12 Credit and Security

1 question on this

I. MORTGAGE

Chattels Non-possessory mortgage of chattels must be registered under the Bills of Sale Act

Land Impt in sg as security Mortgagee sale – duty of mortgagee using bank or finance company to obtain best available market price,

mortgagee is not a trustee. Cuckmere brick case – locus classicus of this matter In sg, earlier cases – ng mui mui v Indian overseas bank 1986 MLJ 1

· Alleged tt Bank had not obtained best available price· No public auction, sale by private treaty and more shld have been obtained· Evaluation by both sides· Lost – ptinciple is tt mortgagee shld obtain best avialabe market prce – valuation by bank was

reaosanble. · Mortgagor succeeded because mortgagee himself interested in mortgage property· String of cases – mortgagee’s duty of sale· Fav exam qn because of this – quite a few no of cases on this pt

Ng Mui Mui v Indian Overseas Bank [1986] 1 MLJ 203Held (FA Chua J): The onus is on the mortgagor to prove on a balance of probabilities that the amount obtained by the

mortgagors was not the best price obtainable in the circumstances of this case and at the time in question. That there was no obligation on the part of the mortgagees to advertise the property before a sale by private

treaty.

Read – justice lai siu chiu – lee nyet yun 1997 1 SLR 517· Duty of mortgagee· Referred to cuckmere brick and ng mui mui· Held tt mortgagee liable to pay sth and played out sale principles· Need not be sale by auction all the time ie sale by private treaty is ok;

Lee Nyet Khiong v Lee Nyet Yun Janet [1997] 2 SLR 713Held (LP Thean J) Courts changed their position as 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.

Held that the mortgagees had failed to adequately advertise as the advertisement published gave a bare minimum description of the property. More description would have attracted a wider group of potential purchasers.

Besides the advertisement had only appeared once thus the number of tenders received did not accurately reflect the true market value of the property.

Justice selvam – bank of east asia 2001 2 SLR 193· Remarks mortgagee although has power of sale – s25 CLPA – mortgagee x have absol power of sale.

Cld be bona fide – mortgagee may have hidden agenda, vested interest in sale. May need to take into acct wishes of mortgagor. If timning not approp, mortgagee sale shld be postponed. Merely because prices falling x mean tt mortgagee to wait.

Emphasis is on mortgagee sale. · Relevant both to credit and security

See conveyancing notes for greater detail

General definition of mortgage: 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.

However, note that a mortgage of land now no longer takes the form of a transfer of ownership. It is now in the form of a charge by way of a legal mortgage, or demise for a term of years absolute.

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. Disposing/realising security of mortgage.

· Banks have to show that they are careful when they are carrying out a mortgagee sale. · Obligation to obtain the best available market price.

Kian Choon Investment v Societe Generale [1990] 2 MLJ 74

Principle: Change in position taken by courts as they are more willing to uphold a mortgagor’s rights. Facts: Upon mortgagors’ default in payment, the mortgagees took possession of the mortgaged property and took

steps to sell the property as mortgagees. Negotiated an agreement with the 2nd df and the terms included a grant to the bank to lease 4 floors of the

property and an option to repurchase 6 floors of the property. The mortgagors challenged the sale claiming that the 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): A mortgagor in exercising the power of sale had 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 the true market

value at the time of sale. As there was a conflict between the mortgagee’s interest to repurchase the part of the property at the lowest

price and his duty to sell the entire property at the best price available. The onus is on the mortgagees to justify their actions.

Since the bank had failed to take reasonable steps to obtain the best price for the property due to their interest in the repurchase of the property, their conduct at the time of the sale reflected a calculated indifference to the position of the mortgagor and could be said to be ‘reckless’ and to ‘sacrifice’ the mortgagor’s interest.

Sri Jaya (Sendirian) Berhad v RHB [2001] 1 SLR 486Principle: Mortgagee had to advertise adequately in order to be able to sell property at the true market value. Mortgagees can be found negligent if they had failed to put one offeror in competition with another. Facts: RHB when carrying out a mortgagee’s sale advertised merely by word of mouth through its local RHB

branches. It merely waited for tenders to come in instead of pro-actively seeking tenders. Had failed to follow up on a competing offer by a serious offeror and sold the property to HDPL for $6.5

mil who sold the same property for $14 mil 3 months later. Held: Although there was no requirement for mortgagees to advertise the property for sale, a mortgagee should

take reasonable steps to obtain the best price possible in the circumstances. More should have been done by RHB to publicise the sale of the property instead of taking a passive stance

by waiting to be approached with offers. Bank was also negligent in failing to follow-up with the alterative offer.

Bank of East Asia v Tan Chin Mong Holdings [2001] 2 SLR 193Principle: Selling at a failing market is not wrong as long as the mortgagees take reasonable care to obtain whatever is

the true market value of the mortgaged property.

Facts: Mortgagees stipulated that they were prepared to permit a sale by the mortgagors as long as the price was

not < $5 mil. Mortgagors proceeded with an action asserting that the mortgagees had breached their duty by insisting on a

sale price of at least $5mil. Held: Mortgagee’s duty in exercising its power of sale is to behave as a reasonable man would in the realisation of

his own property so that the mortgagor may receive credit for the fair value of the property sold. The mortgagee must act in good faith and take reasonable care to obtain whatever is the true market value

of the mortgaged property at the moment he chooses to sell it. The mortgagee is not obliged to do anything for the benefit of a borrower in relation to the recovery of the

debt or realisation of the security. It is the duty of the borrower to activate themselves and discharge their obligations and their failure to do so means bearing the risk of a falling market. The law does not impose a duty on the mortgagee to sell in a falling market. Selling in a falling market per se is not wrong.

The bank’s stipulation of a minimum price of $5 mil was in actual fact an indulgence to the df and not made in exercise of the mortgagee’s power of sale.

Roberto Building Material Pte Ltd V OCBC and another (No 2) [2003] 3 SLR 217. Facts- Roberto had a credit facilities arrangement with OCBC to the tune of $31 mil. It was a term of the

arrangement that the facilities were repayable upon demand. Several forms of security were furnished. - First, Roberto mortgaged its property (‘mortgaged property’) to OCBC. Second, the second to fourth

appellants, who were directors of Roberto, gave a joint and several letter of guarantee to OCBC. Subsequently, Roberto granted a fixed and floating charge over its remaining assets to OCBC.

- Later OCBC gave notice to the appellants to repay the total outstanding sum within 14 days from the date of receipt of that notice, but was informed by Roberto’s auditors that there was a potential buyer for the mortgaged property and that it would revert with an offer.

- However, OCBC did not receive any indication of an offer within the week and it proceeded to appoint a receiver and manager over the assets secured under the debenture.

- Subsequently, the prospective buyer, Chelsfield, made an offer, subject to contract, to purchase the mortgaged property. The guarantors-directors requested OCBC to revoke the receiver’s appointment. OCBC refused the request as well as other proposals were also made by the directors to induce OCBC to revoke the appointment. The deals with Chelsfield and with other potential buyers eventually fell through and the mortgaged property remained unsold.

- The appellants instituted an action against OCBC and the receiver alleging that they had breached their duties as lender and as receiver and manager respectively. Further, the appellants also alleged that OCBC did not give Roberto sufficient time to repay the debt before appointing a receiver and manager and the appointment was therefore invalid.

CA, dismissing the appeal, held:- All that the law required of a lender before exercising his power of appointing a receiver and manager was

that he must act in good faith. In order to show bad faith, there must be dishonesty or improper motive on the lender’s part. Negligence per se was not bad faith since the lender had no general duty of care to consider or have regard to the interests of the debtor. In this case, there was no evidence that OCBC had acted in bad faith or had acted so recklessly as to amount to bad faith: at [23], [24] and [28]; Shamji v Johnson Matthey Bankers Ltd [1991] BCLC 36 and Medforth v Blake [2000] CH 86 followed.

- Where money was payable on demand, a debtor was only permitted to have such time as was necessary to enable him to implement the mechanics of payment and he was not entitled any time to raise the funds, either from banks or from other sources: at [34]; Cripps (Pharmaceuticals) v Wickenden [1973] WLR 944 followed.

- A receiver and manager had no duty to the mortgagor company to exercise the power of sale and he was entitled to determine the time for sale so long as he acted in good faith: at [51].

- In effecting a sale of mortgaged property, a receiver and manager must exercise reasonable care as to the manner in which the sale was carried out so as to obtain its true market value. Just because the sale price of the property was much lower than the book value per se did not suggest a lack of reasonable care. It was the process of effecting the sale which was critical: at [63]; Lee Nyet Khiong v Lee Nyet Yun Janet [1997] 2 SLR 713 followed.

Cripps (Pharmaceuticals) v Wickenden [1973] WLR 944 - Facts

- P Ltd was a wholly-owned subsidiary of C Ltd. Policy decisions affecting P Ltd were taken by the board of C Ltd of which all P Ltd's directors were members. The bank increased P’s and C’s overdraft facilities, and each company gave the bank an all-moneys debenture, under which the money was repayable on demand. Later C Ltd borrowed a sum from a firm and the firm took a second debenture

- Later, the branch of the bank which had extended the overdraft facilities to C and P Ltds decided a receiver must be appointed but this required the authority of the head office, so the branch manager sent a note to the head office recommending W as receiver.

- The assistant general manager upon receiving the note, approved and signed instruments of appointment for the recommended receiver. The next day, the receiver’s assistant collected the documents and proceeded to meet the receiver. On that same day, the chairman of C Ltd went to the branch bank and was handed written demands for payment. The chairman duly handed it to his company secretaries of P and C Ltd.

- Four hours later, the receiver arrived at the branch bank, inspected C and P Ltd’s accounts, and ordered the companies’ cheques (which had arrived for payment) returned and marked 'Receiver appointed -- Refer to Drawer'. They then proceeded to the companies' office and took possession of the premises. By W's order the business was closed.

- Subsequently C Ltd and P Ltd brought actions against W and the bank claiming that W's appointment as receiver was invalid in that it had been made before the bank had made demand for payment or, alternatively, before the companies had had an opportunity to comply with the demand.

Held - The actions would be dismissed for the following reasons --(i) An appointment under hand took effect when the document of appointment was handed to the receiver by a person having the necessary authority in circumstances from which it might fairly be said that he was appointing a receiver, and the receiver accepted the proffered appointment, although the acceptance might be tacit. The date of the instrument was irrelevant except as a piece of evidence if the actual date of handing over was not known(ii) On the evidence, the instruments of appointment had been given to W's assistant in London as agent for the bank to bring them to the district office where the matter was to be finalised. They did not come to be held by W until the district manager informed W and his assistant that the demands had been made and not satisfied and released the documents by asking W's assistant for them and handing them over to W. Accordingly the appointment of W as receiver had not been effected until that moment.

- (iii) The appointment could not be impugned on the ground that insufficient time had been allowed to the chairman after the demands had been made. Where money was repayable on demand, all a creditor had to do was to give the debtor time to get the money from some convenient place; he was not obliged to give the debtor time to negotiate a deal which might produce the money; in the circumstances it was clear that the companies had neither the money nor any convenient place to which they might go to get it. Accordingly the companies could not object on the ground that they were not given time to find the money or that the interval between 11 am when the demand was made and midday or later when the receiver was appointed was too short (iv) Furthermore it was not open to P Ltd to object to the appointment on the ground that the chairman of C Ltd was not a director of P Ltd since it was clear that he was held out as authorised to act for both companies. In any event, any defect would have been remedied when S handed the demand to the company secretary about midday, for in the absence of certainty about the sequence of events it was to be presumed that that event had taken place before W had been received at the district office of the bank.

Silven Properties Ltd V Royal Bank of Scotland [2004] 1 WLR 997.- Facts - The appellant mortgagors secured their indebtedness to a bank by mortgaging various properties to it. After

demanding repayment, the bank appointed the respondents, pursuant to the mortgages, as receivers of the mortgaged properties. The mortgages provided that the receivers were to be agents of the mortgagors.

- The receivers investigated the possibility of adding value to some of the mortgaged properties by obtaining planning permission, but eventually decided not to proceed with those applications. Instead, they decided to proceed immediately with sales of the mortgaged properties as they were. The properties were duly sold.

- In subsequent proceedings against the receivers for allegedly selling the properties at an undervalue, the mortgagors alleged, inter alia, that, in order to obtain the best price obtainable, the receivers had been under a duty before selling to pursue the planning applications, and to defer a sale until those goals had been achieved. That contention was rejected by the judge who dismissed all of the mortgagors' claims. The mortgagors appealed.

- Held –

1. The primary duty of a receiver was to bring about a situation where the secured debt was repaid. Thus the receiver had to be entitled as a matter of principle to sell the property in the condition in which it was in the same way as a mortgagee could, and in particular without awaiting or effecting any increase in value or improvement in the property.

2. Duties in respect of the exercise of the power of sale by mortgagees and receivers were the same: (i) receivers were not obliged before sale to spend money on repairs, (ii) make the property more attractive before marketing it or (iii) work an estate by refurbishing it. The receivers, by accepting office as receivers of the mortgagors' properties, assumed a fiduciary duty of care to the bank, the mortgagors and all (if any) others interested in the equity of redemption.

3. The receivers' appointment as agents of the mortgagors did not affect the scope or content of the fiduciary duty. The scope or content of the duty had to depend on, and reflect, the special nature of the relationship between the bank, the mortgagors 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 that regard to the bank.

4. Those circumstances precluded the assumption by, or imposition on, the receivers of the obligation to take the pre-marketing steps for which the mortgagors contended. Further, no such obligation could arise in their case. 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.

II. LIFE INSURANCE

Regarded as Good security by banks esp when no tangible property to give – best thing then to give life Done by way of assignment – mortgagor life policy As good as cash Surrender value after 3 yrs Policy tt has travelled a few yrs is worth sth If policy holder dies, bank gets huge sum tt covers all loans taken Policy – s73 policies Life policies may be given as security to bank and can be used to cover outstanding loans. Customers can assign policies to bank as beneficiaries. (Assignment by way of mortgage). Banks as

beneficiaries will automatically get the money. Caveat: note S73 CLPA which automatically creates a trust in favour of wife and children of the deceased.

– trust policy. See decision, such policies are part of matrimonial assets however. Apart fr this, bank to be careful in accepting such policies as security. Law today - s73 – if buy life policy on ur life for ur wife and children, then trust in their favour.

Immed trust? Contingent trust? If advise banks, know tt these are subj to a trust or may be subj to a trust and therefore as security is of low

value Such policies shld not be accepted as security (s73 policies) S23 civil law act Malaysia – identical section.

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.

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. (b) Note divorce situations – where the wife can claim even after divorce due to the automatic creation of trust

in the wife’s favour.

In the Matter of Lim Yeow Seng [1995] 3 SLR 363 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.

III. LIEN, PLEDGE, HYPOTHECATION, CHARGE AND BILL OF SALE

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:

- Solicitor’s lien.- When clients don’t pay, then may ask for their documents – you will ask for fees. Lien over their docs in

your hand.- Repairer’s lien exercised by workshops- Banker;s lien – banks have lien when loans or advances are unpaid – lien over goods and property in their

hands belonging to the customer- Banker’s lien is a pledge. – exception- Pledge – can sell property unlike lien – lien is mereluy possessory right. Once possession disappears, lien

disappears. So banker’s lien amts to pledge and they are privileged

(a) Common Law 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. A particular lien may be exercised, i.e. only over the goods to which the payment arises, a possessory

lien such as a repairer’s lien or a warehouse-men’s lien. Once the goods pass out of the person’s hands, the possessory lien is relinquished.

Another lien is the general lien, i.e. exercised over all the goods in the liencee’s possession, e.g. solicitor’s, banker’s, factor’s or stock broker’s lien.

(b) Equitable Lien – Not dependent on possession (unlike common law) 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. As it rests on the principle of equity, an equitable lien cannot be enforced against a bona fide purchaser

for value of property without notice. The list of equitable liens is not closed

(c) Maritime Lien –

Arises as soon as payment is due to a claimant for loss and damage caused by a ship or arising under a contract, e.g. seamen’s wages

Security over its ship in respect of outstanding liabilities plus costs incurred in its enforcement. From the moment of its attachment, it binds all subsequent owners of the ship whether or not they have

notice of the lien and whether or not they are purchasers for value of the ship See Admiralty Notes

(d) Statutory Lien – Creation via statute instead of operation via common law or equity. Sale of goods – unpaid seller has lien on goods.

(e) Contractual lien Re bonds limited 1921 FMSLR Vol 2 Letter of lien – in it said tt we hreby pledge our goods Real comp when it borrows money – cld be floating charge

- Bencher: company borrowing- Letter of lien – contents there was pledge but court held tt it was flating charge- Danger of floating charge of course is tt if not registered on CA then void- Therefore once court held tt there was floating charge and this doc not registered,

the bank cld not sue- Must register under law and ALSO CA- Be careful!!!

2. Pledge

Pawnshop – a pledge shop. Pawn and pledge are the same Basis of any pledge is possession. Right of sale – afte 6 mths if pawn not redeemed, then can sell it C.f. lien see above

Essence of pledge: have to leave goods in possession of the pledgee. I.E. the creditor takes possession of an asset(s) belonging to the debtor to secure payment of the debt. Essentially similar to the working of a pawnshop.

Possession is essential. However, constructive possession has been recognised as sufficient, e.g. where a third party holding goods for the debtor intimates to the creditor that the goods will be held to his order.

A pledge is a bailment, i.e. a delivery of possession of chattels or documents of title as security for a debt. The pledgee has right to retain the property until it is discharged coupled with a power of sale on default of

payment. Pledge involve right of sale but lien does not involve right of sale except in banking liens. (Banking lien is

an implied pledge).

Chase Manhatten v Wong Tui San [1993] 1 SLR 1

Principles: Floating charge and not pledge 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 could not have access to the safe without a representative of the company being however the

company could remove share certificates without consulting the bank. Under the terms of the share memorandum, share certs removed in the course of trading in the day would be

replaced by other share certs of equivalent values unless the appropriate sum was deposited into the company’s bank account to reduce indebtedness.

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

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.

3. Letters of hypothecation Hypothecation is a form of equitable charge The chargor gives neither property nor possession of the goods to the chargee and hence the chargee’s claim

may be defeated by a bona fide purchaser for value without notice of a third party claim Like a pledge without possession; inferior form of security to the pledge 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. 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. Note also that although letters of hypothecation used in the ordinary course of business are not registrable

under the Bills of Sale Act, there is still doubt as to what kind of security it takes the form of. Hence if such a letter is given by a company, have it registered at the Companies Registry, or else under BOSA, for validity of charge.

Dresdner Bank v Ho Mun – Tuke Don & Anor [1993] 1 SLR 114Facts: Letters of hypothecation which contained a list of shares were given to various banks including the

appellant bank. Whether the LOH created a security of interest in favour of the appellants and the nature of the interest –

whether the LOH created a fixed or floating charge.

Held (LP Thean J): The LOHs clearly indicated an intention to create and did create a security interest although there was no

actually physical delivery of the shares listed in the LOHs. The freedom which the appellant bank gave to the liquidated company o deal with the shares in the LOHs

resulted in the creation of floating charges and not fixed charges. Floating charge was void against the appellant bank fro want of registration.

Well known case of Re city securities 1990 2 MLJ 257 - Chao hick tin held tt there was floating charge. Back to sq one – void for non registration. Re Lin securities

1988 2 MLJ 137 followd by CA tt also involved 18 banks. Lin securities involved 21 banks.- Landmark decisions for Singapore.

4. Charge/ debentures Fixed and floating Come under debentures most of the time In company lending, give debenture – sth like mortgage doc Much more sweeping than mortgage because comp gives to bank or banks all their property Fixed assets are given as a fixed charge Floating assets re woolcombers association – HL case – definition of floating charge – remaining assets of

comp not fixed eg stocks and trade – usu come in and out o This is main prob with floating charge

Basic law – fixed charges are usually fixed But nth can be absol I nlegal terms Fixed charge x nec mean fixed asets Depends on bank as well Cld be or cld not be immovable property Bk debts are valuable items – regarded as floating charge in 2005 –

Constit a floating charge because of eng case HL decision tt has superseded tt eng HC decision The bk debts tt can increase or decrease are floating charges In re spectrum plus 2005 WLR 3 pg 58 HL decision overruling sweet Gorman and another case Bk debts now regarded as floating charge and not as fixed charge otherwise reaoanbly simple Fixed charge are assets tt are fixed and floating charges are asets tt float – come in and out

Floating charges are NOT good secrity Can be dissipated – this is the inherent defect of a floating charge Light rein as opposed to rigid harness of a fixed charge

Romalpa case – romalpa clause Retention f title clause In tt case, floating charge, bank hlding debenture. Seller a dutch company sold aluminium foil to brit

company and there was a clause in same document – until all instalments have been paid, in law, we remain owner of the goods

When company went down and receiver went in and tried to seize aluminuium foil, sellers said cannot touch the foil, there was sale agreement and they retain prior title to debenture holder

Big fight In HC, held on facts and wording of clause tt seller had beter title than debenture holder becxuse of

ROT Some cases follow this case and some don’t

Impt – read clause carefully. Every word counts

RETENTION OF TITLES CLAUSES (ROMALPA CLAUSES) IN COMMERCIAL CONTRACTSWhat is Retention of Title? A Retention of Title Clause may be found in a well drafted contract for the supplyof goods. Such a provision allows a seller to delay passing title or ownership to the buyer until a specificcondition is fulfilled, usually the full payment for the goods, despite the goods being in possession of thebuyer.How does a supplier protect itself? Suppliers attempt to protect their position against secured creditors byproviding that title to the goods supplied is not to pass to the purchaser until full payment has been received. Ifa seller delivers goods to the buyer, and property passes to the buyer, but the seller subsequently learns thatthe buyer is insolvent, the seller cannot, unless the contract gives a right of repossession, reclaim the goodsback without the buyer's consent.Accordingly, if the purchaser has agreed that ownership or title is not to pass until payment is made in full,then proceeds will not belong to the purchaser. Therefore, any trustee in bankruptcy, receiver, administratoror liquidator would not have the right to seize or sell such goods since they do not belong to the purchaser.Effectiveness – In the past, a Romalpa Clause has proved to be ineffective in providing a remedy to creditorswhere such goods have been transformed, converted or used in a manufacturing process. Attempts to applythe Clause to the proceeds of such converted goods have generally been found by the Courts to constitute anunregistered charge and subsequently be void against a liquidator or administrator.However, in the case of Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liquidation) 2000, theRomalpa Clause provided for the following:"In the event that the Buyer uses the goods/product in some manufacturing orconstruction process of its own or some third party, then the Buyer shall hold such partof the proceeds of such manufacturing or construction process as relates to thegoods/products in trust for the Seller. Such parts shall be deemed to equal in dollarterms the amount owing by the Buyer to the Seller at the time of the receipt of suchproceeds."The Associated Alloys case failed on the basis that the creditor could not satisfactorily prove that the debtorhad in fact received any proceeds from the sale of the manufactured goods, which embodied the convertedgoods subject to the Romalpa Clause.However, the High Court majority were satisfied that a contractual trust had been created that did notconstitute an unregistered charge over the assets of the debtor. In the past there have been two very distinctclasses of creditors, those that are secured and those that are not. However, as a result of the AssociatedAlloys case there is now a third class of creditors, being the beneficiary of a contractual trust created by aRomalpa Clause.Registration – If the Retention of Title Clause can be properly characterised as a company charge requiringregistration under the Corporations Law it may be ineffective unless it is registered. The decision inAssociated Alloys is the first decision whereby the High Court considered Retention of Title claims. Here, theCourt held the Clause did not require registration of a charge and the charge therefore operated effectively toensure the seller obtained a priority in respect of certain goods, and money over and above that of anysecured creditor of the Purchaser.Drawback – If the goods have become mixed with the purchaser company’s goods, then the retention of titleclause will fail. Similarly, if the goods cannot be identified as belonging to the supplier, the retention of titleClause will not be effective.

What does it mean to you? As a supplier, having a Retention of Title Clause protects you in case yourcustomer becomes insolvent. It also stops your customer on-selling the goods you have supplied until youhave been paid in full. As the other party to a Contract with a Romalpa Clause, you should be aware that youcannot deal with the goods until the conditions of the Contract have been met and ownership of the goodspasses to you.Romalpa can be critical in a contract for the supply of goods. It is important that both parties in a transactionunderstand clearly their responsibilities and rights. Entering into a contract involves risk. It is stronglyrecommended business advisers including accountants and lawyers are involved in the process, to ensurerights and obligations are respectively protected and honoured.

Debenture is like mortgage document – get a copy and see the form Look out for what are the charges tt have been secured – floating charge or fixed Usu both There may only be 1 charge – airline travel agency with no fixed proerty for eg so entirely floating

charge Imptly in such cases, when deventure holder acts, he normally appts a receiver Receivers are NOT the same as liquidators Receiver is first stage whencomp goes down – he goes in to receive whatever is left It sucks the remaining blod of a dying company and liquidator then puts it into the coffin Receiver’s pri duty is to person who appts the receiver namely the lender usu the bank who holds the

deventure Liquidator’s duty is to ALL creditors. This ist e funda difference

o Preferential creditors etc but basic duties as above Receiver and manager –

RM – comp can be turned around Otherwise only receiver Cannot anyhow apt – unless goodwill inside debenture, cannot appt manager because he takes over

comp and runs the company which receiver is not enttled to 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 is 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. Charges stated in s131 CA are required to be registered, otherwise void for want of registration.

s131 CA

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.

(1A) In connection with the registration of a charge to which this section applies which is created by a company there shall be produced to the Registrar, upon the Registrar’s request and for the purposes of inspection, at no cost to the Registrar, the instrument (if any) by which the charge is created or evidenced or a certified true copy thereof.

(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.

(4) Where a charge created in Singapore affects property outside Singapore, the statement containing the prescribed particulars of the charge may be lodged for registration under and in accordance with subsection (1) notwithstanding that further proceedings may be necessary to make the charge valid or effectual according to the law of the place in which the property is situate.

(5) When a series of debentures containing or giving by reference to any other instrument any charge to the benefit of which the debenture holders of that series are entitled equally is created by a company, it shall be sufficient if there are lodged with the Registrar for registration within 30 days after the execution of the instrument containing the charge, or if there is no such instrument after the execution of the first debenture of the series, a statement containing the following particulars:

(a) the total amount secured by the whole series; (b) the dates of the resolutions authorising the issue of the series and the date of the covering instrument, if any, by which the security is created or defined; (c) a general description of the property charged; and (d) the names of the trustee, if any, for the debenture holders.

(6) For the purposes of subsection (5), where more than one issue is made of debentures in the series, there shall be lodged within 30 days after each issue particulars of the date and amount of each issue, but an omission to do so shall not affect the validity of the debentures issued.

(7) Where any commission, allowance or discount has been paid or made either directly or indirectly by a company to any person in consideration of his (whether absolutely or conditionally) subscribing or agreeing to subscribe or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any debentures the particulars required to be lodged under this section shall include particulars as to the amount or rate per cent of the commission, allowance or discount so paid or made, but omission to do so shall not affect the validity of the debentures issued.

(8) The deposit of any debentures as security for any debt of the company shall not for the purposes of subsection (7) be treated as the issue of the debentures at a discount.

(9) No charge or assignment to which this section applies (except a charge or assignment relating to land) need be filed or registered under any other written law.

(10) Where a charge requiring registration under this section is created before the lapse of 30 days after the creation of a prior unregistered charge, and comprises all or any part of the property comprised in the prior charge, and the subsequent charge is given as a security for the same debt as is secured by the prior charge, or any part of that debt, then to the extent to which the subsequent charge is a security for the same debt or part thereof, and so far as respects the property comprised in the prior charge, the subsequent charge shall not be operative or have any validity unless it is proved to the satisfaction of the Court that it was given in good faith for the purpose of correcting some material error in the prior charge or under other proper circumstances and not for the purposes of avoiding or evading the provisions of this Division.

Banks and bankingBank’s lien

OCBC Ltd v. Infocommcentre Pte Ltd [2005] 4 SLR 30 . (Overdrafts -

whether recallable on demand).- Legal position of an overdraft- Banking practice – docs for letters of offer or facility letters- Loans by way of overdraft – overdraft implies payable on demand- Basic law – once borrow money – have to pay back whether demanded or not- Generally repayable on a mth- But if agreement to contrary ie no dd for repayment then no need tp pay back on dd- But generally overdrafts are dangerous

- Facts- Pursuant to a letter of offer, Bank of Singapore (“BOS”) had granted the defendant a short term advance

facility (“the LOF”). The LOF stated that the purpose of the facility was to supplement the working capital requirements of the defendant and further provided that the facility was subject to BOS’s periodic reviews. These terms were repeated to similar effect in a short term advance facility agreement (“the STAFA”) between the parties

- The facility was secured by a mortgage (“the Mortgage”) of the sole asset of the defendant, a piece of vacant land (“the Property”), and a guarantee furnished by a director of the defendant (“Dr Ang”), who was in effect its alter ego.

- The STAFA was restructured by way of a further letter of offer (“the FLOF”) which provided that the facility granted to the defendant was “repayable on demand”. The defendant agreed to the implementation of the restructured facilities.

- Subsequently, the defendant defaulted on its contractual obligations to BOS. The defendant then proposed to repay BOS by developing the Property and employing the sale proceeds in discharge of its debt. The details of this arrangement were documented in a letter (“the Release Letter”).

- After acquiring BOS, the plaintiff granted the defendant several extensions of time to develop the Property but no progress was made. The plaintiff moved to terminate the defendant’s facilities. Eventually, various compromise arrangements were made between the plaintiff and the defendant. Consistent with the existing facility, the plaintiff was expressly conferred the discretion to review and/or terminate the facility as it saw fit. Again, the defendant persistently failed to fulfil its obligations.

- The plaintiff, through its solicitors, then terminated the facility arrangement and demanded repayment. The defendant was unable to comply with this demand. The plaintiff successfully obtained summary judgment against the defendant. The defendant appealed. It argued that: (a) it had been induced into entering into the compromise arrangements because of the plaintiff’s misrepresentation that it did not have a copy of the Release Letter; (b) the variation of terms effected by the compromise arrangements were contractually ineffective as there had been no fresh consideration; and (c) the facility was not recallable on demand prior to the development of the Property. The defendant also relied on the decision in Titford Property Co Ltd v Canon Street Acceptances Ltd (Chancery Division, 22 May 1975) (“Titford Property”) in support of its claim that the plaintiff was precluded from exercising its express rights until the purpose of the loan was fulfilled.

Held, dismissing the appeal:- (1)    To succeed in its contention of misrepresentation, the defendant had to demonstrate, inter alia, that

there had been an inducement arising out of a false representation made by another party. The defendant, however, was unable to show precisely what the purported misrepresentation was and how such a purported misrepresentation effectively induced it to enter into the various compromise arrangements. Dr Ang had willingly and unreservedly agreed with the plaintiff that the various compromise agreements would govern their relationship thereafter regardless of any pre-existing disputes (legitimate or otherwise) the parties had: at [31] to [33].

- (2)    The defendant’s documents in evidence established that the defendant itself had felt it was not viable to develop the Property. Thus, the defendant’s contention that the bank’s failure to locate or disclose the Release Letter in its possession amounted to misrepresentation simply did not stand up to scrutiny: at [34] and [37].

- (3)    Pursuant to the compromise arrangements, the plaintiff, inter alia, withdrew its various letters of demand and further exercised forbearance in relation to its rights. This by itself constituted sufficient consideration. In addition, the facility arrangement was reinstated and the defendant given additional time to complete construction at the Property. The defendant’s monthly interest payments were also reduced: at [44].

- (4)    The decision of Titford Property appeared to be one largely peculiar to its factual matrix. The decision itself did not lay down any wider principle of general application. In the present factual matrix, the facility was not expressly granted for a fixed term or indeed for any special or particular purpose: at [49] to [51].

- (5)    It was in no way inconsistent for a bank, or any other lender, to grant a facility which it and the borrower both envisaged would last for some time, but with the caveat that the lender retained the right to call for repayment at any time on demand. Further, a bank did not owe any duty of care to a borrower, or indeed any interested third party, when it exercised its discretionary right to withdraw overdraft facilities: at [52].

- (6)    An overdraft facility for a fixed period was a hybrid creature bearing characteristics of both a term and overdraft facility. In such a case a bank had to exercise prudence in unequivocally spelling out its contractual rights. An express term that an overdraft facility was repayable on demand would usually be given effect to although this was not invariably the position, particularly if the purported right was repugnant to an agreement the parties had reached on the express purpose and/or duration of the facility: at [54].

- (7)    The LOF, STAFA, FLOF and the compromise arrangements all contained practically identical clauses spelling out in no uncertain terms BOS’s and the plaintiff’s express right to recall the facility on demand. There was no representation by the plaintiff that it would not exercise its contractual discretionary right to recall, on demand, the facilities. The plaintiff repeatedly conveyed to the defendant its intention to exercise this right should the need arise. Dr Ang and the defendant not only knew this, they fully understood the true purport of the plaintiff’s right and accepted it at each and every material juncture: at [56].

- [Observation: Even if the compromise arrangements were impeached as a result of a failure of fresh consideration, the plaintiff nevertheless retained extensive and uncompromised rights in relation to the Property pursuant to the LOF, the FLOF and the Mortgage: at [45].

- It seemed plain that whether a facility was recallable on demand or not was in the final analysis simply an issue of interpretation. Substance took precedence over form. Labelling a term loan “an overdraft facility” would not alter the substance of that facility. In every case the court should be astute enough to probe the relevant factual matrix to ascertain the purpose of the loan and the lender’s rights that prevail within that matrix. Had the parties expressly or impliedly agreed to any term relating to the length and/or duration of the facility? Was an “on demand” recall of the facility inimical or contrary to the agreed purpose of that particular facility? Also, knowledge of the usage of a particular facility should not as a matter of course be conflated with an agreed purpose or an agreement to extend a facility for a particular period: at [55].]

Low Geok Khim v. Low Geok Bian [2006] 2 SLR 444. (Banking - jointaccounts - parent & child).Banking jt accounts- Jt account means nth, Doesn’t mean tt other acct holder is enitled to sth- Legally entitled to draw all the money but note law of constructive trust – banker is constructive trustee of

customer’s funds. Bank may be sued by husband if wife draws all out- Father dies, youngest son sole owner of acct. but other children asked bank to freeze assets and claimed all

of it since it still beloniged to father arguably- In that case unusual – judge held tt there was presumptn of advacenement in favour of the child, the other

acct holder. Ie no resulting trust in favour of tt person’s estate. Child got all the money

- Facts- The deceased (“LKT”) and his youngest son, the first defendant (“LGB”), jointly held a fixed deposit

account opened in 1990 (“the OCBC account”) and four savings accounts opened in 1995 (“the EasiSave accounts”) (collectively “the bank accounts”). All the moneys in the bank accounts came from LKT. The third to the 16th defendants (“the grandchildren”), who were beneficiaries of LKT's estate, claimed that the moneys in the bank accounts belonged to the estate. The administratrix of LKT’s estate sought a court ruling as to whether these moneys vested in LGB as the surviving account holder or in LKT's estate. In deciding this issue, the court had to determine: (a) whether LKT had intended to open the bank accounts in the sense of having, at the material times, both the mental capacity to decide to open these accounts as well as the knowledge that he was opening joint accounts; (b) if LKT had such knowledge, whether the presumption of advancement applied so that the moneys in the bank accounts were prima facie a gift to LGB; and (c) if the presumption applied, whether it was rebutted on the facts.

- Held, finding that the moneys in the joint accounts vested in the first defendant as the surviving account holder:

- (1)    The experts’ evidence as to whether LKT was suffering from any mental impairment when he opened the OCBC account in 1990 was equivocal. There was, however, independent evidence that as at April 1994, LKT still had sufficient mental capacity to testify in a civil suit. Moreover, as an experienced businessman, LKT would not have found it difficult to decide whether to open a fixed deposit bank account and whether to hold that account solely or jointly. LKT thus had the requisite mental capacity to open the OCBC account in 1990. He also knew then that he was opening a joint account with LGB: at [21], [22], [24] and [36].

- (2)    LKT likewise had the requisite capacity to open the EasiSave accounts in 1995. At that time, LKT had, at most, mild dementia and, according to the grandchildren’s own experts, was still capable of making simple decisions: at [37] and [38].

- (3)    Given the parent-child relationship between LKT and LGB, the presumption of advancement applied to the moneys which the former deposited in the bank accounts. The operation of this presumption was not limited to cases in which the child was in need of financial support: at [47].

- (4)    On the facts, the presumption of advancement was not rebutted. From LKT’s previous distribution of assets to his children in his lifetime, it could be inferred that LGB was his favourite surviving child at the time the OCBC account was opened. There was no indication that this position had changed since. Besides, the amount which LKT placed in the OCBC account then, when he was aged 84, was probably more than what he needed for himself at that stage of his life. On a balance of probabilities, LKT intended that on his death, LGB should have the moneys in the joint accounts: at [55], [59] to [61].

5. Bill of Sale- Governed by Bills of Sale Act (BOSA)- A form of non-possessory mortgage of chattels and does not include choses in action: s. 3(1), Bills of Sale

Act- Where certain charges are given by non-company entities, they must be registered under the Bills of Sale

Act, or be void as against the creditor: s4, BOSA

3. —(1) In this Act, unless there is something repugnant in the subject or context — "bill of sale" includes bills of sale, assignments, transfers, declarations of trust without transfer, inventories of goods with receipt thereto attached, or receipts for purchase moneys of goods, and other assurances of personal chattels, and also powers of attorney, authorities, or licences to take possession of personal chattels as security for any debt, and also any agreement, whether intended or not to be followed by the execution of any other instrument, by which a right in equity to any personal chattels, or to any charge or security thereon, shall be conferred, but does not include the following documents:

(a) assignments for the benefit of the creditors of the person making or giving the same; (b) antenuptial marriage settlements; (c) transfers or assignments of any ship or vessel or any share thereof; (d) transfers of goods in the ordinary course of business of any trade or calling; (e) bills of sale of goods in foreign parts or at sea; and (f) bills of lading, warehouse-keeper’s certificates, warrants or orders for the delivery of goods, or any other

documents used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by endorsement or by delivery, the possessor of such documents to transfer or receive goods thereby represented;

"bill of sale" also includes as regards any personal chattels which may be seized or taken thereunder every attornment, instrument or agreement whereby a power of distress is given or agreed to be given by any person to any other person by way of security for any debt or advance, and whereby any rent is reserved or made payable as a mode of providing for the payment of interest on such debt or advance or otherwise for the purpose of such security only, but does not include or extend to any mortgage of any estate or interest in any land, tenement or hereditament which the mortgagee being in possession demises to the mortgagor as his tenant at a fair and reasonable rent;

"bill of sale" also includes agreements for the hire of personal chattels entered into for the purpose of securing the repayment to the lessor of such chattels of money advanced by him to the hirer; and the hirer shall in every such case be deemed to be the grantor of the bill of sale and the lessor shall be deemed to be the grantee thereof; "factory or workshop" means any premises on which any manual labour is exercised by way of trade, or for purposes of gain in or incidental to the following purposes or any of them:

(a) the making of any article or part of an article; (b) the altering, repairing, ornamenting or finishing of any article; or (c) the adapting for sale of any article;

"personal chattels" means goods, furniture and other articles capable of complete transfer by delivery, and trade machinery as hereinafter defined, and, when separately assigned or charged, fixtures and growing crops; but does not include chattel interests in real estate nor fixtures, except trade machinery as hereinafter defined, when assigned together with a freehold or leasehold interest in any land or building to which they are affixed, nor

growing crops when assigned together with any interest in the land on which they grow, nor shares or interests in the stocks, funds or securities of any government or in the capital or property of incorporated or joint-stock companies nor choses in action;

"trade machinery" means the machinery used in or attached to any factory or workshop, exclusive of — (a) the fixed motive powers, such as the water-wheels and steam-engines, and the steam-boilers, donkey-engines, and other fixed appurtenances of the said motive powers; (b) the fixed power machinery such as the shafts, wheels, drums and their fixed appurtenances, which transmit the action of the motive powers to the other machinery, fixed and loose; and (c) the pipes for steam, gas and water in the factory or workshop.

(2) No fixtures or growing crops shall be deemed to be separately assigned or charged by reason only that they are assigned by separate words, or that power is given to sever them from the land or building to which they are affixed, or from the land on which they grow, without otherwise taking possession of or dealing with such land or building, or land, if by the same instrument any freehold or leasehold interest in the land or building to which such fixtures are affixed, or in the land on which such crops grow, is also conveyed to the same person or persons.

Bill of sale to be void under certain circumstances unless attested and registered.4. —(1) Every bill of sale shall be duly attested and shall be registered under this Act within 3 clear days after the execution thereof, and shall truly set out the consideration for which it was given, otherwise the following consequences shall ensue:

(a) in the case of a bill of sale made or given by way of security for the payment of money by the grantor thereof, such bill of sale shall be void in respect of the personal chattels comprised therein; and

(b) in the case of any other bill of sale it shall, as against all trustees or assignees of the estate of the person whose chattels or any of them are comprised in such bill of sale under the law of bankruptcy or liquidation or under any assignment for the benefit of the creditors of such person, and also as against all sheriff’s officers and other persons seizing any chattels comprised in that bill of sale in the execution of any process of any court authorising the seizure of the chattels of the person by whom or of whose chattels that bill has been made, and also as against every person on whose behalf such process shall have been issued, be deemed fraudulent and void so far as regards the property in or right to the possession of any chattels comprised in that bill of sale which at or after the time of filing the petition for bankruptcy or liquidation or of the execution of such assignment or of executing such process, as the case may be, and after the expiration of such 3 days are in the possession or apparent possession of the person making that bill of sale or of any person against whom the process has issued under or in the execution of which that bill has been made or given, as the case may be.

(2) Personal chattels shall be deemed to be in the apparent possession of the person making or giving a bill of sale so long as they remain or are in or upon any house, warehouse, shop, building, vessel, works, yard, land or other premises occupied by him, or are used and enjoyed by him in any place whatsoever, notwithstanding that formal possession thereof may have been taken or given by or to any other person.

(3) Personal chattels comprised in a valid bill of sale which is duly attested and registered under this Act shall not, so long as such bill of sale continues to be duly registered under this Act, be deemed to be in the possession, order or disposition of the grantor of the bill of sale within the meaning of the law of bankruptcy.

(4) Subsection (3) shall not apply to personal chattels in the possession, order or disposition of the grantor in his trade or business.

- E.g. charge over book debts of sole proprietorship, charge over chattels, etc.- A Bill of Sale is a document which is given where the legal property in goods passes to the person who

lends money on them but possession does not pass: Mills v Charlesworth [1890] 25 QB 421 C.A., per Lord Esher, MR

6. Differences between the various types of security

6.1 Distinction between Pledge and Lien

Pledge Lien

Pledgee acquires a special interest in property pledged, i.e. right to sale (upon default of payment)

Only right to detain subject matterof lien until he is paid. No right of sale.

May be transferred to a 3rd party. May not be assigned. [M’Combie v Davies (1805) ]

6.2 Differences between Pledge and Letters of Hypothecation

Pledge Letters of Hypothecation

Possession of security. No possession of property or goods – merely given general charge over goods or documents of title of the goods without possession of them. Can even be given before the goods or documents of title are in existence.

6.3 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/essential.

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

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

6.4 Differences between Pledge and Charges

Pledge Charge

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

6.5 Distinction between Pledge and Bill of Sale

Pledge Bill of Sale

Requires delivery of possession of the chattels to be given to the pledgee

A form of non-possessory mortgage of chattels

The subject matter of a pledge can include a chose in action represented by indispensable documents which may be physically transferred.

Does not include choses in action: s. 3(1), Bills of Sale Act

IV. LETTER OF GUARANTEE

Don’t anyhow sign Personal form of security, no proprietary interest is given. Third party promises the creditor that should the principal debtor default in payment of his debt, the third

party will personally pay it Creditor is merely given the benefit of another person obligation to pay. The guarantor’s obligation arises only upon default payment by the principal debtor, so obligation is

characterised as a “secondary” as opposed to “primary" one Banks are stric t- if principal debtor x pay, guarantor must pay Some banks rather not take this iof other security Guarantees are NOT security Security is the word – I will pay if he doenst pay – this is it Separate and independeng contract fr loan Certain defences not open to principal debtor But many cases on guarantees

OCBC Ltd v. Ang Thian Soo [2006] 4 SLR 156. (Liability of guarantor -whether there is a separate and independent defence).- -justice choo han teck – he pted out that although guarantor wld be liable if principal debtor x pay, guarantor

may have defences open to him that are not open to principal debtor- conditional leave given to defend on grds tt severl millions given as bankers guarantee- when guarantors don’t sign at same time - prob – those who sign tog can arg tt they thought all wld sign and be liable, but now only 4/5 liable – not

part of the contract- case in sg HC – held tt guarantee not binding on guarantor who signed because some missing- in subseq cases, court has held – depends on obj intention of parties as opposed to subj intention. Held tt

guarantee binding on all guarantors who sign. - C.f. 2005 case – all are liable. - Be careful when advising bank – much safer if all persons named sign at same time. - Challenge to guarantees on grds of undue influence

Facts- The Bank of Singapore Limited (“BOS”) granted Infocommcentre Pte Ltd (“the company”) a loan and the

defendant executed a guarantee in respect of the loan (“the guarantee”). The plaintiff, successor-in-title to BOS, sought summary judgment against the defendant for the sum owing under the guarantee. The plaintiff was granted summary judgment against the company in separate but related proceedings and the company’s appeals against that decision were unsuccessful. The judge in the proceedings against the company found the defendant, who was cross-examined in those proceedings, to be the alter ego of the company and an unreliable witness. The issue before the court hearing the plaintiff’s claim against the defendant was whether the defendant was entitled to leave to defend because he had a valid defence (one that had a likelihood of success) in light of the fact that the plaintiff had been granted summary judgment against the company and the findings of the court in that set of proceedings.

Held, granting conditional leave to defend:- A contract of guarantee was a separate and independent contract from the principal contract and thus there

was a possibility that the defendant might have defences that might not be available or applicable to the

company. However, the connection with the case between the plaintiff and the company could not be ignored: at [6].

- The court was entitled to consider the judge’s findings, in the proceedings between the plaintiff and the company, as regards the defendant as a witness when determining whether conditions ought to be imposed in granting the defendant leave to defend. The opinion of the judge was relevant and had to be given due respect until the defendant was heard at trial and it was decided that he had a case: at [7].

- If the overall circumstances in law and the available evidence indicated that the likelihood of the defence succeeding was very small, the court would require the defendant to pay the money claimed into court or provide a banker’s guarantee for the amount claimed as a condition to secure the opportunity of proving that his defence was a valid one after all. In addition to that, the court may also require him to provide security for costs: at [8].

- The defendant was granted leave to defend on the condition that he paid a substantial amount of the sum claimed by the plaintiff into court. In the light of the defendant’s pleaded impecuniousity, ordering that the full sum of $34m be paid would effectively prevent him from proceeding. At the same time, any amount less than $9m was inadequate and unfair to the plaintiff. The interests of both sides had to be balanced. Therefore, the defendant was to provide security for $9m as part of the sum claimed, as well as $500,000 as security for costs on an indemnity basis. The amount for security for costs would not be reduced unless it was ostensibly untenable since a lower sum was ordered for the security of the sum claimed: at [9].

1. 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.

2. Requirements Required to be evidenced by writing. Compare guarantees with Indemnities Indemnities are not required to be evidenced by writing.

3. Problems: UNDUE INFLUENCE Issue of undue influence: esp for married women and old people. Note undue influence is as per contract principles So there are two kinds of undue influence: where there is no special relationship between the parties; and

where there is one. In the former category, it is called “actual undue influence” In the latter category, special relationship includes that as between parents and husband and wife, and gives

rise to a presumption of undue influence See Royal Bank of Scotland v Etridge below

3.1 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. 1. indep advice 2. psychiatrist/doctor who can swear tt guarantor of sound mind and aware of what signing

United Overseas Bank Ltd v. Bebe Bte Mohammad [2005] SGHC 113; [2005] 3 SLR 501 (Mortgages - unsound mind of mortgagor).- Judge decided in favour of old lady on techcnial grd – brushed aside qn of whether 84 yr old cld be of sound

mind. Let it go on grd tt how is bank supposed to know tt person is of unsound mind.- They myust have reason to believe or KNOW tt party is of unsound mindFacts- The present action arose after a loan was granted by the plaintiff to the defendant’s adopted daughter and her

husband (“the borrowers”) on the security of a legal mortgage of the defendant’s property (“the Mortgage”).- Prior to the execution of the Mortgage, the plaintiff’s solicitors, through their conveyancing clerk, conducted

the relevant searches in respect of the property. Through the searches, they knew that a replacement certificate of title had been issued. However, the borrowers’ agent had only handed over to them the original

duplicate certificate of title (“original duplicate CT”) and this was used to register the Mortgage. As a result, the Mortgage was registered on the strength of an erroneous document.

- Upon the defendant’s default on the terms of the Mortgage, the plaintiff commenced this action to claim for, inter alia, delivery of vacant possession of the property. In defence, it was argued that the Mortgage was defeated as the defendant was of unsound mind at the time of the execution of the Mortgage and further, the plaintiff’s solicitors were guilty of wilful blindness which amounted to fraud. It was further submitted, in the alternative, that the land-register should be rectified on the ground that the registration was obtained through a mistake and further, that the defendant had an “in personam remedy” against the plaintiff by reason of the plaintiff’s and its agents’ conduct.

Held, dismissing the claim:- Although the defendant was of unsound mind at the time of the execution of the Mortgage, the plaintiff had

no knowledge of this. Thus, the apparent paramountcy of the estate of the Mortgage under s 46(1) of the Land Titles Act (Cap 157, 1994 Rev Ed) (“the LTA”) was not defeated by the legal disability exception in s 46(2)(d) of the LTA: at [26] to [30].

- Wilful blindness could in certain circumstances be “akin to fraud”. This was a situation of wilful blindness on the part of the plaintiff’s conveyancing clerk, if her conduct was not fraudulent in the first place. On either basis, the defendant was entitled to defeat the Mortgage registered pursuant to s 46(2) of the LTA on the ground of fraud: at [38].

- In accepting the original duplicate CT at the Registry of Titles, the staff concerned must have made a mistake. As such, the land-register should be rectified by cancelling the registration of the Mortgage under s 160(1)(b) of the LTA on the ground that it was obtained through a mistake: at [39].

- Further, the defendant had a personal right recognised by equity to set aside the transaction on the ground that the plaintiff’s agents had unlawfully used the cancelled original duplicate CT to get on the land-register as a mortgagee, to the defendant’s detriment, when they were not entitled to do so. The use of the cancelled original duplicate CT to register the Mortgage was unconscionable. The sanctity of the land-register under the LTA under the doctrine of indefeasibility should not be used to allow unconscionable behaviour: at [40], [42] and [43].

3.2 Spouses Be careful where wife is gurantor of husbands loans 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.

Barclays v O’Brien [1993] 3 WLR 786Held (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 3 rd

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 802Held (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 (No 2) [2001] 3 WLR 1021 (UKHL)(1) A transaction that is not readily explicable by the relationship of the parties remains one of the two elements

necessary to give rise to a rebuttable evidential presumption of undue influence, shifting the evidential burden of proof from the party who is alleging undue influence to the party who is denying it.

(2) In the ordinary course, a wife's guarantee of her husband's business debts is not to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband. Such transactions as a class are not to be regarded as prima

facie evidence of the exercise of undue influence by husbands, though there will be cases which call for an explanation

(3) Where a wife proposes to charge the matrimonial home as security for a bank loan to her husband or to a company through which he operates his business, the following principles and guidance apply with regard to the position of the bank and the duty of the solicitor acting for the wife in the transaction-

(i) A bank is put on inquiry whenever a wife offers to stand surety for her husband's debts (or vice versa). On its face, such a transaction is not to the financial advantage of the wife and there is a substantial risk in such transactions that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.

These two factors do not have to be proved in each case before the bank is put on inquiry.

The bank is also put on inquiry in cases where the wife becomes surety for the debts of a company whose shares are held by her and her husband, even when the wife is a director or secretary of the company.

Such cases cannot be equated with joint loans to a husband and wife, where the bank is not put on inquiry unless it is aware that the loan is being made for the husband's purposes, as distinct from their joint purposes. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company's business.

(ii) Where a bank has been put on inquiry, it need do no more than take reasonable steps to satisfy itself that the practical implications of the proposed transaction have been brought home to the wife, so that she enters into the transaction with her eyes open.

The bank is not required to discharge that obligation by means of a personal meeting with the wife, provided that a suitable alternative is available. Ordinarily, it will be reasonable for the bank to rely upon confirmation from a solicitor, acting for the wife, that he has advised her appropriately.

The position will be different if the bank knows that the solicitor has not duly advised the wife or the bank knows facts from which it ought to have realised that she has not received appropriate advice. In such circumstances, the bank proceeds at its own risk. In the ordinary case, however, deficiencies in the advice are a matter between the wife and the solicitor, and the bank is entitled to proceed in the belief that a solicitor advising the wife has done so properly. In giving such advice, the solicitor is acting not as the bank's agent but solely for the wife.

(iii) With regard to future transactions, a bank should take the following steps once it has been put on inquiry and is looking for protection to the fact that the wife will be advised independently by a solicitor.

First, it should communicate directly with the wife, informing her that for its own protection it will require written confirmation from a solicitor acting for her, to the effect that the solicitor has fully explained to her the nature of the documents and the practical implications they will have for her.

She should be told that the purpose of that requirement is that thereafter she should not be able to dispute that she is legally bound by the documents once she has signed them. She should be asked to nominate a solicitor whom she is willing to instruct to advise her, separately from her husband, and act for her in giving the bank the necessary confirmation.

She should be informed that, if she wishes, the solicitor may be the same solicitor who is acting for her husband in the transaction. If a solicitor is already acting for the husband and the wife, she should be asked whether she would prefer a different solicitor to act for her regarding the bank's requirement for confirmation from a solicitor.

The bank should not proceed with the transaction until it has received an appropriate response directly from the wife.

Secondly, if the bank is unwilling to undertake the task of explaining the husband's financial affairs to the wife, it must provide the solicitor with the financial information he needs for that purpose. The information

required will depend on the facts of the case. Ordinarily, it will include information on the purpose for which the proposed new facility has been requested, the current amount of the husband's indebtedness, the amount of his current overdraft facility, and the amount and terms of any new facility.

If the bank's request for security arises from a written application by the husband for a facility, a copy of the application should be sent to the solicitor. The bank will, of course, need to obtain the consent of its customer to that circulation of confidential information. If that consent is not forthcoming, the transaction will not be able to proceed.

Thirdly, where, exceptionally, the bank believes or suspects that the wife has been misled by her husband or is not entering into the transaction of her own free will, it must inform the wife's solicitor of the facts giving rise to its belief or suspicion.

Fourthly, the bank should in every case obtain from the wife's solicitor a written confirmation to the effect mentioned above. In respect of past transactions, the bank will ordinarily be regarded as having discharged its obligations if a solicitor who is acting for the wife in the transaction has given it confirmation to the effect that he has brought home to her the risks she was running by standing as surety

(iv) In future, banks should regulate their affairs on the basis that they are put on inquiry in every case where the relationship between the surety and the debtor is non-commercial. The creditor must always take reasonable steps to bring home to the individual guarantor the risks that he is running by standing as surety. That constitutes a modest burden for banks and other lenders, being no more than is reasonably to be expected of a creditor who is taking a guarantee from an individual.

If the bank or other creditor does not take those steps, it will be deemed to have notice of any claim the guarantor may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor.

(Solicitor’s duties begin here)

(v) The scope of the responsibilities of the solicitor acting for the wife is dictated by a retainer which stems from the bank's concern to receive confirmation from him that he has brought home to the wife the risk involved in the proposed transaction.

As a first step, he will need to explain to the wife the purpose for which he has become involved at all. He should explain that, if it ever becomes necessary, the bank will rely upon his involvement to counter any suggestion that the wife has been overborne by her husband or that she has not properly understood the implications of the transaction.

The solicitor will need to obtain confirmation from the wife that she wishes him to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction. When such an instruction is forthcoming, the content of the advice required from the solicitor will, inevitably, depend on the facts of the case.

Typically, the advice that a solicitor can be expected to give should cover the following matters as a core minimum. First, he will need to explain the nature of the documents and the practical consequences they will have for the wife if she signs them.

Secondly, he will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, its amount and principal terms, and that the bank may increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under the guarantee. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. He should discuss whether the wife or her husband have any other assets out of which repayment can be made if the husband's business fails.

Thirdly, the solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband's present indebtedness, and the amount of his current overdraft facility.

Fourthly, the solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming that he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation may include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities.

The solicitor should not give any confirmation to the bank without the wife's authority. The solicitor's discussion with the wife should take place at a face-to-face meeting, in the absence of the husband. He should obtain from the bank any information he needs. If the bank fails for any reason to provide the information requested, the solicitor should decline to provide the confirmation sought by the bank

(vi) As a general rule, however, it is not for a solicitor to veto the transaction by declining to confirm to the bank that he has explained the documents to the wife and the risks she is taking upon herself.

If the solicitor considers the transaction not to be in the wife's best interests, he should give her reasoned advice to that effect. However, the decision on whether to proceed is the client's, not the solicitor's, and a wife is not to be precluded from entering into a financially unwise transaction if, for her own reasons, she wishes to do so. There may, of course, be exceptional circumstances where it is glaringly obvious that the wife is being grievously wronged. In such a case, the solicitor should decline to act further

(vii) The solicitor advising the wife may also act for her husband or the bank, provided that he is satisfied that that is in the wife's best interests and will not give rise to any conflicts of duty or interest. If at any stage the solicitor becomes concerned that there is a real risk that other interests or duties may inhibit his advice to the wife, he must cease to act for her

Malaysian case – no undue influence, merely act of love? See case.

Teo Song Kwang (alias Teo Richard) and Anor v. VijayasundramJeyaban [2005] SGHC 60. (Co-guarantors and separate guarantee documents).

- The unsigned November guarantee- The plaintiffs’ assertion that VJ is liable to them under the terms of the November guarantee will next be

considered. The plaintiffs’ attempt to rely on the November guarantee is fraught with insurmountable problems.

- To begin with, neither a signed copy of the November guarantee nor an original copy of the unsigned guarantee was furnished as evidence. RT contended that VJ had admitted in DC Suit 50759/1998, that he had signed this guarantee because it was included in his affidavit in that suit among the guarantees he claimed to have signed when asked to do so by RT. However, the copy of the November guarantee that was included in the said affidavit was also an unsigned copy, and when cross-examined in the present case, VJ said that he received a copy of the unsigned guarantee long after he had left Seng Hup. It appears that the unsigned copy of the November guarantee had been included among the copies of signed guarantees in VJ’s affidavit in DC Suit 50759/1998 by mistake.

- At the outset, it must be noted that there was insufficient proof that the November guarantee was handed over to VJ for his signature in November 1992 or at any time thereafter. VJ, who had executed various guarantees when asked to do so by RT, stated categorically that if RT had asked him to sign the November guarantee in 1992, he would have done so unhesitatingly and immediately. After all, their working relationship was such that he signed, without questioning, other guarantees put in front of him by RT. It is rather telling that RT testified that he did not ask VJ to return the signed guarantee to him in November 1992 or at any time between 1992 and 1998. RT must have known that if the signed guarantee was not in his hands, it was unlikely to surface should it become necessary for him to rely on it in the future. In any case, one would have expected RT to ask VJ to hand over to him the November guarantee after his relationship with VJ deteriorated to such an extent that the latter left Seng Hup in 1995 to set up a rival business in Kuala Lumpur. It is significant that it was only in April 2003 that RT finally made a claim under the November guarantee. On balance, I believe VJ’s evidence that he was not given the November guarantee to sign in November 1992.

- Notwithstanding my finding that VJ was not given the November guarantee to sign in 1992, RT’s allegation that he was induced to inject more funds into Asiapac by VJ’s fraudulent representation that the November

guarantee had been signed will also be considered. As RT alleged that a fraudulent representation had been made, he has, in Lord Herschell’s words in Derry v Peek (1889) 14 App Cas 337 at 374, to prove that VJ made the false representation “(1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”.

o I have no doubt that VJ did not tell RT that he had signed the November guarantee. Neither did he give any impression that the said guarantee had been signed. That being the case, RT’s case on fraudulent misrepresentation and deceit collapsed.

o In any case, RT could not prove that he had been induced by any representation by VJ that the November guarantee had been signed to put more money into the Indonesian timber business. When asked how he could have been induced by VJ to pour more funds into that business when he was in fact the leader, he pointed to a letter from Seng Hup to the board of directors of Asiapac as evidence of inducement. This letter, dated 15 July 1995, which was signed by both RT and VJ as directors of Seng Hup, was worded as follows:

- We hereby confirm that we will provide to Asiapac Pte Ltd and its subsidiary company, P.T. Profilindo Sejahtera Manunggal continuing financial support as may be required for them to meet their liabilities and their normal operating expenses incurred until this undertaking is revoked by us in writing. We further confirm that we will not demand immediate payment for debts owing to us so that Asiapac Pte Ltd and P.T. Profilindo Sejahtera Manunggal will be able to continue to operate as going concerns.

- RT clutched at straws when he asserted that the above-mentioned letter was an inducement to him to continue to pour money into the Indonesian timber business as he finally admitted that the letter had been suggested by his auditors because the financial position of Asiapac was then quite critical. Such evidence could only further undermine his case against VJ. I thus hold that the allegation, that RT was induced by VJ’s representation that he had signed the November guarantee to inject more funds into the Indonesian timber business, had no substance whatsoever.

- Whether there was an understanding to share the cost of funds- The plaintiffs’ assertion that the parties had an understanding to share the cost of the foray into the

Indonesian timber business will next be considered. The alleged understanding is supposed to have been an oral one. However, there was insufficient proof of this.

- Admittedly, RT, VJ and HT were to contribute one-third of the cost of the shares in PT Profilindo Sejahtera, but apart from this, RT appeared to treat the Indonesian timber business as an extension of his family group of companies and especially so after VJ and he went their separate ways and became competitors in the lighting business in Kuala Lumpur. In his Affidavit of Evidence-in-Chief, VJ stated as follows:[4]

- It is contrary to the nature of Richard Teo to give away any part of his business to anyone, let alone 34% in real terms of the timber business in Indonesia to me. I find the idea of me being the equal partner of Richard Teo absurd and preposterous. I wish to add that what I mean is that Richard Teo is always absolutely in control of the timber business in Indonesia and other businesses and he treated the Indonesian timber business as his own.

- What VJ said is not without sense. Indeed, if RT had wanted to have VJ assume a share of the liabilities, it would have been very easy for him to do so when he gave the latter a 5% stake in his Malaysian company, Seng Hup Sdn Bhd. According to RT, he made VJ a rich man as the shares given to the latter were worth millions of ringgit after that company became a public company. That being the case, RT could easily have arranged for the money that was given on a silver platter to VJ to be diverted to the Indonesian timber business as the latter’s share of the money required by the said business, but he did not do so. As for the money loaned to Asiapac by Seng Hup, which was recorded as a debt owed to the company by RT, that debt could have been recorded in Seng Hup’s books as a debt that was owed equally by RT and VJ if both of them had an equal share in the Indonesian timber business, since they were both directors of Seng Hup at the material time.

- Reference was made to a proposal by HT to take over Asiapac. In the proposal, HT assumed that he had a one-third share of the assets of Asiapac and calculated the price for his takeover on this basis. This, the plaintiffs alleged, showed that the parties must have agreed to share equally the cost of the foray into the Indonesian timber business. HT was not called to give any evidence on his rather skimpy proposal. He was named by the plaintiffs as a witness for the trial as late as September 2004 but RT said that he subsequently lost contact with HT. Without the benefit of cross-examination, HT’s proposal cannot advance the plaintiffs’ case. Furthermore, VJ said that he had not agreed to accept HT’s proposal and whatever may have been HT’s dealings with RT, he did not have a one-third share of the assets or liabilities of Asiapac.

- I hold that the plaintiffs have failed to establish that an understanding was reached between the parties concerned that VJ would assume one-third of the liabilities incurred in the Indonesian timber business.

- The decision- The plaintiffs’ claim against VJ for a contribution with respect to their losses in the Indonesian timber

business is dismissed with costs.

- The ING Bank guarantee- RT’s claim on the ING Bank guarantee, which stands on a different footing from his other claims, will

next be considered. As has been mentioned at [11] above, RT was sued by ING Bank for US$700,000 under the terms of the ING Bank guarantee signed by him, VJ and HT. He compromised this claim for US$200,000 without consulting VJ.

- It is trite law that a creditor is entitled to sue any of the guarantors of the sum loaned. It is also a well-established rule founded upon natural justice and equitable principles that if one guarantor is asked to pay a sum, his co-guarantors are liable to contribute their share of the amount paid if they benefit from such a payment to the creditor. In Craythorne v Swinburne (1807) 14 Ves 160; 33 ER 482, Lord Eldon LC explained that the equitable principle of contribution enabled a guarantor to assume the burden of suretyship on the faith of an implied promise of contribution from his co-sureties.

- When cross-examined, VJ tried to avoid liability under the ING Bank guarantee on three grounds. Firstly, he said that he had signed a separate guarantee from that on which RT was sued. Secondly, he complained that the signature on the letter accepting the offer for credit facilities of $700,000 was not his and that he had signed a letter of offer for credit facilities of $500,000 instead. Thirdly, he said that he should not be liable because he was not given notice of the suit by ING Bank against RT and was not consulted in any way by the latter on the negotiations to compromise the suit.

- Admittedly, VJ and RT signed separate documents in relation to the ING Bank guarantee, but it is not the case that co-guarantors need not contribute towards a claim merely because separate guarantee documents had been signed (see, for instance, Prosperous Credit Pte Ltd v Gen Hwa Franchise International Pte Ltd [1998] 2 SLR 649). Much depends on the facts of each case and on whether the papers signed by the parties were part of the same transaction. In the present case, VJ knew that the documents were all part of the same transaction as he and RT signed separate guarantee documents pursuant to ING Bank’s letter of offer, which made it clear that the loan of US$700,000 was to be granted on the basis of guarantees executed by VJ, RT and HT. As for VJ’s claim that the signature on the acceptance copy of the said letter of offer was not his, this was a bare denial without any proof whatsoever. Furthermore, it was not pleaded that his signature had been forged. As such, VJ cannot avoid liability on the guarantee on the basis that he signed a different document from that signed by RT.

- As for the negotiations undertaken by RT, there can be no doubt that VJ ought to have been consulted. A person who settles a claim by a creditor under a guarantee without informing and consulting his co-guarantor runs the risk that the latter may defend a claim for contribution on the basis that the creditor’s claim could have been resisted or that a settlement could have been reached on better terms.

- In the present case, there was no concrete evidence that this was not a good settlement of ING Bank’s claim under the ING Bank guarantee. Although VJ asserted that the proper forum for the determination of ING Bank’s claim against RT is Indonesia, there was no doubt that RT, who had received legal advice, had done quite well by compromising ING Bank’s massive claim of US$700,000 for only US$200,000. This resulted in a savings of US$500,000 for all the co-guarantors. VJ benefited from this settlement because part of the deal between ING Bank and RT was that the former could no longer sue VJ and HT after the payment of the settlement sum. In view of this, VJ is liable for one-third of the US$200,000 paid by RT to ING Bank.

- As far as his claim for a contribution under the ING Bank guarantee is concerned, RT is entitled to costs.

Standard Chartered Bank v. Uniden Systems [2003] 2 SLR 385- Facts - The first defendant, Uniden, was a customer of the plaintiff (“the Bank”). The second defendant (“Tan”) was

the managing director of Uniden. The third defendant, a degree-holder director of the Company, was the wife of Tan. The Bank claimed against Uniden as principal debtor and against Tan and Choo as guarantors, in respect of banking facilities, interest and costs.

- The trial here was confined to the Bank’s claim against Choo. Choo admitted signing the guarantee but alleged that the Bank’s solicitor neither explained to her the nature of the documents nor advised her the consequences of signing the guarantee. Choo also alleged that she was under the undue influence of Tan when she signed the guarantee.

- Held, allowing the plaintiff’s claim against the third defendant:o Choo knew that she was signing a guarantee as the Bank’s solicitor would have mentioned to

her the nature of the documents in passing. However, as she was not told, Choo did not appreciate the risks and consequences of signing an unlimited liability guarantee.

o There was no actual undue influence, given that the Bank’s representatives did not perceive any intimidation or overbearing or bullying conduct on Tan’s part whenever they saw him with Choo.

o Choo would still have signed the guarantee even if she had been advised of the risks involved, as she willingly accepted Tan’s dominance of her, trusted Tan and had complete faith in him, and did not think that Tan would put her in a risky position. Her will was not “overborne” when she signed the guarantee.

o Tan’s business was the source of the family income, and it was in Choo’s interest to support the business. The signing of the guarantee was not manifestly to her disadvantage.

o Even if Tan did exercise undue influence on Choo when she signed the guarantee, the Bank had neither actual nor constructive notice of his undue influence. There was nothing out of the ordinary in the couple’s relationship to warrant the Bank conducting further investigations before the signing of the guarantee.

- [Observation: A solicitor who acts for both mortgagor and mortgagee in loan transactions is in a conflict of interest situation, notwithstanding that this is a common (albeit not commendable) practice in Singapore]

4. 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.

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. See above for latest case

Indian Bank v Raja Suria & Ors [1993] 2 SLR 497Facts The company W requested the appellant Indian bank for overdraft facilities to be secured, inter alia, by the personal guarantee of all W’s directors. The seven directors were named in the standard form of guarantee as joint and several guarantors of facilities granted. A first guarantee was signed by the first six directors. W drew on the overdraft facility the next day, and the day after, Indian Bank sent a sanction ticket to W stating as security for the facilities the personal guarantee of all directors. The seventh director’s signature was appended to a separate guarantee form more than a month later naming only the seventh director as guarantor. W defaulted on repayments and Indian Bank sued all seven directors on the two guarantees which they asserted constituted one transaction. The High Court dismissed the claim and Indian Bank appealed.Held, dismissing the appeal:(1)     The two guarantees could not be read together as part of one transaction. It could only be one transaction if there was some express or implied reference in one document to the other. As there was no incorporation by reference of either one of the guarantees into the other guarantee and was no evidence to show that the two were related, the one transaction principle was inapplicable here.(2)     All co-sureties of a joint and several guarantee had to sign the guarantee unless it was shown that there was no such intention or that the requirement was waived. The trial judge found that two of the six directors had been unaware at all times that the seventh director had not executed the first guarantee and that it was never their intention to waive the requirement that all seven directors sign the guarantee. The action therefore failed because there was no single guarantee which all the co-sureties executed.

OUB v Lim Keh Lam [1999] 3 SLR 393Principle: 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 606Principle: 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 370Facts: 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 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.

Conclusiveness of certificate of demandSomerset Investments Pte Ltd v Far East Technology International Ltd [2004] 3SLR 46, HC SingaporeFactsThe plaintiff was the landlord. The defendant was the parent company of a tenant. The plaintiff leased premises within to the tenant, who undertook fitting-out works on the premises, in order to build a theme restaurant. The plaintiff agreed to contribute to the cost of the works and intended to recoup its contribution from the turnover rent to be collected from the tenant.

In consideration of the plaintiff’s commitment, 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 expressed to be for a sum of up to $3,200,000.00, 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.The tenant defaulted in the payment of rent. The plaintiff then executed a writ of distress, distrained and auctioned merchandise belonging to the tenant, re-entered into possession of the tenanted premises and issued a letter of demand to the defendant. The plaintiff enclosed with this letter a certificate, pursuant to the guarantee, indicating a sum as the landlord’s contribution. This sum was subsequently reduced in a second letter of demand. The defendant refused to comply with the demand and the plaintiff commenced this action.The defendant resisted the claim for contribution citing, inter alia, the following grounds:(a) The plaintiff did not comply with its obligations under a collateral agreement such that there was a total failure of consideration entitling the defendant to treat the guarantee as void;(b) There were errors in the plaintiff’s computation of the amount demanded such that the certificate was not final and conclusive on the amount owed by the defendant; and(c) The plaintiff failed to make a valid or correct demand within the stipulated three-month period.Held, allowing the plaintiff’s claim:(1) On the evidence, there was no collateral agreement as alleged by the defendant. Even if there was such an agreement, it had not been breached. However, if there had been a breach, the defendant’s remedy would be damages and not avoidance of the guarantee.(2) The plaintiff’s final computation of the amount owed by the defendant took into account set-offs that had been agreed to between the plaintiff and the tenant. It was incorrect for the defendant to argue that it was not bound by these set-offs because the payments were actually for the works contemplated in the tenancy agreement and were not extraneous expenses added on to increase the defendant’s financial exposure.(3) A 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.(5) The second letter of demand was valid under the guarantee although it was erroneous as to the amount owing. There could be no prejudice to the defendant in any event, as the amount stated there was less than the actual amount owing. The call on the guarantee within the stipulated period attached liability, while the certificate merely stated the extent of liability. Judgment could, therefore, be given for the lesser amount.

Standard Chartered Bank v. Neocorp International Bank [2005] 2 SLR 345. (Interpretation of guarantees-conclusive evidence clause). Facts The plaintiff bank granted banking facilities, comprising a term loan and overdraft facilities, to the

defendant’s subsidiary, Ceramic Technologies Pte Ltd (“the borrower”). The purpose of the overdraft facility was to meet the borrower’s working capital requirements. These facilities were expressly stated in the facility letters to be subject to the plaintiff’s Standard Terms and Conditions, which stated that the facilities approved could be “revised, amended and supplemented from time to time”.

The defendant executed a guarantee for the sum of $1.5m for all liabilities which might become due any time thereafter. A board resolution was also passed stipulating that the defendant was to provide the guarantee in the form and content required by the plaintiff bank.

The borrower subsequently began servicing the term loan. Although no mode of repayment was specified, the repayments were paid out from the borrower’s current account. This account was the sole operational account through which all moneys were paid in and out after the term loan had been disbursed. One of the defendant’s complaints was that the repayments should not have been paid out this way.

The borrower later requested an increase in the overdraft limit for six weeks and subsequently asked to extend this period for two months. Some time afterwards, pursuant to the Standard Terms and Conditions, the borrower defaulted on the loan and overdraft facilities when it was placed under interim judicial management.

The plaintiff demanded payment under the guarantee of the principal sum of $1.5m with interest thereon. The defendant disputed its liability. Pursuant to the guarantee, the plaintiff issued a conclusive evidence certificate asserting that as at 1 April 2004, the defendant owed the plaintiff $1,712,938.36. This comprised $1.5m and accrued interest from the relevant period.

There were three main issues of contention. First, the plaintiff argued that the court was precluded by the conclusive evidence certificate from reviewing the legal basis of its claim as it arrogated to the plaintiff the

sole right to judge the propriety of the claim. Second, the defendant asserted that the terms of the guarantee were limited by a collateral agreement formed between the parties which precluded the plaintiff from claiming sums due on the overdraft facility that were not strictly used for working capital purposes. Third, the defendant maintained that the extent of its liability turned on the construction of the facility letter, the guarantee and the board resolution. It alleged that the plaintiff had, through the facility letters which preceded the guarantee, created an understanding that they would rely on the guarantee only to recover overdraft facilities employed by the borrower strictly for the purposes of its working capital. The plaintiff countered that the defendant’s liability should be determined by reference only to the terms of the guarantee as they were unambiguous.

Held, giving judgment for the plaintiff: A court was loath to construe a conclusive evidence clause as encapsulating an intention to

preclude any review of the legal basis of the plaintiff’s claim. Nevertheless, that did not mean that a court would never recognise such a clause provided it was well-drafted and unequivocally conferred to one party the right to determine issues impacting on the other. Generally therefore, there would be a rebuttable presumption in commercial documents that a party had not agreed to confer on the opposing party an exclusive right to determine conclusively all matters pertaining to an adversarial claim: at [21] and [23].

The defendant’s argument that a collateral agreement existed, limiting the terms of the guarantee, was wholly unmeritorious. The only extrinsic evidence the defendant relied upon was the facility letter and the board resolution. There was never any meaningful communication between the defendant and the plaintiff relating to either the terms of the facility letters or the guarantee. Furthermore, the board resolution did not create a contractual relationship between the parties. The defendant was also staffed with experienced directors and managers who would certainly have qualified the terms of the guarantee had they so desired. It was amply evident that the defendant agreed to the guarantee without manifest reservations to its terms: at [26] to [29].

On the interpretation point, where the terms of a guarantee were unambiguous, extrinsic evidence was inadmissible to vary its terms. Nevertheless, the immediate events surrounding the giving of a guarantee could be relevant in determining the context in which the guarantee was given and how it was to be interpreted. However, this was not tantamount to an unbridled licence to import subjective expressions of intent, or to ignore established rules of interpretation, which eschewed reliance on prior negotiations and subjective expressions of intent: at [35] and [36].

The facts did not demonstrate that the scope of the guarantee was limited only to facilities utilised for the borrower’s working capital. It was clear that the intention of the facility letter was to confer on the plaintiff bank the discretion to rely on the securities for not only the proposed facilities but for facilities which might be granted periodically as well: at [37] to [39].

The defendant had agreed to the guarantee without any qualification. Its contention that the term loan repayments and interest should not have been debited from the borrower’s current account was vacuous. By not raising any objections, the borrower had clearly acquiesced to this mode of repayment: at [40].

Although several of the plaintiff’s internal documents, at first blush, appeared to indicate that the plaintiff might have initially intended to rely on the guarantee in somewhat limited circumstances, it was pertinent to note that the defendant’s witnesses conceded they had no knowledge of any such documents, nor had they ever had any direct communications with the plaintiff on these issues. Therefore, the internal documents that followed the execution of the guarantee were clearly inadmissible. Where the contract was fully embodied in documents, the court ought not to look at the subsequent conduct of either party to determine the meaning of the written agreement or to discern the parties’ intentions: at [41]and [44].

The terms of the guarantee were broad enough to embrace the plaintiff’s claim in the proceedings. Further, the terms of the facility letter and the board resolution did not pare down the ambit of the guarantee. The plaintiff’s claim for the principal sum and outstanding interest was allowed in full with costs: at [48].

[Observation: There was no reason why a guarantor could not assume a more extensive liability than that contemplated in a facility letter if the terms of the guarantee explicitly provided so, though such instances would be unusual. This was essentially a question of fact. Most guarantors focused only on the upper limit of their liability when signing a guarantee and did not consider the permutations that may be visited upon them by the other terms of the guarantee: at [45]and [46].]

V. BILLS OF EXCHANGE

Bill of exchange defined3. —(1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person, or to bearer.

(2) An instrument which does not comply with these conditions, or which orders any act to be done in addition to the payment of money, is not a bill of exchange.

(3) An order to pay out of a particular fund is not unconditional within the meaning of this section.

(4) An unqualified order to pay, coupled with — (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to

be debited with the amount; or (b) a statement of the transaction which gives rise to the bill, is unconditional.

(5) A bill is not invalid by reason — (a) that it is not dated; (b) that it does not specify the value given, or that any value has been given therefore; or (c) that it does not specify the place where it is drawn or the place where it is payable.

VI. BANKING

1. Cheques- Definition found in s73(1) of Bills Of Exchange Act as “a bill of exchange drawn on a banker payable on

demand”

2. Crossing Cheques Importance of crossing a cheque. 2 crossings:

(a) General – bears on its face two parallel lines, either with or without the words “not negotiable” or with the words “& Co.” This crossing constitutes a direction to the paying bank that payment can only be made to a banker.

(b) Special – has the name of the payee’s bank, either with or without the words “not negotiable” and is an instruction to the paying bank that payment can be made to that particular bank only

(c) Specific – a/c payee only, i.e. the “Account Payee” crossing. – constitutes a direction to the collecting bank that proceeds of the cheque is to be paid into the

account of the named payee and no other party A/c Payee: not transferable

· By crossing a/c payee means that it is not transferable. · N.B. S82 of Bills of Exchange Act (see below)

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 2 parallel transverse lines, either with or without the words “not negotiable”; or (b) 2 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. s81 and s82: 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 cheques82. —(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.

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.

A crossing is deemed a material part of the cheque and may not be obliterated, added to or altered. A cheque is treated effectively as a cash payment. Should payment on it be stopped, the payee has a cause

of action straightaway which can be enforced independently of the circumstances surrounding the order to stop payment.

The only defences available to the drawer are that the cheque was given for consideration which has wholly failed, or that payment was induced by fraud or misrepresentation.

See also s55, BOEA.

Liability of drawer or indorser55. —(1) The drawer of a bill, by drawing it — (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured, he will compensate the holder or any indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken; (b) is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse. (2) The indorser of a bill, by indorsing it — (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured he will compensate the holder or a subsequent indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken; (b) is precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements; (c) is precluded from denying to his immediate or a subsequent indorsee that the bill was, at the time of his indorsement, a valid and subsisting bill, and that he had then a good title thereto.

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

Forged or unauthorised signature

24. —(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.

N.B. 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 plf 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.

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 had 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.

Khoo Tian Hock & Anor. v OCBC [2000] 4SLR 673. The plaintiffs were husband and wife. They maintained a joint personal account with the defendant bank at

one of its branches. The plaintiffs’ son forged the signatures on five cheques and the bank paid on them at the branch.

The plaintiffs sued the bank, alleging that the signatures on the five cheques were forgeries and that the bank wrongly debited the account for the amount of the five cheques. The plaintiffs also alleged negligence against the bank in that the latter should have, but failed to contacted the first plaintiff, the husband, to verify if the plaintiffs had actually issued the cheques, as was the usual procedure which the plaintiffs had instituted.

The plaintiffs also pointed out that one of the bank officers had been informed of a previous similar incident the plaintiffs had with another bank and their son forging signatures, and the bank officer had been instructed to remove the son from the list of authorised signatories for the plaintiffs’ business. However, neither the plaintiffs nor the officer informed the branch

The three main issues before the court were whether: (a) the signatures were forgeries; (b) the plaintiffs precluded from maintaining their claim by reason of estoppel or negligence; and (c) the bank were, in any event negligent and if so, whether they were liable.

Held, dismissing the plaintiffs’ claim, inter alia:

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.

The bank’s payment of the fifth cheque over the counter without contacting the plaintiffs did not constitute negligence on the part of the bank in view of the particular circumstances. 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 . Also, the branch officer who paid on the cheque was entitled to take into account that the bearer of the cheque was not a stranger. The payment of the second cheque over the counter also did not constitute negligence on the part of the bank

As for the other three cheques, they were payable to the third party or bearer and were not crossed. The bank was not negligent in paying the monies from these cheques into the son’s account without first contacting the plaintiffs as the cheques were treated like non-cash cheques

The bank was not negligent in failing to inform other officers in the branch of the plaintiff’s practice. It was impossible for every officer to remember to disseminate the practice or habit of every customer to all of the officers in the branch or in a section of the branch. If a customer considered a particular practice to be particularly important to him, then it was for him to instruct the bank in writing.

The officer’s knowledge of the previous unrelated incident, and thus the son’s dishonesty, should not be attributed to the officers in the branch as he did not handle the account and was in a section dealing with business accounts. He was also not negligent in omitting to tell the branch about the incident because the son was not an authorised signatory for the account.

The plaintiff was not negligent in not reporting the son to the police or in not informing the branch about the similar 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 plaintiffs’ breach of duty caused the loss. 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

VII. PROMISSORY NOTES

1. Definition 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.

Defined in s92(1), BOEA

Promissory note defined92. —(1) A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer. (2) An instrument in the form of a note payable to maker’s order is not a note within the meaning of this section unless it is indorsed by the maker. (3) A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof. (4) A note which is, or on the face of it purports to be, both made and payable within Singapore is an inland note. Any other note is a foreign note.

Strictly speaking, a promissory note is not an order to pay and so is not a bill of exchange. However, under s95, BOEA, it is considered a note “payable on demand”, and hence the BOEA applies.

Note payable on demand95. —(1) Where a note payable on demand has been indorsed, it must be presented for payment within a reasonable time of the indorsement. (2) If it be not so presented, the indorser is discharged. (3) In determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade, and the facts of the particular case. (4) Where a note payable on demand is negotiated, it is not deemed to be overdue, for the purpose of affecting the holder with defects of title of which he had no notice, by reason that it appears that a reasonable time for presenting it for payment has elapsed since its issue.

A promissory note is NOT an I.O.U. note, which is not an “instrument” but merely an acknowledgement of debt.

VIII. BANKER’S DRAFTS

Banker’s drafts are regarded as “safe” payments because the drawer is a bank. An instrument drawn by (i) a banker on another bank, or (ii) by a branch of a bank on its head office or

another branch. (i) is in fact a cheque and (ii) is strictly not a bill of exchange at all, since the drawer and drawee are the

same entity. But s5(2), BOEA provides that “Where in a bill, drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note.”

IX. 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, i.e. the local bank will add its own undertakings to pay the seller 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. Law governing DLC UCP (Uniformed Customs and Practice)

3. Types of DLCs:

(a) Revocable and Irrevocable Credits : Revocable – can be cancelled at any time by the issuing bank. The issuing bank is not committed to

pay, and this is usually used when security for payment is not an objective. Irrevocable – The issuing bank gives its undertaking once and for all, and even contrary instructions

from applicant of credit cannot discharge undertaking to pay.

(b) Confirmed and Unconfirmed Confirmed – another bank (usually advising or correspondent bank of the issuing bank in the seller’s

country) would add its own undertaking to pay the seller. Unconfirmed – no such additional undertaking

(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 and seller has to present the credit to the

relevant bank for acceptance against documents before maturity date.

(d) Straight Credits and Negotiation Credits Straight credit – non-negotiable credit, seller may not sell draft to a 3rd party purchaser. Purchaser will

have no claim against drawee bank if it refuses to honour the credit Negotiable credit – open to subsequent parties who negotiate in good faith. It contains an undertaking

to pay not only the seller, but such subsequent parties.

(e) Transferable credits Seller is permitted by the issuing bank to transfer the whole or part of the benefit of the credit to a 3 rd

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.

Whether, and if so, under what circumstances the issuing bank of a letter of credit transferable can refuse to effect a transfer at the request of a beneficiary of the letter of credit?

United bank v BNP 1992 2 SLR 64 no of basic principles

- Letter of credit is means of international pwyment usu for sale of goods- Buyer opens letter of credit in favour of seller- United bank issues letter of credit- LC sent to beneficiary through local bank known as advising bank- Stimes it also accepts liability – then known as confirming bank- Although LC came to Sg advised by HSBC- BNP which was bank for the businessman negotiated the credit and got matter fr using bank. Using bank

discovered tt docs were defective. - Doc called uniform customs practice (UCP) – international law on letters of credit issued by ICC

UCP now being revised. Fr july 2007, there will be new UCP. - Under UCP, basic law is that – banks are only concerned with docs. Not with goods.- Letter of credit is doc – doctrine of strict compliance- In this case docs were bills of lading etc- Issuing bank tells benef tt it wld pay if produced those docs stipulated by buyer- In this case docs sent, money paid and then realised tt no good- LC issued in favour of pan associated limited- Shipping docs sent by pan sccoaited private limited- Discrepancy.- Want money back- No strict compliance- Cannot have two comp of same name? – cannot say 100 percent. view tt normally shldn’t be same name

which is limited and private limited. In practice, no one cares about Pte. In sg showed tt no other company

- Justice chao hick tin – omission of the word Pte which was not on LC docs amted to discrepancy and therefore lost. Luckly other grds. BNP won.

- Banks deal in docs and not in goods- Unless active or actual fraud. Otherwise banks must pay. Integrity of letters of credit. Must be payment

totally reliable.

Facts The plaintiff bank UB carried on business in the United Arab Emirates. In October 1980 the third defendant

applied to UB to open a letter of credit for US$220,000 in favour of a Singapore company Pan Associated Ltd (PA), subject to the provisions of the Uniform Customs and Practice for Documentary Credits (1974 Revision) (UCP). On issuing the letter of credit, the second defendants informed the beneficiary PA of the opening of the letter of credit. UB posted the letter of credit to the second defendants. In the meantime the third defendant requested UB to amend the letter of credit and UB conveyed the amendments in a letter dated 6 November 1980 (‘the amendment letter’) to the second defendants for onward transmission to PA. UB also sent a telex to the second defendants three days later detailing the amendments (‘the amendment telex’).

However, on receiving from UB the letter of credit, the second defendant forwarded it to PA on 12 November 1980. On 19 November 1980, the first defendant BNP negotiated the letter of credit in favour of Pan Associated Pte Ltd. On the same day, the second defendants sought clarification from UB whether

the beneficiary should be Pan Associated Ltd or another company, Naraina. On 20 November 1980, the second defendants forwarded the amendment letter to PA, before even receiving UB’s reply from UB. Only when UB received clarification on 23 November 1980 that the beneficiary had not changed, and that the only amendment was that further certificate be obtained from Naraina Trading Pte Ltd, did the second defendants send the amendment telex to the beneficiary. However, on 3 November 1980 PA replied to say that the amendments could not be accepted as shipment of the goods had been effected. Having negotiated the letter of credit and reimbursed itself of the amount due thereunder, BNP forwarded all the documents to UB. UB replied by telex on 30 November 1980 pointing out certain discrepancies and asking for a refund. The telex concluded in these terms: ‘Documents treated on collection basis. Kindly refund the negotiated amount …’ BNP rejected UB’s contention that the. documents were not in order and also pointed out that UB’s telex of 30 November 1980 did not comply with art 8(e) and (f) of the UCP.

UB commenced legal action to recover US$220,000 from BNP on the grounds that BNP was in breach of their duty of care in negotiating the letter of credit and paying to a person other than the beneficiary named in the letter of credit. They also claimed pursuant to art 8(e) of the UCP, that they were entitled to a refund of money paid out under the letter of credit. Against the second defendants, UB claimed for loss suffered on account of the second defendants’ failure to exercise reasonable diligence, skill and care as advising bankers in promptly notifying the beneficiary and/or its bankers of the requested amendments and/or in seeking agreement to such amendments. The issues in the claim against BNP were: (a) whether BNP was correct in negotiating the letter of credit and making payment thereunder to Pan Associated Pte Ltd when the letter of credit was issued in favour of Pan Associated Ltd and the documents tendered were in the name of Pan Associated Pte Ltd; and (b) if not, whether UB failed to comply with art 8(e) and/or (f) of the UCP and was thus precluded from claiming a refund from BNP.

Held, dismissing the claim:(1)    In letters of credit transactions, the parties were only concerned with documents. BNP could and should have rejected the documents tendered. Whether a tender was good or bad doubt annotations depended on whether the banker was aware that in law you could not have a company ‘ABC Pte Ltd’ and another company ‘ABC Ltd’. Moreover, while under s 27(1)(c) of the Companies Act (Cap 50, 1990 Ed) the Registrar will not register a company by a name which so nearly resembles the name of another as to be likely be mistaken for it, this is not an absolute provision. There could be exceptions with the consent of the Minister. UB was entitled to reject the documents but if it accepted them, it does so at its own risk.(2)    While there was authority that art 8(e) of the UCP did not require any precise form of words to be used, a fair view of the words ‘documents treated on collection basis’ would be that UB were holding the documents and would back the third defendant. It would be stretching the meaning of the words to the extreme to suggest that it could mean that the documents were being held at the disposal of BNPs. There was therefore no proper rejection of the documents by UB in accordance with art 8 of the UCP.(3)    UB in fact completed examination of the documents within one day. To reply on 4 December 1980 when it could have been done on 30 November 1980 must suggest that there was delay. Under art 8(d) of the UCP, the issuing bank had a reasonable time within which to examine the documents and to determine whether to make a claim; the telex of 4 December 1980 was too late. Furthermore, UB having decided to hedge their telex of 30 November 1980, used up their option and it was not open to UB to have a. second bite. Article 8(e) and (f) was very clear on this. As UB failed to comply with art 8(e) and (f) of the UCP, are precluded from making a claim against BNP for a refund.(4)    The fact that a telex was sent ipso facto suggested that the second defendants should have conveyed the matters contained therein right away although the amendment letter proper would only come in the mail later. However, the burden was on UB to show that failure on the part of the second defendants in notifying the beneficiary caused the loss. While there was confusion or oversight on the part of the staff of the second defendants, on the facts there was nothing to sustain the assertion that if the amendments were conveyed in good time, fraud could have been avoided. Accordingly UB failed to discharge the burden of proving the causal connection between the loss and the failure on the second defendants’ part to notify the beneficiary of the amendments in good time.Pankaj v. Donald McArthy Trading Pte Ltd [2006] 4 SLR 79. (Commission and interest taken for issuing Letters of Credit - whether moneylending).- Many small comp do not have financial pluck to ask bank to issue LC in their favour. - banks wont- so small comp go to bigger firm maybe moneylender who will open the LC- contracting parties will be tt comp and the issuing bank- so actual buyer will have to repay other sg company plus commission and interest- but when goods don’t come – or bigger comp paid LC – smaller comp

- justice ang ting choo – held tt this was perfectly legitiame – biger comp finaning smaller comp and LC opened in name of bigger comp – and said tt although in effect money has been advanced this does not amt to moneylending.

- Issue was whether openig of LC in favour of skall comp is moneylending – unlicensed – therefore contract void under moneylender’s act

- Note case because freq in sg – earlier case in 1970s – bank of indo china v gian singh - See dr myint soe’s bk - chapter 12, 13, 14, 15

Facts The plaintiff, a sole proprietor of a business, arranged to have his bankers issue letters of credit (“L/C(s)”)

which were used to pay for goods the first defendant, a limited company, purchased. Once the L/Cs were issued and the goods paid for, they would be taken by the first defendant. For the benefit of the service, the first defendant agreed to pay the plaintiff the principal sum of the L/Cs, a commission charge, and interest (“the agreement”). The plaintiff sued the first defendant, and the second and third defendants who were allegedly the controlling minds and wills of the first defendant, for the debts the first defendant owed to him pursuant to the agreement.

The defendants’ defence was that the agreement was unenforceable because it infringed the Moneylenders Act (Cap 188, 1985 Rev Ed) (“The Act”). They applied for and obtained an order under O 33 rr 2 and 3(2) of the Rules of Court (Cap 322, R 5, 2004 Rev Ed) for trial on three preliminary issues: (a) whether the plaintiff was a moneylender within the meaning of the Act; (b) if the plaintiff was a moneylender, whether he was an unlicensed moneylender; and (c) if the plaintiff was an unlicensed moneylender, whether the agreement was rendered unenforceable as against the defendants.

Held: The lending of money was common, but it was not the sole form of financial assistance. Like the purchase

of book debts and the discounting of bills, the provision of L/C facilities was distinct from moneylending. It was a form of financial assistance that one party offered to another, usually for a profit. Some businessmen who did not have their own funds or banking facilities to pay for their purchases relied on such arrangements to finance their purchases, and businessmen with ready facilities offered the service for a profit. Unless all forms of financial assistance for a profit was considered moneylending, the arrangement between the plaintiff and the first defendant was not moneylending because no money was lent. The plaintiff was not a moneylender and therefore the defendants did not have a complete defence against the plaintiff’s claim: at [17], [18], [21], [23], [24] and [40].

[Observation: Assuming that the agreement constituted a lending of money, the plaintiff would be presumed (under s 3 of the Act) to be a moneylender because, as part of the agreement, the first defendant had to pay the plaintiff a larger sum than the amounts in the L/Cs. It then fell to the plaintiff to rebut this presumption by: (a) showing that he was not in the business of moneylending by establishing that the arrangement was not offered to anyone who wanted to borrow; or (b) showing that there was no system and continuity in the lending. Additionally, if the plaintiff had made the agreement in the course of and for the purpose of carrying on his business, he would fall within the exception in s 2(c) of the Act, and would not be a “moneylender” within the meaning of the Act: at [27] to [30], [34].

A person could be unprepared to lend to everyone and be selective of his clients, content with lending on a commercial basis to a few or even only one regular borrower whom he trusted. Such a person was nevertheless carrying on moneylending as a business: at [31].

The plaintiff had issued invoices, maintained an accounting ledger and collected interest payments in relation to the arrangement. It was clear that there was system and continuity in the transactions. Further, the plaintiff pleaded that he had not made the arrangement with the first defendant in the course of and for the purpose of his own business. The exception in s 2(c) of the Act did not apply to exclude the plaintiff from the definition of “moneylender” under the Act. The plaintiff would therefore be considered an unlicensed moneylender: at [30], [33], [37] and [38].

If the plaintiff was an unlicensed moneylender, the defendants would have a complete defence against his claim under s 15 of the Act, which rendered contracts for the repayment of money lent by an unlicensed moneylender unenforceable: at [39].]

Negara Bank Indonesia v Lariza Pte Ltd (1988) 2 WLR 374 (Privy Council on appeal from Singapore CA)

The defendant bank opened an irrevocable transferable letter of credit in favour of the plaintiffs by order of the buyer under contracts of sale. The credit was expressed to be subject to the Uniform Customs and Practice for Documentary Credits (1974 Revision). The plaintiffs instructed the bank to transfer part of the letter of credit to their supplier but the bank refused.

The plaintiffs failed to perform their contracts with their supplier and so the supplier obtained judgment against the plaintiffs. The plaintiffs commenced proceedings in the High Court of Singapore against the bank claiming, inter alia, damages for breach of contract arising from the issuing and opening of the letter of credit. The judge dismissed the plaintiffs' claim holding that the plaintiffs had no cause of action against the bank as issuing bankers of the letter of credit. On appeal by the plaintiffs the Court of Appeal of Singapore allowing the appeal held that under article 46(a) and (b) the bank was obliged to effect the transfer.

On the bank's appeal and the plaintiffs' cross-appeal to the Judicial Committee: - Held, allowing the appeal and dismissing the cross-appeal,

On the assumption that under article 46(a) a beneficiary had the right to instruct the bank which issued a transferable letter of credit to make the credit available to one or more third parties, by article 46(b) no bank asked to transfer the credit was obliged to do so except to the extent and in the manner to which the bank expressly agreed

Designation of a letter of credit by the issuing bank as transferable was insufficient to constitute consent to a subsequent transfer request; therefore, since after the plaintiffs' request for part of the credit to be transferred to the plaintiffs' supplier the bank had given no express consent, the bank was under no obligation to effect the transfer, and so the judge had properly dismissed the plaintiffs' action.

Decision of the Court of Appeal of Singapore reversed.

(f) Back-to-back credits Facility for seller from seller’s bank 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.

4. Specific forms of DLCs

(a) Performance Bonds (sometimes called Performance Guarantees) Given by banks in construction contracts where the employer and contractor are in different

countries. The employer requires the facility of recourse to a bank in the event the contractor fails to execute

the works in conformity with the contract Contractor will provide indemnity to bank to secure its obligation Employers in a strong bargaining position may be able to exact “on-demand” bonds payable on

demand irrespective of default by the contractor This is not strictly a guarantee as the bank’s obligation to pay is primary not secondary Enforceable under the principle of freedom of contract

IE Contractors Ltd v. Lloyds Bank PLC (1989 2 Lloyd’s Rep 205) Considered the adequacy of a demand made under a performance bond Held that the demands were defective, because each demand failed to show unequivocally that payment was

required on the basis provided in the respective facility; it had to specify the amount in order to be valid

Alteck Cement v Romanian Bank for Foreign Trade [1989] 1 AER 1189 Court asked to decide whether the proper law pof a performance bond was necessarily the same as the

proper law of the underlying transaction Court held that since the performance bond was intended to be a separate transaction, it was ordinarily

governed by the law of the place where payment was to be made under it

(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. A hybrid facility Has characteristics of guarantee, because it is a secondary obligation, but also has characteristics of

documentary credit in that payment is required to be made upon presentation of specified documents (a certificate or declaration by beneficiary that default has occurred) without the need to verify the contents)

HSBC v Kloeckner & Co. [1989] Lloyd’s Rep

Ct had to decide if the issuing bank could set off against the amount demanded by the beneficiary under a standby credit, an amount due to the bank from the beneficiary

the standby letter of credit was specifically opened for the purpose of financing the liabilites in the transactions and it would be very unjust if the bank were precluded from enforcing a set-off in relation to the present claims which arose directly out of the self same transactions;

this was a liquidated set-off and it would be anomalous that such a set-off should be unavailable in letters of credit cases but available against bills of exchange which were closely analogous, in that a bill of exchange was also virtually equivalent to cash; it was open to the bank to set off their liquidated claims under the letter of credit

(e) Trust Receipts Main facility for effecting DLCs. Provide for the release by the bank of the Bill Of Lading 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(where it retains its interest as pledgee) but not from dishonesty, where

the bank will have only a personal claim against the pledgor, when the goods are sold and the proceeds misappropriated. Similarly, if the pledgor has made an unauthorised disposition of the goods, the bank has only a personal claim.

Trust receipts do not need to be registered as bills of sale; exempted under s3(1)(f), BOSA: as documents used in the ordinary course of business

Trust receipt does not create any charge. The bank’s right as pledgee does not arise under a trust receipt, but under the original pledge.

(f) Doctrine of strict compliance Since banks only deal with documents, the documents must conform to what the LC requires.

Indian Overseas Bank v United Coconut Oil Mils Inc [1993] 1 SLR 141Held (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 64Facts: 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):

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.

Note however the English CA case below:

Kredietbank Antwerp v Midland Bank plc; Karaganda Ltd v Midland Bank and another (1999)

The credit specified, "Draft survey report issued by Griffith Inspectorate at port of loading". The beneficiary presented and Kredietbank accepted a Draft Surveyors Report which constituted a certificate signed on behalf of Daniel C. Griffith (Holland) BV. The certificate was on that company's headed writing paper, and at its foot there appeared a logo representing the word "INSPECTORATE".

Midland Bank rejected it on ground that it was not as according to the Letter of Credit: Griffith Inspectorate ≠ Daniel C. Griffith.

Midland Bank argued that in matter of corporate identification, precise compliance was required and cited Singapore’s United Bank v. Banque Nationale de Paris. The trial judge disagreed, and the Court of Appeal agreed with the trial judge that:

Any banker used to examining documents tendered under letters of credit would know that there are a number of groups which carry out surveys and other inspections of goods on a world-wide basis, and that a bank on reasonable examination would form the view that what the letter of credit called for was a document issued by a Griffith company, a member of the Inspectorate Group.

The CA went on: 'The banker is not concerned as to whether the documents for which the buyer has stipulated serve any

useful commercial purpose or as to why the customer called for tender of a document of a particular description. Both the issuing banker and his correspondent bank have to make decisions as to whether a document which has been tendered by the seller complies with the requirements of a credit

... the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents. To some extent, therefore, the banker must exercise his own judgment whether the requirement is satisfied by the documents presented to him.”

PT Adaro Indonesia v Rabobank [2002] 3 SLR 260

A company (‘GPT’) bought coal from the plaintiffs, Adaro, for re-sale to another company. GPT instructed the defendants, Rabobank, to issue a letter of credit in favour of Adaro (L/C Adaro). Similarly, an L/C was issued in favour of GPT (L/C GPT).

Adaro sent documents required under the L/C Adaro to Rabobank. The defendant noted discrepancies in the documents and sent a refusal advice to Adaro’s bank, which also stated that it had referred the discrepancies to GPT for further instructions. Later, Rabobank sent an arrival notice to GPT which stated that all the terms and conditions of the L/C Adaro had been complied with. Ultimately, GPT confirmed its acceptance of the discrepancies with Rabobank. Shortly after, GPT was placed under interim judicial management.

Following this, the defendants Rabobank sent an amended arrival notice to GPT which stated that it had noted certain discrepancies. Meanwhile, the defendants received payment under the L/C GPT, part of which was used to set-off some of GPT’s debts to it.

Adaro sued Rabobank for the amount under the L/C Adaro on the following grounds: (a) the L/C Adaro was a ‘back-to-back credit’ with the L/C GPT, and payment under the former was to be secured against funds received under the latter, (b) the documents were not discrepant, and (c) Rabobank had converted Adaro’s goods and had colluded with GPT in causing the bills of lading to be improperly issued.

The def argued that the discrepancies justified its refusal of payment, and that it could use the funds received from GPT’s bank under the LC GPT to set-off GPT’s debts.

Held, allowing the claim (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.

X. COMPANY DOCUMENTS AND FINANCING

In re: Spectrum Plus Ltd (In liquidation) [2004] 2 WLR 783 (Relevant to debentures and Charge over book debts)

Facts The first respondent company opened an account with the applicant bank, obtained an overdraft facility (the

facility) and granted the bank a debenture to secure all moneys due from the company to the bank. The facility was repayable on demand and might be withdrawn, reduced or otherwise varied on notice. It was otherwise subject to the bank's general terms.

Clause 2(v) of the debenture charged 'by way of specific charge all book debts and other debts . . . now and from time to time owing to the Company'.

Clause 5 provided: 'With reference to the book debts and other debts hereby specifically charged the Company shall pay into the Company's account with the Bank all moneys which it may receive in respect of such debts and shall not without the prior consent of the Bank sell factor discount or otherwise charge or assign the same in favour of any other person or purport to do so and the Company shall if called upon to do so by the Bank from time to time execute legal assignments of such book debts and other debts to the Bank.'

The company later went into creditors' voluntary liquidation and appointed the second and third respondents as liquidators.

The bank made an application for a declaration that the debenture had created a fixed charge over the company's book debts and the proceeds thereof and for an order on the liquidators to account to the bank in respect of them. The debenture granted by the bank to the company was not materially distinguishable from the debenture considered in a High Court authority which had decided that it was possible to create a fixed change over present and future book debts

Held –

The correct approach to deciding whether a charge over uncollected book debts which left a company free to collect them and use the proceeds in the ordinary course of its business was a fixed or a floating charge involved:

o Ascertaining the nature of the rights and obligations which the parties had intended to grant each other in respect of the book debts,

o Then ascertaining from those rights and obligations whether it was the intention of the parties that the book debts should be under the control of the company or of the bank,

o Then considering whether that intention was consistent with the nature of the transaction as described by the label put upon it by the parties.

o In the instant case the company's account was an ordinary current account with a clearing bank and there was no restriction on its operation. Unless and until the facility was withdrawn by the bank, or it became repayable upon the bank giving notice, the company was free to draw cheques in the ordinary course of business as it thought fit.

It was clear that the book debts were intended to be under the control of and available for use by the company in the ordinary course of its business through the collection of the book debts and the ordinary operation of the bank account. That intention was not consistent with the label the parties had put on it. Although cl 2(v) of the debenture charged the book debts 'by way of specific charge', that was not the consequence of the rights and obligations granted and imposed by cl 5. The charge over book debts granted by the company to the bank could therefore only have been a floating charge and the rights of the parties to the instant application had to be ascertained accordingly. The application would therefore be dismissed.