Notes from the bar: Lien over sub-freight - registrable charge

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There has been a long tussle between insolvency lawyers and shipping lawyers over whether a lien over sub-freight ought to be treated as a registrable charge pursuant to the Companies Act. Unfortunately, the score is insolvency lawyers 1 : shipping lawyers 0. In this update, we take a brief look at the case of Siva Ships Intl. Pte Ltd (in liquidation) [2017] (“Siva Ships”).

Overview on law on registration of charges

Section 131(1) of the Companies Act provides as follows;

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.”

What that means is if a charge is created over a company’s assets, that charge must be registered with ACRA. If the charge is not registered, and if the company is subsequently liquidated, that charge will be void against the liquidator and any creditor of the company. The creditor then joins the pool of unsecured creditors and share pari passu from whatever assets recovered by the liquidator.

Brief facts of the Siva Ships case

Diablo is the owner of the vessel and bareboat chartered the vessel to Siva Ships. Siva Ships in turn entered into a pooling arrangement with V8 Pool Inc. Siva Ships earns charter hire based on the actual earnings from the pooling arrangement.

After Siva Ships filed a winding up application, Diablo served a notice to V8 Pool Inc purporting to exercise its lien over the sub-hire pursuant to clause 18 of the bareboat charter.

After receiving the notice of lien, V8 Pool Inc withheld from making payment of the charter hire due to Siva Ships.

Subsequently the liquidators of Siva Ships filed an application with the Singapore High Court to seek a declaration that the lien over the sub-hire due from V8 Pool Inc is void for want of registration.

The above is a very bare summary of the factual matrix as we are focusing only on the issue of whether a lien over sub-hire is a registrable charge.

Decision of the Singapore High Court

The Singapore High Court concluded after hearing arguments from the liquidators and Diablo, as well as submissions from an amicus curiae, that a lien over sub-hire is a book debt and hence is to be treated as a floating charge. And since it was not registered, it was void as against the liquidators.

Diablo argued that the bareboat charter was governed by English law, and under English law, the registration requirement does not apply to a foreign company. In this case, Siva Ships being a Singapore incorporated company is not bound by the provisions of the UK Companies Act 2006.

However, the court held that although Siva Ships is not subject to the provisions of the UK Companies Act 2006, it is still subject to the requirements under the Singapore Companies Act, and hence the Singapore law requirement of registration of charges would still be applicable even though the governing law of the bareboat charter was English law.

Once insolvency proceedings are commenced in a particular jurisdiction, the courts in that jurisdiction would generally apply the statutory insolvency scheme of that jurisdiction to matters arising from the insolvency.

After establishing that Singapore law applies, the court went on to ascertain whether a lien over sub-hire should be regarded as a charge within the meaning of Section 131 of the Companies Act.

The court examined a number of English case authorities, namely the Ugland Trailer [1986], the Annangel Glory [1988] and the Western Moscow [2012] and held that a lien over sub-hire is essentially a charge over book debts or a floating charge and hence is registrable under English law.

While Diablo does not contest that this is the position under English law, Diablo sought to persuade the court to adopt the same position taken in Hong Kong.

Hong Kong Companies Ordinance

A contractual lien is not characterised as a charge under the Hong Kong Companies Ordinance. There is an express provision in the Hong Kong Companies Ordinance which states that the shipowner’s lien on sub-freights for amounts due under the charter is not to be regarded as a charge on book debtors of the company or as a floating charge.

In its arguments Diablo relied on the consultation paper by the Hong Kong Financial Services and the Treasury Bureau explaining why a lien over sub-freights should be excluded from the definition of a registrable charge.

It was argued that a lien lacks the proprietary characteristics of a charge. Further registration is also inconvenient from a commercial perspective as charter parties are usually negotiated by shipbrokers and not by lawyers and are normally of a relatively short duration.

Singapore’s legislative history

The Singapore High Court examined the legislative history behind Section 131 of the Companies Act and noted that our statutory provisions were modelled after the English and Australian legislations.

In essence, the provisions of the Singapore Companies Act can be traced back to the provisions of the UK Companies Act 1948. Even the categories of charges in the Singapore Companies Act are essentially the same as those in the UK Companies Act 1948.

On that basis, the Singapore High Court held that the position under English law would be more relevant to us rather than the position under the Hong Kong Companies Ordinance. English case authorities would similarly be highly persuasive.

The court went on to follow the decision of Nourse J in the Ugland Trailer and held that a lien over sub-hire operates by way of an equitable assignment, which in turn creates an equitable charge over the sub-hire.

And since a lien over sub-hire is categorised as a charge, the provisions on registration of charges in the Companies Act would thus apply. If the lien is not registered, it is void as against the liquidator and other creditors of Siva Ships.

Commercial difficulties of requiring the registration of a lien over sub-hire

In coming to her decision, Audrey Lim JC acknowledged that the requirement of registering a lien would be commercially impracticable and give rise to significant inconvenience.

Her Honour accepts that it would be impracticable to require a shipowner to register a charge against each corporate charterer for every charter party entered into. This is particularly so in respect of charters with short durations.

However, the court held that, unlike the position in Hong Kong, since Parliament did not exclude such liens from the requirements of registration, the impracticability and inconvenience it causes is not a reason to hold that a lien over sub-hire is excluded from the registration regime.

Therefore, whether a lien over sub-hire should be excluded from the registration regime is something for Parliament to determine.

Our views

While it is difficult to fault the reasoning that the court adopted in coming to its decision, the final outcome is however rather disappointing.

The impracticability of the requirement of registration appears to have been argued strenuously in court but to no avail.

It would unfortunately create additional compliance cost for the shipowners if shipowners decide to register a charge each time they enter into a charter party with a lien clause.

Key summary

  • A lien over sub-hire is regarded as a book debt and hence is treated as an equitable charge.
  • As an equitable charge, it has to be registered in the company’s books failing which it would be void against the liquidators and other creditors in the event of the company’s insolvency.
  • If the lien over sub-hire is regarded as void, then the ship owner would not be able to intercept any sub-hires payable to the charterer. The ship owner would then be placed in the position where he would stand pari passu with the general body of unsecured creditors.

Download full version of 'Lien over sub-freight - registrable charge' - August 2017 (PDF, 174KB)