan on the life insurance policy without the wife’s written consent.

Held (on the issue of whether such policy is part of the matrimonial asset): Section 112(10) WC includes in the definition of “matrimonial asset” any asset “of any nature acquired

during the marriage by one party or both parties to the marriage”. o The court can make any order which it thinks fair and just in relation to any matrimonial

asset when it carries out the task of dividing the assets between the divorcing parties. A life insurance policy would be considered a “matrimonial asset” within the meaning of s 112(1)) WC if

the policy (to which the wife is named as a beneficiary) is purchased by the husband after the date of the marriage , and the premiums have been paid during the marriage .

o However, the policy would be the wife’s asset, rather than the husband’s asset, as she has the beneficial interest in the policy.

o Such assets would be put into the pool of matrimonial assets to be divided by the court. If the policyholder named his nephew as a beneficiary to his life insurance policy, is it still a matrimonial

asset? This would depend on whether the policyholder had created a Section 73-type trust in the nephew’s favour.

o Whether this has happened would depend on the construction of the particular policy. In the case of Kishabai, for example, the court held that a Section 73-type trust had been created by the policyholder in his nephew’s favour, and that he was not entitled to revoke the trust and re-assign the benefit of it to himself or any other party.

If a Section 73-type trust had indeed been created in favor of the policyholder’s nephew, then the nephew would not be able to be removed as a beneficiary to the policy- and the policy would therefore not be a matrimonial asset. Only the nephew would have rights under the policy.

o If a Section 73-type trust had not been created in favor of the third party beneficiary, then the life insurance policy would be a matrimonial asset. The policy holder could remove the third party as beneficiary to the life insurance policy, and nominate a new beneficiary, or surrender the policy and collect the cash proceeds for himself.

If a life insurance policy was held by the ancillary matters court to be a matrimonial asset within the meaning of s 112(1))WC, then the wide powers granted to the court under s 112 meant that the court could make such orders in relation to that life policy as it saw fit, including ordering the removal or change of named beneficiaries.

o The court could order that the spouse be removed as beneficiary, and for the children of the marriage to be nominated as beneficiaries instead (though not the other way round, as, if only the children were nominated as beneficiaries, there would be a Section 73-trust in their favor and the policy would not be a matrimonial asset).

o This would look after the interests of the children in respect of their maintenance as well. Though the parties in this case had not raised the issue of the life insurance policy at the ancillary

matters stage when the consent order was recorded, the court still had the jurisdiction to deal with it now.

o This jurisdiction was derived from s 112(4) which permitted the court to extend, revoke or vary any prior order.

The court decided to order that the life insurance policy be given to the husband, to do with as he liked.

o This order meant that the husband should be able to remove the wife’s name as the beneficiary to the policy.

However, the court could not give the husband a declaration that the earlier assignment he executed to A was valid and binding.

o The ancillary matters court could only decide what a matrimonial asset was for the purposes of deciding how to divide the assets between the parties.

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o The court had no power to make declarations in respect of third party rights or third party assets, which was what the husband was asking the court to do.

The court could make a finding (but not a declaration) that A was or was not the rightful beneficiary of the policy.

The irrevocable nature of a Section 73 trust may be justifiable—to some extent—when the husband and wife are still married. But as this case has illustrated, a Section 73 trust for the benefit of a spouse is much more difficult to justify in a divorce situation, and creates potential pitfalls for the parties.

o There would be no incentive for any person to incur additional expenses to benefit his or her ex-spouse.

o The ancillary matters court has the power to accommodate and cater for this reality upon the breakdown of the marriage. It has done so in the past, both in England and in Singapore and it should continue to do so.

The Proposed Nomination Framework

1. Scope of Proposed FrameworkPolicyholder can only make nominations to proceeds from non-indemnity (life and personal accident) insurance policies.

2. Choices Available to PolicyholdersPolicyholder decides whether or not to make nomination. If he decides to nominate, he has a further choice between revocable and irrevocable nominations. Nomination can be made at any time during policy coverage period.

3. Eligibility

Revocable Nominations Irrevocable NominationsAll legal persons (individuals, unincorporated associations or incorporated corporations) are eligible. This includes the policyholder’s spouse and/or children.

Only policyholder’s spouse and/or children are eligible.

4. Key Features of Nominations

Revocable Nominations Irrevocable NominationsNo statutory trust created. Policyholder remains the owner of the policy and retains full rights and control over it.

Statutory trust created in favour of beneficiaries. Policyholder not allowed to add, remove or change beneficiaries, or deal with the policy, without the consent of all the beneficiaries.

Policy proceeds not protected from policyholders’ creditors in the event of his bankruptcy.

Policy proceeds generally protected from policyholder’s creditors in the event of his bankruptcy.

Disaggregation of policy proceeds for purposes of calculating estate duty not allowed.

Disaggregation of policy proceeds for purposes of calculating estate duty allowed if policyholder is deemed to never have had an interest in the policy proceeds

5. Disbursement of Policy Proceeds

Revocable Nominations Irrevocable NominationsProceeds paid out while policyholder is alive go to policyholder.

Proceeds paid out while policyholder is alive go to beneficiaries

Proceeds paid out after policyholder’s death go to beneficiaries

6. CPFIS Policies

Revocable Nominations Irrevocable NominationsCan be made for CPFIS policies Cannot be made for CPFIS policies

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Policy proceeds paid out while policyholder is alive go back to his CPF account if he is not yet eligible for CPF withdrawal. Upon reaching withdrawal age, policy holder can take the monies out of his CPF account.

Not applicable.

Death benefits are paid to the beneficiaries who are named by policy holder in his insurance policy regardless of whether policyholder has reached CPF withdrawal age or not at the time of his passing away.

Not applicable.

7. Existing Policies and/or NominationsPolicyholders whose insurance policies have no prior nominations or other encumbrances (Type 1) can nominate under the proposed framework.

Policyholders who have nominations which fall under s 73 CLPA (Type 2) are not allowed to nominate under the proposed framework unless they obtain the consent of all the beneficiaries to do so.

Policyholders who have nominations of unclear legal effect (Type 3) are not allowed to nominate under the proposed framework unless it is ascertained that their insurance policies are not subject to other encumbrances.

8. Nomination FormsPrescribed statutory forms must be used – one for revocable nominations, another for irrevocable nominations and a third to revoke existing nominations, either revocable or irrevocable, without nominating anew.

A single insurance policy must either be revocably or irrevocably nominated; the policyholder cannot make both revocable and irrevocable nominations on the same insurance policy.

Policyholders can specify the percentage share of the policy proceeds that each beneficiary should receive. 100% of the policy proceeds must be nominated.

9. Priority of NominationsRevocable nomination forms deemed as testamentary instruments, i.e. recognised as legal instruments with which to disburse the assets of the policyholder.

Where conflicts between different testamentary instruments arise, the person named in latest, validly executed instrument will be recognised as the rightful beneficiary.

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PART THREE: LIEN, PLEDGE, HYPOTHECATION AND CHARGE

General:

Concerned with security over personal property. Security can be created via a variety of ways namely:

(a) Liens(b) Pledge(c) Letters of hypothecation(d) Charges – charges are much wider in scope.

1. Liens

1.1 Types of Liens:

(a) Common Law Lien (a.k.a. Possessory Lien) – A person who has done work for another is entitled to retain possession of goods belonging to

that person until the person has paid for work done. Essential element is possession.

(b) Equitable Lien – Not dependent on possession but arises by operation of equity. Eg: an unpaid vendor of property will have an equitable lien over the property to the extent of

the purchase money. *NOTE: Equitable lien cannot be enforced against a bona fide purchaser for value of property

without notice.

(c) Maritime Lien – Security over its ship in respect of outstanding liabilities. This lien arises as soon as payment is due for loss and damage cause by a ship or arising

under contract Lien constitutes a security over the ship or its freight in respect of all outstanding liabilities plus

costs incurred in its enforcement --- therefore can add up to a significant sum. *NOTE: From the moment of attachment, this lien will bind all subsequent owners of the ship,

regardless of whether they had notice of the lien and whether they were purchasers for value of the ship.

(d) Statutory Lien – Creation via statute instead of operation via common law of equity.

Example: Banker’s lien; solicitor’s lien

Re Bonds: A letter of lien was a floating charge2. Pledge

Re EG Tan [1991] MLJ 3

General:

Essence of pledge: A pledge involves delivery of possession. o Have to leave goods in possession of the pledgee. o Essentially similar to the working of a pawnshop. o Creditor takes possession of an asset belonging to the debtor to secure the payment of the

debt. This delivery may be actual or constructive.

o Constructive delivery: e.g. through attornment.

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o Dublin City Distillery v Doherty [1914] AC 823, Lord Atkinson:

A contract to pledge a specific chattel, even though money be advanced on the faith of it, is not in itself sufficient to pass any special property in the chattel to the pledgee. Delivery is, in addition, absolutely necessary to complete the pledge, but of course it enough if the delivery be constructive or symbolical, as it is called, instead of actual.

A pledge is a bailment, pledgee has right to retain the property until it is discharged coupled with a power of sale on default of payment .

o Pledgor retains the property in the pledged article and is entitled to recover possession on payment of the debt or to any surplus proceeds on sale.

Pledge involves right of sale but lien does not involve right of sale except in banking liens. (Banking lien is an implied pledge).

Distinguishing a pledge from a charge:

Where the alleged pledgor still retains the right to deal with the matter pledged, it is likely that this would be found to be a charge rather than a pledge.

Chase Manhatten v Wong Tui San [1993] 1 SLR 1 (Court of Appeal)

Principles: Floating charge and not pledge is created when party could continue to deal with asset without

consent of the party holding the security.

Facts: Whether the arrangement in question involving several share certificates which were placed in a

safe in the company ’s premises constituted a pledge. The bank was given the right of access to the premises at all times and to take and transfer such

stocks and shares from the safe.

Held (Chao Hick Tin J): It was clear that considering the memorandum as a whole, the arrangement was not a mere pledge

of the share certificates, but an equitable mortgage or charge. The provisions in the memorandum showed that the bank was not looking at the pieces

of paper as their security but the rights attached to the shares or the choses in action. Many of the rights conferred upon the bank undoubtedly went beyond the scope of

what would ordinarily be the rights of a pledgee. The basic characteristic of the security was not altered as the company could trade in

those shares without the consent of the bank. What was created was a floating charge and the charge is void for want of registration (this is

because under the Companies Act, a fixed or floating charge has to be registered, failing which a charge will be rendered valueless as security, leaving the lender to sue only on the original consideration).

Therefore, it is important to look at the substance of the document to determine whether there was a pledge i.e. substance over form.

In the following case, the question was whether there was an equitable mortgage of the shares and not a pledge.

o If it is a pledge, there is no problem but if it s the latter, then it may have to be registered under the Companies Act.

o Failure to register a mortgage or a charge would result in the dealing having no legal effect.

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Pacrim Investments Pte Ltd v Tan Mui Keow [2005] 1 SLR 141 (Andrew Ang J) Facts: This case involves share certificates, where the blank transfer forms were left to someone with certain

conditions attached. Held: There are ample authorities to support the defendants’ contention that the Pledge actually amounted to

an equitable mortgage. o In Harrold v Plenty [1901] 2 Ch 314, Cozens-Hardy J held that the deposit of a share

certificate by way of security for a debt amounted to an equitable mortgage.o Citing this case as authority, Professor Roy Goode, in his book Legal Problems of Credit

and Security (3rd Ed, 2003), states: English law does not recognise a pledge of registered securities. Decisions in English cases assume that even where the delivery of the certificate to

the creditor is accompanied by a completed or blank transfer the interest of the transferee is purely equitable until the transfer has been registered, and that pending registration he is an equitable mortgagee or chargee, not a pledgee. This assumption accords with commercial realities.

In the instant case, the alleged Pledge was an equitable mortgage. The intention of the parties was that the shares were to be security for the deferred payment of the commission to the plaintiff.

As Prof Goode ([14] supra), has stated, in practice, pledges are confined to goods and to documentary intangibles.

o Documentary intangibles are documents embodying title to goods, money or securities such that the right to these assets is vested in the holder of the document for the time being and can be transferred by delivery of the document with any necessary indorsement.

A share certificate is not a documentary intangible . A pledge of a share certificate does not confer on the pledgee the rights attaching to the shares but only possessory title to the paper on which the share certificate is printed. Accordingly, no interest in the shares passes thereby.

Where, however, a blank transfer duly executed by the registered shareholder was also deposited upon the terms agreed between the parties, what was created was not merely a pledge but the means whereby legal title to be shares might be transferred by completion and registration of such transfer.

o Such an arrangement created an equitable mortgage and not a mere pledge.

3. Letters of hypothecation

*NOTE: Lecturer said this will not be tested.

General:

A hypothecation is different from a pledge in that delivery of possession is not required. Pledge without possession, security itself was not given. Meant to use for objects which by its nature cannot be given as security eg: a ship. Ship owner

cannot pledge a ship as bank would have no place to store it. However, some banks do take a “letter of hypothecation” in a case where the transaction is really a

pledge. Banks would normally require its account holders to sign letters of hypothecation once they open an

account so that they can have a go at the property the moment the account holder defaults. However, letters of hypothecation are difficult to execute and create.

There is the risk that since the lender does not obtain actual or constructive possession of the goods, his control over them is limited and the borrower has considerable opportunity to defraud the bank.

The complexity of the Bill of Sales Act makes it difficult even for an experienced lawyer to draw up a document which will not be in conflict with the provisions of the Act.

In the past years, there has been a few cases where lists of shares have been deposited with banks and financial institutions by stock-broking companies under so –called “letters of hypothecation”. However, in the end they were held to be “floating charges” and as the documents were not

registered under the Companies Act, they were void.

Lin Securities Pte [1988] 2 MLJ 137

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Stock broking companies began to borrow from banks. They made a list of all the shares they had and the banks relied on that. Therefore, the same shares were used differently as securities.Chao Hick Tin JC: this letter of hypothecation was in fact a floating charge, which, if not registered, has no effect.

Dresdner Bank AG v. Ho Mun-Tuke Don [1993] 1 SLR 114 (Court of Appeal) Facts: The applicants were liquidators of an insolvent stockbroking company. The respondent banks had

offered credit facilities to the company, and as security for the facilities, C had executed letters of hypothecation to five of the respondents, providing as security shares listed in daily certificates to be issued to the various respondents. In the case of the last respondent, the letter offering facilities required the delivery of monthly certificates.

There was no actual physical delivery of the shares listed in these certificates and the company dealt with the shares in their trading. The letters of hypothecation and offer of facilities by the last respondent were not registered under s. 131 of the Companies Act.

The respondents (except two) subsequently obtained interim orders against the company for the delivery up of the shares listed in the last periodical certificate delivered to each respondent. The other two respondents arranged with the company for the shares listed to be placed in safe deposit boxes in the joint name of the respective respondent and the company.

The applicants sought the determination of the effect and nature of the security interests created by the letters of hypothecation, the offer of facilities and the periodical certificates.

Held: Dismissing the applicants’ appeal, There was no dispute that the letter of hypothecation in favor of each of the five respondents created a

security interest. The security created by each of the letters of hypothecation in favor of each of the five respondents and

the daily certificates delivered to them was not a fixed charge on any specific assets of the company; they were in each case a floating charge. o The charges created in favor of the respondents certainly had at least two of the characteristics

listed by Romer L.J. in Yorkshire Woolcombers Association Ltd, namely: The shares charged to the banks in the ordinary course of the business of the company

changed from time to time, and Until some steps were taken by the respondents to enforce the charges, the company was

at liberty to carry on business in the ordinary way as far as concerned the shares charged. o The security created in each case was ‘ambulatory and shifting in its nature’.

The company did not seek consent from any of the respondents to deal with the shares listed in the daily certificate during the course of the day; the company just continued to trade in the ordinary course of its business.

Hence, the shares subject to charges in favor of the banks were changing and in some cases constantly changing.

o The daily certificates were to be issued at the will of the company and were to contain such shares as the company chose to set out. This plainly showed that the shares charged were ambulatory and shifting in nature.

This showed that the company had the liberty to trade. The fact that the shares listed must be up to the prescribed value did not alter that position.

o The irresistible inference from the facts was that the respondents had allowed the company to deal with the shares described in the daily certificates and to replace those shares, which had been dealt with, with other shares so long as the aggregate value thereof was not loss than the limit prescribed by the respondents.

There was therefore, a freedom to trade in those shares until the respondents intervened, and they did not intervene until they sought the interim order.

The facility letter granted in favor of the last respondent was similarly a floating charge. o The facility letter evidenced the intention of the company and the respondent that the company

would create or provide security over the shares listed in the monthly certificates delivered by the company to the respondent.

The facility letter provided that the respondent shall have a pledge over the stocks and shares that were bought on behalf of the company’s clients.

o The letter was an agreement by the company to give security over the shares listed in the monthly certificates to be delivered by the company and conferred an equitable security or charge on those shares.

The intention to create charge on the shares was clear; the use of the word ‘pledge’ in the facility letter was wholly inapt.

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The facts in the present case were materially different from those in Askrigg. o In that case, the company allocated to each of its customers a specified bill or bills of exchange and

placed the bill or bills on which the depositor had a pledge in a security packet bearing the name of the depositor in a security box.

o In the present case, the shares charged were not specifically appropriated to each respondent bank and kept separately from the other shares.

The daily certificates did not specify the particular shares charged; they merely specified the counter, quantity and value of the shares.

There was no segregation of the shares charged to any particular bank from those charged to the other banks and from the other shares held by the company.

On the true construction of the letters of hypothecation and the facility letter, the floating charge was not over all the assets of the company, but rather over the shares described in the latest daily or monthly certificate for the time being issued and delivered by the company to the respondent bank concerned. o Even if the periodical certificates did not sufficiently identify the shares charged, such lack of

identification of the subject matter of the charge could not possibly extend the charge to cover all the assets of the company.

o In addition, the letters expressly referred to the shares described in the daily or monthly certificates, and the daily or month certificates, though they did not identify specifically the shares charged, did identify the counters, quantity of shares and value of the shares charged.

The floating charges in question had all crystallized prior to the company’s liquidation. o The four respondent banks, by demanding delivery up of the shares described in the latest daily

certificates and obtaining interim orders, had terminated the license given to the company to deal with the shares charged to them respectively.

o The other two respondents had also terminated the license given to the company to deal with the shares charged to them respectively by arranging to place the shares in safe deposit boxes operated jointly by the company and the respondent in question.

However, notwithstanding their prior crystallization, the floating charges fell within the requirement of registration within s. 131 of the Companies Act and were therefore void against the liquidators and creditors of the company. o First, the object of s. 131 and the mischief it was intended to remedy was clearly to enable persons

dealing with a company, who were minded to make a search at the Registrar of Companies, to ascertain whether the company had created certain charges on its assets.

If an unregistered floating charge, which was potentially void against the liquidators and creditors of the company under s. 131, could escape the consequence of being avoided by crystallization and becoming a fixed charge, not capable of registration, before the liquidation of the company, this would render farcical the requirement of registration.

o Second, crystallization was merely a process in the enforcement of a floating charge and did not retrospectively change the nature of the security.

Upon crystallization, the floating charge fastened on the assets subject to the charge and thenceforth the company was not at liberty to deal with the assets, whether in the course of business or otherwise.

It was true that at this stage the charge had become a fixed charge, but the resulting fixed charge arose from the original floating charge and was in effect the same security affecting the same assets. There was no ‘new’ charge created on those assets.

o Accordingly, if the original floating charge was void under s. 131 of the Act by reason of non-registration of the charge it remained void even after crystallization and could not avoid the consequences of that section.

The appeal would be dismissed.

4. DEBENTURES (CHARGES AND RECEIVERSHIP)

General:

When we talk about debentures, remember that only a company can issue debentures. Debenture is any doc which either creates a debt or acknowledges it

Receivership:

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When a company goes down, the receiver will take the things that are left behind. Receiver can also be appointed as manager. When there is a fixed charge (amongst other things) on

good will (equitable) of the company, given under the debenture, the receiver can continue to manage the company. This is extremely effective in cases where they could turn the business around or obtain a buyer of a company as a going concern.

Charges: Does not involve the transfer of either possession of ownership at law but arises by trust or by

contract. Creditor has a right to a designated asset of the debtor appropriated to the discharge of the debt

and the sale of the asset. 2 types of charge – fixed and floating charge.

Fixed charge: attaches as soon as the charge has been created and confers control of property to the chargee.

Floating charge: one which hovers over a designated class of assets in which the debtor has or will in the future acquire interest, the debtor having to deal with any of the assets under a floating charge.

Requirements of a floating charge: Re Yorkshire Woolcombers Association(1) If it is a charge on a class of assets of a company present and future; (2) The assets are fluctuating from time to time in the ordinary course of the business of

the company; and (3) Until some future step is taken by or on behalf of those interested in the charge, the

company may carry on its business in the ordinary way as far as concerns that class of assets.

Charges stated in s131 CA are required to be registered, otherwise void for want of registration.

Registration of charges.131. —(1) Subject to this Division, where a charge to which this section applies is created by a company there shall be lodged with the Registrar for registration, within 30 days after the creation of the charge, a statement containing the prescribed particulars of the charge, and if this section is not complied with in relation to the charge the charge shall, so far as any security on the company’s property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company.

(2) Nothing in subsection (1) shall prejudice any contract or obligation for repayment of the money secured by a charge and when a charge becomes void under this section the money secured thereby shall immediately become payable.

(3) The charges to which this section applies are — (a) a charge to secure any issue of debentures; (b) a charge on uncalled share capital of a company; (c) a charge on shares of a subsidiary of a company which are owned by the company; (d) a charge or an assignment created or evidenced by an instrument which if executed by an

individual, would require registration as a bill of sale; (e) a charge on land wherever situate or any interest therein; (f) a charge on book debts of the company; (g) a floating charge on the undertaking or property of a company; (h) a charge on calls made but not paid; (i) a charge on a ship or aircraft or any share in a ship or aircraft; and (j) a charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a

licence under a copyright.

(3) The reference to a charge on book debts in subsection (3) (f) shall not include a reference to a charge on a negotiable instrument or on debentures issued by the Government.

OLD POSITION ON CHARGES:

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Since Sibe Gorman it was held that book debts constituted a fixed charge.

Siebe Gorman & Co. Ltd. v. Barclays Bank Ltd. [1979] 2 Lloyd's Rep. 142 (Slade J)Facts: A company (RHM) executed a debenture in favour of the Defendant. The debenture provided that all

monies the company may receive in respect of book debts or other debts are to be charged and cannot, without the written consent of the defendant, be assigned or changed.

It was also provided that the Defendant was granted a first fixed charge over the book debts (present and future) of the company. Later, the company and the Plaintiff entered into a deed of assignment in respect to its book debts.

Issue: Whether the bills in question, which were assigned to the Plaintiff came within the legal meaning of

book debts and therefore within the ambit of the debenture held by the bank. If not, the Plaintiff could claim the proceeds received by the Defendant upon the collection of the amounts due under the bills of exchange and letter of credit.

Held: That although neither the plaintiff nor its solicitors had seen a copy of the debenture until some time

after the deed of assignment, they should still be held to have acquired constructive knowledge of the existence of the debenture held by the defendant since it was registered.

The bills of exchange constituted a book debt within the meaning of the debenture, although there is no evidence that the debts were actually shown as receivable bills in RHM’s books.

Further held that the charge held by the defendant over the book debts amounted to a fixed charge because RHM did not have an unrestricted right to deal with the proceeds of any of the book debts paid into its account.

o However, it was also held that the deed of assignment over the particular bills held by the plaintiff will stand because the defendant failed to inform the plaintiff of the full terms of its debenture when the plaintiff went to speak to a representative of the defendant.

o Also, having received actual notice of the deed of assignment, the defendant incorrectly assumed that it was safe to disregard the assignment.

NEW POSITION:

Book debts constitute floating charges. PC in Agnew v Commissioners of Inland Revenue [2001] (on appeal from NZ) disagreed with Siebe

Gorman and held that a book debt was a floating charge. In In re Spectrum, the HC judge (Sir Andrew Morritt) preferred the PC view, i.e. floating charge.

o This was overruled by the CA, which affirmed Sibe Gorman. o However, HL restored the PC view that book debt constituted floating charge.

In re Spectrum Plus Ltd (in liquidation) [2004] 2 WLR 783 (Sir Andrew Morritt VC)Facts: N, a bank, sought a declaration that a debenture granted by a company, S, created a fixed charge over

S's book debts and the proceeds thereof. S had obtained an overdraft facility with N and granted N a debenture securing all monies due. The

overdraft was repayable on demand. The debenture was in standard form and was duly registered. S went into creditors voluntary liquidation and the liquidators collected S's book debts but refused to account to N for them.

Issue:Whether following the authority of Siebe Gorman (above), a similar debenture in the present case created a fixed charge over present and future book debts and that as such, the liquidators should account to it for the proceeds of S's book debts.

Held: Siebe Gorman was wrongly decided.

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It was clear that the book debts were to be under the control of and available for use by S in the ordinary course of its business through their collection and the ordinary operation of the bank account.

o Therefore, following the definition of a floating charge In Re Yorkshire Woolcombers Association Ltd., (1903) 2 Ch. 284, at p. 295, the charge over the book debts was no more than a floating charge.

Approach taken is substance over form and that even is referred to as “specific charge”, may not be fixed charge as in the situation here

In re Spectrum Plus Ltd (In liquidation) [2005] 3 WLR 58 (House of Lords). Facts: The issue in this case is whether the charge over book debts, present and future, granted by Spectrum

Plus Ltd to National Westminster Bank Plc under a debenture was a fixed charge, which it was expressed to be, or merely a floating charge.

The bank, naturally, said that it was a fixed charge. Para 5 of the debenture required that the debts once collected be paid into Spectrum's account with the

bank. This account was a current account. It enjoyed the overdraft facility of £250,000 to which I have referred. Provided that overdraft limit were not exceeded, Spectrum was free to draw on the account for its business purposes.

Held: Lord Hope of Craighead: Section 175(2)(b) of the Insolvency Act 1986 provides that, so far as the assets of the company

available for payment of general creditors are insufficient to meet them, preferential debts have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and that they shall be paid accordingly out of any property comprised in or subject to that charge.

o It is notorious that this state of affairs operates to the disadvantage of creditors whose claims are secured by a charge which takes the form of a floating charge and not that of a fixed security.

The charge which the company granted by way of what the debenture described as a specific charge over its book debts and other debts then and from time to time owing to the company was in law a floating charge. It was not a fixed charge, so section 175(2)(b) applies to it.

There are a limited number of ways to ensure that a charge over book debts is fixed. o One is to prevent all dealings with the book debts so that they are preserved for the benefit

of the chargee's security. One can, of course, be confident where this method is used that the book debts will

be permanently appropriated to the security which is given to the chargee. But a company that wishes to continue to trade will usually find the commercial

consequences of such an arrangement unacceptable.o Another is to prevent all dealings with the book debts other than their collection, and to

require the proceeds when collected to be paid to the chargee in reduction of the chargor's outstanding debt.

But this method too is likely to be unacceptable to a company which wishes to carry on its business as normally as possible by maintaining its cash flow and its working capital.

o A third is to prevent all dealings with the debts other than their collection, and to require the collected proceeds to be paid into an account with the chargee bank. That account must then be blocked so as to preserve the proceeds for the benefit of the chargee's security.

o A fourth is to prevent all dealings with the debts other than their collection and to require the collected proceeds to be paid into a separate account with a third party bank. The chargee then takes a fixed charge over that account so as to preserve the sums paid into it for the benefit of its security

The method that was selected in this case comes closest to the third of these. o It was selected, no doubt, because it enabled the company to continue to trade as normally

as possible while restricting it, at the same time, to some degree as to what it could do with the book debts.

o The critical question is whether the restrictions that it imposed went far enough.

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Credit & Security

o There is no doubt that their effect was to prevent the company from entering into transactions with any third party in relation to the book debts prior to their collection.

The uncollected book debts were to be held exclusively for the benefit of the bank. But everything then depended on the nature of the account with the bank into which

the proceeds were to paid under the arrangement described in clause 5 of the debenture.

As McCarthy J said in In re Keenan Bros Ltd [1986] BCLC 242, 247, one must look, not at the declared intention of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention.

It is impossible to conclude that the debenture in the Siebe Gorman case had the effect that the company could collect the money but was not free to use it as it saw fir.

o In Slade J's judgment, in the Siebe Gorman case, he appears to have reached that conclusion in two stages.

First, he said, the effect of the debenture was to create a specific charge on the proceeds of the debts as soon as they were received which prevented the company from disposing of an unencumbered title to them without the mortgagor's consent.

Second, he said that the bank would have had the right, if it chose, to assert its lien under the charge on the proceeds of the book debts, even at a time when the account into which they were paid was temporarily in credit.

o His Lordship would agree that the effect of clause 5(c) of the debenture (the equivalent of clause 5 here) was that the company was prevented from doing anything with the proceeds of the book debts when collected other than paying them into its account with the bank.

o But the second point-that the bank could assert a lien over the proceeds-overlooked the fact that the account into which the proceeds were to be paid was the company's current account with the bank which the company was to continue to be free to operate for its own business purposes within the agreed limit of its overdraft.

The company's undertaking in clause 5 of the debenture to pay the proceeds of the book debts into its account with the bank has to be seen and understood in that context.

This was a current account into which the company paid money drawn from a variety of other sources as well as the proceeds of its book debts. The company's continuing contractual right to draw out sums equivalent to the amounts paid in was wholly destructive of the argument that there was a fixed charge over the uncollected proceeds because the account into which the proceeds were to be paid was blocked.

His Lordship was in no doubt whatsoever that Siebe Gorman should be overruled.

Lord Scott of Foscote: If it was a floating charge Spectrum's preferential creditors are entitled to have their debts paid out of the

proceeds of the book debts in priority to the bank. If it was not a floating charge the preferential creditors have no such priority and the bank will be entitled to the whole of the proceeds.

The question for decision, therefore, is whether a charge over present and future book debts, where the chargor cannot dispose of or charge the uncollected book debts but can deal with its debtors and collect the debts and where the chargor is obliged to place the payments made to it by its debtors in a designated account with the chargee bank but can freely draw on the account for its business purposes provided the overdraft limit is not exceeded, is capable in law of being a fixed charge.

If a security has Romer LJ's third characteristic his Lordship was inclined to think that it qualifies as a floating charge, and cannot be a fixed charge, whatever may be its other characteristics.

o In any case in which the chargor remains free to remove the charged assets from the security, the charge should, in principle, be categorised as a floating charge. The assets would have the circulating, ambulatory character distinctive of a floating charge.

o The essential characteristic of a floating charge, the characteristic that distinguishes it from a fixed charge, is that the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.

The following features of the debenture and the arrangements regarding the bank account into which the collected debts had to be paid need to be taken into account:

o (1) the extent of the restrictions imposed by the debenture; o (2) the rights retained by Spectrum to deal with its debtors and collect the money owed by

them;

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o (3) Spectrum's right to draw on its account with the bank into which the collected debts had to be paid, provided it kept within the overdraft limit;

o (4) the description "fixed charge" attributed to the charge by the parties themselves. Restrictions on Spectrum's right to deal with its uncollected book debts went very little way in supporting

the characterisation of the charge as a fixed charge. It was restrictions on the use that Spectrum could make of the payments made by its debtors that were important.

o Moreover, the restrictions on Spectrum's right to deal with its uncollected book debts did not enable the bank to realise its security over those uncollected book debts.

o The bank could not have sold the book debts without first taking some step or steps that would have given it the power to do so. In effect a crystallisation event would have had to take place.

o The value of the uncollected book debts as a security lay always in the money that could be obtained from the debtors in payment of those debts

The bank's debenture required all payments of book debts received by Spectrum to be paid into its account with the bank.

o The money once received by the bank would become the bank's money and in return Spectrum's account would be credited with the amount that had been received.

o Whether the account was for the time being in credit or in debit the result of each payment would be the accrual to Spectrum of the right to withdraw from the account a corresponding amount for its normal business purposes.

The bank's debenture placed no restrictions on the use that Spectrum could make of the balance on the account available to be drawn by Spectrum. Slade J in the Siebe Gorman case [1979] Lloyd's Rep 142, 158 thought it might make a difference whether the account were in credit or in debit. His Lordship must respectfully disagree.

o The critical question is whether the chargor can draw on the account. If the chargor's bank account were in debit and the chargor had no right to draw on it, the account would have become, and would remain until the drawing rights were restored, a blocked account.

o But so long as the chargor can draw on the account, and whether the account is in credit or debit, the money paid in is not being appropriated to the repayment of the debt owing to the debenture holder but is being made available for drawings on the account by the chargor

The correct conclusion, in my opinion, is that the debenture, although expressed to grant the bank a fixed charge over Spectrum's book debts, in law granted only a floating charge.

o The nature of the charge depends on the rights of the chargor and chargee respectively over the assets subject to the charge. The moneys in the bank account were assets subject to the charge.

o If the account had been treated as a blocked account, so long as it remained overdrawn, it would be easy to infer from a combination of that treatment and the description of the charge as a fixed charge that Spectrum had no right to draw on the account until the debit on the account had been discharged.

o But the account was never so treated. The overdraft facility was there to be drawn on by Spectrum at will. In the operation

of the account there was never a suggestion that Spectrum needed to obtain the bank's consent before writing a cheque.

The bank could, by notice, have terminated the overdraft facility, required immediate repayment of the indebtedness and turned the account into a blocked account. Pending such a notice, however, Spectrum was free to draw on the account.

Its right to do so was inconsistent with the charge being a fixed charge and the label placed on the charge by the debenture cannot be prayed in aid to detract from that right.

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5. Differences between the various types of security

5.1 Distinction between Pledge and Lien

Pledge Lien

Possession of subject matter used for security.

Possession of subject matter used for security.

Power of sale upon default of payment. Has right to detain the subject matter of lien until he is paid. No right of sale.

May be transferred to a 3rd party. May not be assigned.

5.2 Differences between Pledge and Letters of Hypothecation

Pledge Letters of Hypothecation

Possession of security. No possession of security – merely given general charge over goods/docs.

5.3 Differences between Pledge and Mortgage

Pledge Mortgage

Property pledged should be actually or constructively delivered to the pledgee.

Property passes by assignment. Possession is not necessary.

Pledgee only has a special property in the goods pledged (right to sale), whilst the general property remains in the pledgor.

Mortgagee has absolute interest in the property subject to right to redemption.

5.4 Differences between Pledge and Charges

Pledge Charge

Confers ownership with right of sale. Does not confer ownership, chargee only has a right to have a designated asset of the debtor appropriated to the discharge of indebtedness.

5.5 Differences between Pledge and Charges

Pledge Bill of Sale

Requires delivery of possession of the chattels

Subject matter of pledge can include chose in action

B/S is a doc which is given where the legal property in goods passes to the person who lends money on them but possession does not pass

A form of non-possessory mortgage of chattels and does not include choses in action

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PART FOUR: LETTER OF GUARANTEE

General:

Personal form of security, no proprietary interest is given. Creditor is merely given the benefit of another person obligation to pay. 3P promises the creditor that should the principal debtor default in payment of his debt, the

3P will personally pay it (secondary obligation as obligation to pay arises only on default of payment as cf primary obligation to pay which is an indemnity i.e. 3P undertakes payment to creditor irrespective of whether principal)

This is simply obtained by making the guarantor(s) sigh a standard letter of guarantee. No real security is given; the security lies in the net worth of the guarantor and how willing

he is to repay. Guarantee vs. indemnity:

Guarantee involves three parties: (i) guarantor; (ii) principal debtor (borrower); (iii) lender or creditor (bank).

An indemnity oppositely, is a promise to be primarily liable. There are only two parties to the contract.

Types of guarantees:

Guarantees can be several, joint or joint and several. The most popular type of guarantee is the “joint and several” guarantee. This is because under the general law, all the guarantors may be jointly liable under a “joint

guarantee” which means that all have to be sued in a joint action. If only some guarantors are sued, even though any judgment obtained is unsatisfied, the

other guarantors who are not sued will be discharged. In a several guarantee, each may be sued separately and judgment obtained against one does not

discharge the others. A several guarantee means that one is given by each of the guarantors.

A joint and several guarantee combines the two methods. It is a guarantee given by each and all of the guarantors, so that the guarantors may be

sued in any way the creditor deems fit. It is the most flexible type of guarantee and is favoured by the banks.

Consideration

Have to know why you’re liable. Read the letter of guarantee – 1st paragraph would state the consideration. · Meaning of that consideration must move from the promisee to the promisor – guarantee

can equate an exchange of promises, namely a promise to make or to continue to make advances or loans or otherwise give credit or banking facilities.

· Consideration: the bank is giving the loan to the person you are giving the guarantee to only because you agree to be his/her guarantee.

It is apparently good law that if the parties intend, a guarantee can cover past loans or existing loans, i.e. loans that already exist before the guarantee is signed: Oriental Bank of Malaya v N Subramaniam.

*NOTE: The guarantee amount must be limited in the letter of guarantee .

Empire International Holdings v Mok Kwong Yue [2004] 4 SLR 820 (Tan Lee Meng J) Facts: The respondent advanced loans to the appellant’s company in exchange for which the appellant

executed a comprehensive guarantee in favor of the respondent with respect to loans already advanced, as well as for future loans.

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The respondent subsequently issued letters of demand to repay the loans. When the loans were not repaid, the respondent instituted the present proceedings and made an application for summary judgment which was granted.

On appeal, the appellant claimed that the guarantee he executed was unenforceable because the respondent had not furnished any consideration for the obligation he assumed under the guarantee.

Held: As the guarantee was a continuing guarantee, the appellant’s contention that consideration was not

furnished by the guarantee did not rest on solid ground. o That a promise to advance additional funds may be consideration for a promise to

guarantee the repayment of debts already incurred as well as future advances, had been reiterated on innumerable occasions.

o In the present case, there was no doubt that a continuing guarantee was envisaged. As such, the question of lack of consideration did not arise.

The appellant also tried to attack the validity of the Guarantee by pointing out that although there was a promise of future advances, there were no such advances.

o It was worth noting that in Overseas Union Bank v Lew Keh Lam, Karthigesu JA answered such an assertion in the following comprehensive terms:

The consideration was not illusory for there was an exchange of promises, namely the promise to ‘make or continue to make advances or loans or otherwise give credit or other banking facilities’.

It was the promise itself that constitutes the consideration and not the subject matter of the promise. The fact that the bank had not actually granted any new facilities was only relevant to the issue of the performance of the contract and not the validity of the consideration.

The respondent has confused performance with consideration in making this argument.

“Continuing guarantee” – to avoid the rule in Clayton’s Case Guarantees should normally be signed at the same time by all the guarantors. Susbsequent cases whre the court of appeal said it depends on the facts – see Karthigesu J’s

decision in the CA: referred to objective intention of the parties as opposed to the subjective intention of the parties.

Conclusive evidence clause – Yong CJ - bankers are very honourable people, and therefore they can be trusted – justification for conclusive evidence clause. Bangkok Bank v Cheng Lip Kuan [1990] 2 MLJ

Quoting Lord Denning – a banker’s words can be trusted. Once the bank says it is conclusive, if the bank says this is the figure owned by a borrower, you cannot argue against it.

Courts will therefore uphold a conclusive evidence clause

Standard Chartered Bank v Neocorp International Ltd [2005] 2 SLR 345VK Rajah J – courts will usually uphold a conclusive evidence clause, but there is a possibility of the bank making a mistake. Court ought to look at the subsequent conduct of either party to see the meaning of the agreement / discern the parties’ intention – stuck to the words of the clause.

Malaysian courts do not agree that the conclusive eivdnece clause is not conclusive – but not binding on SG Courts.

Requirements

Required to be evidenced by writing. Compare guarantees with Indemnities

o Indemnities are not required to be evidenced by writing. It is important to see that all persons who intend to sign as guarantors have signed and that no one is

left behind. Taking a second guarantee from the person left behind can mean trouble.

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o See e.g. Indian Bank v Raja Suria where the CA held that the two guarantees could not be read as part of one transaction, and therefore there was a non-fulfilment of the condition that all seven directors sign the guarantee, resulting in both the guarantees being void.

Banks should ensure that all the individual guarantors sign either in the presence of a solicitor or a bank officer.

o Forgery is possible.

Problems

Issue of undue influence: especially for married women giving guarantees for their husbands and old people giving guarantees for their much loved and better educated sons.

Aged Parents Whenever the guarantors are of the above: tendency for children to make parents sign guarantees. Require independent legal advice, ensure that the person knew what he of she is signing.

Spouses

It is agreed in both Singapore and Malaysia that there is no presumption of undue influence in favor of a wife. They may deserve careful attention but there is no special equity in their favor.

Doctrine of resulting trust: husbands keeping property in wife’s name. Resulting trust usually do not apply require to have the married woman sign the guarantee.

Undue influence as husband was acting as the agent of the bank.

Minors A minor’s contract is voidable according to the Minor’s Act.

Barclays v O’Brien [1993] 3 WLR 786

Held (Lord Browne-Wilkinson): Where a wife had been induced to stand as surety for her husband’s debt by his undue influence,

misrepresentation or some other legal wrong, she had an equity as against him to set aside that transaction.

And on ordinary principles the wife’s right to set aside the transaction would be enforceable against a 3rd

party who had actual or constructive notice of the circumstances giving rose to her equity or form whom the husband was acting as agent.

CIBC Mortgage v Pitt [1993] 3 WLR 802 HL

Held (Lord Browne-Wilkinson): Facts differed from Barclays v O’Brien as there was no misrepresentation made to the wife by the

husband and the wife was fully aware of the terms and conditions of the loan. Therefore it was held that the husband was not acting in the position of an agent of the bank.

No indication other than that the transaction was anything other than a normal advance to husband and wife for their joint benefit and the plf bank was not put on inquiry and could not be fixed with constructive notice of undue influence.

Royal Bank of Scotland v Etridge (2001) 3 WLR 1021 gave the last word on guarantees given by a wife.

(S) courts quite kind to banks when married woman and said no equity in favour of wife but doctrine of constructive notice i.e. guarantee not enforceable on grounds of undue influence.

Validity of Guarantees

E.g.: If only 3 out of 4 directors signed on the guarantee form. Old law that for such a guarantee to be valid all the directors have to sign on the same guarantee form if their liability is joint and several. If only 3 out of 4 directors signed the form, the guarantee is invalid.

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However, dicta in Indian Bank v Raja Suria & Ors [1993] 2 SLR 497 changed the position. Test for validity of a guarantee is the objective intention of the parties – whether they intended for the

guarantee to be joint and several or separate. Subsequent cases: OUB v Lim Keh Lam, CGU v Quah Boon Hua and OCBC v Chng Sock Lee &

Anor confirmed the position in Indian Bank v Raja Suria.

OUB v Lim Keh Lam [1999] 3 SLR 393

Principle: The validity of the guarantee would depend on the objective intention of the parties.

Facts: Appellant bank had granted loan facilities to df company and in return for the loan, bank requires the

directors of the company to sigh a guarantee as security. The terms of guarantee were signed by the directors, Tham and Li in May 1991 and under the terms

of the guarantee they were jointly and severally bound. After the removal of one director, the appellant bank wanted the df to be a guarantor in addition to

Tham and Li. Subsequently a guarantee, identical to the one signed by Tham and Li was executed and signed by df.

Whether df’s guarantee was valid as it is well-established law that if all 3 joint guarantors had not singed in the same guarantee form, the guarantee was invalid.

Held: It was not the subjective intention of the parties that was important but rather the objective

intention of the parties that the court was seeking to construe. It is the objective intention of the parties to create a separate personal guarantee and as that was

what was said on the face of the guarantee form. Since only the respondent’s name was on second guarantee form, there was no reason to read it as anything other than a separate personal guarantee.

CGU International Insurance v Quah Boon Hua & Ors [2000] 4 SLR 606

Principle: It is not a rule of law that where an instrument of guarantee was in the form or in terms that implied

that it was to be executed by more than one guarantee, who were to be jointly and severally liable, all must sign the instrument before any was bound. The crucial test was the intention of the parties.

Facts: Action commenced against defendant who was one of the directors who had signed the guarantee. Df signed the guarantee only on assumption that all 3 directors would sign the guarantee. However,

the guarantee stated that only 2 out of 3 directors were required to sign the guarantee. Whether the guarantee was valid.

Held (Rajendran J): Crucial test is the intention of the parties and not the form of the guarantee. Representation from the plf bank that all 3 directors were required to sign the document although in

a separate letter to the 2nd director it was stated that only signatures of 2 directors were required. The objective intention was thus for all 3 directors to sign the document.

Since the df had no knowledge of the letter sent to the 2nd director and would not have signed the guarantee unless all the directors were signing (as he was a minority shareholder), the guarantee would have no legal effect against the df.

OCBC v Chng Sock Lee [2001] 4 SLR 370

Facts: Plf granted banking facilities to Goldenlite for the development of certain properties. Df had agreed unconditionally on a joint and several basis to guarantee the payment of all moneys

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and liabilities owing by Goldenlite. Goldenlite defaulted payment on overdraft and df denied liability on following grounds:

(a) Guarantee was voidable as it was signed under undue influence;(b) Plf failed to draw to the df attention some special circumstances which the plf were aware

of; (c) Plf and Goldenlite had substantially varied the principal contract; and(d) Plf permitted Goldenlite to make unauthorised withdrawal.

Held (Lai Kew Chai J): On the ground of undue influence: a person who had been induced to enter into a transaction by

undue influence or misrepresentation has an equity to have the transaction set aside. However, it is not established that Goldenlite had unduly influenced the df to sign the guarantees.

Both parties must act with utmost good faith in a contract of guarantee however, as the plf themselves were unaware of any special circumstances during the term of the loan, they had not acted in male fide.

As the rest of the claims were not supported by evidence, held that the df were liable for the amount that they had guaranteed.

Somerset Investments Pte Ltd v. Far East Technology International Ltd [ 2004] 3 SLR 46Facts: The Plaintiff was the landlord of Liang Court. It leased units to a tenant whose parent company was the

defendant. The defendant provided the plaintiff with a guarantee to secure its contribution in the event of either a

breach of the tenancy agreement by the tenant, or the termination of the tenancy prior to its expiry. This guarantee was payable by the defendant upon the production by the plaintiff of a certificate,

deemed to be final and conclusive as to any sum payable to it. The guarantee stipulated a three-month period within which the demand ought to be made. The three-month period was calculated from the expiry of the term, or from the date of the sooner determination of the tenancy, whichever was earlier.

Held: A certificate of demand to a guarantor was generally valid if it was made clear to him that the creditor

required payment of a sum that was actually due. It was not essential to the validity of a notice calling up a debt that it correctly stated the amount of the debt.

Letters of Comfort

Similar to letters of guarantee except that such letters may not even create legal obligations on the part of the persons who gave them.

Bankers dealing with major credit-worthy borrowers may be willing to accept such letters otherwise it is considered too risky a form of security.

Usually used when subsidiaries are negotiating loans and holding companies may be reluctant to offer a letter of guarantee as it would have to show it in its balance sheet as a contingent liability.

Bangkok Bank Limited v. Cheng Lip Kwong [1990] 2 MLJ 5

Issue:Whether a certificate issued under a conclusive evidence clause (e.g. “Any admission or acknowledgement in writing by the customer or any person on behalf of the customer of the amount of the indebtedness of the customer or otherwise in relation to the subject matter of this guarantee or any judgment or award to the bank against the customer or proof by the bank in bankruptcy or companies winding up which is admitted or any certificate by an officer of the bank as to the moneys and liabilities for the time being due and remaining or incurred to the bank from or by the customer or a copy of the account of the customer contained in the bank’s book of account signed by any officer of the bank shall be binding and conclusive evidence on the guarantor in all courts of law and elsewhere”) can be conclusive of liability of the borrower / guarantor.

Held:

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By its very nature, a certificate issued by a bank to certify an amount due to it `for the time being` never referred to an amount which might be owing in the future, but to an amount due to it at a date, present or past, to which reference was being made.

The fact was that in business and commerce, there were many instances when provisions were inserted into contracts by which the contracting parties agree that a designated person would have the power to issue a certificate as evidence of a fact, and the issue by him of the certificate was then conclusive evidence of that fact, as between the parties.

The widespread use by banks of `conclusive evidence` clauses had arisen simply because of the dictates of commerce. What was significant was that, in the absence of fraud or obvious error on the face of it, a certificate issued under a `conclusive evidence` clause was conclusive of both the liability and the amount of the debt.

PART FIVE: BANKING

1. Crossing Cheques

Importance of crossing a cheque. 2 types of crossings:

(a) General – not negotiable(b) Specific – a/c payee only

A/c Payee: not transferable· By crossing a/c payee means that it is not transferable.

Not negotiable: intangible property of negotiability is not available but still transferable.

S76 Bills of Exchange Act: defines the 2 types of crossings:

General and special crossings defined76. —(1) Where a cheque bears across its face an addition of — (a) the words “and company” or any abbreviation thereof between two parallel transverse lines, either

with or without the words “not negotiable”; or (b) two parallel transverse lines simply, either with or without words “not negotiable”,

that addition constitutes a crossing, and the cheque is crossed generally.

(2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that addition constitutes a crossing, and the cheque is crossed specially and to that banker.

See also S 64 s80 and s81A: giving the meaning of Not negotiable crossing and A/c payee crossing

respectively.

Effect of “not negotiable” crossing on holder 81. Where a person takes a crossed cheque which bears on it the words “not negotiable”, he shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had.

Non-transferable cheques81A. —(1) Where a cheque is crossed and bears across its face the words “account payee” or “a/c payee”, either with or without the word “only”, the cheque shall not be transferable, but shall only be valid as between the parties thereto.

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Algemene v Happy Valley [1991] 2 MLJ 289 – Old Provision

Held (Chao Hick Tin J) The crossing of a cheque with the words ‘account payee only’ did not in law prevent the

transferability of a cheque and was merely a directive to the collecting bank. The crossing of a cheque with the words ‘not negotiable’ also would not preclude such a crossed

cheque from being transferred. All it meant was that the subsequent indorsee of the cheque ‘shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had’.

The combined effect of the 2 sets of crossing did not render the cheques any less transferable and something more had to be indicated on the cheque to show that there was an intention that the cheque should not be transferable.

NB: New position now, amendment made to the definition of ‘account payee only’ as it would be

ridiculous to require 3 crossings on a single cheque. Definition of ‘account payee’ meant cheques becomes non-transferable.

2. Forgeries

Once signature is forged, the cheque is wholly inoperative and bank suffers the loss. S24 Bills of Exchange Act.

Forged or unauthorised signature24. —(1) Subject to the provisions of this Act, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorised signature is wholly inoperative, and no right to retain the bill or to give a discharge therefore or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

Position has been altered; a wave of pro-bank decisions tilted the balance – the account holder bears the loss if he/she is contractually precluded from asserting a claim for errors and discrepancies.

Consmat Singapore v Bank of America NT & A [1992] 2 SLR 828 (HC decision)

Principle: If the plf had verified the statement of account, it becomes the conclusive evidence that the account

was correct. They are precluded from claiming the amount deducted from the bank via forged cheques.

Facts: When the plf opened their account with the dft bank, they signed a General Agreement for

Commercial Business, where it is stated in cl 3(c) that the plf were under an obligation to notify the df of a debit in the plf’s statement of account arising from a cheque which had been forged or unauthorised within 7 days.

Plf discovered that the dft had honoured and paid 15 cheques drawn on the plf’s account and all 15 cheques were forged.

Whether the lf had a claim against the dft.

Held: If the plf had failed to notify the df subject to cl 3 (c), the statement of account became conclusive

evidence that the account was correct. Cl 3 (c) was intended to apply to a debit wrongly made and based on a cheque which had been

forged. Cl 3 (c) therefore provided a defence to the plf’s claim.

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Stephen Machinery v OCBC [2000] 1 SLR 300 (HC decision)

Facts: The df bank had paid out 57 forged cheques amounting up to $904,398. Clause 13 of the Terms and Conditions in the agreement between plf and df bank provided that any

statements sent by the bank shall be final and conclusive of all matters if the customer did not notify the bank of any discrepancies or errors within 14 days from the date of the bank statement.

Whether the plf can claim against for the 57 forged cheques pursuant to s24 Bills of Exchange Act.

Held (Lai Kew Chai J): When the plf opened an account with the df bank, the plf ad declared on the account application

that they had received and read a copy of the df’s terms and conditions and agreed to abide by it. The plfs were therefore contractually precluded from asserting a contrary position that the 57 debits

were errors and discrepancies.

Unsatisfactory decision? No authoritative CA decision as yet whether the liability should be borne by the customer or the bank.

What is the standard of duty on the cheque owners in relation to fraud?

Khoo Tian Hock & Anor. V OCBC [2000] 4 SLR 673Facts:The Plaintiffs’ son forged five cheques and the bank paid the amounts. He was able to obtain the cheques because he had a key to the safe and he also knew the combination to the safe. The son had a history of defrauding the plaintiffs of small sums. One of the bank officers at OCBC knew of this.

Issues:Whether the Plaintiffs can sue the bank because of estoppel or negligence; and whether the bank was negligent and therefore liable.

Held: In cases where the allegation was as serious and grave as fraud or forgery, the standard of proof was more onerous than the ordinary civil standard. Here, the Plaintiffs had discharged this high burden of proof because they had made a police report after discovering the unauthorised drawings of the cheques.

In the absence of express instructions to the contrary, the bank should not be required to defer payment indefinitely on a cash cheque that appeared regular on the face of it, just because the bank was unable to contact its customer.

Khoo was not negligent in not reporting the son to the police or in not informing the branch about the UOB incident or in not putting them on notice about the son. The plaintiffs were also not obliged to procure the son’s arrest and there was nothing to preclude either of them from standing bail for him. However, *the plaintiffs owed a duty to the bank not to facilitate fraud. This duty arose as an implied term in the contract between a bank and its customers. The plaintiffs were in breach of this duty. In light of the UOB incident, the plaintiffs knew that the son could no longer be trusted and Khoo was negligent in failing to deny his son access to the cheques

The circumstances were such that the plaintiffs should have anticipated the subsequent fraudulent conduct of the son in relation to the five cheques. The fraudulent acts of the son did not break the chain of causation since such acts should have been anticipated. The fact that a crime was necessary to bring about the loss did not prevent its being the natural consequence of the carelessness

Comments:

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Places a very onerous duty on the owners of cheques to prevent fraud even though the standard should only be one of not to facilitate fraud. s 24 is there because when cheque is forged, no mandate from customer to release money as forger is the one giving order to bank and if bank pays, it’s bank fault, subject to the fact that customer is not allowed to set up the forgery case should have use this wording rather then going to the extent of saying that duty of customer not to trust others

PART SIX: DOCUMENTARY LETTERS OF CREDIT (DLC)

1. Introduction Method of financing international trade and a means of assurance to a seller of goods to a foreign

buyer that he will be paid after shipment. Issued by the bank of the buyer, in favour of the seller and may be confirmed by a local bank in the

seller’s city. Seller’s credit will be paid after he has presented the shipping documents evidencing shipment and the documents are found to be in order.

Banks deal with documents not goods. All documents must be specifically complied with.

2. Operation of a DLC – illustration

3. Law governing DLC UCP (Uniformed Customs and Practice)

o Document issued by the international chamber of commerce, the latest one is ICC 600. (July 2007)

Parties that may be liable:o Bank issuing the letter of credit: Issuing Bank.o Bank advising on letter of credit: Confirming Banko

*NOTE: That this is not law, merely a document agreed by more than one hundred countries as the rules or regulations to govern LCs.

4. Types of DLCs:

(a) Revocable and Irrevocable Credits:

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Seller / Beneficiary

Advising Bank / Confirming Bank

Buyer / Applicant

Issuing Bank

2. Issuing bank sends the original credit to the advising bank

3. Credit advised to Seller (S)

4. S arrange shipment and presents doc to confirming bank for payment

5. Confirming bank pays S and sends doc to issuing bank for reimbursement.

6. Issuing bank reimburses negotiating bank and sends doc to B against payment

1. Buyer (B) opens credit

Credit & Security

Revocable – can be cancelled at any time by the issuing bank. Irrevocable – contrary instructions from applicant of credit cannot discharge undertaking to

pay.

(b) Confirmed and Unconfirmed Confirmed – another bank would add its own undertaking to pay the seller.

(c) Sight Credits and Acceptance Credits Sight credit – immediately paid by issuing or confirming bank on the presentation of the

appropriate documents. Acceptance credits – term bills payable only at maturity.

(d) Straight Credits and Negotiation Credits Straight credit – non-negotiable credit, seller may not sell draft to a 3rd party purchaser. Negotiable credit – open to subsequent parties who negotiate in good faith.

(e) Transferable credits Seller is permitted by the issuing bank to transfer the whole or part of the benefit of the

credit to a 3rd party. Involves the return of the original letter of credit to the issuing bank who then issues a new

letter of credit to the 3rd party for the whole or part of the amount of the original credit.

(f) Back-to-back credits The bank in expectation of presentation of documents may issue a new letter of credit to the

manufacturers of the goods. Bank will take possession of the LC and after discharging its own obligation as issuing

bank, collects payment from the original issuing bank. Will remit the balance to the seller after deduction of its own expenses for providing this

service.

(g) Revolving Credits Allows seller to present documents as often as he wishes during a certain period and in the

amounts desired so long as the overall credit limit is not exceeded.

5. Specific forms of DLCs

(a) Performance Bonds Given by banks in construction contracts where the employer and contractor are in different

countries.

(b) Tender Bonds Bond to the effect that if the principal’s tender is successful, he will sign the contract, failing

which the amount of bond will become payable to compensate the beneficiary for his trouble.

(c) Repayment guarantee Enables the beneficiary, in the event of the principal’s default in performance to recover

advances or other payments made by him.

(d) Standby Letter of Credit Issued by a banker by way of security and envisages payment by the bank only if the

principal defaults in his obligations.

6. Trust Receipts Main facility for effecting DLCs. Provide for the release by the bank of the BOL to the debtor as trustee for the bank and

authorises him to sell the documents or goods on behalf of the Bank. Debtor undertakes to hold the goods and their proceeds in trust for the Bank and to remit the

proceeds to the bank. Bank is protected from insolvency but not from dishonesty.

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7. Doctrine of strict compliance – IMPORTANT! Since banks only deal with documents, the documents must conform to what the LC requires. The documents must strictly comply to the letter, as specified. “Pte” was an important word – cannot be missing. Negotiating bank would be liable.

Indian Overseas Bank v United Coconut Oil Mils Inc [1993] 1 SLR 141

Held (Yong Pung How CJ): The requirement that documents tendered under a letter of credit must conform strictly to the terms of

the credit does not require literal compliance. Very minor and inconsequential discrepancies between the documents and the terms of the credit may

be disregarded. The documents would conform so long as, property read and understood, they do not contain any

discrepancy which calls for an inquiry or investigation or invites litigation.

United Bank v Banque Nationale De Paris [1992] 2 SLR 64

Facts: Confirming bank accept documents that were made to Pan Associated Pte Ltd when the name of the

beneficiary was Pan Associated Ltd. Whether issuing bank had right to reject document. Held (Chao Hick Tin J) – he took a strict view: In letters of credit transactions, the parties are only concerned with documents. The confirming bank

should have rejected the documents tendered. Whether a tender is good or bad cannot depend on whether the banker is aware that in law you cannot

have a company ‘ABC Pte Ltd’ and another company ‘ABC Ltd’. The df bank is entitled to reject the documents but if it accepts them, it does so at its own risk.

Issuing bank thus has a right to reject document even though confirming bank had already paid the seller.

Strict compliance necessary, the discrepancy was not inconsequential.

PT Adaro Indonesia v Rabobank [2002] 3 SLR 260

Held (Tay Yong Kwang JC): Where there are valid discrepancies in the documents, the df will be estopped from relying on the

discrepancies if they had accepted all discrepancies and had communicated such acceptance. The plf would be entitled to rely on the df’s unequivocal position when they had not taken any steps to

rectify the documents.

City Hardware v Kent Ridge Electronics Pte Ltd [2005] 1 SLR 733. This is a decision by VK Rajah. This is the most up to date case on the new line of argument that

certain commercial transactions where money has been passed may amount to a money lending transaction.

In this case, the Goh, the MD of DF, proposed to PF further transactions with a local supplier, Aloh. Goh solely determined the goods to be purchased and their prices, and arranged for the invoices to be forwarded to the plaintiff. The plaintiff would then instruct its bank to make payment directly to Aloh. Goh would directly arrange for delivery of the goods from Aloh to the defendant. However, unlike previous arrangements, where all the suppliers introduced to the plaintiff by the defendant had been independent entities, Aloh was in reality another front by GBC.

The plaintiff would invoice the defendant for the goods inclusive of the mark-up that had been agreed to prior to each transaction. The defendant would sign the plaintiff’s invoices to confirm that it had received the goods in good order and condition and that the price of the goods, inclusive of the mark-up, was acceptable. The defendant paid for all the transactions except for those that formed the subject matter of the plaintiff’s claim against the defendant.

DF contended that this was a moneylending transaction in contravention of the provisions in the Moneylending Act.

Held:

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It would be wholly inappropriate to apply the MLA to commercial transactions between experienced business persons or entities, which do not prima facie have the characteristics of moneylending. The position could be quite different if the parties had wilfully attempted to structure a transaction so as to evade the application of the MLA

The judge affirmed Litchfield v Dreyfus [1906] 1 KB 584 on the English MLA: The Act was intended to apply only to persons who are really carrying on the business of money-

lending as a business, not to persons who lend money as an incident of another business or to a few old friends by way of friendship.

The Singapore Court of Appeal in Lorrain Esme Osman v Elders Finance Asia Ltd [1992] 1 SLR 369 at 378, [39] endorsed these observations and stated “what he [Farwell J] said in respect of the English Money-lenders Act 1900 is equally true of the [MLA]”.

The MLA prohibits the business of moneylending and not the act of moneylending: Subramaniam Dhanapakiam v Ghaanthimathi [1991] SLR 432.

It is undisputed that the defendant could not obtain banking facilities, whereas the plaintiff, given its standing, had substantial banking facilities. The plaintiff facilitated the purchase of the goods by the defendant by making arrangements with its bank to pay directly for the purchase of the goods. It charged a fee for making these arrangements and absorbed the risk of a default by the defendant. These transactions could be viewed as a “sale of credit facilities” by the defendant.

The arrangements can also be considered, without any gloss to the facts, as commission transactions for banking facilities which the defendant could not directly obtain on its own standing.

The mark-up or the profit element was fixed without any provision for accruing interest in the event of default.

Each of the transactions between the plaintiff and GBC and/or the defendant was an arms-length transaction between experienced commercial persons.

The mark-up by the plaintiff was negotiated on a transactional basis. The mark-up appeared to follow a standard formula and did not exceed nine per cent of the actual purchase price paid by the plaintiff. This mark-up was neither exorbitant nor unusual.

This judgment is very valuable in that it says where you enter into a normal transaction where money is advanced, parties surely do not intend it to be a money lending transaction.

The crux of the case was the observation made: The viability of small businesses often depended on their ability to raise capital, to improve their liquidity and/or to obtain credit. They were often unable to obtain credit facilities from established financial institutions as a result of their lack of standing, unpredictable cash flow and higher risk profile. It was clearly not the objective or intention of the MLA to prevent or impede legitimate businesses from entering into legitimate arrangements for improving cash flow; nor was it the objective of the MLA to constrict the flow of financial liquidity in commerce among smaller businesses. In many cases L/C are kept open as you give commission in allowing its transferability.

OCBC Ltd v Infocommcentre Pte Ltd [2005] 4 SLR 30VK Rajah J, in discussing overdraft facilities, said that an overdraft as a credit facility is inherently defective. An overdraft can be called back on demand, though it is not done so in practice. See definition of fixed term overdraft, term loans etc.

Pertamina Energy Trading Ltd v Credit Suisse [2006] 4 SLR 273 (CA)Director forged some documents, allowing the company to borrow money. He took away 8 million from Mr Rasif. One of the issues is the banks terms and conditions which few people read. Held: For corporate clients, a bank’s terms and conditions are binding. The conclusive evidence clause was considered binding. What is the impact of UCTA? And this case was confined to corporate clients, so what is the effect on non-corporate clients?

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Legal effect of registration of a charge: it is conclusive that there was a certificate given but not conclusive as to the content.

Donald McArthy Trading Pte Ltd v Pankaj [2007] 2 SLR 321Held: Where you use another’s credit facilities and you pay a commission does NOT amount to a moneylending transaction. It is legal and good for business, because smaller companies with no LC facilities can use other companies for such facilities

MAS Consultation Paper for Nomination of Beneficiaries (Life Policies) (Proposed Repeal of s 73 CLPA) S 73 is going to be abolished

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11. Credit & Security

Documents

Transcript of 11. Credit & Security