Singapore Court of Appeal considers whether a charterparty lien on sub-freight is a registerable charge
Diablo Fortune Inc v Duncan, Cameron Lindsay and another [21.05.18]
The Singapore Court of Appeal (SCA) has affirmed the earlier High Court’s decision that, under Singapore law, a charterparty lien on sub-freight is a floating charge that is registrable under s131(3)(g) of the Companies Act (the Act). Accordingly, such lien is void and unenforceable against a charterer in liquidation if it is not registered. However, it is anticipated that the Act may be amended in the future to relieve owners of this somewhat impractical requirement.
Diablo Fortune Inc (Owners) chartered the “V8 Stealth II” (the Vessel) to a Singapore registered company, Siva Ships International Pte Ltd (Charterers) on a BIMCO standard bareboat charterparty (the CP). Clause 18 of the CP provided that Owners would have a lien upon all cargoes, sub-hires and sub-freights belonging or due to the Charterers for all claims under the CP.
The Charterers sub-chartered the Vessel to V8 Pool Inc (V8) and earned charter hire from V8 pursuant to a pooling arrangement.
- 19 December 2016 - while the Vessel was still under the CP, the Charterers issued winding up proceedings in the Singapore courts.
- 30 December 2016 - Owners sent a notice to V8 purporting to exercise its lien under Clause 18 of the CP (Lien Notice). As a result of the Lien Notice, V8 withheld payment of hire due to Charterers under their pooling arrangement.
- 6 January 2017 - Charterers were wound up, while the Vessel was in the midst of a voyage.
- Charterers’ liquidators applied to the Singapore High Court for a determination that the Owners’ lien on sub-freight was void as against the liquidators for want of registration under s131(1) of the Act.
The High Court found that the Owners’ lien on sub-freight was indeed registerable and was therefore void and unenforceable as against the liquidators as it had not been registered.
Owners appealed against the High Court’s decision.
The SCA affirmed that liens on sub-freights should be characterised as floating charges that are registrable under s131(3)(g) of the Act.
As Owners had not registered its lien on sub-freights within 30 days of the CP having been entered, the lien was void against the liquidators and Charterers’ other creditors.
The SCA accepted that a lien on sub-freights is in substance (even if not in form) a ‘floating charge’ in that:
- The lien creates an immediate security interest on the date of the charterparty.
- The charterer may deal with its sub-freights so long as the floating charge has not crystallised by way of the owner’s exercise of lien through its notice of lien.
- Upon crystallisation of the floating charge, the owners will have a proprietary right on the sub-freights and be able to pursue the disposal of such monies to third parties or to the charterers.
This is in line with the prevailing English position.
The SCA acknowledged that it may be commercially inconvenient and impractical to require shipowners to register their liens on sub-freights when clauses providing for such liens feature heavily in charterparties.
Nonetheless, the SCA was of the view that whether such liens could be excluded from registration under s131(1) of the Act was a matter to be determined by legislative reform – much like how Hong Kong has expressly provided that such liens were not to be considered as a floating charge on the charterers’ undertaking or property.
The SCA’s decision now makes clear that Singapore law requires charterparty liens on sub-freight to be registered with the Accounting and Corporate Regulatory Authority of Singapore (ACRA) in order for the lien to be valid as against the liquidators of the insolvent charterer. Where the lien is not registered, owners will stand as unsecured creditor for sums due to it from the insolvent charterer under the charterparty.
This decision also serves as a reminder that an owners’ rights under a charterparty can be significantly altered by the charterers’ insolvency.
The Singapore Ministry of Law has, following the High Court’s decision, proposed amendments to the Act to exempt liens on sub-freight from registration and conducted a public consultation exercise on the proposed amendments. The public consultation has very recently concluded and in light of this we expect the amendments to the Act to be introduced in the near future.
However, until such time, owners entering into charterparties with Singapore registered charterers would do well to consider at the time they enter into the charterparty if they wish to register the lien with ACRA.