In the Singapore Court of Appeal decision in Malayan Banking Bhd v Bakri Navigation Company & Anor  SGCA 41, the Court of Appeal upheld the High Court’s decision to dismiss the Appellant’s claims for, amongst others, the enforcement of security under a floating charge and the tort of conspiracy. Floating charges are a common form of security granted by borrowers over a pool of assets because this gives the borrower the flexibility to deal with their assets in their ordinary course of business. This decision provides important clarity on the nature of a lender’s security under a floating charge before and after crystallisation, as well as the circumstances under which a floating charge crystallises.
Oon & Bazul Managing Partner Bazul Ashhab, Senior Associate Nora Jessica Chan and Associate Wesley Aw successfully represented the Respondents, entities under the Bakri Group, a Saudi Arabian conglomerate in the energy and marine sectors. The successful dismissal of the appeal follows the team’s earlier success in the High Court which was reported in Malayan Banking Bhd v ASL Shipyard Pte Ltd and other  SGHC 61.
The Appellant bank had extended substantial loans to a Malaysian shipbuilder, NGV Tech Sdn Bhd. to finance NGV’s construction of vessels. The loans were secured by, amongst others, a floating charge over all of NGV’s assets, including vessels under construction by NGV. NGV and the Respondents had entered into a contract for the construction of a new-build vessel. Payment for the vessel upon delivery was secured by way of letter of credit opened by the Respondents. When NGV was unable to complete the vessel in time, the Respondents agreed to fund the completion of the vessel in exchange for an immediate transfer of title to the vessel. Subsequently, NGV defaulted on its loans from the Appellant, and was wound up.
Unable to recover its debts from NGV, the Appellant bank commenced proceedings against the Respondents (and against other buyers of NGV’s vessels in various proceedings), to enforce its security interests against the Respondent’s vessel. The Appellant bank also sought an alternative claim for damages for the tort of conspiracy.
Dismissing the Appellant bank’s appeal against the High Court’s decision, the Court of Appeal held that:
- The threshold for crystallisation of a floating charge as a matter of law is a high one. Crystallisation of a floating charge by operation of law occurs when the borrower ceases trading as a going concern. This happens either when the borrower is wound up or when the borrower has effectively stopped trading, for example by disposing of its whole undertaking.
- Unless expressly provided for, transactions which are fraudulent or outside the ordinary course of a borrower’s business or in breach of the terms of the floating charge do not automatically crystallise a floating charge by any operation of law. The chargee (lender) cannot assert any proprietary or possessory right to any specific asset, and must instead seek recourse through the rules of priority.
- The applicable two step test of whether a transaction falls within the ordinary course of business is based on (1) an objective assessment by an observer with knowledge of the company and (2) parties’ intention based on the proper interpretation of the document creating the floating charge. Merely because a transaction was “extraordinary” did not place the transaction outside the ordinary course of a company’s business
- On the facts, although the subsequent agreement to transfer title in the vessel from NGV to the Respondents was not NGV’s usual way of handling its business, it was for the purpose of the sale of the vessel, and therefore, within NGV’s ordinary course of business. Further, the Court agreed with the High Court that the Respondents were simply protecting their own commercial interests against NGV’s default. Accordingly, the Appellant bank’s claim in conspiracy also failed.
The reported judgement can be read here.