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Highest court of Singapore confirms that typical lien clause over subfreight/sub-hire must be registered

24.05.2018

On Wednesday, 23 May 2018, the Singapore Court of Appeal (“CA”) issued their grounds of decision confirming that a lien over sub-freight/sub-hire (“Lien”) is a registrable charge under the Companies Act. For our previous articles on this case, please see our previous articles here and here.

In this long-awaited judgment, the CA considers three competing theories of the juridical basis of the Lien: (i) a contractual right of interception; (i) a registrable charge; and (iii) an agreement to create a charge on the occurrence of a charterer’s default.

The CA’s principal objection to the “contractual right” analysis was the absence of any direct contractual relationship between the shipowner and the sub-charterer, which results in the right under the Lien being unenforceable for lack of privity. The contractual analysis is unable to explain why payment to the shipowner by the sub-charterer would discharge its debt to the charterer, as a mere contractual relation between the shipowner and the charterer cannot have any legal effect on the sub-charterer’s debt to the charterer.

In contrast, characterising a Lien as an equitable assignment addresses this loophole: the shipowner (lien holder) at the top of the chain is the assignee of the hire payable under the sub-charter, sub-sub-charter and so on. This way, the shipowner, as assignees of the rights to payment, can discharge the sub-charterers in the same way that an assignee can discharge a debtor from its indebtedness to an assignor.

On this note, the CA turned to consider the prevailing position in English law that a Lien gives rise to an equitable assignment by way of floating charge. In the CA’s view, such an assignment would be one by way of security – the Lien creates an immediate security interest on the date of the Charterparty, but the shipowner holds no proprietary interest in any particular sub-freights (as and when they come into existence) until sums due under the charter go unpaid and the shipowner crystallises the charge by giving notice of the lien.

The CA further added that it is incorrect to differentiate Liens from floating charges on the basis that lien holders do not enjoy a proprietary right in the sub-freights until the lien is exercised. The reason being, it is not an essential pre-requisite of a floating charge to create an immediate proprietary interest. In fact, the operation of a Lien accords with the operation of floating charges – that the chargee enjoys an immediate security interest when the charge is created, but the charge creates no proprietary interest in favour of the chargee until crystallisation.

As for the theory that a Lien is an agreement to create a charge, where registration of the same would only be required after the giving of notice to the sub-charterers (the event that perfects the assignment), the CA rejected this theory because: (i) the clause’s language does not permit the Lien to be construed as such; (ii) allowing a charge to be created at a time when the lien is exercised in response to a default by the charterer would allow the shipowner to steal a march over the other creditors in the likely event of insolvency; and (iii) characterising the Lien as an agreement to create the charge, will still cause it to fall within the definition of “charge” in the Companies Act and thus be registrable.

After consideration of all three juridical basis, the CA found that Liens should be characterized as floating charges that are registrable under section 131(3)(g) of the Companies Act.

In its concluding remarks, the CA recognized that while this decision may cause commercial difficulties, these considerations cannot change the nature of the security nor justify a court decision in exempting Liens from registration. The CA strongly pushed for Parliament to consider introducing a statutory carveout for Liens – especially in light of feedback from members of the shipping industry who view Lien registration as “onerous”, and “an administrative burden”.

All things considered, until there is any statutory carve-out, registration of such liens is a must.

Ms Samantha Kong of Incisive Law represented the Appellant.