27 April 2018
Pars Ram Brothers (Pte) Ltd (in creditors’ voluntary liquidation) v Australian & New Zealand Banking Group Limited & Ors  SGHC 60
The Singapore High Court decision in Pars Ram Brothers (Pte) Ltd (in creditors’ voluntary liquidation) v Australian & New Zealand Banking Group Limited & Ors is a sequel to the previous decision in Pars Ram Brothers (Pte) Ltd (in creditors’ voluntary liquidation)  SGHC 38 (“2017 Decision”). In the 2017 Decision, Justice Steven Chong (as he then was) decided that the commingling of goods in which various creditors had perfected security interests did not extinguish the respective creditors’ security interests. Accordingly, the creditors who could assert a security interest in the underlying stock should be paid a proportion of the sale proceeds (based on proportions to be resolved separately).
Subsequently, as the secured creditors could not agree on the distribution method for several disputed categories of stock, the matter again went before the Singapore High Court. After considering the competing methods of distribution put forward by the respective creditors, the High Court determined that the “rolling charge” method should be applied.
This decision is notable as it is the first Singapore decision of its kind (and also amongst the Commonwealth jurisdictions), where the “rolling charge” method was applied. Prior to this decision, even though the courts in the United Kingdom have endorsed the “rolling charge” method as, in principle, the preferred distribution method, it appears that the “rolling charge” method has never in fact been applied in the United Kingdom.
Pars Ram Brothers (Pte) Ltd (“Company”) was a global player in the spice and commodity trade, primarily in pepper and cashew nuts. The Company collapsed with liabilities of approximately S$160 million and was placed into liquidation.
Prior to liquidation, the Company’s purchase of pepper stock was financed mostly through trade financing facilities granted by various banks. The trade financing facilities were secured by a pledge over the pepper stock in favour of the respective banks. Typically, the lending banks would disburse funds directly to the suppliers of the pepper stock. Thereafter, to enable the Company to sell the pepper stock to their end-customers, the bank would release the relevant shipping documents to the Company in exchange for a trust receipt from the Company in favour of the bank on terms that the Company held the financed stock or its sale proceeds on trust for the bank.
After the Company went into liquidation, the liquidators found that the Company was holding approximately 990,000 kg of pepper stock in a rented warehouse. However, the respective banks were unable to identify the precise bags each had financed because the Company had failed to segregate the pepper stock financed by each bank. This gave rise to the issue in the 2017 Decision, wherein the Singapore High Court was asked to determine whether: (a) the gross sale proceeds of some 12 categories of pepper stock should be held for the benefit of the general pool of the Company’s creditors; or (b) the gross sale proceeds should be paid to the lender banks who could assert a security interest in the pepper stock which they financed. In the 2017 Decision, Justice Steven Chong ruled that the proceeds of sale should be paid to creditors who could assert a security interest in the commingled pepper stock and that the failure by the Company to segregate the stock did not extinguish the respective banks’ security interests.
The sale proceeds for eight categories of stock were distributed to the creditors in accordance with the 2017 Decision. However, for four disputed categories of the commingled stock, the creditors could not agree on the distribution method. The value of the stock in dispute was approximately S$4.6 million. The liquidators therefore applied to the Singapore High Court for directions on the appropriate method of distribution when assets commingled into a mixed bulk were insufficient to satisfy all claims made in respect of the said assets by claimants (none of whom was a wrongdoer towards another) who had a security interest in the mixed bulk.
The court laid down important guiding principles in respect of the three main distribution methods, as follows:
- “First in, first out” method (also known as the rule from Clayton’s Case): Where sums are mixed in a bank account as a result of a series of deposits, the first sum to have been deposited in the account is also treated as the first to have been withdrawn out of the account. The court commented that the scope of this rule was limited and could be displaced by a slight counterweight. It should not be applied if such an application would be impracticable or unjust and there was a preferable alternative, or if the application would be contrary to the intention of the claimants.
- “Pari passu” method: This refers to the pari passu sharing of the total pool of assets according to what each of the claimants is owed, irrespective of the dates on which the claimants made their respective investment or contribution. The court noted that the “pari passu” method might occasion unfairness to the most recent contributors (as they would have to share in the earlier losses/withdrawals out of the mixed bulk).
- “Rolling charge” method: This also refers to the pari passu sharing according to the contributor’s rateable interest in the mixed fund, save that the rateable interest is recalculated at every instance of withdrawal in contrast to the “pari passu” method which only considers the division of assets on a pari passu basis at the point of distribution. The court regarded the “rolling charge” method as the “preferred” method as it was fairer than the “pari passu” method and should therefore be applied, unless the “rolling charge” method was too complicated or costly to apply.
As an overarching consideration, the court would also take into account the parties’ intentions. Where there is an express agreement on the method of distribution, this will be given effect to unless it is unworkable or impracticable. In the absence of such agreement, the court will have regard to the presumed intentions of the parties.
In this case, the court took the view that just because the creditors were victims of a “common misfortune” did not ipso facto mean that their presumed intentions were to deal with the commingled assets on a pari passu basis. On the contrary, the court noted that the trust receipts issued in favour of the banks expressly provided that the Company would hold or store the goods in a manner capable of separate identification. The terms of the trust receipt therefore showed that the creditors did not intend to weather the “common misfortune” on a pari passu basis.
Instead, the court was of the view that the “rolling charge” method was the fairer and more equitable method and could also be applied practicably. In this regard, the court had regard to the warehouse ledgers which set out details of the date of transfer, description of stock, quantity of stock transferred, balance stock and the identity of the financing bank. The warehouseman had also deposed affidavits confirming the veracity of the entries in the warehouse ledgers.
Whilst there were some purported evidentiary uncertainties in the warehouse ledgers (raised by the creditors in favour of the “pari passu” approach), the court was of the view the minor inaccuracies did not make the application of the “rolling charge” method impracticable. The court therefore directed that the “rolling charge” method was to be applied to distribute the sale proceeds in respect of
all four disputed categories of pepper stock.
This decision provides much-needed guidance in an important area of law. As mentioned above, this is the first decision in Singapore (and in the Commonwealth) where the “rolling charge” method was applied to distribute commingled assets.
While a bank would be advised to appoint a warehouse or collateral manager to ensure that the financed stock is segregated from stock financed by other banks, as trust receipt financing is usually a form of short-term financing, the bank may have to rely on the borrower to ensure the financed stock is properly segregated. In such a scenario, banks may wish to consider taking the following precautionary steps to manage their exposure in the event the financed stock is commingled with stock financed by other banks:
- Given the importance that the court has placed on the parties’ intentions, banks should ensure the trust receipts executed in their favour impose an obligation on the borrower company to segregate the goods financed by one bank from those financed by another bank. Banks may also wish to consider requiring that the trust receipts expressly stipulate the method of distribution of the financed goods in the event of the liquidation of the borrower company.
- This case also demonstrates the importance of proper record-keeping. It isin the interest of banks to ensure that the borrower maintains proper records of the movement and status of the financed goods. As the “rolling charge” method of distribution will only be applied where it is practicable to do so, the court may decline to apply the “rolling charge” method if the borrower’s records of the stock movements are not reliable. In such a scenario, the court may apply a “rough and ready” approach (i.e. the “pari passu” method), which is a less precise method of distribution and which is prejudicial to creditors who contributed to the mixed bulk later than other creditors.
Allen & Gledhill LLP Partners Edwin Tong, SC and Loong Tse Chuan represented the secured creditor who successfully argued for the “rolling charge” method to be applied.