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Singapore: whether lien over sub-freight or sub-hire is a registrable charge

02.08.2017

Duncan, Cameron Lindsay and another v. Diablo Fortune Inc and another matter [2017] SGHC 172

In the recent case of Duncan, Cameron Lindsay and another v Diablo Fortune Inc and another matter [2017] SGHC 172, the Singapore High Court considered, amongst other issues, an unsettled point of law: whether a lien over sub-freight or sub-hire is a registrable charge that falls within the ambit of Section 131(1) of the Companies Act (“CA”).

The background facts and issues

A company incorporated under the laws of Singapore had entered into a bareboat charterparty, as the Charterers, with the defendant Greek shipowners, for a period of five years. Pursuant to Clause 18 of the bareboat charterparty, the Owners would have a “lien upon all cargoes, sub-hires and sub-freights belonging or due to [the Charterers], or any sub-charterers and any Bill of Lading freight for all claims under this Charter…”

The Charterers then entered into a pooling arrangement with a sub-charterer, and earned revenue from chartering the vessel to the sub-charterer, which in turn employed the vessel in the pooling arrangement. The Charterers subsequently filed for winding up in Singapore. The Owners sent their first lien notice to the sub-charterer, pursuant to Clause 18, purporting to exercise a lien over their unpaid sub-hire to the Charterers. The Charterers were eventually wound up, following which the Owners sent a second lien notice to exercise a lien over bill of lading freight, payable by the consignee of the cargo on board the vessel to the Charterers.

The Charterers’ liquidators sought a declaration that the Owners’ lien was a registrable charge under Section 131 CA, which should now be void against the liquidators as it had not been registered in Singapore within 30 days after its creation. The Owners argued in response that a lien over sub-freight or sub-hire should not be deemed to be a registrable charge in the first place. Alternatively, in the event that the court disagreed, the Owners requested an extension of time under Section 137 to register the said charge.

The High Court decision

A contractual ien over sub-freights or sub-hire is a registrable charge under Section 131

The Court held that a contractual lien is a registrable charge under Section 131. The Court reasoned as follows:

(i)  A contractual lien operates as an equitable assignment by way of a charge, as opposed to a “sui generis” personal contractual right of interception of sub-freight or sub-hire. In this regard, a contractual lien possesses the characteristics of a floating charge and should, therefore, be classified as such.

(ii)  Notwithstanding that a contractual lien is a form of security interest that amounts to a floating charge, it can also amount to a charge on a book debt. It is undisputed that sub-freights and sub-hire due to a charterer can constitute the charterer's book debts, and that charges can be created on book debts.

(iii)  In this regard, a contractual lien falls within the meaning of a ‘charge’ under Section 131 of the CA, either as a floating charge under Section 131(3)(g) or as a charge on book debts under Section 131(3)(f).

In this case, as the Owners did not register their contractual lien, it was found to be void as against the liquidators.

Extension of time to register charge

The Court accepted that the Owners’ failure to register their contractual lien was due to the Owners’ inadvertence as it has never been the case or the industry practice for such liens to be registered with the local authority as a matter of course, and they were consequently unaware of any requirement to register the lien as a charge under Singapore law. That said, as the Charterers had already been wound up, the Court was not persuaded it would be just and equitable to grant the extension of time after the Charterers had been wound up, as it would prejudice unsecured creditors. The Court held that once a company has been wound up, a chargee should not be allowed to obtain priority over unsecured creditors by virtue of an extension of time granted to register his charge.

Comment

This decision has highlighted the tension between insolvency practitioners and the maritime industry in such cases. From the perspective of insolvency practitioners, registration would give creditors notice of the lien and, in turn, help them better decide whether to extend credit or enter into transactions with the chargor. However, admiralty practitioners would view the registration of contractual liens to be impracticable and inconvenient.

The practical effect of this decision is that a Contractual Lien created by a Singapore company in favour of a counterparty is registrable by the Singapore company with the Accounting and Corporate Regulatory Authority (“ACRA”) as either a floating charge, a charge on book debts, or both. If the relevant charges are not registered with the ACRA, the contractual lien will be void as against the liquidator and any creditor of the Singapore company.

The shipping industry should, therefore, keep in mind the following:

1.  First, shipowners and charterers should take note of any clauses in any charterparty or contract containing a contractual lien created by a Singapore company. If such a contractual lien exists, a charge in respect of this lien should be filed with the ACRA within 30 days or, if out of time, subject to the leave of the Court. Where the contractual lien is not registered as a charge, the security created pursuant to the contractual lien will be void as against the liquidator or any creditor and accordingly, any protection and priority afforded to the lienor by way of the contractual lien will be lost and the lienor will join the ranks of the unsecured creditors of the company in liquidation.

2.  Second, whilst the Singapore company as the lienee is primarily responsible for ensuring that the charges are filed with the ACRA (and may be subject to statutory penalties for failing to do so), the lienor as the security holder and a party interested in ensuring that the charges are necessarily filed, is considered an “interested person” under Section 132(1) of the CA and may, therefore, also be the party who registers the charge. Banks and financial institutions involved in sale and leaseback transactions or relying on the bankability of a vessel charter where the charterer is a Singapore company would also fall within the definition of an “interested person” and should also take particular notice of the above and ensure that the necessary steps are taken to protect their interest in these charters. 

3.  Third, while the Court accepted that there was inadvertence by the Owners in this case, the decision nonetheless means that it will now be harder for a lienee or “interested person” to argue that it did not know of the registration requirement. The Court may in future be less sympathetic towards all parties, including lienors or banks and financial institutions, who should have registered a contractual lien with the ARCA but failed to do so promptly. If the lienors or banks and financial institutions are unable to ensure the registration of the charges by the lienee and, should they wish to avoid the risk of finding that a contractual lien is void for lack of registration, they should themselves take steps to have the contractual lien registered as a charge.  It may be of some comfort that should this be required, Section 131(2) of the CA allows them to recover from the company the amount of any fees properly paid by them on the registration, although it is as yet unclear whether this includes the costs of an application to court for an extension of time to register the charge. 

Moving forward, Hong Kong has legislated to clearly exclude such liens from the need for registration. A similar move in Singapore would be welcomed by its maritime industry. It remains to be seen whether we may see legislative action on this in Singapore. Absent such legislation, parties should exercise prudence and register all such contractual liens to prevent them being found void if and when insolvency strikes.

Incisive Law LLC represented the Owners as counsel in this matter.