Topic 7 [Slide 6] Seah Eng Lim v P & O Banking Corporation Ltd (1933) Issue Seah Eng Lim borrowed money from a broker by way of a forward contract, and this is how he did it: - Seah purportedly sold certain shares to the brokers at a specified price - He simultaneously agreed to re-purchase the same shares from the brokers at a higher price, delivery to be made three months later. - The price at which the shares were brought and sold bore no relation to the prevailing market price. The brokers deposited the shares with P&O Bank as security for advances. Seah subsequently demanded the return of his shares on payment of the sum contracted, when the shares was being worth more than what Seah had borrowed from the brokers. Reasoning The court held that the real intention of the parties was to deposit the shares with the brokers as security for repayment of the loan made to the Seah, without the intention that the brokers should sell, pledge or otherwise deal with them. Moreover, the price at which the shares were bought and sold bore no relation to the prevailing market price. Hence the court held that the forward contract did not amount to an outright sale to the brokers. [Slide 7] Thai Chee Ken v Banque Paribas (1993) Issue Pan-EI wanted to borrow money from Banque Paribas to pay for shares in Orchard Hotel (Singapore) Pte Ltd. Unfortunately Pan-EI was not able to give a pledge, as it was prohibited from doing this by a negative pledge it had given to other creditor banks. To solve the problem, the transaction was structured differently, in the form of a sale and buyback. The bank would purchase the shares from Pan-El on 31/8/1985 Pan-El simultaneously would agree to repurchase the shares from the bank at a higher price on or before 31/12/1985. The sale and purchase price bore no relation to the value of the shares. Pan-EI went into liquidation, and liquidator (Thai) challenged the bank`s rights to the Orchard Hotel shares. Reasoning The court pointed out first that it was not argued by Thai Chee Ken (the liquidator) that the documents were a sham or disguise designed to conceal the true agreements between the parties, ie the documents did not reflect the parties’ true intention of the legal relations that they intended to create between themselves. Secondly, the court held that as it was not argued by Thai Chee Ken that the documents were a sham, their proper characterization was a matter of construction of the documents. It held, following the English courts, that while the court is scrupulous to ensure that the policy of protecting creditors enunciated in section 131 was not evaded by the adoption of a legal shell that apparently and formally lied outside the statutory provisions, the court should not take a hostile attitude and presumed that evasion of the policy was intended. The justification for this
was that different legal forms could be used to achieve the same economic object or end and that some legal forms legitimately fell outside the statutory provisions. The court construed the documents and concluded that they constituted a genuine sale and buyback, even though there were elements in the documents that were at variance with the transactions being a sale and buyback. Firstly, the prices bore no relation to the value of the shares at the date of the two agreements but were based simply on the financing requirements. Secondly, there were some terms in the repurchase agreement which were not usually found in a contract for the sale of shares. [Slide 18-20] Re Spectrum Plus Ltd Reasoning The court cited from the case of Agnew v Commissioner of Inland Revenue: “While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payment from the debtor. Such a right cannot be enjoyed in specie; its value can only be exploited by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value. It is worthless as a security.” The court makes clear that while there are theoretically two assets (debts and proceeds), the debt is worthless as security without the proceeds, so in effect the two assets are one asset – the receipt of money due. Where there are distinct assets (Lord Millett gave the example in Brumark of land generating rental income, and which would also apply to other assets such as equipment and intellectual property rights which also generate income), then there can be distinct charges secured on the asset and on the income stream derived from the asset. The court held that since the chargor remained free to draw on the proceeds of the book debts in the ordinary course of business for its own benefit, the charge cannot be a fixed charge. Hence the charge over the entire book debts is a floating charge. The essential characteristic of a floating 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. In any case where the chargor is free to remove the charged assets from the security, the court said that the charge should in principle be categorised as a floating charge for the assets would have the circulating, ambulatory, character distinctive of a floating charge. The decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd which had determined that the charge over uncollected book debts was held to be fixed charge was wrong and overruled. Priorities – Floating Charge Kay Hian v Phua Ooi Yong Jon - In the case of Kay Hian v Phua Ooi Yong Jon, it has been held that the person asserting priority over a prior registered floating charge has the burden of proving that he had no notice of that charge and the particulars registered with ACRA. - Therefore, one can argue that in view of the nature of the form provided by ACRA that there is a specific section for “Restrictions/Prohibitions” to be stated for registration of charges, it is practically impossible for a person to prove no knowledge of a negative pledge clause if the prior floating charge had been properly registered with that form at ACRA.
