assignment of receivables singapore

The Government restricts bans on assignment

United Kingdom |  Publication |  November 2018

Legislation now in force preventing parties from prohibiting the assignment of receivables under certain contracts.

At the moment, a contract can prohibit or restrict the parties’ ability to assign or transfer rights created under the contract. The extent of the restriction is a matter of interpretation of the clause concerned. If one of the parties to the contract attempts to assign the benefit of the contract in breach of the restriction, the purported assignment is ineffective.

One of the key assets of any business is its receivables, and restrictions on assignment can prevent the parties from factoring receivables or otherwise raising finance on them. The Government has decided that it should be easier for businesses to raise finance on their receivables. Accordingly the Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. The regulations have now been made. They are contained in The Business Contract Terms (Assignment of Receivables) Regulations 2018. Draft regulations published in July, have been approved by both Houses of Parliament and are now in force.

What types of contracts do the Regulations apply to?

The Regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. But there are a number of important exclusions from their application, including the following:

• They only apply to contracts entered into on or after 31 December 2018.
• They only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is a small or medium-sized enterprise which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the
• Regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place.
• There is a specific exemption for contracts “for, or entered into in connection with, prescribed financial services”: These are widely defined to include “any service of a financial nature”.
• There are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases.
• As a general rule, it would seem that the Regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the Regulations.
• The Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom.

What is the effect of the Regulations?

The Regulations provide that “a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction , on the assignment of a receivable arising under that contract or any other contract between the same parties.”

A receivable is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Regulations do not prevent the parties from restricting the assignment of other contract rights.

More difficult is to establish what is meant by assignment. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance by way of sale); and sometimes it is by way of security (for instance to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. “Assignment” is not defined in the Regulations, and so there is some doubt as to which of these transactions are covered.

Although charges are not expressly referred to, they might be covered by the expression “assignment” if it is given a broad interpretation. But because of the uncertainty, the best course is to take an assignment by way of security over a receivable where there is, or might be, a restriction. That way, it is clear that the Regulations do apply.

Non-assignment clauses come in a variety of forms. They will be covered by the Regulations if they prohibit or impose a condition , or other restriction on the assignment of a receivable. The Regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it. Whether or not the Regulations apply in any particular case will require an analysis of the precise terms of the restriction.

The Regulations will be of particular importance to businesses involved in the financing of receivables. And they will also be of concern to buyers because they will override their contractual protections.

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Assignment of Receivables – The Achilles’ Heel of Invoice Financing

Receivables are a key tool in trade finance particularly with the use of invoice financing. By transferring the rights to a receivable such as an invoice, SMEs are able to get much needed working capital, getting paid by funders today, what is owed by their buyers in the future. Whether done on a recourse or non-recourse basis, assignments of the receivables are a central feature of invoice finance structures as they give funders critical rights against buyer-debtors. But without sufficient care on how assignments are obtained, this simple document can be the Achilles’ heel of an invoice financing program.

Risks in Invoice Financing

Invoice financing transforms a supplier-buyer relationship into a multi-faceted, funder-buyer as well as funder-supplier dynamic. The risks to be considered include:

• Receivable title risk: the risk that the supplier may have already assigned or pledged the receivable to another funder;
• Receivable transfer risk: the risk that applicable law may not allow the funder to take good title to the receivable, or otherwise subordinate the lender’s rights to third party claims;
• Dispute risk: the risk that the buyer may claim the supplier failed to deliver goods in accordance with the contract;
• Discount or dilution risk: the risk that the buyer will not pay the full amount of the invoice for reasons other than the supplier’s performance of the contract e.g., relying on set-off rights or discounting mechanisms in umbrella arrangements unknown to the funder;
• Payment delay risk: the risk that the buyer will not pay on time;
• Payment direction risk: the risk that the buyer will make the payment to the supplier or some other party instead of the funder; and
• Debtor credit risk: the risk that the buyer-debtor does not pay at all.

Assignments – why are they important.

A robust invoice financing program using assignments should narrow the risks above but only if careful attention is paid to how they are done. When assigning an invoice, a notice of the assignment serves both legal and practical functions. Legally, a notice of assignment is one of the requirements to create a legal assignment, which in turn allows the assignee-funder to enforce rights in its own name. Without notice, the assignment is treated as an equitable assignment which may provide challenges for a funder to enforce rights through an uncooperative supplier. Practically, a notice also serves to “flush out” some common excuses a buyer may deploy for non-payment relating to setting-off sums from other transactions, side arrangements on discounting or disputes relating to the invoice itself.

With no visibility on whether receivables had been previously assigned, a notice of an assignment serves as an important basic risk mitigant towards double financing. In addition, in cases of multiple assignments done by the supplier, a notice serves to give priority to a funder against subsequent funders – this can make all the difference if multiple financing of the same invoice is discovered later.

Forged/ Multiple Assignments

A notice of assignment as acknowledged by the buyer is only half the battle. In a pursuit for liquidity, unscrupulous traders may fabricate contracts, invoices and by extension assignment acknowledgements. These illegitimate acts may sometimes never come to light as a supplier may be able to recycle liquidity in time to repay its funders. But other times, forged acknowledgments or multiple financing are only discovered when the funder seeks to enforce against the buyer, who may be located in a difficult jurisdiction to get effective legal recourse. In the process, startling discoveries can be made:

• The buyer alleges the contract, invoice and acknowledgment of assignments have been forged;
• The buyer alleges that goods were never received notwithstanding invoicing and acknowledgment of the assignment of the invoice;
• The buyer is directed by the supplier to pay the supplier directly or a third party notwithstanding the assignment notice;
• The buyer convinces the supplier that the assignment has been extinguished; or
• The same invoice has been assigned to multiple funders.

The Achilles’ heel with assignments in invoice financing programs is that there is little interface between the funder and the buyer – the supplier plays a central role in routing documents to its funder. Funders have little visibility or capacity to verify every document and even where verification is done, an unscrupulous supplier may still impersonate their buyers with fictitious email accounts. The difficulty in detecting invoice fraud cannot be overstated and will continue to challenge the trade finance market. The Association of Banks in Singapore have introduced a Code of Best Practices for commodities financing which includes recommendations to get some reference of an assigned invoice into the invoice document itself and for lenders to obtain acknowledgment of assignments directly from the buyer. But without a registry for invoices, it would be difficult for funders to eradicate multiple assignments of the same receivable. Singapore is making plans to change that – so do watch this space.

Assignments as security or as outright transfer – why does it matter?

A receivable can be assigned as security for performance of a supplier’s obligation to repay a loan. Alternatively, an assigned receivable can operate as an outright transfer to a funder. The distinction is critical as understanding which party has ownership in the receivable can have important accounting (e.g., off balance sheet treatment) and legal consequences (e.g., the right to sue under the invoice). The distinction is even more acute if the supplier goes into liquidation – if deemed a security, a receivable would be treated as part of the insolvent supplier’s assets and if the supplier fails to register its assignment as a charge, then it may be void against the liquidator with the consequence that the funder is left unsecured for its debt. Receivables Purchase Agreements, in trying to have the best of both worlds to protect the funder for every loss and contingency can often inadvertently run the risk of being reclassified as a loan rather than a “true sale”.

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Receivables Finance And The Assignment Of Receivables

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Trade finance is a tool that can be used to unlock capital from a company’s existing stock, receivables, or purchase orders. Explore our hub for more.

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A common form of business finance where funds are advanced against unpaid invoices prior to customer payment

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Also known as SCF, this is a cash flow solution which helps businesses free up working capital trapped in global supply chains.

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BoL, BL or B/L, is a legal document that provides multiple functions to make shipping more secure.

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The release of working capital from stock, through lenders purchasing stock from a seller on behalf of the buyer.

This allows a business to grow and unlock cash that is tied up in future income

Receivables Finance

A tool that businesses can use to free up working capital which is tied up in unpaid invoices.

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This is commonly used for trading businesses that buy and sell; having suppliers and end buyers

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A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing.  Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice  discounting  products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

• has no effect;
• has no effect in relation to persons of a prescribed description;
• has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/  – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted  – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080  – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf  – Accessed 14/06/2023

https://www.investopedia.com/terms/a/asset-backedsecurity.asp  – Accessed 14/06/2023

https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf  – Accessed 14/06/2023

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COMMERCIAL LAW

Ch. 08 The Law of Contract

Ch. 08a remedies for breach of contract, ch. 09 domestic sale of goods, ch. 10 international sale of goods, ch. 11 the law of credit and security, ch. 12 intellectual property law, ch. 13 intellectual property licensing, ch. 14 forms of business organisations, ch. 15 law of agency, ch. 16 singapore company law, ch. 17 corporate finance and securities regulation, ch. 18 equity and trusts, ch. 19 restitution, ch. 20 the law of negligence, ch. 21 economic torts, ch. 22 banking and finance, ch. 23 the law of guarantees, ch. 24 insurance law, ch. 25 shipping law, ch. 26 building and construction law, ch. 27 competition law, ch. 28 income taxation, ch. 29 land law, ch. 30 bankruptcy and insolvency, ch. 31 technology, media, and telecom.

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SECTION 1 INTRODUCTION TO CREDIT AND SECURITY

A. General application

(1) Singapore law on credit and security essentially based on English law

11.1.1 This chapter deals with the law relating to debt financing or credit for an individual (consumer credit) or for a business (commercial credit). Singapore law in this area is essentially based on English law. Concepts of Common law, that is law established by past court decisions have generally been followed and applied by Singapore courts unless modified by local statutes. Hence the references to common law in this chapter.

(2) Security interests provided for under common law and statutes

11.1.2 Singapore law adopts the traditional common law forms of security interest, i.e. the mortgage, equitable charge, pledge and lien. Local statutes provide for certain additional or modified forms of security interest. Each type of security interest involves different legal formalities and creates different legal rights and obligations. Further, different assets can be subject to different security interests. The following sections therefore look at the various forms of security interests with reference to the types of asset.

B. Definitions

(1) Definition of credit

11.1.3 Credit is the provision of finance in exchange for a promise to pay at a future date. It can be provided in two ways: (i) by a cash advance known as ‘loan credit’ or ‘lender credit’; or (ii) by postponing payment for goods or services supplied known as ‘sale credit’ or ‘vendor credit’.

(2) Definition of security

11.1.4 Security is any form of asset obtained by a credit provider from the debtor or a third party to ensure repayment of usually the full sum of the debt.

C. Classification of assets

11.1.5 Assets are generally classified as real property (land and building) or personal property (cars, jewellery, rights to sue under a contract e.g. for a debt owed or for insurance proceeds under a contract of insurance). Personal property is commonly further sub-classified as chattels or choses-in-possession (tangible property like cars and jewellery) and choses-in-action (intangible property like debts and rights to sue under a contract).

D. Classification of security

(1) Security classified as real security or personal security

11.1.6 Security over all forms of assets is known as real security. In contrast, personal security does not involve any assets but refers to an individual’s or corporation’s personal undertaking to pay on behalf of the debtor upon the debtor’s failure to make payment, such as guarantees, indemnities and performance bonds.

(2) Quasi-security fulfil same function as security but not security in legal sense

11.1.7 Sometimes, the provider of ‘sale credit’ or ‘vendor credit’ may enter into contractual arrangements with the debtor to ‘secure’ his position vis-à-vis the unpaid purchase price for goods or services supplied. These arrangements are known as quasi-security as they fulfil the same function as security but are not security in the legal sense. An example is the hire-purchase.

E. Sources of credit

11.1.8 The main source of credit in Singapore is the commercial bank. Credit is also available from finance houses, insurance companies, cooperatives societies, moneylenders, pawnbrokers, mutual benefit organisations and credit and charge card organisations. Yet other sources of credit are suppliers of goods or services who provide trade credit by postponing payment for goods or services supplied.

F. Obtaining of credit

(1) Credit can be obtained on terms of unsecured financing, secured credit or quasi-security

11.1.9 Credit can be obtained on terms which do not require the provision of security to the financier (unsecured financing). Unsecured financing is commonly, though not exclusively, a form of consumer credit. Purchases charged to a credit card are an example of unsecured financing. On the other hand, commercial credit is commonly extended on terms which do require the provision of security (secured financing). An example is a loan to finance the working capital of a corporation’s business that is secured by a floating charge on the inventory of the business. As mentioned above, where credit is extended to a debtor, contractual arrangements may be made to provide the creditor with quasi-security.

(2) Legal rights and obligations mainly based on terms of contract made

11.1.10 Whether the credit transaction is secured or not, the legal rights and obligations governing the relationship of creditor (financier) and debtor (borrower) are mainly based on the terms of the contract made, apart from those terms implied by common law. Some forms of credit are additionally regulated by statute.

G. Enforcement of security interests

(1) Attachment refers to creation of security interest enabling creditor to enforce right

11.1.11 Attachment refers to the creation of a security interest over an asset in favour of a creditor so as to enable the creditor to assert/enforce the security right against the debtor but not necessarily against third parties. Without attachment, no enforceable security interest exists at all.

(2) Perfection refers to giving of notice to third parties of security interest over property

11.1.12 Perfection refers to the further step that must be taken to give notice to third parties of the security interest over the property so as to enable that creditor to be able to assert/enforce his security right against the third parties. Perfection normally involves either taking possession of the property, registration in a public register or the actual giving of notice. Failure of perfection would render the security interest invalid against subsequent parties who are granted security interests over the same property, an outright purchaser of the property, an execution creditor or a landlord seeking to distrain the property of the debtor for unpaid rent. The unperfected security interest would, in the event of insolvency, be invalid against the debtor’s other unsecured creditors as well. For example, section 131(1) of the Companies Act requires a charge created by a company to be registered with the Registry of Companies within 30 days of creation, failing which the charge shall be void against the liquidator and any creditor of the company.

(3) Priority issues arise where more than one security interest is created over same property

11.1.13 Priority issues arise where more than one security interest is created over the same property in favour of different parties. The same issues would arise where the property is first subjected to a security interest in favour of one party and subsequently sold to another or subjected to a contractual arrangement giving rise to quasi-security to another. This problem is compounded when the debtor’s collective debts far exceed the value of his total assets and insolvency proceedings are commenced against the debtor. Although priority issues are primarily resolved by reference to common law rules (which are modified by statutes in some cases), the concepts of ‘attachment’ and ‘perfection’ of a security interest are relevant.

(4) Rules governing priority amongst various claimants are complex

11.1.14 The rules governing priority amongst the various claimants against the debtor’s property are complex. The Singapore courts generally follow the English common law priority rules which are in some cases modified by local statutes. The existence of legal and equitable interests and questions of constructive notice of an interest add to the complexity of the rules.

(5) Security interests in commingled stock

11.1.15 Philip Wood’s Comparative Law of Security Interests and Title Finance (Sweet & Maxwell, 2nd Ed, 2007) was cited with approval in Singapore courts to squarely address the situation where goods in which one secured party has a perfected security interest are commingled with goods in which another secured party has a perfected security interest. In such a scenario, Wood cites Art 9 of the Uniform Commercial Code as authority that if neither party has priority, “each secured party is allocated the proportion of the product or mass that the value of that secured party’s collateral bore to the sum of the values of both parties’ collateral at the time that the collateral became commingled” (at para 16-041). The critical point is that prior to the mixture of the stocks in each category, the Lenders already possessed a perfected security interest by virtue of the underlying pledge. Each Lender’s security interest remains intact notwithstanding the mixture with goods in which other Lenders might have security interests. [ Pars Ram Brothers (Pte) Ltd (in creditors ’ voluntary liquidation) v Australian & New Zealand Banking Group Ltd and others [2017] 4 SLR 264; [2017] SGHC 38].

SECTION 2 UNSECURED CREDIT

A. ‘Loan credit’ or ‘lender credit’

(1) Providers of unsecured loan or lender credit

11.2.1 Providers of unsecured loan or lender credit include banks, finance companies, moneylenders and ordinary individuals.

(2) Loan from individual generally treated as simple contract of loan

11.2.2 A loan from an individual would be treated as a simple contract of loan and the usual contractual principles apply. However, an individual who lends money in return for a larger sum to be repaid may be regulated by the Moneylenders Act (Cap 188, 2010 Rev Ed). This Act prohibits the business of moneylending rather than the act of lending money.

(3) Definition of ‘moneylender’

11.2.3 Section 2 defines the terms 'moneylender', 'excluded moneylender' and 'exempt moneylender'. Anyone who is a moneylender under the Act must comply with its requirements while an 'excluded moneylender' need not. 'Exempt moneylender', however, refers to any moneylender who has applied for and been granted a conditional and temporary exemption by the Minister of Law from complying with any or all provisions of the Act; for example, from holding a moneylender licence (see sections 35 & 36). Generally, anyone carrying on a business of moneylending is a moneylender under the Act. Singapore courts have held that lending activity that is regular, and shows a degree of system and continuity is evidence of a business of moneylending. Section 3 raises a rebuttable presumption that a person who lends money in return for a larger sum to be repaid is a moneylender. The definition for excluded moneylender includes:

entities whose lending activities are already regulated by other statutes (eg the Banking Act (Cap 19, 2008 Rev Ed) or Finance Companies Act (Cap 108, 2011 Rev Ed)), any society registered as a credit society under the Co-operative Societies Act (Cap. 62); any pawnbroker licensed under the Pawnbrokers Act 2015;

any person who lends solely to:

his employees (as part of their employment benefits) ; or

corporations, limited liability partnerships; or

trustee-managers or trustees of business trusts, or trustees of real estate investment trusts (for the purposes of the respective trusts) ; or

accredited investors as defined by section 4 of the Securities & Futures Act (Cap 289, 2006 Rev Ed) ; and

‘any person carrying on any business not having for its primary object the lending of money in the course of which and for the purposes whereof he lends money.’

Hence, credit extended by credit and charge card organisations may fall under the first exception while suppliers of goods or services who provide credit facilities fall under the last exception.

11.2.4 The Singapore Court of Appeal, in holding that certain loans entered into between commercial entities for commercial purposes fell within the letter and spirit of part of the definition of “excluded moneylender”, had reiterated Parliament’s intention to de-regulate commercial borrowing. [ Sheagar s/o T M Veloo v Belfield International (Hong Kong) Ltd [2014] SGCA 26]. 

In 2018, the Court of Appeal found that the transactions to extortionate loans disbursed over a period of 3 years and which were never part of any bona fide commercial venture, had clearly fell within the mischief caught under the Act. The appellants had disguised the moneylending transactions as investments in a joint venture, fabricating invoices and defrauding the authorities to intentionally evade the application of the Moneylenders Act, thus they did not fall under the last exception in 11.2.3 (then s 2 Exception (c) of the repealed Moneylenders Act (Cap 188, 1985 Rev Ed). The appellants were found to have engaged in unlicensed moneylending under s 15 of the Act. [ Ochroid Trading Ltd and another v Chua Siok Lui (trading as VIE Import & Export) and another [2018] SGCA 5, Ochroid .

To determine if the agreements were in fact loan contracts within the definition of the Moneylenders Act, weight was given to the form and substance of the transactions, the parties' position and relationship in the context of the entire factual matrix. [ City Hardware Pte Ltd v Kenrich Electronics Pte Ltd [2005] 1 SLR 733].

11.2.5 The Singapore Court of Appeal also, in holding that an individual who had made repeated loans to a certain borrower was not an unlicensed moneylender, had reiterated that the Moneylenders Act is intended to protect the interests of borrowers from the conduct of unscrupulous unlicensed moneylenders. [ Lena Leowardi v Yeap Cheen Soo [2014] SGCA 57].

(4) Business of moneylending regulated under the Moneylenders Act

11.2.6 The business of moneylending is regulated under the Act through strict licensing and procedural requirements. A contract for the repayment of money lent by an unlicensed moneylender is rendered unenforceable as is security or guarantee given for such a loan. Under the Act, the court is vested with wide discretion to grant relief to a borrower or surety or any other person liable under the contract of loan where the interest charged is excessive and the loan transaction is harsh and unconscionable or substantially unfair. Contravention of the requirements under the Act attracts penal sanctions apart from civil consequences relating to enforceability of the contract of loan and security furnished.

(5) Licensed credit bureaus regulated under the Credit Bureau Act 2016 (No. 27 of 2016)

The Act, published in 2017 empowers the Monetary Authority of Singapore (MAS) to regulate licensed credit bureaus and their approved members, subjecting them to corporate governance and operational requirements. Licensed credit bureaus will be required to safeguard the confidentiality, security and integrity of customer credit information, as well as protect customers' rights to access, review and rectify the customer information held by the credit bureaus. (Singapore Parl Debates: Vol 94, Sitting no. 28; [9-11-2016])

B. ‘Sale credit’ or ‘vendor credit’

(1) Unsecured sale of vendor credit provided when supplier allows postponement of payment

11.2.7 Unsecured sale or vendor credit is provided when a supplier of goods or services allows postponement of payment for goods (albeit ownership of goods has passed to the buyer) or services. This may be a term stipulated in the contract of sale or supply itself. Sometimes, the buyer is issued with the supplier’s in-house credit or charge card to which purchases at the supplier’s retail outlets can be charged. The issue and use of the card are governed by the terms of a contract entered into between the buyer-cardholder and the supplier-card issuer. Hence, the usual contractual principles apply to these transactions.

(2) Unsecured sale credit may also be provided by body other than supplier

11.2.8 Unsecured sale credit may be provided by a body other than the supplier of goods or services, typically a credit or charge card organisation. In this scenario, the supplier would enter into a contract with the card issuing organisation agreeing, amongst others, to accept payment for its goods or services made via the cards issued by the organisation (the ‘merchant agreement’). The card issuing organisation would enter into contracts with persons to whom cards are issued (the ‘cardholder agreement’). Again, normal contractual principles apply to govern these contracts.

(3) Sale credit extended by suppliers and credit or charge card organisations regulated by Banking Regulations

11.2.9 Sale credit extended by suppliers of goods or services is not regulated by statute. The supplier is not considered a moneylender under the Moneylenders Act (see Section 11.2.3 above). Sale credit extended by credit or charge card organisations fall outside the purview of the Moneylenders Act (see Section 11.2.3 above) but are subject to Part VIII of the Banking Act and regulations issued pursuant to section 78(2) of the said Act.

11.2.10 The Banking (Credit Card and Charge Card) Regulations 2013 (Cap 19, S8) specify limits on the issue of credit cards and charge cards which include: minimum qualifying income of an individual (of 55 years and below or above 55 years of age) applying for a card with an unsecured credit limit; conditions for issuing a corporate card or business card, a card with a secured credit limit, and a supplementary card to individuals below 18 years of age; maximum allowable credit limit; prohibition on solicitation of cardholders; and the prescribed method of disclosure of finance and late payment charges.

11.2.11 Other Banking Regulations prohibit card issuing organisations from conduct that induce, urge or encourage any individual to use the card to pay for the legally required cash deposit portion of the purchase price of a residential property.

11.2.12 Contravention of the regulations attracts penal sanctions.

SECTION 3 REAL SECURITY OVER LAND AND BUILDING

A. Definition of land

11.3.1 Singapore law adopts the common law definition of land. Land is also defined in section 2 of the Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed) and section 4 of the Land Titles Act (Cap 157, 2004 Rev Ed). Land refers to the surface of any delineated parcel of earth, the column of airspace above it, the subterranean space below it, and all plants growing and structures built upon it. It extends to any rights that run with the land such as rights to air, light, water and the right of access to any adjacent highway.

B. Chattels or choses-in-possession on land may be considered as fixtures

11.3.2 Chattels or choses-in-possession on the land may be considered a part of the land (thus known as ‘fixtures’) such that security interests granted over the land would extend to the fixture. To determine if chattels have become fixtures, Singapore courts apply the common law two-prong test of degree and purpose of annexation. A chattel physically annexed to the building raises the rebuttable presumption that it has become a fixture. A chattel that merely rests upon the ground by its own weight raises the converse rebuttable presumption. The purpose of annexation is also relevant. A chattel attached to the building may not become a fixture if the purpose of attachment is temporary and intended for the better enjoyment of the chattel. Whilst a chattel resting on it own weight may become a fixture if it was for the permanent and substantial improvement of the land.

C. Systems of Registration

11.3.3 Historically, to prevent the incidence of fraud when transfer of ownership of land is effected, a system of registration was put in place requiring records of dealings in land, whether outright transfers of ownership or transfers by way of mortgage, to be kept.

(1) Deeds System

11.3.4 Two systems exist in parallel in Singapore. Under the first, the Deeds System, ownership of common law or ‘unregistered’ land is transferred by deed. Lodging deeds at the Registry of Deeds is not compulsory but necessary to secure priority where there are conflicting and competing interests in the same property and to enable the deed to be introduced as evidence in any court proceeding. The Deeds System is governed by the Conveyancing & Law of Property Act and the Registration of Deeds Act (Cap 269, 1989 Rev Ed).

(2) Torrens System

11.3.5 The second, the Land Titles System (also known as the Torrens system) was introduced later to provide a more simplified system. Dealings in land registered under the Land Titles Act are noted in the Land Titles Register. Registration of transfers is compulsory as transfers have no effect unless registered. A person investigating the owner’s title need only look into the register and may ignore dealings not noted in the register. Priority is conferred to the first party to register amongst competing interests in the same property.

D. Mortgage over land

11.3.6 A security interest commonly created over real property is the mortgage. Thus, contractual principles apply apart from common law principles and statute law.

(1) Traditional mortgage involves transfer of ownership of land by the debtor to the creditor

11.3.7 The traditional mortgage involves the transfer of ownership of land by the debtor or a third party (‘the mortgagor’) to the creditor (‘the mortgagee’) subject to the debtor or third party’s right to have ownership transferred back to him upon full repayment of the sum owed (this right is known as ‘the equity of redemption’). Although ownership is transferred, possession of the property remains with the debtor or third party. Generally, the terms of the mortgage agreement would confer upon the creditor the right to sell the mortgaged property and apply the proceeds in satisfaction of the sum owed to him. A mortgagee would also enjoy a right of foreclosure, that is, to obtain a court order to bring the mortgage to an end and extinguish the mortgagor’s right of redemption of the mortgaged property and any subsequent security rights created over the same property. Other remedies for the mortgagee may be contractually agreed between the parties, for example, the mortgagee’s right to retake possession of the mortgaged property. The traditional mortgage, as described, may be legal (created by transfer of the legal title to the land) or equitable (by an informal deposit of title deeds coupled with an intention to create a mortgage over the property or by transfer of an equitable title to the property).

(2) Mortgages under the Deeds System governed by the Conveyancing & Law of Property Act

11.3.8 Mortgages of land under the Deeds System must comply with the formalities in the Conveyancing & Law of Property Act. The rules of the Act, together with the terms contractually agreed in the mortgage agreement, govern the rights and obligations between mortgagor and mortgagee. Certain rules apply unless expressly excluded or varied by the terms of mortgage.

(3) Modifications to traditional concept of mortgage

(a) Traditional concept of mortgage modified by the Land Titles Act

11.3.9 The traditional concept of mortgage of land has been modified by the Land Titles Act. The modified mortgage thus applies to mortgages of land registered under the Act and new mortgages created after land has been converted to “registered land” under the Act.

(b) All land in Singapore converted to ‘registered land’ under Torrens system

11.3.10 As of 31 December 2002, practically all land in Singapore has been converted to ‘registered land’ under the Land Titles or Torrens system. The effect of the conversion is that new mortgage over land created after that date will be subject to the rules of the Land Titles Act. The rules of the Conveyancing & Law of Property Act continue to apply together with the rules of the Land Titles Act to these new mortgages, insofar as they do not contradict the Land Titles Act.

(c) Mortgages registered under the Land Titles Act must comply with formalities in said Act

11.3.11 Mortgages of land registered under the Land Titles Act must comply with the formalities in the said Act the rules of which, together with terms contractually agreed in the mortgage agreement, govern rights and obligations between mortgagor and mortgagee. Certain rules apply unless expressly excluded or varied by the terms of the mortgage.

(d) Land Titles mortgage differs from traditional mortgage in not involving transfer of ownership in property at all

11.3.12 Under the Land Titles Act, two types of security interest may be created over registered land according to the purpose served by the security interest. If the purpose is to secure payment of a debt, a mortgage in the prescribed form may be registered. In contrast, if the purpose is to secure payment of money other than a debt, then a charge in the prescribed form may be registered. A Land Titles mortgage differs from the traditional mortgage in that it does not involve a transfer of ownership in the property at all although the rights and obligations between mortgagor and mortgagee remain largely the same.

(e) Where a mortageee was entitled to possession under a mortgage, the court generally has no jurisdiction to refuse an order for possession without the agreement of the mortagee.

Following authorities such as Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317, that where a mortgagee was entitled to possession under a mortgage, the court had no jurisdiction to refuse an order for possession, whether on terms that the mortgagor keep up with the payments or pay the arrears or otherwise, without the agreement of the mortgagee.

It was held in Hong Leong Finance Ltd v Tan Gin Huay [1999] 1 SLR (R) 755; [1999] 2 SLR 153 that there was one exception to this general principle. Citing (at [11]) the decision in Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883, the court had the jurisdiction to adjourn a summons for possession or stay the execution of an order for possession for a short period of time in order to afford the mortgagor a chance to redeem the mortgage in full or otherwise satisfy the mortgagee, provided there was a reasonable prospect that the mortgagor would be able to do so. [ Pereira, Dennis John Sunny v United Overseas Bank Ltd [2018] 1 SLR 31; [2017] SGCA 62].

E. Charge over land

(1) Charge created when chargor agrees to appropriate a property towards satisfaction of debt

11.3.13 A charge is created when a debtor or third party (‘the chargor’) agrees to appropriate or make available a property towards the satisfaction of the debt so that the creditor is entitled, in the event of default of repayment of the debt, to take possession of the property, sell it and apply the proceeds in satisfaction of the debt. Unlike a mortgage, both ownership and possession of the land remains with the debtor or third party.

(2) Statutory charge can be created to secure payment of money other than debt

11.3.14 Charges over land are rare. As mentioned, under the Land Titles Act, a statutory charge can be created over registered land to secure payment of money other than a debt. The Court of Appeal has held that section 131(1) of the Companies Act invalidated an unregistered charge as against the liquidator and any creditor of the company, where “creditor” meant a creditor who had acquired a proprietary right or interest in the subject matter of the unregistered charge. It was only upon the making of the winding-up order (in a compulsory winding up), and not on the presentation of a winding-up application, that the assets of the company were impressed with a statutory trust. [Media Development Authority of Singapore v Sculptor Finance (MD) Ireland Ltd [2013] SGCA 58]

SECTION 4 REAL SECURITY OVER CHATTELS / GOODS

A. Chattel mortgage created in same way as traditional mortgage over land

11.4.1 A mortgage over goods is created in the same way as a traditional mortgage over land (see Section 11.3.7 above). Generally, the same rights and obligations are contractually agreed between the mortgagor and mortgagee. Mortgages over chattels can also be legal or equitable.

B. Statutory regulation of chattel mortgages

(1) Written chattel mortgages created by individuals governed by the Bills of Sale Act

11.4.2 An oral chattel mortgage is rare. Written chattel mortgages created by individuals or unincorporated entities (e.g. sole-proprietorships or partnerships) are considered bills of sale and governed by the Bills of Sale Act (Cap 24, 1985 Rev Ed). Written chattel mortgages created by incorporated companies come under the purview of the Companies Act (Cap 50, 2006 Rev Ed).

11.4.3 The Bills of Sale Act regulates written chattel mortgages through strict registration and procedural requirements. For example, failure to comply with the registration requirement renders the bill of sale void in respect of the security interest. Failure to use the prescribed form renders the security bill of sale totally void both in respect of the debt and the security interest. Priority between competing bills of sale over the same chattel is determined according to the date of registration.

(2) Written chattel mortgages created by incorporated companies governed by the Companies Act

11.4.4 The Companies Act requires a chattel mortgage created by a company to be lodged for registration within 30 days after its creation. Non-compliance renders the security interest void against the liquidator and any other creditor upon the insolvency of the company. The common law priority rules apply to two or more mortgages created over the same chattel. Registration under the Act amounts to notice to the public of the existence of the security interest and has an impact on priority between competing interests in the same property.

(3) Mortgages over certain types of goods regulated by specific statute

11.4.5 Mortgages over certain types of goods are regulated by specific statute instead of the above mentioned statutes. For example, mortgages of registered ships must conform to the requirements of the Merchant Shipping Act (Cap 179, 1996 Rev Ed), the provisions of which also determine priority between competing security interests in the same ship.

C. Fixed charge and floating charge

What is a charge?

A charge does not require the transfer of any ownership or possession – it is a creation of equity, appropriating the subject matter to an equitable interest that binds the world other than a bona fide purchaser of the legal title for value without notice. A charge creates an encumbrance or appropriation of an interest in the asset to the satisfaction of whatever obligation is owed by the chargor to the charge. In any event, it does not follow that each asset has to be separately assigned for it to fall under the charge. Once a charge is in effect, regardless of the precise mechanism, any asset that comes into the hands of the chargor is appropriated to the chargee without anything more. [As clarified in Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others v BP Singapore Pte Ltd and another matter " Jurong Aromatics " [2018] SGHC 215].

(1) Definition of fixed charge and floating charge

11.4.6 A fixed charge over goods is similar to a charge over land (see Section 11.3.13 above) and is usually created over ‘permanent’ goods like office equipment. A floating charge may also be created over goods. This enables goods subject to a floating charge to be dealt with in the ordinary course of the chargor’s business as though they are unencumbered by the charge. Floating charges are appropriate for goods that are used to generate an income, like the inventory of a business.

(2) Crystallisation of floating charges

(a) Generally, floating charge crystallises upon happening of various events

11.4.7 Generally, a floating charge becomes a fixed charge (‘crystallises’) attaching on specific goods within the class upon the happening of various events: the chargor ceases to carry on business; the chargor goes into liquidation (whether voluntary or otherwise) ; the chargee appoints a receiver over the chargor’s assets; and the chargee exercises rights of intervention in the chargor’s management of the assets as authorised by the terms of the charge agreement, for example, to take possession of the assets or sell the assets. Other events triggering crystallisation may be contractually agreed between the parties. 

In Jurong Aromatics , the debenture contained an automatic crystallization clause which applied to the appointment of receivers and managers by the Senior Lenders themselves. Once the floating charge crystallised, the assets became subject to the equitable interest of the Senior Lenders. The judge ruled that the receivers and managers were appointed by the Agent in respect of the charged assets and the activities of the receivers and managers including the use of funds were pursuant to that appointment. Therefore, there was control exercised by the receivers and managers and this constituted control exercised by the Senior Lenders. This thus fell under the automatic crystallization clause and the floating charge has been crystallised.

(b) ‘Automatic crystallisation clauses’ provide for crystallisation of floating charges to occur automatically upon happening of events beyond those recognized at common law

11.4.8 ‘Automatic crystallisation clauses’ are clauses inserted into the charge agreement which provide for crystallisation of floating charges to occur automatically without any active act by the chargee upon the happening of events that go beyond the recognised situations at common law (as enumerated in Section 11.4.7 above). The validity of such clauses has yet to be considered by the Singapore courts although it has been generally upheld by most Commonwealth jurisdictions (for example, Australia and New Zealand) including the UK.

(3) ‘Negative pledge clauses’ restrict chargor’s right to create subsequent charges ranking in priority to floating charge

11.4.9 ‘Negative pledge clauses’ which restrict the chargor’s right to create subsequent charges ranking in priority to the floating charge are also often included in the terms of the charge agreement. The restriction is normally upheld as between the chargor and chargee but will only be effective against a third party (purchaser or person who is subsequently granted a security interest over property subject to the original floating charge) if the third party has notice of the restriction. Such a restriction may impact upon priority of competing interests in the same asset.

(4) Written charges created by individuals may be considered bills of sale under the Bills of Sale Act

11.4.10 Written charges over goods created by individuals and unincorporated entities may be considered bills of sale regulated by the Bills of Sale Act (see Section 11.4.3 above).

(5) Charges over goods created by companies subject to same requirements as chattel mortgages under the Companies Act

11.4.11 Charges over goods created by companies would be subject to the same registration requirements and consequences for non-compliance as chattel mortgages under the Companies Act (see Section 11.4.4 above). Generally, floating charges are disadvantaged under the Act. Fixed charges are usually given priority over floating charges. Upon the insolvency of the chargor, debts due to specific unsecured preferential creditors are paid ahead of the floating chargee if the realised available assets are insufficient to meet those debts. Further, where a floating charge is created within six months of the commencement of winding up of the chargor, unless it is proved that the chargor was solvent immediately after the creation of the charge, the floating charge will be invalid to secure any existing sum owed to the chargee. The floating charge will only be valid to secure fresh advances made on the day of creation of the charge or subsequently if the chargor was insolvent at the time of its creation.

(6) Estoppel/ Waiver/ Decrystallisation of a charge

A charged asset will only escape the charge if for some reason the charge is to cease to operate, or to have its effect suspended, through some form of waiver, estoppel or decrystallisation. It is possible for a debenture holder to agree not to assert equitable interest in the charged assets or part thereof. The debenture holder can also release the charged assets, or decide not to have future assets subjected to the charge. In such circumstances, the doctrines of estoppel, waiver or decrystallisation may apply to prevent the operation of the charge. [ Jurong Aromatics at 93.]

Decrystallisation as accepted in Jurong Aromatics [94 - 97], involves a charge ceasing to operate, either because of the restoration of the chargor’s management powers over the assets in question which reverts the charge to one that is floating, or the inaction of the debenture holder which allows the chargor to continue to deal with the charged assets in the ordinary course of business. Decrystallisation does not occur very readily, there has to be clear evidence before the court can conclude that there has been any decrystallisation. The parties have to either agree to it or evidenced by a loss of control by the debenture holder.

Similarly, any estoppel or waiver is only to be found on the basis of a clear and unequivocal representation. The line between decrystallisation on the one hand and estoppel or waiver on the other may be very fine. The judge in Jurong Aromatics [at 98] held that it is not clear at this juncture whether any difference really exists between the concepts.

(1) Pledge created when debtor transfers possession of goods to creditor as security for sum owed

11.4.12 A pledge is created when a debtor (‘pledgor’) transfers possession of goods owned by him to the creditor (‘pledgee’) with the intention of using the goods as security for the sum owed. A crucial requirement for the creation of a pledge is the transfer of possession of the goods. This is done through actual physical delivery, or notional or constructive delivery, for example by delivering documents of title to goods to the creditor. The rights and obligations between pledgor and pledgee at common law apply together with any other rights contractually agreed between them. This include the situation where a bank granted a facility agreement to a borrower on the common understanding that the bank would be compensated by the grant of an equitable mortgage over certain pledged shares where share certificates had been handed over to the bank together with a blank signed share transfer form, held the Court of Appeal in Rainforest Trading Ltd and another v State Bank of India Singapore [2012] SGCA 21

(2) Creditor-pledgee has right to retain possession of pledged goods until debt is repaid

11.4.13 At common law, a creditor-pledgee has the right to retain possession of the pledged goods and use them until the debt is repaid. If the debt is not repaid within the time specified or if no timeframe is specified, within the lifetime of the pledgor, the pledgee has the right to sell the pledged goods and apply the proceeds of sale in satisfaction of the debt.

(3) Pledges of goods with pawnbrokers governed by the Pawnbrokers Act

11.4.14 Barring some exceptions, pledges of goods with pawnbrokers are governed by the Pawnbrokers Act 2015 and the Pawnbrokers Rules 2015. The Act deems goods taken into possession by a lender of money as security for the repayment of a loan as goods taken in pawn. This also applies if the loan gives rise to a mortgage of the goods as per S 3(3c) of the Act. Under the First Schedule of the Act, goods are deemed to be pawned when person A sells the goods to B for a price and B is then required to re-purchase the goods form A at a higher price.

11.4.15 Although there is no formality required for the creation of a pledge at common law, pledges with pawnbrokers are strictly regulated by the Pawnbrokers Act. The Pawnbrokers Act regulates the business of pawnbroking through strict licensing and procedural requirements. The rights and obligations of the pawnor and pawnee are governed by the provisions of the Act.

(4) Trust receipts as commercial credit device utilised by importer of goods

11.4.16 The trust receipt is a commercial credit device typically utilised by an importer of goods. An importer of goods who has created a pledge over the consignment in favour of a financier would have given constructive delivery of possession of the consignment by handing over the bill of lading and other shipping documents to the financier. When these documents are required for taking delivery of that consignment upon their arrival, a trust receipt is executed in favour of the financier wherein the importer undertakes that in consideration of the financier releasing the documents to him, he would hold the documents on trust for the financier, use them to obtain the goods as the financier’s agent and hold both the goods and proceeds after sale on trust for the financier. The usual common law and contractual principles apply.

(1) At common law,lien is extinguished upon relinquishing possession of goods

11.4.17 When possession of goods are transferred to another for some work to be done upon the goods, and the fees for work done is outstanding, the workman in possession of the goods (‘lienee’) obtains, by operation of the law, the right to exercise a lien over the goods. At common law, the rights of the lienee are merely to retain possession of the goods until full payment is made. Unless contractually agreed, no other remedy is available. The lien is extinguished upon relinquishing possession of the goods.

(2) Lien may arise contractually

11.4.18 A lien may arise consensually if expressly provided for by contract.

(3) Lien may be imposed by statute

11.4.19 A lien may be imposed by statute. For example, an unpaid seller of goods may retain possession of goods until payment or tender of price under section 41 of the Sale of Goods Act (Cap 393, 1999 Revised Ed).

SECTION 5 QUASI-SECURITY OVER CHATTELS / GOODS

A. Hire-purchase

(1) Hire-purchase agreement confers quasi-security upon ‘original owner’ of goods

11.5.1 Hire-purchase is a common consumer credit device that places the creditor in a secured position vis-à-vis sums owed to him although no security interest has been created. A hire-purchase agreement thus confers quasi-security upon the ‘original owner’ of the goods.

11.5.2 It is a contractual arrangement where the owner of goods lets out the goods to a hirer (who pays rent for the use of the goods) coupled with an irrevocable option to purchase the goods at the end of the hire period.

(2) Credit providers by way of hire-purchase are usually finance companies

11.5.3 Finance companies are the usual credit providers by way of hire-purchase. For example, a consumer wishing to purchase a car would enter into a hire-purchase agreement with a finance company after the finance company purchases the car from the car dealer.

(3) Hire-purchase transactions below certain values are regulated by the Hire-Purchase Act

11.5.4 Hire-purchase transactions involving consumer goods not exceeding $20,000 (inclusive of any goods and services tax) in value since 1 November 2004; and motor vehicles not exceeding $55,000 (inclusive of any goods and services tax and import and excise duty but excluding the cost of a Certificate of Entitlement) since 15 July 1994 are regulated by the Hire-Purchase Act (Cap 125, 2014 Rev Ed). The usual contractual principles apply to hire-purchase transactions falling outside the purview of the Hire-Purchase Act.

(4) The Hire-Purchase Act protects hirers in ensuring full and truthful disclosure

11.5.5 Generally, the Hire-Purchase Act protects hirers by regulating the form and contents of hire-purchase agreements to ensure full and truthful disclosure to the prospective hirer of financial obligations prior to and after entry into the hire-purchase agreement and specifying the rights and duties of the hirer and the owner under the agreement. Non-compliance may render unenforceable the agreement itself, any security furnished by the hirer or guarantor of the hirer and expose the owner, the dealer or hirer to penal sanctions.

B. Finance lease

(1) Finance leases do not confer option to purchase goods upon hirer, unlike hire-purchase agreements

11.5.6 Another quasi-security device often utilised by businesses (to obtain the use of office or plant equipment) is the finance lease. It is a contractual arrangement where the owner leases goods to usually one hirer (who pays rent for the use of the goods) for the estimated working life of the goods. Unlike a hire-purchase, no option to purchase is conferred upon the hirer by the lease agreement. In practice, the hirer may expect to be able to purchase the goods at the end of the lease. Rentals are computed so that the owner recoups the capital cost of the goods and a margin of profit during the period of the primary lease. The usual contractual principles apply. Terms may be implied into the finance lease contract by the Supply of Goods Act (Cap 394, 1999 Rev Ed).

(2) Providers of “credit” by way of finance lease are usually finance companies

11.5.7 Finance companies are the usual providers of “credit” by way of finance lease. Typically, the hirer selects the equipment he needs and requests the finance company to purchase the equipment from the supplier. The finance company would enter into a finance lease with the hirer after purchasing the equipment from the supplier.

C. Conditional sales & the Romalpa Clause

(1) Supplier of goods may secure his position by contractually providing for retention of ownership in goods

11.5.8 A supplier of goods may secure his position vis-à-vis the payment of the purchase price of the goods by contractually providing for title or ownership in the goods to be retained by him until such time that the full purchase price has been paid. This is known as a retention of title or Romalpa clause.

(2) Romalpa clause over goods mixed in process of manufacture to form new goods may be interpreted as charge over new goods

11.5.9 A Romalpa clause over goods that subsequently lose their original identity when mixed in a process of manufacture with other goods to form new goods may be interpreted as a charge over the new goods. Where the buyer is a company, such a charge would attract registration requirements and consequences for non-compliance under the Companies Act (see Sections 11.4.4 and 11.4.11 above).

(3) Contracts containing Romapla Clause generally governed by the Sales of Goods Act

11.5.10 Generally, contracts for the sale of goods containing the Romalpa Clause are known as “conditional sale contracts” and are governed by the Sales of Goods Act. However, conditional sale contracts involving consumer goods not exceeding $20,000 (including any goods and services tax) in value may be subject to the provisions of the Hire-Purchase Act.

(4) Priorities between conflicting interests in goods determined by common law and statutory rules

11.5.11 Priorities between conflicting or competing interests in goods which are the subject of a contract of sale under the Sales of Goods Act, are determined by common law rules modified by sections 23 to 26 of the Act and sections 8 and 9 of the Factors Act (Cap 386, 1994 Rev Ed).

SECTION 6 REAL SECURITY OVER CHOSES-IN-ACTION

A. Definition of choses-in-action

11.6.1 Choses-in-action are intangible personal assets which are enforceable by legal action. Examples of choses-in-action are trade debts (accounts receivables), stocks and shares, bank deposits, rights under insurance policies and copyright.

B. Mortgages over choses-in-action created in same way as mortgages over land and goods

11.6.2 Mortgages over choses-in-action are created in the same way with generally the same rights and obligations as mortgages over land and goods (see Sections 11.3.7 and 11.4.1 above). Mortgages over choses-in-action can also be legal or equitable.

C. Charges over choses-in-action created in same way as charges over land and goods

11.6.3 Fixed or floating charges may be created over choses-in-action in the same way with generally the same rights and obligations as charges over land and goods (see Sections 11.3.13, 11.4.6 to 11.4.9 above).

D. Applicable law

(1) Common law and normal contractual principles apply generally to mortgages and charges over choses-in action

11.6.4 Generally, common law and normal contractual principles apply to such mortgages and charges. Specific legislative requirements apply according to the type of chose-in-action. For example, mortgages or charges over scripless shares must comply with the procedure prescribed by section 130N of the Companies Act. A legal mortgage over a life insurance policy, effected by a legal assignment of the benefit of the policy to the mortgagee, must comply with the requirements of section 4(8) of the Civil Law Act (Cap 43, 1999 Rev Ed) or with the provisions of the Policies of Assurance Act (Cap 392, 1994 Rev Ed).

(2) Mortgages and charges created over bank deposit accounts in favour of bank are specifically authorised

11.6.5 Legal or equitable mortgages and charges over existing customers’ bank deposit accounts created in favour of the bank as security for advances to the existing customers are specifically authorised by section 13 of the Civil Law Act.

(3) Mortgages and charges, where mortgagor or charger is company, are regulated by the Companies Act

11.6.6 Where the mortgagor or chargor of the chose-in-action is a company, the registration requirements of the mortgage or charge and consequences for non-compliance under the Companies Act may apply (see Sections 11.4.4 and 11.4.11 above).

SECTION 7 QUASI-SECURITY OVER CHOSES-IN-ACTION

A. Trade creditor conferred quasi-security over factored trade debts

11.7.1 Although security interests (mortgage or charge) may be created over trade debts (accounts receivables) they are more popularly sold to factoring houses to obtain immediate liquidity. The trade creditor is thus placed in a ‘secured’ position vis-à-vis the trade debts, especially if the trade debts were sold to the factoring house on a ‘non-recourse’ basis, i.e. on the basis that the trade creditor will not be held responsible for any bad debts. This is known as factoring. As implied, trade debts may be factored on a ‘with recourse’ basis.

B. Sale or legal assignment of trade debts regulated by the Civil Law Act

11.7.2 The outright sale or legal assignment of trade debts must comply with the form and procedure prescribed by section 4(8) of the Civil Law Act. Failure to comply, for example, lack of notice of the assignment to the debtor, may render the assignment effective only as an equitable assignment. Lack of notice to the debtor may also cause the assignee to lose priority to other competing assignees or persons with security interest in the same trade debts who gave notice first.

C. Bank may obtain quasi-security over repayment of loan through contractual means

11.7.3 As mentioned, section 13 of the Civil Law Act allows a mortgage or charge to be created in favour of a bank over their existing customer’s bank deposit account. A bank which extends a loan (or a performance bond or bank guarantee) to an existing customer with a deposit account with the bank may ‘secure’ its position vis-à-vis repayment of the loan (or its contingent liability under the performance bond or bank guarantee) contractually instead. One way is by providing in the loan (or performance bond or bank guarantee) agreement for the bank to be authorised to set off the amounts owed under the agreement against the credit balance in the customer’s account until the liability under the agreement is discharged. This is known as a ‘contractual set-off’. Alternatively, the loan (or performance bond or bank guarantee) agreement may restrict the customer from withdrawing any amount from its deposit account until the liability under the agreement is discharged. The usual contractual principles apply to these quasi-security devices.

SECTION 8 PERSONAL SECURITY

A. Person who furnishes real security creates security rights over his property in favour of financier or creditor

11.8.1 A person who furnishes real security creates security rights over his asset or property in favour of the financier or creditor. A person who furnishes personal security merely contractually undertakes to pay the debt if the debtor fails to pay.

B. Guarantee is most common form of personal security

11.8.2 The most common form of personal security is the guarantee. At common law, the liability of a guarantor is ‘collateral’ or ‘secondary’ in the sense that his liability is dependent upon the primary liability of the debtor. The guarantor is liable only as long as the debtor’s liability is enforceable against the debtor. The rights and liabilities of parties are governed by the terms of the contract of guarantee. Common law and usual contractual principles apply.

C. Statutory provisions governing guarantees

11.8.3 Additionally, section 6(b) of the Civil Law Act requires all contracts of guarantees to be evidenced by some note or memorandum in writing and signed by the guarantor or any person authorised by him before it is enforceable against the guarantor. A guarantee made in respect of repayment of a loan by a moneylender must comply with the requirements of section 20 of the Moneylenders Act. A guarantee in respect of payment of rent-charges under a hire-purchase transaction involving consumer goods not exceeding $20,000 (including goods and services tax) in value must comply with section 21 of the Hire-Purchase Act.

D. Promisor’s liability is independent of debtor’s liability in analogous transactions

11.8.6 Transactions analogous to the guarantee include indemnities, performance bonds and standby letters of credit. (A comfort letter frequently does not create any legally binding undertaking). Like a guarantee, they involve a third party’s undertaking to discharge a debtor’s liability to a creditor. An important difference is that the promisor’s liability is independent of the debtor’s liability, i.e., the creditor is able to enforce the undertaking against the promisor even if the debt is not enforceable against the debtor. The common law and usual contractual principles apply to govern the rights and liabilities between the parties.

SECTION 9 CREDITORS’ REMEDIES

A. Rights of creditor or financier

(1) Creditor or financier with real security entitled to look towards asset or property in satisfaction of debt

11.9.1 A creditor or financier who has obtained real security is entitled to look towards the asset or property in satisfaction of the debt provided the security interest has properly attached to the asset and has been perfected, for example, by registration under the relevant statute. The common law priority rules, modified by statute where relevant, apply to determine priority between conflicting and competing interests over the same property.

(2) Creditor or financier with personal security entitled to look to guarantor or promisor for payment of debt

11.9.2 A creditor or financier who has obtained personal security in the form of a guarantee or some analogous undertaking may look to the guarantor or promisor for payment of the debt, provided applicable legislative requirements, if any, have been complied with. 

Where a creditor had several remedies at its disposal, such as whether to realise the security provided by the mortgagor-borrower or that provided by a guarantor, it was free to determine how and in what sequence it would pursue those remedies. The guarantor had no right to require the creditor to proceed against the mortgagor-borrower before proceeding against himself. This preserves the attractiveness of guarantees as a form of security since the creditor did not have to first exhaust its remedies against the principal debtor before proceeding against the guarantor. [Pereira, Dennis John Sunny v United Overseas Bank Ltd [2018] 1 SLR 31; [2017] SGCA 62].

(3) Creditor or financier with quasi-security entitled to enforce relevant contractual provisions to ensure payment

11.9.3 A creditor or financier who is ‘secured’ by quasi-security may enforce the relevant contractual provisions to ensure payment. As mentioned, certain quasi-security arrangements may attract the application of legislative requirements where non-compliance may affect the enforceability and priority of the creditor’s rights (see Section 11.5.9 above).

B. All creditors entitled to sue debtor for amount owed while debtor is still solvent

11.9.4 All creditors, whether secured or not, whose debt is not fully satisfied (by the security or quasi-security, if any) may sue the debtor for the amount owed while the debtor is still solvent. If the court awards judgment in favour of the creditor, he may enforce the judgment by the methods available under the Rules of Court issued pursuant to section 80 of the Supreme Court of Judicature Act (Cap 322, 2007 Rev Ed) and section 69 of the Subordinate Courts Act (Cap 321, 2007 Rev Ed). These include issuing a Writ of Seizure and Sale, Garnishee Order, Charging Order and Appointment of a Receiver to take charge of enforcing the judgment.

C. Pre-insolvency arrangements

(1) Creditor may negotiate for private compromise or arrangement with debtor

11.9.5 An unsecured creditor or one whose security is unenforceable or lacking in priority may prefer to avoid the consequences of insolvency proceedings (where no or minimal recovery of sums owed is possible) and negotiate for some private compromise or arrangement with the debtor. Such private settlements are governed by the usual contractual principles.

(2) Individual debtor may come up with proposals for voluntary arrangement with creditor

11.9.6 Where private negotiations fail, an individual debtor may wish to come up with proposals for a voluntary arrangement between itself and its creditor. The procedure for coming to a voluntary arrangement and the period of moratorium on bankruptcy application, enforcement of security, execution and other legal proceedings against the individual debtor are governed by Part V of the Bankruptcy Act (Cap 20, 2009 Rev Ed).

(3) Corporate debtor may apply for judicial management of its business

11.9.7 A corporate debtor may wish to apply for judicial management of its business in order to rehabilitate its business with the purpose of effecting a more beneficial realisation and distribution of its assets to its creditors. The procedure by which this is done and the period of moratorium on winding up application, enforcement of security, execution and other legal proceedings against the corporate debtor is governed by Part VIIIA of the Companies Act. A corporate debtor may also present a scheme of arrangement with its creditors under Section 210 of the Companies Act. Such a scheme of arrangement will become binding on its creditors if it is approved by a majority in number representing at least 75% in value of the creditors present and voting, in person or by proxy, at a meeting and confirmed by the Court.

D. Creditor or financier may commence insolvency proceedings against debtor as final resort

11.9.8 As a final resort, a creditor or financier may wish to commence insolvency proceedings against the debtor. Bankruptcy proceedings against the individual debtor are governed by the Bankruptcy Act. Winding up proceedings against a corporate debtor are commenced pursuant to section 254 of the Companies Act and generally governed by Part X of the Companies Act.

Updated as at 11 July 2019

Spring Tan 

KhattarWong LLP

Written by:

Loo Wee Ling

Practice Assistant Professor, School of Law

Singapore Management University

Asia Pacific Guide to Lending and Taking Security

Select a topic.

• Related Publications
• 1. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s secured creditors?
• 2. May security given by a company rank in a specified order so as to secure liabilities owed to different creditors of the company in that order and, if that is not possible, is it viable for parties to enter into a contractual arrangement for the purposes of moderating this order?
• 3. Does this jurisdiction recognise the concept of floating security or similar equivalent (i.e., security over a changing pool of assets that the company giving the security is free to buy, sell and generally deal with)?
• 4. If so, are there any practical reasons why floating security is difficult to take, maintain or enforce?
• 5. May security be granted to a trustee to be held on trust for the lenders from time to time, in such a way that a change of lenders does not require new security to be taken?
• 6. If not, are there any techniques that can be used to achieve substantially the same effect (e.g., parallel debt structures)?
• 7. If an agent holds security for the lenders rather than a trustee, is it necessary to take new security on a change of lenders? If no, why not? If yes, are there ways to structure the transaction to avoid such a requirement?
• 8. Under the laws of this jurisdiction, is there any class of asset over which it is difficult or impossible to grant effective and perfected security, or in relation to which any security granted will be of limited effect?
• 9. Under the laws of this jurisdiction, are there any restrictions on offshore lenders taking security over any class of asset?
• 10. Must a company receive a corporate benefit in return for giving a guarantee or security? In particular, are there restrictions on the grant of upstream and cross-stream guarantees and security? If yes, briefly what is the effect of these laws?
• 11. What type of security interests does your jurisdiction recognise, e.g., pledge, charge, mortgage, hypothecation? In relation to each type of security interest, please state the formalities required to create and perfect that security.
• 12. Are there any registration, translation or notarization requirements in relation to security, guarantees, subordination or intercreditor documents?
• 13. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in respect of security, guarantees, subordination or intercreditor documents? If yes, what are the amounts and when are they payable?

Yes. The order of payment of those claims is set out in the answer to question 1 of the "If things go wrong" section. 

Yes. Creditors may enter into contractual arrangements (usually an intercreditor agreement or deed of priority) to regulate the order of priority of their security interests and the respective rights that they will have in relation to their respective debts.

Yes. Security may be granted by way of a floating charge, typically by way of a debenture  (i.e., a security document that is usually entered into when creating a fixed and floating charge), and is generally created over a class of assets, present and future, belonging to a chargor.

While an individual, a company or another type of entity is permitted to create a fixed charge, an individual is not permitted to create a floating charge.

Maintaining assets

The class of assets subject to a floating charge changes or fluctuates from time to time in the ordinary course of the chargor's business. Therefore, when a floating charge is taken, the arrangement is that, until some future step is taken by, or on behalf of, the chargee (for example, crystallizing the floating charge into a fixed charge), the chargor will carry on its business in the ordinary way in relation to that class of assets (including disposing of those assets) without the chargee's prior consent.

The chargor's freedom to deal with its assets before a floating charge is crystallized into a fixed charge is highly advantageous to a chargor as it gives the chargor flexibility in relation to how it chooses to deal with its assets. At the same time, however, this presents the lender/chargee with the problem of how to prevent the chargor from disposing of all the assets secured by the floating charge. Therefore, a lender usually prefers to take a fixed charge over specific assets of significant credit value and a floating charge over the chargor's other assets.

Priority and enforcement

The holder of a floating charge has several disadvantages compared to a fixed-charge holder, particularly on insolvency, such as the following: 

• A floating charge is more susceptible to being avoided on insolvency.
• A floating-charge holder is only paid out of asset realizations after fixed-charge holders, expenses of the insolvent estate and any preferential creditors have been paid in full.

Yes, trustee structures are recognized in Singapore, and a security trustee may hold security on trust for the benefit of a class of potentially fluctuating lenders. There is no need to execute new security documents each time the composition of the group of lenders changes.

Not applicable. 

Yes, if an agent holds security for the lenders, it will be necessary to enter into new security documents. Under an agency structure, the original lender transfers its security interests to the new lender by way of novation. The existing agreement between the original lender and the borrower is dissolved and replaced by a new agreement each time a novation takes place. Therefore, the security is discharged each time a novation is executed, and parties need to enter into fresh security documents.

A trust structure is usually adopted to avoid this requirement.

In general, there are no restrictions on most types of assets that may be provided as security. The type of security interests, and the relevant formalities required to create and perfect the security, vary depending on the type of asset being provided. Please note, however, the following restrictions when creating security:

• An individual will generally not be able to create a floating charge over their property.
• Security over contractual rights can only be created when there is no contractual prohibition or limitation against assignment or when such prohibition or limitation has been waived by the counterparty. In addition, rights under a contract that are "personal" to the contractual parties are not assignable. Examples of such contracts include employment contracts and motor insurance policies.
• Security created over a bare right to litigate, such as a right of action in tort or in restitution, is generally void since such a right is not assignable as a matter of public policy.

In Singapore, directors of a company must act in the interests of the company. The Companies Act provides that a director must at all times act honestly and use reasonable diligence in the discharge of the duties of his/her office. The phrase "act honestly" has been interpreted to mean "acting bona fide in the interests of the company in the performance of the functions attaching to the office of director." Directors in Singapore also owe fiduciary duties to act in the interests of the company at common law.

When considering the grant of an upstream or cross-stream guarantee or security, directors must continue to act in the best interests of the company. If a guarantee is given by a subsidiary to secure obligations of its holding company or another subsidiary of the same holding company, directors must be able to show that valid consideration was provided, generally by way of a corporate benefit. A director may take into account factors such as corporate benefit in the form of intercompany loans or by way of other indirect benefits that may flow to the guarantor. These may include a reduced cost of funding or stronger or maintained financial capabilities of the parent or other subsidiary.

Further, a corporate benefit must accrue to the company and not just to another company in the group. What is considered a "corporate benefit" depends on the facts of each case. If the matter is brought to court, this is ultimately a question for the court.

If, at the time of entering into a guarantee, there is any uncertainty in relation to whether there is a corporate benefit, it would be prudent for the directors' resolution to set out the corporate benefit which would accrue to the guarantor and a unanimous shareholders' resolution ought to be obtained. However, even if a shareholders' resolution is obtained, a liquidator may still challenge this because, when the company is insolvent, directors owe their duties to creditors as well as to shareholders.

The main forms of security interest that can be created under Singapore law are a mortgage, a charge, a pledge and a lien.

A mortgage involves the transfer of title to an asset by way of security for particular obligations, on the express or implied condition that it will be retransferred when the secured obligations are discharged. A mortgage can generally be applied to tangible and intangible assets. A mortgage over land is created by deed. If the subject matter of the mortgage is not land, a mortgage does not need to be executed by deed.

A charge is essentially a security interest evidenced by way of an agreement between a creditor and a debtor by which a particular asset is appropriated by the chargor to the satisfaction of a debt owed to the creditor. The chargor does not transfer the legal or beneficial interest in the asset to the chargee but gives the chargee the right to have recourse to the charged asset to realize it towards payment of the debt. In addition, unlike possessory securities such as a pledge and lien, the effectiveness of a charge is not dependent on the chargee obtaining and retaining possession of the charged property. A charge can be either fixed or floating.

Pledge 

A pledge is created with the actual or constructive delivery of an asset by the pledgor to the pledgee by way of security, but with ownership of the asset remaining with the pledgor. The pledgee retains possession of the pledged asset until the secured debt is satisfied. If the pledgor does not repay the debt, the pledgee is entitled to sell the pledged asset and use the proceeds to satisfy the debt.

A lien is a creditor's right to retain possession of a debtor's property until the debt has been repaid, while a contractual lien normally extends by way of contract between the parties. A lien may be created by common law, by contract or by statute.

Perfection refers to the requirement to give public notice of a security interest to enable the creditor to enforce its security right against third parties. The main methods by which a security interest can be perfected include registration of the security interest in a public register, taking possession of the asset subject to security or giving actual notice to relevant parties. The perfection requirements in relation to a mortgage, charge, pledge and lien are set out below.

A mortgage over assets created by a Singapore company must be lodged with ACRA (please refer to the answer to question 12 of this section for more information). Additional documents must be lodged in relation to particular classes of assets. For example, in relation to land, a caveat, a mortgage and a memorandum of mortgage must be lodged with the Singapore Land Authority.

A charge that is created by a company incorporated in Singapore (or the branch of a foreign corporation registered in Singapore) and to which Section 131 of the Companies Act applies must be registered with ACRA (please refer to the answer to question 12 of this section for more information). Non-registration results in the security interest intended to be created by the charge being invalid and unenforceable against the liquidator and other creditors of the company in the event of the company's insolvency or liquidation.

Pledge and lien

Some security interests, such as pledges and liens, are not registrable. In these cases, the usual practice is to give notice to, and obtain acknowledgment from, the applicable third party. A lender also often requires the security provider to represent and warrant that there is no existing security interest over the asset. The possession by the security interest holder of the assets subject to the security interest can also constitute perfection.

Under Singapore law, there are registration requirements in relation to certain security documents (as listed below). However, notarization is not required for security documents that are executed in Singapore.

Registration requirements

If a charge to which Section 131 of the Companies Act applies (listed below) is created by a Singapore-incorporated company, the charge must be registered with ACRA.

Under Section 131 of the Companies Act, the following charges must be registered:

• A charge to secure any issue of debentures.
• A charge on uncalled share capital of a company.
• A charge on shares of a subsidiary of a company which are owned by the company.
• A charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale.
• A charge on land wherever situated or any interest in the land but not including any charge for any rent or other periodical sum issuing out of land.
• A charge on book debts of the company.
• A floating charge on the undertaking or property of a company.
• A charge on calls made but not paid.
• A charge on a ship or aircraft or any share in a ship or aircraft.
• A charge on goodwill, on a patent or license under a patent, on a trademark, or on a copyright or a license under a copyright, or on a registered design or a license to use a registered design.

In addition, certain assets (particularly assets such as land, ships, aircraft and scripless shares where title to that asset is entered into a register) have specific registration requirements depending on the form of security being created.

The company must lodge a statement of particulars of charge with ACRA within (a) 30 calendar days (if executed in Singapore); or (b) 37 calendar days (if executed outside Singapore), of the creation of the charge.

If the charge is not registered, the charge will be void against the liquidator and any creditor of the company in the event of the company’s insolvency or liquidation.

Please see the answer to question 8 of the "When lending to borrowers" section.

Registration

ACRA fees for registration of a charge are currently SGD 60. Registration fees vary across other registers (such as those registers relating to land, ships, aircraft and scripless shares) depending on the registration.

Receivables Financing – Floating Charge vs Third Party Set-Off

Contributor.

BP Singapore Pte Ltd v Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others and another appeal [ 2020 ] SGCA 9

In an appeal against the High Court decision, the Singapore Court of Appeal (" CA ") upheld that the vesting of an equitable interest in a debt in favour of secured creditors by way of a crystallised floating charge, was sufficient to destroy mutuality of debts required for insolvency set -off to occur. It also discussed the impact of receivership on charged receivables, and how non-assignment clauses and third-party set-off rights could encroach on recovery of charged receivables.

Financing by Senior Lenders: The joint venture Jurong Aromatics Corp Pte Ltd (" JAC ") was tasked with the development of the Jurong Aromatics Plant on Jurong Island (" Plant "). JAC was financed by a syndicate of financiers (" Senior Lenders "), whose loans to JAC were secured by among other things, a debenture (" Debenture ") between JAC and the Senior Lenders' security agent, BNP Paribas Singapore Branch (" BNP Paribas ") which granted: (a) under clause 3.1(c), a first fixed charge covering among other things, JAC's present and future book debts; and (b) under clause 4.1, a first floating charge over all of JAC's assets, both present and future.

2014–Set-off Agreement: Glencore Singapore Pte Ltd (" Glencore ") and BP Singapore Pte Ltd (" BP ") (collectively, " Glencore/BP ") were trade suppliers to and customers of JAC under various feedstock supply/product offtake agreements (" Trade Agreements "). The Glencore-JAC feedstock supply/product offtake agreements provided that parties were not entitled to set-off for any sums due under those agreements. Glencore subsequently contracted with JAC to vary such terms by a set-off agreement, setting-off their mutual claims (" Set-Off Agreement ") under these Glencore-JAC feedstock supply/product offtake agreements, the net effect of which created a debt (" Set-Off Agreement Debt ") payable by Glencore to JAC. No such debt was owed by BP.

2014-2015–Receivers and managers appointed: JAC became substantially indebted to Glencore/BP as a result of the Trade Agreements (" JAC Indebtedness "). The Plant's operations were shut down. Receivers and managers (" Receivers ") were subsequently appointed by BNP Paribas pursuant to the Debenture. Glencore/BP were notified of the Receivers' appointment in September 2015. Glencore/BP then issued enforcement notices stating their intention to wind up JAC later in 2015.

2016-2017–Tolling Agreement and Sale of Plant: The plan to wind-up JAC was postponed as the Receivers proposed for continued functioning of the Plant while a buyer was sought. JAC entered into a tolling agreement (" Tolling Agreement ") with Glencore/BP in April 2016, to enable the Plant's operations to resume, under which Glencore/BP had to pay JAC a monthly fee for use of the Plant. While Glencore/BP initially paid such tolling fees without asserting set-off, they did not pay the fee for August 2017 (" Tolling Fee Debt "). Instead, Glencore, with support from BP, commenced winding-up proceedings in August 2017 against JAC (but was only wound up in 2019). Glencore/BP also followed up with a letter to JAC asserting for the first time, on 20 September 2017, that the Tolling Fee Debt was subject to insolvency set-off against the JAC Indebtedness.

Meanwhile, a buyer, ExxonMobil Asia Pacific Pte Ltd (" Exxon Mobil "), was found in May 2017. Exxon Mobil contracted with JAC and Glencore/BP (by way of a " Transitional Agreement ", as amended by the " Transitional Supplemental Agreement ") to enable the Plant to be sold without shutting it down ( ie a " Hot Transition "). The Tolling Agreement, Transitional Agreement and Set-Off Agreement each contained non-assignment clauses. To facilitate such a Hot Transition, Glencore/BP undertook to pay JAC a final payment amount under the Transitional Supplemental Agreement (" Final Payment Amount "), for the value of feedstock transferred by JAC to Glencore/BP at the start of tolling. Such Final Payment Amount was not paid by Glencore/BP to JAC when due. As with the Tolling Fee Debt, Glencore/BP asserted on 20 September 2017 that such Final Payment Amount was subject to insolvency set-off against the JAC Indebtedness.

High Court Decision

JAC and the Receivers sought to claim the charged receivables from Glencore/BP, namely, the Tolling Fee Debt, the Final Payment Amount and the Set-Off Agreement Debt (in Glencore's case) (collectively, the " Charged Receivables "). Glencore/BP responded they were entitled to set these off against the JAC Indebtedness.

The High Court held that Glencore/BP were not entitled to set-off the Charged Receivables against the JAC Indebtedness. In particular:

(a) as soon as they arose, all receivables payable to JAC became subject to the fixed charge or crystallised floating charge in favour of the Senior Lenders. Thus, the Senior Lenders were entitled to payment of the Charged Receivables rather than JAC. However, JAC owed Glencore/BP the JAC Indebtedness, not the Senior Lenders. The requirement of mutuality of debts for insolvency set-off to operate was therefore not met; and

(b) the Senior Lenders neither ceded control over the Charged Receivables nor released their security in the charges to permit any estoppel, waiver or decrystallisation to arise. Although the Tolling Agreement, the Transitional Agreement and the Set-Off Agreement each contained non-assignment clauses, these clauses could not prevent the equitable interest in the Charged Receivables from being vested in the Senior Lenders, pursuant to the fixed charge under clause 3.1 and crystallised floating charge under clause 4.1.

Apart from its findings on equitable set-off (which was found not applicable), the CA had to decide if insolvency set-off was applicable, either because the crystallised floating charge ( ie crystallised on the Receivers' appointment) had decrystallised or because the assets were released from the charge.

The CA's findings/observations on the following are also noteworthy:

(a) When will decrystallisation of a crystallised floating charge or release of security from a charge occur?;

(b) Does a non-assignment clause prevent the crystallisation of a floating charge over receivables?; and

(c) Can a third party with knowledge of the receivership of a security provider exercise set-off rights against debts due to such security provider?

CA Decision

Insolvency set-off – not possible if debts are subject to a crystallised floating charge

Broadly, insolvency set-off did not apply as there was no mutuality of debts between the Charged Receivables and the JAC Indebtedness. The JAC Indebtedness were due to Glencore/BP but the Charged Receivables were due to the Senior Lenders by virtue of their equitable interest which was vested by the crystallised floating charge under the terms of the Debenture.

Decrystallisation of crystallised floating charge – possible to set-off after clear evidence of decrystallisation

There needs to be clear evidence before a court can conclude there has been any decrystallisation of a crystallised floating charge. The CA rejected, tentatively, that decrystallisation could only be effected by contracting directly with the charge holder ( eg an express agreement between parties on decrystallisation). In deciding if decrystallisation had occurred and if the Charged Receivables were released from the Senior Lenders' security, the CA focused on evidence of the loss of control over the Charged Receivables.

Non-assignment clauses – may prevent crystallisation of a floating charge

A non-assignment clause may prevent crystallisation of security over an asset not yet affixed with a charge – as tentatively observed by the CA. Tentatively, a non-assignment clause may also continue to be relevant to a crystallised floating charge, which had subsequently decrystallised, by preventing any further crystallisation of the floating charge. As the non-assignment clause in the Tolling Agreement came into existence after crystallisation of the floating charge, and Glencore/BP failed to prove it had subsequently decrystallised, the CA declined to make a pronouncement.

Unknowing deprivation of set-off rights – knowledge/notice of security and receivership relevant

The CA appears to take a view that a crystallised floating charge should generally be given its full effect in favour of the charge holder. Nonetheless, the CA explored the concern that a customer trading with the security provider in receivership ought not to be unknowingly deprived of his right to set-off. However, on the facts, there was no concern that Glencore/BP, while trading with JAC (in receivership) might be unknowingly deprived of their right to set-off – they were notified of the receivership in 2015 but continued working with JAC on various arrangements including the Tolling Agreement, without asserting their rights of set-off until September 2017.

In essence, the CA upheld that vesting of an equitable interest in a debt in favour of secured creditors by way of a crystallised floating charge was sufficient to destroy mutuality of debts required for insolvency set-off to occur. This is a welcome development to charge holders, as a crystallised floating charge potentially shields debts from insolvent set-off almost like an assignment. However, the outcome of this case may be different if: (a) the security was by way of an assignment (and not a charge) in contravention of the non-assignment clause; (b) the right of set-off accrued before the creation of the security or crystallisation of the floating charge; (c) Glencore/BP had no knowledge or were not notified of the security or receivership; and (d) the Senior Lenders had not exercised sufficient control over the Charged Receivables. Accordingly, it is important for secured creditors to consider the following in receivables financing:

(a) Impact of non-assignment clause – secured creditors should pay close attention to the existence and coverage of non-assignment clauses. In addition, a crystallised floating charge, which is shown to have subsequently decrystallised, may be prevented from further crystallisation by a non-assignment clause. Secured creditors should therefore retain control over charged receivables even after the crystallisation of a floating charge;

(b) Due diligence on trading relationship and underlying contracts – the security interest of secured creditors is often subject to adverse contractual arrangements such as payment conditions and set-off. Due diligence should therefore be done on the trading relationship and underlying contracts between the parties to mitigate such risk;

(c) Knowledge of third parties – it is important for secured creditors to notify relevant third parties of their security interest. This is commonly done by way of notices of security interest to such third parties. It is also prudent to obtain the agreement or acknowledgement of such third parties in relation to certain rights of the secured creditors. In addition, third parties should also be promptly notified of any enforcement actions over the security such as the crystallisation of the floating charge by way of the appointment of a receiver; and

(d) Control and decrystallisation of crystallised floating charge – third parties may, by providing clear evidence, show that a crystallised floating charge has subsequently decrystallised, or that security has been released by the secured creditor. While this is a question of fact, courts are likely to pay close attention to evidence of control or relinquishment of control by a secured creditor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Singapore – Receivables Financing – Floating Charge vs Third Party Set-Off.

March 17, 2020 by Conventus Law

17 March, 2020

BP Singapore Pte Ltd v Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others and another appeal [2020] SGCA 9

In an appeal against the High Court decision, the Singapore Court of Appeal (“CA”) upheld that the vesting of an equitable interest in a debt in favour of secured creditors by way of a crystallised floating charge, was sufficient to destroy mutuality of debts required for insolvency set-off to occur. It also discussed the impact of receivership on charged receivables, and how non-assignment clauses and third-party set-off rights could encroach on recovery of charged receivables.

Financing by Senior Lenders: The joint venture Jurong Aromatics Corp Pte Ltd (“JAC”) was tasked with the development of the Jurong Aromatics Plant on Jurong Island (“Plant”). JAC was financed by a syndicate of financiers (“Senior Lenders”), whose loans to JAC were secured by among other things, a debenture (“Debenture”) between JAC and the Senior Lenders’ security agent, BNP Paribas Singapore Branch (“BNP Paribas”) which granted: (a) under clause 3.1(c), a first fixed charge covering among other things, JAC’s present and future book debts; and (b) under clause 4.1, a first floating charge over all of JAC’s assets, both present and future.

2014–Set-off Agreement: Glencore Singapore Pte Ltd (“Glencore”) and BP Singapore Pte Ltd (“BP”) (collectively, “Glencore/BP”) were trade suppliers to and customers of JAC under various feedstock supply/product offtake agreements (“Trade Agreements”). The Glencore-JAC feedstock supply/product offtake agreements provided that parties were not entitled to set-off for any sums due under those agreements. Glencore subsequently contracted with JAC to vary such terms by a set-off agreement, setting-off their mutual claims (“Set-Off Agreement”) under these Glencore-JAC feedstock supply/product offtake agreements, the net effect of which created a debt (“Set-Off Agreement Debt”) payable by Glencore to JAC. No such debt was owed by BP.

2014-2015–Receivers and managers appointed: JAC became substantially indebted to Glencore/BP as a result of the Trade Agreements (“JAC Indebtedness”). The Plant’s operations were shut down. Receivers and managers (“Receivers”) were subsequently appointed by BNP Paribas pursuant to the Debenture. Glencore/BP were notified of the Receivers’ appointment in September 2015. Glencore/BP then issued enforcement notices stating their intention to wind up JAC later in 2015.

2016-2017–Tolling Agreement and Sale of Plant: The plan to wind-up JAC was postponed as the Receivers proposed for continued functioning of the Plant while a buyer was sought. JAC entered into a tolling agreement (“Tolling Agreement”) with Glencore/BP in April 2016, to enable the Plant’s operations to resume, under which Glencore/BP had to pay JAC a monthly fee for use of the Plant. While Glencore/BP initially paid such tolling fees without asserting set-off, they did not pay the fee for August 2017 (“Tolling Fee Debt”). Instead, Glencore, with support from BP, commenced winding-up proceedings in August 2017 against JAC (but was only wound up in 2019). Glencore/BP also followed up with a letter to JAC asserting for the first time, on 20 September 2017, that the Tolling Fee Debt was subject to insolvency set-off against the JAC Indebtedness.

Meanwhile, a buyer, ExxonMobil Asia Pacific Pte Ltd (“Exxon Mobil”), was found in May 2017. Exxon Mobil contracted with JAC and Glencore/BP (by way of a “Transitional Agreement”, as amended by the “Transitional Supplemental Agreement”) to enable the Plant to be sold without shutting it down (ie a “Hot Transition”). The Tolling Agreement, Transitional Agreement and Set-Off Agreement each contained non-assignment clauses. To facilitate such a Hot Transition, Glencore/BP undertook to pay JAC a final payment amount under the Transitional Supplemental Agreement (“Final Payment Amount”), for the value of feedstock transferred by JAC to Glencore/BP at the start of tolling. Such Final Payment Amount was not paid by Glencore/BP to JAC when due. As with the Tolling Fee Debt, Glencore/BP asserted on 20 September 2017 that such Final Payment Amount was subject to insolvency set-off against the JAC Indebtedness.

High Court Decision

JAC and the Receivers sought to claim the charged receivables from Glencore/BP, namely, the Tolling Fee Debt, the Final Payment Amount and the Set-Off Agreement Debt (in Glencore’s case) (collectively, the “Charged Receivables”). Glencore/BP responded they were entitled to set these off against the JAC Indebtedness.

The High Court held that Glencore/BP were not entitled to set-off the Charged Receivables against the JAC Indebtedness. In particular:

(a)  as soon as they arose, all receivables payable to JAC became subject to the fixed charge or crystallised floating charge in favour of the Senior Lenders. Thus, the Senior Lenders were entitled to payment of the Charged Receivables rather than JAC. However, JAC owed Glencore/BP the JAC Indebtedness, not the Senior Lenders. The requirement of mutuality of debts for insolvency set-off to operate was therefore not met; and

(b)  the Senior Lenders neither ceded control over the Charged Receivables nor released their security in the charges to permit any estoppel, waiver or decrystallisation to arise. Although the Tolling Agreement, the Transitional Agreement and the Set-Off Agreement each contained non-assignment clauses, these clauses could not prevent the equitable interest in the Charged Receivables from being vested in the Senior Lenders, pursuant to the fixed charge under clause 3.1 and crystallised floating charge under clause 4.1.

Apart from its findings on equitable set-off (which was found not applicable), the CA had to decide if insolvency set-off was applicable, either because the crystallised floating charge (ie crystallised on the Receivers’ appointment) had decrystallised or because the assets were released from the charge.

The CA’s findings/observations on the following are also noteworthy:

(a)  When will decrystallisation of a crystallised floating charge or release of security from a charge occur?;

(b)  Does a non-assignment clause prevent the crystallisation of a floating charge over receivables?; and

(c)  Can a third party with knowledge of the receivership of a security provider exercise set-off rights against debts due to such security provider?

CA Decision

Insolvency set-off – not possible if debts are subject to a crystallised floating charge

Broadly, insolvency set-off did not apply as there was no mutuality of debts between the Charged Receivables and the JAC Indebtedness. The JAC Indebtedness were due to Glencore/BP but the Charged Receivables were due to the Senior Lenders by virtue of their equitable interest which was vested by the crystallised floating charge under the terms of the Debenture.

Decrystallisation of crystallised floating charge – possible to set-off after clear evidence of decrystallisation

There needs to be clear evidence before a court can conclude there has been any decrystallisation of a crystallised floating charge. The CA rejected, tentatively, that decrystallisation could only be effected by contracting directly with the charge holder (eg an express agreement between parties on decrystallisation). In deciding if decrystallisation had occurred and if the Charged Receivables were released from the Senior Lenders’ security, the CA focused on evidence of the loss of control over the Charged Receivables.

Non-assignment clauses – may prevent crystallisation of a floating charge

A non-assignment clause may prevent crystallisation of security over an asset not yet affixed with a charge – as tentatively observed by the CA. Tentatively, a non-assignment clause may also continue to be relevant to a crystallised floating charge, which had subsequently decrystallised, by preventing any further crystallisation of the floating charge. As the non-assignment clause in the Tolling Agreement came into existence after crystallisation of the floating charge, and Glencore/BP failed to prove it had subsequently decrystallised, the CA declined to make a pronouncement.

Unknowing deprivation of set-off rights – knowledge/notice of security and receivership relevant

The CA appears to take a view that a crystallised floating charge should generally be given its full effect in favour of the charge holder. Nonetheless, the CA explored the concern that a customer trading with the security provider in receivership ought not to be unknowingly deprived of his right to set-off. However, on the facts, there was no concern that Glencore/BP, while trading with JAC (in receivership) might be unknowingly deprived of their right to set-off – they were notified of the receivership in 2015 but continued working with JAC on various arrangements including the Tolling Agreement, without asserting their rights of set-off until September 2017.

In essence, the CA upheld that vesting of an equitable interest in a debt in favour of secured creditors by way of a crystallised floating charge was sufficient to destroy mutuality of debts required for insolvency set-off to occur. This is a welcome development to charge holders, as a crystallised floating charge potentially shields debts from insolvent set-off almost like an assignment. However, the outcome of this case may be different if: (a) the security was by way of an assignment (and not a charge) in contravention of the non-assignment clause; (b) the right of set-off accrued before the creation of the security or crystallisation of the floating charge; (c) Glencore/BP had no knowledge or were not notified of the security or receivership; and (d) the Senior Lenders had not exercised sufficient control over the Charged Receivables. Accordingly, it is important for secured creditors to consider the following in receivables financing:

(a)  Impact of non-assignment clause – secured creditors should pay close attention to the existence and coverage of non-assignment clauses. In addition, a crystallised floating charge, which is shown to have subsequently decrystallised, may be prevented from further crystallisation by a non-assignment clause. Secured creditors should therefore retain control over charged receivables even after the crystallisation of a floating charge;

(b)  Duediligenceontradingrelationshipandunderlyingcontracts–thesecurityinterestofsecuredcreditors is often subject to adverse contractual arrangements such as payment conditions and set-off. Due diligence should therefore be done on the trading relationship and underlying contracts between the parties to mitigate such risk;

(c)  Knowledge of third parties – it is important for secured creditors to notify relevant third parties of their security interest. This is commonly done by way of notices of security interest to such third parties. It is also prudent to obtain the agreement or acknowledgement of such third parties in relation to certain rights of the secured creditors. In addition, third parties should also be promptly notified of any enforcement actions over the security such as the crystallisation of the floating charge by way of the appointment of a receiver; and

(d)  Control and decrystallisation of crystallised floating charge – third parties may, by providing clear evidence, show that a crystallised floating charge has subsequently decrystallised, or that security has been released by the secured creditor. While this is a question of fact, courts are likely to pay close attention to evidence of control or relinquishment of control by a secured creditor. 

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Lending & Secured Finance Laws and Regulations Singapore 2024

ICLG - Lending & Secured Finance Laws and Regulations - Singapore Chapter covers common issues in lending and secured finance laws and regulations – including guarantees, collateral security, financial assistance, syndicated lending and LIBOR replacement.

Chapter Content Free Access

1. overview, 2. guarantees, 3. collateral security, 4. financial assistance, 5. syndicated lending/agency/trustee/transfers, 6. withholding, stamp and other taxes; notarial and other costs, 7. judicial enforcement, 8. bankruptcy proceedings, 9. jurisdiction and waiver of immunity, 10. licensing, 11. libor replacement, 12. esg trends, 13. other matters.

1.1        What are the main trends/significant developments in the lending markets in your jurisdiction?

The resurgent lending market witnessed in Singapore in 2021 and 2022 due to an increase in loan demand post-pandemic sharply contracted over the course of 2023, as evinced by the announced results for the third quarter of 2023 of the three major Singapore banks (DBS Group Holdings, Ltd. ( DBS ), Oversea-Chinese Banking Corporation, Limited ( OCBC ) and United Overseas Bank Limited ( UOB )) – the banks saw a rise in loan growth of just 1% year-on-year for the period reported.  Amidst global economic uncertainties worsened by the ongoing Russia-Ukraine war and the Israel-Palestine conflict, the Monetary Authority of Singapore ( MAS ) has been maintaining its prevailing monetary policy for the last two quarters, choosing to closely monitor global and domestic economic developments amid global economic uncertainties reflected by weaker than expected growth in Eurozone and China.  This has preserved the Singapore dollar on a broadly steeper path of appreciation against the nation’s key trading partners.

To address inflation woes plaguing the global economy since 2022, the U.S. Federal Reserve ( Fed ) had moved to steadily increase base lending rates an unprecedented 11 times across 2022 and 2023.  However, the resilience demonstrated by the U.S. economy has resulted in talk of a freeze of further interest rate hikes by the Fed going into 2024.  Accordingly, major Singapore banks have begun slashing fixed interest rates for home loans – from the two decade high of 4.5% in November 2022 to a more palatable 3.75% in June 2023.

In line with forecasts that Southeast Asia’s energy needs will grow by 50% before 2050, demand for financing of conventional and renewable energy projects continues to increase unabated.  Introduced in October 2021 by the Singapore government agency Enterprise Financing Scheme-Green has been helping companies access green financing, and close to 50 small and medium-sized enterprises developing and providing green solutions have received support, with up to $260 million of green loans being issued as of April 2023. 

On the sustainability front, the Singapore government is also making progress on its objective to issue up to S$35 billion of green bonds by 2030.  As of 31 March 2023, S$8.2 billion’s worth of green bonds have been issued across four green categories, namely clean transportation, waste management, green building and sustainable water, including the S$2.4 billion inaugural sovereign bond – the Green Singapore Government Securities (Infrastructure) Bond, part of which proceeds raised will be allocated to finance Singapore’s expansion of its rail network.  In line with the Singapore government’s commitment to ensure that the green bonds issued by the public sector agencies adhere to market best practices, the MAS introduced in June 2022 the Singapore Green Bond Framework, a governance framework for sovereign green bond issuances under the Significant Infrastructure Government Loan Act 2021.  The framework sets out guidelines for public sector green bond issuances that are aligned with internationally recognised market principles and standards.

The Green Finance Industry Taskforce ( GFIT ), which was convened by the MAS as part of its action plan for Singapore to be a leading centre for sustainable and green finance in Asia and globally, has continued with its efforts to help accelerate the development of green finance in Singapore through the following key initiatives: (i) developing a taxonomy; (ii) improving disclosures; (iii) fostering green finance solutions; and (iv) enhancing environmental risk management practices of financial institutions.  In connection with this, on 3 December 2023, the GFIT together with the MAS launched the Singapore-Asia Taxonomy for Sustainable Finance ( Singapore-Asia Taxonomy ) – the world’s first multi-sector transition taxonomy which sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors.  Pivotally, the Singapore-Asia Taxonomy provides a credible framework to phase-out coal-fired power plants, a critical part of the energy transition in the Asia-Pacific region where coal accounts for almost 60% of power generation.  To ensure credibility of the early coal phase-out process, the taxonomy sets out both entity and facility-level criteria that are aligned to a 1.5°C scenario.

Lastly, on the technological front, the MAS announced in 2020 the award of digital banking licences to a number of entities.  Following this, four digital banks, GXS Bank, backed by a consortium comprising Grab Holdings Inc. and Singapore Telecommunications Limited, MariBank, backed by South-east Asian e-commerce giant Sea Limited, Green Link Digital Bank, backed by Chinese developer Greenland Holdings and supply chain financing platform Linklogis Hong Kong, and Anext Bank, backed by Ant Group launched their services in 2022 and 2023.

It remains to be seen how the entry of digital banks into Singapore will affect the loan market – particularly in areas such as accessibility of funds for small-to-medium enterprises.

1.2        What are some significant lending transactions that have taken place in your jurisdiction in recent years?

Trafigura Group Pte. Ltd., a market leader in the global commodities industry, announced on 25 October 2022 the successful closure of its new syndicated loan facilities amounting to an equivalent of USD2.4 billion.  The new facilities comprised, inter alia , a USD revolving credit facility as well as USD and CHN term loan facilities.  The facilities were used to refinance existing loans of the Trafigura Group as well as for general corporate purposes.  A total of 28 financial institutions participated in the transaction with DBS, SCB and Sumitomo Mitsui Banking Corporation Singapore Branch as the mandated lead arrangers and bookrunners.

On 23 June 2021, DBS entered into Singapore’s first USD Secured Overnight Financing Rate ( SOFR ) linked export financing transaction with Bunge.  The S$25 million transaction, priced off SOFR averages, represents a noteworthy milestone as the industry transitions away from the Singapore Interbank Offered Rate ( SIBOR ).  Another industry milestone achieved by DBS is the completion of Singapore’s first trade finance transaction referencing the Bloomberg Short-Term Bank Yield Index ( BSBY ) with Reliance.  The option of using the BSBY in addition to SOFR-based pricing is useful for trade finance transactions involving straight-through processing.  CapitaLand and UOB have also signed a two-year S$200 million term loan pegged to the Singapore Overnight Rate Average ( SORA ), in a first-of-its-kind loan agreement.  CapitaLand had also signed another agreement referencing SORA, for a S$150 million three-year corporate loan as part of the original S$300 million sustainability-linked loan extended by OCBC.

Amidst growing efforts by the Singapore government/MAS to intensify sustainable development in Singapore, there has been an increase in the number of sustainable financing and green loan transactions.  One example is the S$3 billion Multicurrency Medium Term Note ( MTN ) Programme and Green Bond Framework established by the National Environment Agency ( NEA ).  The purpose of this MTN Programme is to finance the NEA’s landmark Tuas Nexus Integrated Waste Management Facilities, making it the first of its kind in the region to, amongst other things, treat incinerable waste with enhanced efficiency.  Separately, the Housing & Development Board ( HDB ), Singapore’s public housing authority, also announced in March 2022 that it raised S$1 billion through the issuance of its inaugural green bond.  The proceeds from the green bond will be used exclusively to finance HDB’s green building projects, as guided by HDB’s new Green Finance Framework.

On the sustainable loans front, in early 2022, Sembcorp Industries secured a S$1.2 billion syndicated sustainability-linked loan facility pegged to SORA by a group of banks including DBS and OCBC, the first and largest loan of such type which will be used for its general corporate purposes and/or the financing or refinancing its group renewable energy and sustainable projects.  Additionally, mainboard-listed OUE Commercial Real Estate Investment Trust announced in August 2022 that it successfully completed a S$978 million unsecured sustainability-linked loan to refinance its existing secured borrowings.  The loan is one of the largest sustainability-linked loan extended to a Singapore real estate investment trust and was syndicated by a consortium of four mandated lead arrangers and bookrunners – CIMB Bank Singapore, Maybank Singapore, OCBC and SCB – and was supported by a total of 19 banks. 

2.1        Can a company guarantee borrowings of one or more other members of its corporate group (see below for questions relating to fraudulent transfer/financial assistance)?

Yes, subject to there being sufficient corporate benefit and no contravention of specific rules under the Companies Act 1967 ( CA ); for example, relating to guarantee of loans to companies related to directors and provision of financial assistance.

S157 of the CA provides that a director of a company “shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office”.  This statutory statement is in addition to the directors’ duty under general law to exercise their discretion bona fide in what they consider is in the best interest of the company.  The directors of a company must ensure there is sufficient corporate benefit in giving any guarantee, including a guarantee for the borrowings of one or more members of its group.

A commonly asked question is whether directors can, in giving a guarantee, consider the interests of the corporate group as a whole.  The theoretical rule is that companies within a group are separate legal entities.  However, in practice, companies are often part of larger groups and it is generally accepted that there is corporate benefit on the face of a transaction involving a holding company guaranteeing the obligations of its subsidiary.  It would be harder, however, to show corporate benefit in a subsidiary guaranteeing the debts of its holding or sister companies and in such situations it would therefore be prudent to have the shareholders of the company sanction the giving of the guarantee.

In addition, companies must be mindful of the prohibition under s163 of the CA relating to the guarantee of loans, quasi-loans or credit transactions to companies related to directors.  Such prohibition does not apply to exempt private companies, which are essentially private companies owned wholly by individual shareholders not exceeding 20, or a government-owned private company gazetted as such.  There are exceptions to this prohibition, including where the companies involved are in a subsidiary/holding company relationship or are subsidiaries of the same holding company in the legal sense.  Members of a corporate group in the legal sense are therefore generally exempted from such prohibition.  They are, however, not exempted if they are non-subsidiary affiliates and directors must be careful then to conduct the necessary enquiry to ensure there is no contravention of the section.  With effect from 3 January 2016, a new exception was introduced to allow for prior approval by the company in a general meeting to permit such transactions.  Where practicable (for example, when dealing with private companies), lenders are likely to require such prior approval by shareholders to be obtained to do away with the risk of triggering this prohibition.

Regard must also be given to the prohibition against the giving of financial assistance and other considerations where a company is insolvent, as set out under sections 4 and 8 below.

2.2        Are there enforceability or other concerns (such as director liability) if only a disproportionately small (or no) benefit to the guaranteeing/securing company can be shown?

See question 2.1 above.  In giving a guarantee, the directors of the company must ensure there is sufficient corporate benefit.  If the corporate benefit to the guaranteeing company is disproportionately small or there is no corporate benefit, then there may be an issue as to whether the directors in giving the guarantee are in breach of their fiduciary duties.

Where directors have given a guarantee in breach of their fiduciary duties, the guarantee may be set aside if the lender had knowledge of the impropriety and the offending directors may be both civilly and criminally liable for their breach.

Other considerations where a company is insolvent are set out under section 8 below.

2.3        Is lack of corporate power an issue?

Unless otherwise limited or restricted by the provisions of its own constitutive documents, a company has full capacity to perform any act, including entering into guarantees.  Caution should be taken as there are, however, companies with old forms of constitutive documents that still contain restrictions and limits on the grant of guarantees and if so, such restrictions will continue to apply.

The effect of the lack of corporate power in the grant of a guarantee, whilst it does not invalidate the guarantee per se , may be asserted or relied upon in, amongst others, proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the company’s property, by the holder of any of those debentures to restrain the doing of any act or transfer of any property by the company.  The court may, in such a situation, exercise discretion to set aside and restrain the performance of the guarantee but allow for compensation for loss or damage sustained.

S25B of the CA deems the power of the directors to bind the company, or authorise others to do so, to be free of any limitation under the company’s constitution, in favour of persons dealing with the company in good faith.  It remains to be seen whether the Singapore courts will find that knowledge of an act being beyond the powers of the directors under the constitutive documents of the company will, by itself, be sufficient to establish a lack of good faith for purposes of this new provision.

2.4        Are any governmental or other consents or filings, or other formalities (such as shareholder approval), required?

No governmental consents or filings are generally required.

A guarantee will be required to be lodged with the companies’ registry in Singapore, the Accounting and Corporate Regulatory Authority ( ACRA ), only if by its terms it also seeks to create a charge or agreement to charge within the meaning of s131 of the CA.

In terms of formalities, a contract of guarantee must be in writing and signed by the person sought to be rendered liable under the guarantee.  Board resolutions approving the terms, execution and performance of the guarantee should be passed.  Shareholders’ approval should also be obtained if there is any potential issue of lack of corporate benefit and breach of directors’ duties, or triggering of s163 of the CA, or where it is otherwise required by statute (for example, to whitewash the transaction) or the constitutive documents of the company.

2.5        Are net worth, solvency or similar limitations imposed on the amount of a guarantee?

No, unless otherwise restricted by the constitutive documents of the company.

If, however, the amount guaranteed is clearly disproportionate to the corporate benefit received, the issues discussed in question 2.2 above would arise.

2.6        Are there any exchange control or similar obstacles to enforcement of a guarantee?

There are no exchange controls in Singapore that would act as an obstacle to the enforcement of a guarantee.

3.1        What types of collateral are available to secure lending obligations?

Under Singapore law, all types of collateral may potentially be available to secure lending obligations, provided the grant thereof is not against public policy.

Common types of collateral that can be used include real property (land and buildings), personal chattels, debts and other receivables, stocks and shares and other choses in action.

3.2        Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?

It is possible to give asset security by means of a general security agreement; for example, by way of a debenture seeking to take security over different classes of assets, save to the extent that a statutorily prescribed form is required (e.g. to effect a legal mortgage over land under the Land Titles Act 1993 ( LTA ) or a Singapore-registered ship under the Merchant Shipping Act 1995, or to take a legal assignment over book-entry securities under the Securities and Futures Act 2001).

The main types of security interests that can be created under Singapore law are mortgages, assignments, charges, liens and possessory pledges, and the appropriate method of taking security would depend on the nature of the asset over which the security is to be taken and the extent of security required.

Different classes of assets will also be subject to different procedures and perfection requirements.

3.3        Can collateral security be taken over real property (land), plant, machinery and equipment? Briefly, what is the procedure?

Yes, a legal or equitable mortgage/charge or assignment of sale and purchase/lease/building agreement with mortgage-in-escrow is commonly granted over real property (land and to the extent immovable, plant and buildings thereon).  The type of security will depend on, amongst other factors, whether title over the land has been issued, the land type and the type of holding.

There are two types of land in Singapore – common law titled land and land under the LTA.  Virtually all land in Singapore has been brought under the LTA.  A legal mortgage for land under the LTA must be in a statutorily prescribed form and registered with the Singapore Land Authority ( SLA ).  Where title has not been issued for land under the LTA, a lender would take an equitable mortgage over the sale and purchase agreement, lease or building agreement in relation to the land, with an accompanying mortgage-in-escrow for perfection upon issue of title.

Commonly, an appropriate caveat may also be lodged with the SLA against the land to protect the lender’s interest during the time between the acceptance of the facility and the registration and perfection of the security.

Related security like an assignment over insurances, rental and sale proceeds and agreements, and in the case of land under construction, assignment over construction contracts and performance bonds, are usually also taken.

Procedure and perfection steps briefly include the seizing of relevant title documents, registration with the SLA (or Registry of Deeds, if applicable), registration of the charge with ACRA under s131 of the CA, stamping, consents from lessor of the land or other third parties (if applicable), corporate authorisations, whitewash/shareholders’ approval (if applicable), etc.  In practice, some banks require shareholders’ approval where the assets to be mortgaged/charged constitute the whole or substantially the whole of the company’s undertaking or property.

Machinery and equipment

A fixed charge granted by way of a debenture or charge is commonly taken over machinery and equipment.

Registration with ACRA will be required under s131 of the CA.  Other perfection steps are (to the extent applicable) discussed above.

3.4        Can collateral security be taken over receivables? Briefly, what is the procedure? Are debtors required to be notified of the security?

Yes, security over receivables (being choses in action) can be taken by way of an assignment or charge (fixed or floating) through a deed of assignment/charge or a debenture, depending on the entire security package to be taken.  Generally, lenders may also, for control purposes, obtain a charge (fixed or floating) over the accounts into which the receivables are paid (see question 3.5 below).

In order to take a legal assignment over receivables, it must be in writing with express notice in writing given to the debtor of the receivables.  The giving of notice also enables the lender to secure priority.

A charge to be taken over receivables can be fixed or floating.  Where the lender is able to control the receivables and they are not subject to withdrawals without consent, a legal assignment or fixed charge may be created over the subject receivables.  Often, however, the receivables are part of the ongoing business of the security provider and the lender does not seek to take control over the same.  In such a situation, only a floating charge may be created in substance, regardless of how the charge is termed or labelled in the documentation.

Registration with ACRA will be required if the charge is floating or the receivables fall under one of the prescribed categories of s131 of the CA.  Other perfection steps are, to the extent applicable, discussed in question 3.3 above.

3.5        Can collateral security be taken over cash deposited in bank accounts? Briefly, what is the procedure?

Yes, security over cash deposited in bank accounts (being choses in action) can be taken in the same way as receivables, and the principles and requirements in question 3.4 apply.

In practice, it may be difficult to obtain a legal assignment or fixed charge over cash deposited in a bank account unless the bank account is opened with and controlled by the lender.  Where that is not practicable and/or it is necessary to enable the chargor to make withdrawals from the bank account freely, the lender may be left with taking only a floating charge over the account.

Registration with ACRA will be required if the charge is floating or if it falls under one of the prescribed categories of s131 of the CA.  An express written notice of assignment must also be given to the account bank to perfect the security and preserve priority.  Other perfection steps are, to the extent applicable, as discussed in question 3.3 above.

3.6        Can collateral security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Can such security validly be granted under a New York or English law-governed document? Briefly, what is the procedure?

Shares in Singapore may be in certificated/scrip or scripless form.

Where shares are certificated, a legal or equitable mortgage may be taken over the shares.  A legal mortgage may be granted by way of a share mortgage, accompanied by a transfer and registration of the shares and delivery of share certificates in the mortgagee’s name.  The procedures and restrictions for the transfer will be set out in the company’s constitutive documents and the CA.  An equitable mortgage/charge may be granted by way of a share mortgage/charge and deposit of share certificates together with a blank transfer executed by the mortgagor/chargor on the agreement that the mortgagee/chargee may complete the transfer forms upon occurrence of a default event under the facility or by notice.

Where shares are in scripless form (i.e. book-entry securities, being essentially listed shares of companies on the Singapore stock exchange – Singapore Exchange Securities Trading Limited), by statute, a different regime will apply.  Security may be taken over such shares by way of a statutory assignment or statutory charge in prescribed form registered with the Central Depository (Pte) Limited in Singapore or by common law subject to certain prescribed requirements.

There is no specific restriction to prohibit the general terms of security over shares to be governed by New York or English law; however, the creation and grant of security over shares should be governed by Singapore law as the shares of Singapore companies (and exercise of certain enforcement rights) are regulated by the CA and local property rules.

Registration with ACRA will be required if the charge is floating or if it falls under one of the prescribed categories of s131 of the CA.  In the case of a statutory charge over shares in scripless form, an express written notice of assignment must also be given to the depository agent to perfect the security and preserve priority.  Other perfection steps, to the extent applicable, are as discussed in question 3.3 above.

3.7        Can security be taken over inventory? Briefly, what is the procedure?

Yes, a floating charge is most commonly created over inventory.  The chargor in this instance will generally be permitted to deal with the inventory in the ordinary course of its business until the occurrence of a default event under the facility or notice from the lender.

Registration with ACRA is required under s131 of the CA.  Other perfection steps, to the extent applicable, are as discussed in question 3.3 above.

3.8        Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility (see below for questions relating to the giving of guarantees and financial assistance)?

Yes for both cases, subject to considerations such as the existence of corporate power and corporate benefit, s162/s163 of the CA (prohibition on loans, quasi-loans and credit transactions to directors and related companies) and financial assistance, etc., as set out in this chapter.

3.9        What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets?

The fee for the registration of a charge/security instrument with ACRA in accordance with s131 of the CA is currently S$60 per charge.

In addition, security interest over certain assets (e.g. aircraft, ships, intellectual property rights and land) will need to be registered at specialist registries and additional fees will be payable.  For example, the fee payable for the registration of a mortgage over land with the SLA is currently S$68.30 per mortgage.

Stamp duty is payable on a mortgage, equitable mortgage or debenture of any immovable property and stocks or shares.  A legal mortgage is subject to ad valorem duty at the rate of 0.4% of the amount of facilities granted on the mortgage of immovable property or stocks and shares, subject to a maximum duty of S$500.  An equitable mortgage is subject to ad valorem duty at the rate of 0.2% of the amount of facilities granted on the mortgage of immovable property, subject to a maximum duty of S$500.

Notarisation is not required for security documents that are executed and to be used in Singapore.

3.10      Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?

The charge/security instrument to be lodged with ACRA under s131 of the CA must be lodged within 30 calendar days after the creation of the charge where the document creating the charge is executed in Singapore (or within 37 calendar days if executed outside Singapore).  The filing (once filing forms are completed) is instantaneous and confirmation of registration from ACRA will normally take up to three business days.

The timeframe for registration at specialist registries differs according to each registry.  For example, the registration of a mortgage with the SLA may take several weeks or even several months if complex and involving multiple units.  In the interim, a lender may protect its interest by the lodgement of a caveat with the SLA.

Fees payable for such registrations are as discussed in question 3.9 above.

3.11      Are any regulatory or similar consents required with respect to the creation of security?

Regulatory consents may be required in certain circumstances; for example, where the subject land is state land leased from the Singapore government or government statutory boards, such as the SLA and Urban Redevelopment Authority.

3.12      If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?

Under Clayton’s rule, security taken over a revolving loan may be “reducing” as the loan “revolves” as a result of the “first-in first-out” rule.  In the absence of contrary indication, a secured revolving facility may technically lose the security once an amount equal to the original loan and any associated charges and interest has been paid into the account, even though sums have been paid out in the meantime.  This is rarely an issue in practice, however, as finance documents will be drafted to provide for inverse order of payment and/or for security to be continuing notwithstanding any intermediate payments made and to secure the ultimate amount outstanding under the loan.

3.13      Are there particular documentary or execution requirements (notarisation, execution under power of attorney, counterparts, deeds)?

Execution requirements are predominantly set out in the company’s constitutive documents and the CA.  In addition, certain instruments are also statutorily required to be in writing or executed by deed.  For example, a legal mortgage over land must be by deed.  Certain statutory remedies (e.g. power to sell the mortgaged property, to insure the property, to appoint a receiver, etc.) given to mortgagees will also not be available unless the mortgage is by deed.  Commonly, it is prudent in any event for securities to be executed by deed so that there is no issue of past consideration.  It is worth noting that amendments to the CA in 2015 introduced provisions allowing for the execution of deeds without the use of a common seal, thereby making the execution of deeds less administratively burdensome for local companies.

Where it is envisaged that the execution of the security instrument be completed by virtual means, it is also good practice for it to be done in line with the principles set out in the English case R (on the application of Mercury Tax Group and another) v HMRC .

4.1        Are there prohibitions or restrictions on the ability of a company to guarantee and/or give security to support borrowings incurred to finance or refinance the direct or indirect acquisition of: (a) shares of the company; (b) shares of any company that directly or indirectly owns shares in the company; or (c) shares in a sister subsidiary?

S76 of the CA provides, inter alia , that a public company or a company whose holding company or ultimate holding company is a public company, shall not, whether directly or indirectly, give any financial assistance for the purpose of, or in connection with, the acquisition by any person (whether before or at the same time as the giving of financial assistance) or proposed acquisition by any person of shares in the company or in a holding company or ultimate holding company (as the case may be) of the company.  The prohibition does not extend to sister subsidiary companies.  The CA further provides that financial assistance for the acquisition of shares may be provided by means of a loan, the giving of a guarantee, the provision of security, the release of an obligation or the release of a debt or otherwise.

These provisions may therefore be triggered in the event of the giving of guarantees/securities or other accommodation that may directly or indirectly provide “financial assistance” within the meaning of the CA.  There are, however, whitewash provisions available under our laws, including short-form whitewash procedures that would enable the company to effect a whitewash through, inter alia , board approval, if doing so does not materially prejudice the interests of the company or its shareholders or the company’s ability to pay its creditors, or the passing of shareholders’ and directors’ resolutions and lodgement of solvency statements and papers with ACRA without the need for public notification and objection period or court order.  Where the company is unable to effect a short-form whitewash, parties must bear in mind that the need for public notification and objection period for a long-form whitewash will mean that a timeframe of six to eight weeks (assuming no objections) may be required.

5.1        Will your jurisdiction recognise the role of an agent or trustee and allow the agent or trustee (rather than each lender acting separately) to enforce the loan documentation and collateral security and to apply the proceeds from the collateral to the claims of all the lenders?

Yes, Singapore recognises the role of an agent and trustee and these roles are normally taken up by the lead bank to whom the borrower has granted the mandate to arrange the syndicated loan.  An express trust will be created to ensure the desired consequences.

The creation of the trust must comply with the relevant formalities.  For example, s7 of the Singapore Civil Law Act 1909 requires a trust in respect of immovable property to be manifested and proved in writing signed by the person who is able to declare such trust.  In addition, a validly constituted express trust must be certain as to the intention of the settlor to create the trust, the identity of the subject matter and the identity of the beneficiaries.  Provided the relevant mechanics are set out in the finance documents and the trust is properly constituted, the security trustee will be able to hold the security on trust for the syndicated lenders and will have the right to enforce the finance documents and collateral security, including applying the proceeds from the collateral to the claims of the syndicated lenders in accordance with the finance documents.

5.2        If an agent or trustee is not recognised in your jurisdiction, is an alternative mechanism available to achieve the effect referred to above, which would allow one party to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?

This is not applicable.  Please refer to question 5.1 above.

5.3        Assume a loan is made to a company organised under the laws of your jurisdiction and guaranteed by a guarantor organised under the laws of your jurisdiction. If such loan is transferred by Lender A to Lender B, are there any special requirements necessary to make the loan and guarantee enforceable by Lender B?

The right of Lender B to enforce the loan and guarantee exists provided the procedure for assignment or novation of Lender A’s rights and obligations, as set out in the finance documents, are complied with (e.g. consent of borrower and guarantor if required) and the continuity of the guarantee is provided for expressly and preserved under the documents.

Where there are no proper procedures or transfer/preservation provisions within the finance documents or the security agency/trust is not properly constituted, an assignment or novation of the underlying loan may result in an assigned or new debt that is not covered by the guarantee.  A transfer in such a situation may fail and the guarantee rendered unenforceable over the assigned or new debt.  In such an instance, a fresh guarantee will be required for Lender B to be guaranteed.  In practice, confirmation by the guarantor is often sought even if the documents provide expressly for preservation without consent.

6.1        Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?

Withholding tax is applicable by virtue of s12(6) read with s45 or s45A of the Singapore Income Tax Act 1947 ( ITA ), where a person is liable to pay another person not known to him to be tax resident in Singapore any interest, commission, fee or any other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness if such payments are either (i) borne, directly or indirectly, by a person resident in Singapore or a permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore or any immovable property situated outside Singapore), or (ii) deductible against any income accruing in or derived from Singapore.  Interest and payments in connection with any guarantee or indebtedness that are made to foreign lenders would generally be subject to withholding tax unless otherwise exempted.  The current withholding tax rate on such s12(6) payments is 15% of the gross amount (assuming the payment is not derived by the non-resident from any trade, business, profession or vocation carried on or exercised by him in Singapore and is not effectively connected with any permanent establishment in Singapore of the non-resident).

There are, however, various exceptions to this.  S12(6A) of the ITA excludes from the scope of s12(6) the following payments:

• any payment made to a non-resident person for any arrangement, management or service relating to any loan or indebtedness where such arrangement, management or service is performed outside Singapore for or on behalf of a person resident in Singapore or a permanent establishment in Singapore; and
• any payment made to a guarantor who is a non-resident person for any guarantee relating to any loan or indebtedness, where the guarantee is provided for or on behalf of a person resident in Singapore or a permanent establishment in Singapore.

For the purposes of s12(6A), a qualifying “non-resident” is a person who is not incorporated, formed or registered in Singapore and who does not, by himself or in association with others, carry on a business in Singapore and does not have a permanent establishment in Singapore; or if he does carry on a business in Singapore (by himself or in association with others) or has a permanent establishment in Singapore, the arrangement, management, service or giving of guarantee was not performed through, or effectively connected with, that business carried on in Singapore or that permanent establishment.

Since payments covered under s12(6A) are excluded from the scope of s12(6), the obligation to withhold tax does not arise for s12(6A) payments even though they are made to a non-resident person.  In addition, s45(9)(c) of the ITA exempts from withholding tax interest that is paid to Singapore branches of non-resident foreign companies (e.g. non-resident foreign banks).  If the non-resident bank is a resident of a country with which Singapore has an applicable tax treaty, the treaty may provide for a reduced withholding tax rate.

6.2        What tax incentives or other incentives are provided preferentially to foreign lenders? What taxes apply to foreign lenders with respect to their loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

Singapore has various governmental agencies to assist foreign investors and creditors.  The Economic Development Board is the lead governmental agency responsible for planning and executing strategies to attract foreign businesses and investments.  Enterprise Singapore works to position Singapore as a base for foreign businesses to expand into the region, in partnership with Singapore-based companies.

Although incentives are generally industry-specific, and are not affected by the residency of the investors or creditors, there are selected schemes directed at attracting foreign investors and creditors. 

Save for withholding taxes as discussed in question 6.1, no taxes specific to loans, mortgages or other security documents, either for the purposes of effectiveness or registration, are applicable.  Stamp duty as discussed in question 3.9 will be applicable.

6.3        Will any income of a foreign lender become taxable in your jurisdiction solely because of a loan to, or guarantee and/or grant of, security from a company in your jurisdiction?

Where the bank is not a tax resident in Singapore, withholding tax as discussed in question 6.1 may apply.

Where the bank is a tax resident in Singapore or has a branch in Singapore, any interest, commission, fee or any other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness that is either (i) borne, directly or indirectly, by a person resident in Singapore or a permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore or any immovable property situated outside Singapore), or (ii) deductible against any income accruing in or derived from Singapore, that accrues to or is derived by the bank or its Singapore branch will be deemed to be sourced in Singapore and subject to income tax in Singapore by virtue of s12(6) read with s10(1) of the ITA.

6.4        Will there be any other significant costs that would be incurred by foreign lenders in the grant of such loan/guarantee/security, such as notarial fees, etc.?

Apart from fees and tax payable as discussed above (i.e. questions 3.9 and 6.1), the provision of certain services, for example, the provision of guarantee services, may be subject to Goods and Services Tax ( GST ) in Singapore if the provider of the service is registered for GST purposes pursuant to s9(1) read with the first schedule of the Singapore Goods and Services Tax Act 1993, unless the service qualifies for zero-rating as an international service or is an exempt supply on which no GST is chargeable.  The rate at which GST is chargeable on standard-rated supplies of goods and services is 8.9% with effect from 1 January 2024.

6.5        Are there any adverse consequences for a company that is a borrower (such as under thin capitalisation principles) if some or all of the lenders are organised under the laws of a jurisdiction other than your own? Please disregard withholding tax concerns for the purposes of this question.

Singapore tax laws do not contain thin capitalisation rules.  However, should the banks be organised under the laws of a foreign jurisdiction, and no express choice of law is made in the finance documents, the applicable law governing the finance documents may be that of the foreign jurisdiction.  In such a situation, the borrower may not be able to enjoy any rights and remedies that are available to a borrower in Singapore, but not in that foreign jurisdiction.

7.1        Will the courts in your jurisdiction recognise a governing law in a contract that is the law of another jurisdiction (a “foreign governing law”)? Will courts in your jurisdiction enforce a contract that has a foreign governing law?

Provided that it is bona fide and legal and there is no reason for avoiding the choice on grounds including illegality or public policy, the express choice of the laws made by the parties to a contract will be upheld as valid and binding in any action in the courts of Singapore and the courts will enforce a contract that has a foreign governing law.

In January 2015, the Singapore International Commercial Court ( SICC ) was established to hear international commercial disputes, including those governed by foreign laws.

The key features of the SICC are: (i) it is a division of the General Division of the Singapore High Court, which means that SICC judgments can be enforced as judgments of the Supreme Court of Singapore; (ii) it has a diverse panel of judges that include eminent international jurists and existing Supreme Court Judges; (iii) its proceedings are open court proceedings, although parties may apply for the proceedings to be confidential; (iv) there is flexibility for parties to seek leave of court to apply alternative rules of evidence (i.e. rules that differ from the existing Singapore rules of evidence) that they may be more familiar with; and (v) parties may appoint foreign-qualified lawyers to represent them in court where the cases have no substantial connection to Singapore or to address the court on matters of foreign law.

The SICC has heard a number of cases on a range of subjects and involving parties from various jurisdictions.  Additionally, the Supreme Court of Judicature (Amendment) Act 2018 clarified that the SICC has jurisdiction to hear cases relating to international commercial arbitration (see s18D of the Supreme Court of Judicature Act 1969).  A Technology, Infrastructure and Construction List was also established in 2021 to address technically complex cases (e.g. construction, engineering and technology-related disputes).  Specialised procedures will apply to cases that are placed on the list with the consent of the parties, which allows for more efficient and expeditious resolution of such disputes.  The Singapore International Commercial Court (Amendment No. 2) Rules 2022 also introduced a new amendment such that from 1 October 2022, the SICC will also have jurisdiction to hear any proceedings relating to corporate insolvency, restructuring or dissolution that are international and commercial in nature.

7.2        Will the courts in your jurisdiction recognise and enforce a judgment given against a company in New York courts or English courts (a “foreign judgment”) without re-examination of the merits of the case?

At present, certain judgments from English courts may be recognised and enforced in Singapore without a re-examination of the merits of the case under the Reciprocal Enforcement of Commonwealth Judgments Act 1921 ( RECJA ) (for judgments obtained before 1 March 2023), the Reciprocal Enforcement of Foreign Judgments Act 1959 ( REFJA ) (for judgments obtained on or after 1 March 2023), and/or the Choice of Court Agreements Act 2016 ( CCAA ).

Under the RECJA, a final judgment which was obtained before 1 March 2023 for a sum of money obtained against a company in Singapore (which is not a judgment for the payment of a fine, penalty or tax, or anything of that nature) in a superior court in England may be enforceable against the company in Singapore, unless there are special grounds for refusing registration and enforcement (e.g. the judgment was obtained by fraud, an appeal is pending, or the judgment concerns a cause of action that could not be entertained in Singapore for reasons of public policy).

The REFJA, however, applies if the final judgment from the relevant English court was obtained on or after 1 March 2023.  The RECJA was repealed with effect from 1 March 2023, and the legal framework for statutory recognition and enforcement of foreign judgments in civil proceedings was streamlined and consolidated under the REFJA.  The REFJA provides for the possibility that non-money judgments (e.g. freezing orders, injunctions) as well as judgments that are not from superior courts, amongst others, may be registered and enforced in Singapore. However, as at the time of writing, such non-money and other judgments from English courts have not yet been gazetted as judgments which are registrable under the REFJA.

English judgments may also be recognised under the CCAA, which implements the regime created by the 2005 Hague Convention on Choice of Court Agreements ( Hague Convention ).  Under the CCAA, English judgments may be recognised and enforced if parties had entered into an agreement designating the English courts as having exclusive jurisdiction in respect of a particular matter.  In instances of overlap (i.e. where the English judgment is a final judgment for a sum of money obtained against a company in Singapore (which is not a judgment for the payment of a fine, penalty or tax, or anything of that nature) from a superior court in England and there exists an agreement designating English courts as having exclusive jurisdiction over the subject matter in dispute), enforcement of the English judgment will be governed by the CCAA and not the RECJA or REFJA (as may be applicable).

Like the RECJA and REFJA, recognition and enforcement of English judgments under the CCAA will not entail a re-examination of the merits.  Similarly, there are also exceptions to the scope of the CCAA.  For example, insolvency matters and matters involving consumers are excluded from the scope of the CCAA.  Further, recognition and enforcement may be refused if, for example, the English judgment is inconsistent with a Singapore judgment given in a dispute between the same parties.  There are also several grounds on which recognition and enforcement must be refused if, for instance, the foreign judgment was obtained by fraud in connection with a matter of procedure, or where it would be manifestly incompatible with the public policy of Singapore.

As to judgments by New York courts, only certain judgments issued by New York courts will be enforced in Singapore in accordance with the common law.  There is no reciprocal agreement or convention between Singapore and the United States of America in respect of the enforcement of court judgments.  There is also no Singapore legislation in place to facilitate the enforcement of New York court judgments.  Broadly speaking, under the common law, a judgment for a fixed or ascertainable sum of money may be enforced, provided it is final and conclusive, and the foreign court had jurisdiction over the defendant in accordance with the private international law principles recognised by the Singapore courts.  It will then be for the party resisting enforcement to prove that the New York courts had no jurisdiction over the matter, or that the judgment was obtained by fraud, or that there were any major procedural irregularities in arriving at the judgment, or that enforcement would be a direct or indirect enforcement of foreign penal, revenue or other public law, or that enforcement would be contrary to the public policy of Singapore.  The Singapore court will not re-examine the merits of the case.

7.3        Assuming a company is in payment default under a loan agreement or a guarantee agreement and has no legal defence to payment, approximately how long would it take for a foreign lender to (a) assuming the answer to question 7.1 is yes, file a suit against the company in a court in your jurisdiction, obtain a judgment, and enforce the judgment against the assets of the company, and (b) assuming the answer to question 7.2 is yes, enforce a foreign judgment in a court in your jurisdiction against the assets of the company?

The timeline for each case would depend on its own facts.  Generally, if the claim is against a defendant in Singapore and based on a straightforward loan agreement or guarantee, it is possible to obtain default or summary judgment within three to six months of filing the claim (assuming there is no appeal).

There are generally three main methods of enforcement, namely:

For civil proceedings commenced on or after 1 April 2022, the Rules of Court 2021 consolidate methods of enforcement into a single enforcement order, where the party seeking enforcement of a judgment takes out a single application for one or more methods of enforcement, such as those listed at points 1 and 2 above.  Depending on which method of enforcement is selected and whether any challenge is mounted by the debtor, the process could take two to six months or longer (again, assuming there is no appeal).

7.4        With respect to enforcing collateral security, are there any significant restrictions that may impact the timing and value of enforcement, such as (a) a requirement for a public auction, or (b) regulatory consents?

There is no specific requirement for a public auction, although sale by public auction is commonly carried out as a matter of practice.  Secured creditors typically have wide powers under the terms of the security document to take possession, dispose or otherwise deal with the secured assets, or appoint a receiver in respect of the secured assets, to satisfy the secured debts.  There may be requirements for regulatory consent in respect of certain types of borrowers (for example, regulated entities).

7.5        Do restrictions apply to foreign lenders in the event of (a) filing suit against a company in your jurisdiction, or (b) foreclosure on collateral security?

There are no specific restrictions on foreign lenders filing a suit or foreclosing on collateral security, provided the Singapore courts have jurisdiction over the matter.

7.6        Do the bankruptcy, reorganisation or similar laws in your jurisdiction provide for any kind of moratorium on enforcement of lender claims? If so, does the moratorium apply to the enforcement of collateral security?

Yes, there are various types of moratoria which are statutorily provided for under Singapore law in the bankruptcy, organisation and similar contexts.  Broadly, these operate on enforcement on lender claims (though not always necessarily on enforcement of collateral security), and may be categorised into moratoria in the contexts of liquidation, judicial management and schemes of arrangement.

In the context of liquidation, the Insolvency, Restructuring and Dissolution Act 2018 ( IRDA ) provides for an automatic moratorium where a liquidation order is made, or where a provisional liquidator is appointed.  Such a moratorium generally does not apply to the enforcement of collateral security, and in the event the secured creditor requires court action or proceedings to enforce its security, Singapore courts are likely to grant such permission.  In the insolvent liquidation of a company, no secured creditor is entitled to any interest in respect of its debt after the commencement of the winding up, if the secured creditor does not realise its security within 12 months after the commencement of the winding up or such further period as the liquidator may determine.

In the context of judicial management, the IRDA also provides for an automatic moratorium upon the making of an application for a judicial management order or the lodgement of a written notice of appointment of an interim judicial manager (i.e. where creditors have resolved to place the company under judicial management, a process that does not involve the Singapore court).  However, if within the period of 12 months immediately before the date on which such an application or lodgement the company already enjoyed such an automatic moratorium by virtue of a prior application for a judicial management order or lodgement, no second automatic moratorium will apply.  An automatic moratorium also applies upon the making of a judicial management order.  If such an automatic moratorium applies, generally a creditor may not enforce any security over the company’s assets without permission from the court or the judicial manager.  If a secured creditor does not realise its security within 12 months after the date on which the permission or consent to enforce the security was given or such further period as the judicial manager may determine, that secured creditor is not entitled to any interest in respect of its debt from the date that such permission or consent is obtained.

In the context of schemes of arrangement, under the IRDA and the CA, the court may grant a moratorium order ( Scheme Moratorium ) if applied by the company (under the IRDA and the CA), creditor or member (under the CA), which may cover the enforcement of security.  Most companies would be able to avail themselves of the IRDA regime, under which an automatic 30-day moratorium comes into effect on the filing of a moratorium application (subject to the relevant statutory requirements being satisfied).  Under the IRDA regime, related companies (i.e. the applicant company’s subsidiaries, holding company or ultimate holding company) may apply to extend the Scheme Moratorium to the related companies.  Further, the IRDA also allows a Scheme Moratorium to have worldwide or extraterritorial effect (i.e. applying to acts outside of Singapore).  For the Scheme Moratorium to have extraterritorial effect, the applicant company must seek to restrain specific acts of a specific party that is in Singapore or within the jurisdiction of the Singapore court.

If the IRDA regime is unavailable, a company may seek a Scheme Moratorium under the CA but as a prerequisite the applicant company will need to put forth a sufficiently detailed scheme proposal first.

Notwithstanding the moratorium for companies in liquidation, judicial management or a scheme of arrangement, secured creditors may generally enforce their security with the permission of the court and in accordance with the terms that the court may impose.

7.7        Will the courts in your jurisdiction recognise and enforce an arbitral award given against the company without re-examination of the merits?

Foreign arbitral awards (i.e. arising out of arbitrations seated outside of Singapore) may be recognised and enforced in Singapore in accordance with the New York Convention in conjunction with the International Arbitration Act 1994 ( IAA ) (which puts into force the UNCITRAL Model Law on International Commercial Arbitration, with modifications) without having its merits re-examined.  However, the courts may refuse to enforce such awards on grounds recognised by the New York Convention, which includes: incapacity of a party; failure to give proper notice to a party or the inability of a party to present his/her case; the selection of the arbitrators or the arbitral procedure was inconsistent with the agreement of the parties or the law of the seat; the award falling outside of the scope of the submission to arbitration; invalidity of the arbitration agreement; the award having been set aside; the subject matter of the difference between the parties to the award not being capable of settlement by arbitration under the law of Singapore; and/or the enforcement of the award being contrary to the public policy of Singapore.

An award arising out of an international arbitration seated in Singapore under the IAA may also be enforced in Singapore without having its merits re-examined.

The grounds for setting aside an arbitral award under the IAA are substantially the same as the grounds for refusing enforcement under the New York Convention, except that the award may also be set aside if there was fraud, corruption or a breach of the rules of natural justice in connection with the making of the award.

An award arising out of a domestic arbitration under the Arbitration Act 2001 may generally be enforced without having its merits re-examined, with the same grounds for setting aside as an international arbitration award.  However, in limited situations the court may grant leave to appeal on a question of law that is of general public importance where the parties have not excluded such appeals by agreement.

8.1        How does a bankruptcy proceeding in respect of a company affect the ability of a lender to enforce its rights as a secured party over the collateral security?

Bankruptcy proceedings in respect of a company, in the sense of court proceedings relating to the insolvency of a company, include liquidation, schemes of arrangement and judicial management.  The restrictions on enforcing security in these contexts are by way of statutory moratoria, which are explained under question 7.6 above.

8.2        Are there any preference periods, clawback rights or other preferential creditors’ rights (e.g., tax debts, employees’ claims) with respect to the security?

Yes.  Liquidators and judicial managers, but not receivers, can apply to set aside transactions entered into or claw back certain assets transferred before the commencement of liquidation or judicial management.  Such transactions include transactions at an undervalue, unfair preferences, extortionate credit transactions, floating and unregistered (but registrable) charges and transactions defrauding creditors.  The clawback period ranges from three years (transactions at an undervalue and extortionate credit transactions) to two years (unfair preferences, if given to a person connected with the company; if not, one year) before the commencement of liquidation or judicial management.  Generally, floating charges created within one year (two years if given to a person connected with the company) before the commencement of liquidation or judicial management are invalid except to the value of the consideration (insofar as the consideration consists of money paid, goods or services supplied, or the discharge/reduction of debt) for the creation of the charge together with interest, unless there is proof that the company was solvent at the time the floating charge was created.  Finally, charges that are registrable under the CA should be registered within 30 days after the creation of the charge, though the time may be extended by the court where it is, amongst other things, just and equitable to do so.

Though not directly affecting security, the IRDA also contains provisions against fraudulent trading (i.e. where the business of a company has been carried on with the intent to defraud creditors or for any fraudulent purpose) as well as wrongful trading (i.e. where the company incurs debts or other liabilities without reasonable prospect of meeting them when the company is insolvent or when such liabilities cause the company to become insolvent).  A liquidator, judicial manager, contributory or creditor can in such instances apply for a declaration for the parties to the fraudulent/wrongful trading to be personally responsible for the debts/liabilities of the company.

In a liquidation, costs and expenses relating to the winding up as well as specified employment liabilities (including wages, retrenchment benefits, contributions under a scheme of superannuation and remuneration in respect of vacation leave, up to a certain limit prescribed by order in the Gazette) rank ahead of floating charges and must accordingly be paid out of property subject to a floating charge if the remaining assets of the company are insufficient to meet those debts.  In a receivership, the same employment liabilities must be paid in priority to any claim for principal and interest secured by property subject to a floating charge.

8.3        Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?

Entities incorporated in Singapore are generally not excluded from bankruptcy proceedings in Singapore, although the source legislation for the winding up may differ depending on the type of entity in question.  Various exclusions and/or modifications also exist in relation to specific kinds of entities and industries.  As an example, a judicial management order under the IRDA cannot be made in relation to (amongst other entities) a banking corporation or a finance company licensed under the Finance Companies Act 1967, a licensed insurer licensed under the Insurance Act 1966, or a company otherwise prescribed under the Gazette (including securitisation special purpose vehicles, covered bond special purpose vehicles, certain approved financial institutions and merchant bank licensees) (this list is not exhaustive).

8.4        Are there any processes other than court proceedings that are available to a creditor to seize the assets of a company in an enforcement?

Self-help remedies may be available if provided under the contract or are otherwise conferred by the law for specific types of security.  For instance, appointment of a receiver can be provided for in debentures, and the creditor may have a power of sale for properties subject to a mortgage or a pledge.  In this regard, the right to appoint a receiver over a company can arise statutorily, contractually in accordance with the terms of the security document, such as a debenture, or by an exercise of the court’s power to appoint a receiver on the application of the secured creditor.  For the most part, the receiver’s duties are owed to the appointing secured creditor, and the receiver would act in furtherance of the interests of the secured creditor to realise the collateral security.

9.1        Is a party’s submission to a foreign jurisdiction legally binding and enforceable under the laws of your jurisdiction?

Yes, a party’s submission to a foreign jurisdiction will generally be upheld as valid and binding in any action in the courts of Singapore.  Whether such submission has taken place will be determined by the laws of Singapore.

In particular, where a party has submitted exclusively to the jurisdiction of a state that is party to the Hague Convention (see question 7.2 above), the CCAA would apply and a Singapore court must stay or dismiss proceedings in the Singapore court in favour of proceedings in the foreign court.  This is subject to certain exceptions.  For example, the CCAA does not apply to certain types of matters, such as insolvency matters and matters involving consumers.  The Singapore court can also refuse to stay or dismiss proceedings in its courts if, for example, the agreement to submit to the foreign jurisdiction is null and void under the law of the foreign jurisdiction, or if giving effect to the agreement would lead to manifest injustice or would be manifestly contrary to the public policy of Singapore.

Even where the Hague Convention does not apply, Singapore courts will stay local proceedings if there is a valid exclusive jurisdiction clause in favour of a foreign court, unless there is strong cause to refuse a stay, such as an abuse of process or a denial of justice.

9.2        Is a party’s waiver of sovereign immunity legally binding and enforceable under the laws of your jurisdiction?

A party’s waiver of sovereign immunity may be legally binding and enforceable provided it satisfies the conditions set out in the State Immunity Act 1979.

10.1      What are the licensing and other eligibility requirements in your jurisdiction for lenders to a company in your jurisdiction, if any? Are these licensing and eligibility requirements different for a “foreign” lender (i.e., a lender that is not located in your jurisdiction)? In connection with any such requirements, is a distinction made under the laws of your jurisdiction between a lender that is a bank versus a lender that is a non-bank? If there are such requirements in your jurisdiction, what are the consequences for a lender that has not satisfied such requirements but has nonetheless made a loan to a company in your jurisdiction? What are the licensing and other eligibility requirements in your jurisdiction for an agent under a syndicated facility for lenders to a company in your jurisdiction?

Under Singapore law, unless exempted or excluded, a person may not carry on the business of a moneylender without holding the requisite moneylenders’ licence.  The relevant legislation, the Moneylenders Act 2008, provides that any person who lends a sum of money in consideration of a larger sum being repaid (i.e. charge interest) shall be presumed, until the contrary is proved, to be a moneylender.  The same prohibition would apply to a “foreign” lender who carries on the business of moneylending in Singapore from a place outside Singapore.

“Any person licensed, approved, registered or otherwise regulated by the MAS under any other written law”, amongst others, would fall outside the ambit of the prohibition as an “excluded moneylender”.  These would include banks or finance companies that are licensed and regulated under the Banking Act 1970 and Finance Companies Act 1967, respectively.  The question therefore is whether “foreign” lenders or other non-bank entities that are not so licensed, approved, registered or otherwise regulated by the MAS are necessarily excluded.  With effect from 1 March 2009, an amended Moneylenders Act came into force in Singapore pursuant to which, amongst others, “any person who lends money solely to corporations” or “any person who lends money solely to accredited investors within the meaning of s4A of the Securities and Futures Act 2001” would be an “excluded moneylender”.  Accordingly, a lender can be an “excluded moneylender” provided that it lends (and has lent) money solely to corporations or only to accredited investors.

There has been academic debate on whether a “foreign” unlicensed lender or other non-bank entity would not be deemed an excluded moneylender if it had in the past lent money otherwise to individuals who were not accredited investors.  The prevailing view, however, is that the Singapore courts are unlikely to allow such a defence without more to succeed in the context of legitimate financial activity of commercial entities.

For corporations convicted of unlicensed moneylending, a fine will be imposed of not less than S$50,000 and not more than S$500,000.  In addition, subject to certain exceptions, the contracts for such loans, and guarantees or securities given for such loans, shall be unenforceable, and any money paid by or on behalf of the unlicensed moneylender under the contracts for the loans will not be recoverable in any court of law.

The granting of loans to corporations per se is not otherwise regulated in Singapore.  There are no licensing or eligibility requirements in Singapore for an agent under a syndicated facility for lenders lending to a company in Singapore and, subject to the above, it need not be licensed or authorised provided that no other regulated activities (e.g. banking, securities or financial advisory activities) are being conducted.

11.1      Please provide a short summary of any regulatory rules and market practice in your jurisdiction with respect to transitioning loans from LIBOR pricing.

In December 2020, there were various developments in relation to the discontinuation of LIBOR and SIBOR, with implications for the industry benchmark transition to SORA.  To provide additional guidance on cessation timelines and to support the transition to a SORA-centred SGD interest rate market for a range of financial products, the Steering Committee for Swap Offer Rate & SIBOR Transition to SORA ( SC-STS ) laid down the following key timelines to be observed by financial institutions ( FIs ): (i) FIs to cease usage of the Swap Offer Rate ( SOR ) and SIBOR in new derivatives contracts and in financial products respectively by the end of September 2021; (ii) the SC-STS to retain the originally contemplated end-date of end-2024 for the Fallback Rate (SOR); and (iii) FIs to target to reduce their SOR exposures to corporates to 20% by the end of 2022.

In line with the timelines above, the Association of Banks in Singapore and the SC-STS have finalised the key settings of the MAS Recommended Rate, which will apply as a contractual fallback reference rate in wholesale SOR contracts after 31 December 2024.  In view of its recommendation to cease the reliance on LIBOR in new contracts, the SC-STS had also published an updated Transition Roadmap and set out supplementary guidance to help market participants price the conversion of wholesale SOR contracts to SORA for the current period until 31 December 2024.  The committee’s guidance provides clarity on the pathway for the eventual transition of all legacy SOR contracts to SORA, and will further facilitate the industry’s transition away from SOR following its discontinuation on 30 June 2023.

Since the end of February 2021, key market participants such as OCBC have been offering a full range of SORA-based products.  FIs have been encouraged to implement the essential changes to transition exposures to SORA, including the acceleration of staff training, operational changes, and client outreach.  The key timelines and roadmap set out by the SC-STS provide a prudent path towards mitigating financial risks from the imminent discontinuation of LIBOR, and ensures continual access to important funding markets.

12.1      Do you see environmental, social and governance (ESG) or sustainability-related debt products in your jurisdiction?  If yes, please describe recent documentation trends and the types of debt products (e.g., green bonds, sustainability-linked loans, etc.).

The MAS has been taking active steps to develop Singapore as the leading centre for green and sustainability/sustainability-linked finance, and Singapore has seen significant growth in green and sustainable finance instruments, including green and sustainability-linked bonds and loans – please refer to questions 1.1 and 1.2 above on the Singapore government’s initiatives in this regard, and the significant lending transactions in relation to such ESG and sustainability-related debt products in recent years.  The types of debt products we see in Singapore are mainly green and sustainability-linked bonds and loans, with documentation based largely on Loan Market Association ( LMA )/Asia Pacific Loan Market Association ( APLMA ) templates, taking into account the relevant LMA/APLMA Green Loan Principles and Sustainability-Linked Loan Principles.

12.2      Are there any ESG-related disclosure or diligence requirements in connection with debt transactions in your jurisdiction?  If yes, please describe recent trends and any impact on loan documentation and process.

There are no specific ESG-related disclosure or diligence requirements in connection with debt transactions in Singapore.

However, the Singapore Exchange introduced a phased approach to mandatory climate reporting for issuers of equity securities listed on the Singapore Exchange based on the recommendations of the Task Force on Climate-related Financial Disclosures in 2021.  In 2022, climate reporting was made mandatory for all listed issuers on a ‘comply or explain’ basis.  From 2023 and through to 2024, climate reporting is being made progressively mandatory for issuers in specified industries (namely, issuers in the (a) financial industry, (b) agriculture, food and forest products industry, (c) energy industry, (d) materials and buildings industry, and (e) transportation industry), while other issuers will continue to report on a “comply or explain” basis.  The “comply or explain” approach requires issuers to describe their practices in relation to each principle and/or guideline.  If the issuer excludes any component, it must disclose this and describe what it does instead, with reasons for doing so.

13.1      Are there any other material considerations that should be taken into account by lenders when participating in financings in your jurisdiction?

The principal Singapore law considerations for lenders when participating in financings in Singapore have generally been covered by the above questions and answers.

Production Editor's Note

This chapter has been written by a member of ICLG's international panel of experts, who has been exclusively appointed for this task as a leading professional in their field by Global Legal Group , ICLG's publisher. ICLG's in-house editorial team carefully reviews and edits each chapter, updated annually, and audits each one for originality, relevance and style, including anti-plagiarism and AI-detection tools. This chapter was copy-edited by Hollie Parker , our in-house editor.

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1 June 2021 Reed Smith Client Alerts

The Singapore Court of Appeal highlights issues of assignment and set-off

In our client alert dated 8 March 2021 we reported on the Singapore Court of Appeal’s judgment in CIMB Bank Bhd v. World Fuel Services (Singapore) Pte. Ltd . 1 The case related to issues arising out of an assignment of receivables to a bank and the exercise of rights of set-off by the debtor. We reported that, in that case, a master set-off agreement was construed as taking precedence over the terms of subsequent contracts, including standard terms and conditions, in the context of a claim by CIMB for assigned receivables.

On 20 May 2021, the Court of Appeal delivered a new judgment in a case also involving CIMB: Italmatic Tyre & Retreading Equipment (Asia) Pte. Ltd. v. CIMB Bank Bhd . In this case the court approved but distinguished the World Fuel judgment on its facts. The court also observed that set-off could apply even after an assignee of a debt gave notice of assignment if the set-off agreement was entered into prior to the assignment.

Autores: Kohe Hasan Omar Al-Ali Kyri Evagora

What happened between the parties?

In June 2016, the respondent (the Bank) extended trade-financing facilities to Panoil Petroleum Pte Ltd (Panoil), a marine fuel supplier. In July 2016, as security for those facilities, Panoil executed a debenture in favour of the Bank granting it a security interest in goods financed by the facilities and in all receivables and documents relating to such goods.

In July and August 2017, Panoil entered into and performed seven contracts under which it sold and delivered seven cargoes of marine fuel to the appellant, Italmatic (the Contracts). Each Contract was evidenced by a sale confirmation incorporating Panoil’s standard terms and conditions (the Panoil T&Cs).

Italmatic owed Panoil a total of US$2.43 million plus interest for the cargoes.

As a result of Panoil’s financial prospects, the Bank served a notice of assignment on Italmatic on 29 August 2017, notifying Italmatic of the terms of the debenture and asking it to pay the above amount to the Bank. When Italmatic failed to do so, the Bank commenced High Court proceedings against it.

In the High Court, Italmatic argued that the cargoes had been paid for by an exercise of its rights of set-off under an agreement dated 1 July 2015 between the parties (the Set-Off Agreement). The Set-Off Agreement permitted mutual set-off by the parties of their undisputed invoices. The rights of set-off were purportedly exercised by an exchange of ‘set-off letters’ dated 13 August 2017.

Italmatic argued that alternatively its debt to Panoil was cancelled when Panoil agreed to invoice Italmatic’s end customer directly. This was evidenced by ‘cancellation letters’ exchanged between the end customer and Panoil on 17 and 18 August 2017.

The Bank disputed the authenticity of the Set-Off Agreement, the set-off letters, and the cancellation letters and put Italmatic to strict proof. The Bank also argued that the rights of set-off were precluded by clause 8.2 of the Panoil T&Cs, which required payment without any set-off or counterclaim. Italmatic countered that clause 8.2 was nullified by the set-off letters.

The judge held that: (a) the set-off letters were fabrications, meaning Italmatic had never exercised its rights of set-off; (b) in any event, clause 8.2 of the Panoil T&Cs precluded Italmatic’s ability to exercise any such rights; and (c) the cancellation letters were also fabrications.

Italmatic appealed the decision.

What did the Court of Appeal decide and why?

In the Court of Appeal, Italmatic submitted that the judge erred in holding that Italmatic’s rights of set-off were precluded, relying on the World Fuel judgment. In World Fuel , the Court of Appeal held that a specifically agreed master set-off agreement took precedence over subsequent contracts, including standard terms and conditions, even if the latter were properly incorporated and acted on by the parties. Italmatic also sought to introduce new evidence proving the authenticity of the set-off letters but failed to meet the legal standards to do so. The court rejected Italmatic’s appeal and found for the Bank for the following reasons:

(a) Set-off was not precluded but was inapplicable in this case as the relevant notices were fabrications

The court adopted and followed the World Fuel judgment, noting that a specifically agreed set-off agreement took precedence over the Panoil T&Cs. Accordingly, Italmatic’s rights of set-off were not precluded by clause 8.2 of the Panoil T&Cs.

However, the court noted that unlike the case in World Fuel , the Set-Off Agreement restricted the rights of set-off to undisputed amounts. This restriction, the court held, meant that there was a need for some form of notice and confirmation to be exchanged between the debtor (Italmatic) and the assignor (Panoil) for set-off to apply. The set-off letters could have satisfied this requirement, but the court held that they were fabrications based on the evidence. As such, the requirement for notice and confirmation was not fulfilled and the amounts owed under the Contracts remained outstanding from Italmatic.

Noting that assignees of a debt take “subject to equities existing before the notice of assignment”, the court commented that such equities could arguably encompass a contractual set-off agreement and that set-off could well have operated even after the notice of assignment was issued.

However, the court left the issue to be determined in an appropriate future case.

(b) The cancellation letters were fabrications

The court held that Italmatic’s submissions proving the authenticity of the cancellation letters were unproven and rejected them for the same reason. As such, the amounts owed by Italmatic under the Contracts had not been cancelled and remained outstanding.

What does this judgment mean for you?

For those offering trade finance through receivables purchase arrangements or financings secured by an assignment of receivables, this judgment highlights the need for thorough due diligence of the underlying contractual relationships between buyer and seller or, where that is not practicable, the need for well drafted protections in the receivables purchase or financing documentation that will protect against the risk that prior contractual arrangement(s) may exist that entitle a debtor to exercise rights resulting in the full amount of a receivable not being paid.

The judgment offers a reminder to those offering such products that assignees may take subject to equities existing prior to the notice of assignment even if the equities are not acted upon until after the notice is issued. As such, the service of a notice of assignment on a debtor is no guarantee that such debtor is obliged to make payment of the full amount of a receivable to the financier if earlier or even later agreements concluded with the debtor include rights of set-off.

Finally, it is important to note that, while it proved unhelpful to the debtor in this case, the World Fuel judgment remains good authority.

• [2021] SGCA 19.

Client Alert 2021-153

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