The Singapore High Court has held in the unreported decision of Duncan, Cameron Lindsay and another v Diablo Fortune Inc and another matter [2017] SGHC 172 (the “Judgment“) (available on Singapore Law Watch here) – amongst other things – that a contractual lien on sub-freights and sub-hire constitutes a security interest and a registrable charge under Section 131 of the Companies Act (Cap. 50) (the “Act“).

What is a Contractual Lien?

There is no doubt that a lien constitutes a form of security. It is in fact one of the only four types of recognised security, the other 3 being a mortgage, charge and pledge. However, whether it constitutes a registrable security interest is questionable. The issue is critical as a lack of registration results in the lien being ineffective against a liquidator.

As a matter of general law, a lien simpliciter is considered as a:-

“…right to detain goods of the debtor to secure payment or performance of some other obligation, the goods having been delivered to the creditor for some purpose other than security, such as storage or repair. It is this last element that distinguishes the contractual lien from the pledge. The legal effect of a contractual lien differs from that of a pledge in that the latter carries with it an implied power of sale upon the debtor’s default, whereas a lien is in principle a right of detention only, so that a power of sale would have to be agreed.”

See Ewan McKendrick, Goode on Commercial Law (4th Edn) at page 628.

What Security Interests Are Registrable Under The Act ?

Section 131(1) of the Act provides the type of security interest subject to registration as well as the effect of a failure to register:-

“Subject to this Division, where a charge to which this section applies is created by a company there shall be lodged with the Registrar in the prescribed manner for registration, within 30 days after the creation of the charge, a statement containing the prescribed particulars of the charge, and if this section is not complied with in relation to the charge the charge shall, so far as any security on the company’s property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company.“

[emphasis added]

Section 131(3) goes on to list various types of charges – created by the company (the chargor) that are registrable under the Act. It is noteworthy that the word “charge” is expressly used. In its plain and ordinary meaning, this would exclude a contractual lien, but in the Judgment the Court adopted a purposive interpretation of “charge“.

One critical question in the Judgment was therefore whether the contractual lien over the sub-freights and sub-hire constituted a charge under Section 131(1) of the Act as non-registration would result in it being void as against the liquidator.

It is noteworthy that the purpose of registration of any charges created by the chargor is to ensure that third parties are put on notice as to what property is encumbered by the chargor. Whether a contractual lien falls within this purpose, is – in this author’s view at least – questionable, since it involves the exercise of a contractual right of defeasible right to detain property.

What Is A Charge?

A charge vests equitable rights in the chargee (the person with the benefit of the charge) in the property subject to the charge as security in respect of an obligation owed by the chargor to the chargee. Unlike a mortgage, the chargee does not have legal title over the charged property, but does have direct rights against the property subject to the charge.

A definition of a charge may be found in the English Court of Appeal decision of National Provincial and Union Bank of England v Charnley [1924] KB 431 at 449. This may be neatly summarised as follows:-

“...a charge (also sometimes termed hypothecation) does not depend on either the delivery or possession or the transfer of ownership, but represents an agreement between creditor and debtor by which a particular asset or class of assets is appropriated to the satisfaction of the debt, so that the creditor is entitled to look to the asset and its proceed to discharge the indebtedness, in priority to the claims of unsecured creditors and junior incumbrancers. The charge does not transfer ownership to the creditor; it is merely an incumbrance, a weight hanging on the asset which travels with it into the hands of third parties other than a bona fide purchaser of the legal title for value and without notice.”

See Louise Gullifer, Goode on Legal Problems of Credit and Security (5th Edn) at [1-55]

In the Judgment, the High Court held that the contractual lien on sub-freights and sub-hire did indeed constitute a charge, and was therefore liable to be registered pursuant to Section 131 of the Companies Act. As it had not been registered, it was void as against the liquidator.

The commercial implications of this decision are far reaching.

Difficulties

In this author’s view, there are difficulties with the characterisation of a contractual lien as a charge and, perhaps more importantly, as a registrable charge.

As noted by Lord Millett in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 at [41]:-

“The lien is the creation of neither the common law nor equity. It originates in the maritime law, having been developed from the ship owner’s lien on the cargo. It is a contractual non-possessory right of a kind which is sui generis. Since the subfreights are book debts and so incapable of physical possession, the lien has been described as an equitable charge: see Federal Commerce and Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757, 784 per Lord Russell of Killowen. But this was a passing remark which was not necessary to the decision, and if the lien is a charge it is a charge of a kind unknown to equity. An equitable charge confers a proprietary interest by way of security. It is of the essence of a proprietary right that it is capable of binding third parties into whose hands the property may come. But the lien on subfreights does not bind third parties. It is merely a personal right to intercept freight before it is paid analogous to a right of stoppage in transitu. It is defeasible on payment irrespective of the identity of the recipient. In this respect it is similar to a floating charge while it floats, but it differs in that it is incapable of crystallisation. The ship owner is unable to enforce the lien against the recipient of the subfreights but, as Oditah observes, this is not because payment is the event which defeats it (as Nourse J stated in In re Welsh Irish Ferries Ltd [1986] Ch 471); it is because the right to enforce the lien against third parties depends on an underlying property right, and this the lien does not give. Apart from the obiter dictum of Lord Russell in the Federal Commerce case, the cases in which the lien has been characterised as an equitable charge are all decisions at first instance and none of them contains any analysis of the requirements of a proprietary interest. Quite apart from the conceptual difficulties in characterising the lien as a charge, the adverse commercial consequences of doing so are sufficiently serious to cast grave doubt on its correctness.”

[emphasis added]

This specific passage was cited by the High Court in the Judgment, although the Court ultimately did not agree with Lord Millet’s approach, which the Court considered as obita dicta: see [58] of the Judgment.

The Singapore High Court considered its interpretation of a contractual lien to fall within the definition of “charge” – as used in Section 131 of the Act – holding as follows:-

“In the final analysis, I prefer the approach of the line of decided English cases and hold that a Contractual Lien operates as an equitable assignment by way of a charge. This was also the view arrived at by Mr Teo. Ultimately, the question of classification of a “charge” is one of substance and not of form (see Dresdner Bank AG at [31] and [37]). Hence, if in substance, the nature of the rights and obligations which the parties intended to grant each other via a Contractual Lien is consistent with the rights and obligations intended by a grant of a charge, the proper characterisation of the Contractual Lien should be that of a charge”.

See [64] of the Judgment.

Reliance was placed on several English authorities for this proposition. However at least one academic has leaned to the contrary:-

“Decisions holding that a lien on sub-freights was registrable as a charge on book debts or a floating charge have now been doubted by Lord Millett, who in a decision of the Privy Council has expressed the view that it is not a charge at all, merely a personal right to intercept the freight before it is paid to the owner and thus a right analogous to a stoppage in transit. This seems the historically correct approach.”

Ewan McKendrick, Goode on Commercial Law (4th Edn) at page 658.

Commercial Implications

The commercial implications (as cautioned by Lord Millett) of the characterisation of liens on sub-freights as registrable charges cannot be understated.

This is because lenders, charterers or in fact any institution or person taking a contractual lien over sub-freight or sub-hire will have to register the charge pursuant to Section 131(1) of the Act, or risk – in the event of insolvency – their lien being construed as a charge, and therefore invalid as against the liquidator and creditors in an insolvency.

What may be routine contracts freely agreed between parties prior to loading and shipment may now require further steps to be taken in order to ensure that contractual liens are registered under the Act, whereas holders of existing contractual liens may have to apply to have those liens registered out of time.

This is not only a lengthy process, but a cumbersome one given that most financing agreements which provide for a lien over the goods (or proceeds thereof) are “rolling agreements”, namely that they continue until terminated.

Consequently, each and every shipment where a contractual lien is involved may require registration, a process that can take some time since the specific particulars of the charge would have to be filed with the Companies Registrar.

Holders of unregistered contractual liens – which may now be registrable – would have to apply to register their respective contractual liens out of time, a process that would take at least 30 days (to allow for any competing security interest holder to challenge the validity or priority of the contractual lien).

Conclusion

The Judgment is – in the round – extremely sound, dealing with a wide-range of complex insolvency and credit and security issues, particularly the law applicable to the registration of charges versus the law applicable to the creation of that charge (see [28] to [31] of the Judgment), as well as the non-arbitrability of certain consequences arising out of liquidation (see [14] to [21] of the Judgment).

However, the holding in the Judgment pertaining to contractual liens over sub-hire and sub-freight as a registrable charge presents difficulties, not only from a legal standpoint – but from a commercial perspective as well.

Should there be an appeal against this decision, this author hopes that this aspect of the Judgment will be considered by the Court of Appeal for final determination.

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