Companies (Amendment) Bill

Order for Second Reading read.

5.12 pm

The Second Minister for Finance (Ms Indranee Rajah): Mr Speaker, I beg to move, "That the Bill be now read a Second time."

The Bill introduces two amendments to the Companies Act.

The first amendment seeks to exempt Shipowners' Liens from the requirement of registration as a charge under the Companies Act.

The second amendment seeks to clarify the categories of persons bound by a compromise or scheme of arrangement when a company is in the course of being wound up.

Mr Speaker, let me now take Members through the details of the two amendments in the Bill.

First is on Shipowners' Liens. Clause 2 of the Bill seeks to preserve the ease of doing shipping business in Singapore. Specifically, this clause exempts Shipowners' Liens from the requirement of registration as a charge under section 131 of the Companies Act. A Shipowner's Lien is a standard feature in ship charterparties. A charterparty is a maritime contract, typically between a shipowner and a charterer or a hirer of the shipowner's vessel.

The Shipowners' Lien in such a contract gives the shipowner the right, in the event of the charterer's default, to claim payment from monies owing to the charterer by third parties. In other words, should the charterer be unable to pay the shipowner, the lien allows the shipowner to directly recover payment of sub-hire, sub-freight or, in certain instances, bill of lading freight, from a sub-charterer.

The term "Shipowner's Lien" is the term of the art used by the shipping community to refer to liens provided to others, beyond the registered owner of the ship. These include a disponent owner, bareboat charterer or other charterer, in addition to the registered owner.

In 2017, the status of an unregistered Shipowner's Lien vis-a-vis a liquidator of the charterer and its interaction with section 131 of the Companies Act was litigated in Singapore for the first time.

The High Court in Duncan, Cameron Lindsay v Diablo Fortune Inc recognised a Shipowner's Lien as a charge that is required to be registered under section 131 of the Companies Act. In March 2018, the Court of Appeal affirmed the High Court's decision.

As a consequence of non-registration under section 131, the lien in that case was not enforceable against the liquidator of the charterer and the shipowner who would otherwise have had the benefit of the lien, ranked together with the unsecured creditors of the charterer instead.

The effect of the Diablo case gives rise to several practical difficulties for the shipping industry in connection with section 131 of the Companies Act and Shipowners' Liens.

First, leaving aside the long-standing industry custom and practice where shipowners do not habitually register Shipowners' Liens, the registration of Shipowners' Liens is particularly difficult from a practical perspective. This is because each ship is typically subject to a continual series of charterparties, each entered into as quickly as possible, to ensure that the ship is continually gainfully employed. Often, charters are for periods as short as a few days. This means that many charterparties may have been completed before a charge can even be registered.

Second, given the volume of charterparties, there would likely be significant administrative and cost implications for shipping companies.

As a result, compliance with section 131 of the Companies Act in relation to Shipowners' Liens would be particularly burdensome for the shipping industry.

Furthermore, the underlying rationale of section 131 of the Companies Act, which is to protect third parties who deal with companies, by disclosing charges against a company’s property, is less applicable in the shipping context. As observed by the Court of Appeal in its grounds of decision in the Diablo case, "[n]otice…may not be necessary in the [shipping] context since all parties who deal with charterers are aware that such liens are standard in charterparties".

Moving to the specifics of the amendment, there is precedent for the introduction of a statutory exemption from registration under section 131 of the Companies Act. Similar exemptions exist within the Companies Act. For example, section 131(3A) of the Companies Act exempts charges over securities issued by the Government.

There is international precedent for excluding Shipowners' Liens from registration requirements. In Hong Kong, for example, the Hong Kong Companies Ordinance stipulates that a Shipowners' Lien does not amount to a charge and, consequently, Shipowners' Liens are excluded from the requirement of registration.

We have taken a different approach. In our case, the Bill, while exempting such Shipowners' Liens from registration requirements under section 131 of the Companies Act, maintains the Singapore Courts' characterisation in the Diablo case of such liens as charges. The effect of this is that the Shipowners' Lien retains its essential nature as a security but without the need for registration. As a result, the Shipowners' Lien will take priority over other charges created subsequent to it, as well as over unsecured creditors. This is unlike Hong Kong where, given that a Shipowners' Lien is not a charge to begin with, it will not take priority over other charges and will rank pari passu with unsecured claims.

So, this will be the position for all Shipowners' Liens that are created on or after the date that the amendments in this Bill come into effect.

With regard to Shipowners' Liens that are already in existence, or which are created before the effective date of these amendments, the position is as follows.

Clause 2 contains a saving provision that preserves, where possible, the validity of unregistered Shipowners' Liens existing prior to this amendment coming into force.

Specifically, such unregistered Shipowners’ Liens would generally remain valid, unless the relevant company is already in winding up, or a creditor has already obtained proprietary rights or interests in the subject matter of the charge.

Next, compromise and schemes of arrangement. Clause 3 of the Bill seeks to clarify the categories of persons bound by a compromise or scheme of arrangement when a company is in the course of being wound up.

Section 210 of the Companies Act provides the mechanism for a compromise or arrangement to rearrange the rights of the company, its creditors or members. In 2014, the provision was amended to clarify that holders of units of shares in a company can be parties to a compromise or scheme of arrangement. However, creditors and members, who were bound by a compromise or scheme of arrangement before the amendments in 2014, were inadvertently excluded from the amended provision, in respect of a company which is in the course of being wound up. Thus, clause 3 is a technical amendment to reinstate these categories of persons. Mr Speaker, I beg to move.

Question proposed.

5.21 pm

Mr Dennis Tan Lip Fong (Non-Constituency Member): Mr Speaker, I first declare my interest as a shipping lawyer.

Mr Speaker, the main thrust of today's Companies (Amendment) Bill provides that a Shipowner's Lien for bill of lading freight, sub-freights, sub-hires or for any amount due under any charter, no longer requires registration under section 131 of the Companies Act. Under the proposed amendments, a shipowner includes a registered owner, a disponent owner or a bareboat charterer of a ship.

Simply put, the shipowner can intercept income due to charterers in the form of bill of lading freight, sub-freight under a voyage charter or sub-hire under a sub-charter.

Today's Bill for the proposed amendment of section 131 of the Companies Act stems from the recent Court of Appeal case of Diablo Fortune v Duncan Lindsay. The Court of Appeal, with five judges hearing the appeal, affirmed the decision of Judicial Commissioner Audrey Lim in the High Court below.

Diablo Fortune Inc are the owners of the cargo vessel V8 Stealth II. Their bareboat chartered the vessel to Siva Ships International Pte Ltd. The charterers entered into a pooling agreement with another company by which the charterers earned charterhire. The charterers then went into liquidation and the owners sought to enforce a lien over subhire pursuant to clause 18 of the bareboat charterparty by serving a lien on the pool. The pool withheld hire payments to the charterer. The liquidators applied to the High Court directing payment of the charterhire to the charterer.

In the High Court decision below, the hon Judicial Commissioner held that the lien over sub-hire created by a charterparty was registrable pursuant to section 131(3)(f) of the Companies Act as a book debt or pursuant to section 131(g) as a floating charge.

The decision in July 2017 last year generated a strong reaction from the maritime community in Singapore. Although it can be said that the decisions of the Court of Appeal and the High Court are not surprising given that they are, in some respects, consistent with English law on the registrability of liens on sub-hire and sub-freights, the recent decisions are nonetheless the first local judicial pronouncements on the effect of the non-registration of such liens. The shipping community, led by the Singapore Shipping Association, bemoaned the “onerous” and “administrative burden” of having to register all such liens and pleaded for a “statutory carve out”.

The reaction from the shipping community is perhaps hardly surprising, at least to those in the community. And I am in total agreement. Such a lien clause is very common in standard charterparties all over the world, not just in bareboat charterparties which are the subject of the Diablo case, but also in time and even voyage charterparties; in many of these commonly used charterparty forms, we will use a variant of a lien clause allowing lien over hire, freight, sub-freights or sub-hire. Parties all over the world enter into charterparties on an everyday basis. Singapore is, of course, a major maritime hub in the world with many shipping businesses setting up companies, subsidiaries and operations in Singapore. Moreover, many charterparties and fixture notes have Singapore or Singapore law as part of their jurisdiction or arbitration or governing law clauses.

I agree that it is wholly impractical to require all liens for freights, hire, sub-freights or sub-hire to be registered as charges under sections 131(f) or (g) of the Companies Act.

If the law is not amended, businesses may be compelled to register charges for such liens, and failure to do so may even lead to penalties under the Companies Act.

Besides being impractical, it is inconvenient and the legal fees for registration are unnecessary expenses for businesses. Notwithstanding the recent judicial pronouncements of there being a need to register a charge under section 131(3)(f) or (g), the reality is that the practice of registering was never part of our commercial landscape in Singapore.

It is notable that the Court of Appeal made comparisons with the corresponding laws in the United Kingdom (UK) and Hong Kong, respectively. I would suggest that the comparisons with the UK and Hong Kong are not merely of jurisprudential significance. Whether as admiralty jurisdictions, legal or maritime centres, England and Hong Kong are arguably two of Singapore's closest rivals.

While it may be a slight exaggeration to say that maintaining the status quo will put Singapore in a distinct disadvantage compared to Hong Kong, it is important that we continue to make our maritime and legal hub as competitive as possible and minimise or avoid any unnecessary shortfalls that make us less sensitive to the views and needs of the business community. The amendments should, in my view, now place our law on shipowners’ lien in a better position than Hong Kong or the UK.

The proposed amendments under this amendment Bill are also timely in that Singapore is also aiming to be one of the leading international debt restructuring centres in Asia, especially with the amendments to the Companies Act provisions brought in May 2017 with the introduction of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. In recent years, insolvency cases involving internationally well-known companies have been started or filed in our Courts for various reasons, such as insolvency protection and debt restructuring. They include companies in shipping or oil and offshore industries, too. The proposed amendments will bring about some certainty to the interpretation of section 131(f) and 131(g) of the Companies Act, while the amendments themselves will not necessarily put any party in a position of great disadvantage.

Mr Speaker, for the above reasons, I support this amendment Bill. The Court of Appeal was certainly right to recommend the proposed changes to Parliament.

Mr Speaker: Mr Louis Ng.

5.27 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, I rise in support of this Bill. This is a swift legislative response to the Court of Appeal's proposal in the case of Diablo Fortune Inc vs Duncan, Cameron Lindsay, as the Minister has pointed out, to carve out liens on sub-freights from the registration requirement under section 131(1) of the Companies Act.

As the law currently stands, given the Court of Appeal and High Court decisions that characterise a lien on sub-freight as a floating charge and a charge on the company's book debts, a shipowner must register its lien as a charge under the Companies Act, failing which, this lien will not be valid against other creditors.

However, this requirement is viewed by the industry as onerous and commercially inconvenient for charterparties that are usually of relatively short durations.

This reform would resolve the dilemma shipowners face between expediency and protection of their right to exercise the lien.

The proposed statutory carve out differs from the Hong Kong approach, which the Minister has also mentioned, which provides under section 334(4) of its Companies Ordinance that a lien on sub-freights is not a charge on book debts of the company or a floating charge for the purposes of registration.

Given that the outcome on the registration requirements is, in effect, the same, can the Minister clarify if there are any other practical implications that are intended in affirming the Singapore Courts' characterisation of a lien on sub-freight as a charge on book debts of the company or a floating charge?

Given the lack of clarity on the characterisation and registration requirements of liens on sub-freights prior to the Courts' decisions and this amendment, shipping companies and creditors would understandably have acted according to what is most commercially expedient.

In practice, registration of liens on sub-freights is not commonplace, especially for shorter charters.

The new section 131(3AC) provides for a period of transition by clarifying that the consequences of non-registration should only apply prior to the amendments commencing where there is a liquidator or creditor.

Until the new amendments take effect, under section 132(1) of the Companies Act, the lienor or company and every officer of the company is guilty of an offence and liable to a fine for not registering such a lien. Can the Minister clarify whether these penal consequences will be applied against shipping companies and their officers?

Clarifications notwithstanding, I stand in support of this Bill, which provides much needed clarity on this area of law and is in line with commercial practice.

Mr Speaker: Second Minister.

5.30 pm

Ms Indranee Rajah: Mr Speaker, I would like to thank Mr Dennis Tan and Mr Louis Ng for their support of the Bill. In their speeches, they have highlighted the practical difficulties that would be faced by shipping companies if the requirements for a lien to be registered were maintained. The difficulties that they have described are very real. For that reason, it was in response to feedback from the shipping industry, the Singapore Chamber of Maritime Arbitration (SCMA), and also looking at the Court decision, that we move very quickly to put forward these amendments to Parliament.

Mr Louis Ng had two questions. The first was, he asked, given the approach of Singapore and Hong Kong gives the same practical outcome, whether there were practical implications or differences between the two.

On the practical implication of affirming the Court's characterisation of the lien as a charge, as I explained earlier in my speech, this results in Shipowner's Liens retaining their nature as security. This affords enhanced protection to shipowners and charterers in the event of default and insolvency, as they will be secured creditors. Otherwise, the shipowners and charterers would have to compete with unsecured creditors for payment. In short, with these amendments, in Singapore, a lien is still a charge and, because it is a charge, it will rank ahead of charges which are created after it, and it will also rank ahead of unsecured claims.

In Hong Kong, it is not a security at all and does not have to be registered. So, in Hong Kong, the lien will rank together with unsecured claims after secured creditors and, as Mr Dennis Tan pointed out, this, in fact, puts us in a better position.

With respect to Mr Louis Ng's second question on whether, because until the new amendments take effect, he said the lienor company and officers may be guilty of an offence, and asked for clarification on whether there will be penal consequences against the shipping companies and their officers.

First and foremost, I should clarify, it is not the case that all Shipowner's Liens created prior to the effective date of these amendments need to be registered.

New subsection 3AC provides that the lien will be regarded as registrable and be subject to the consequences of non-registration only if: as at the effective date of the amendments, the company has been wound up; or a creditor has acquired a proprietary right to, or an interest in the subject matter of the Lien. So, in other words, it is only in those two situations – the company has been wound up or a creditor has acquired a proprietary right to or interest in – that it will become registrable.

Therefore, a large majority of the existing Liens will not be registrable and, hence, no offence would be committed. They will only be regarded as having been registrable in the event of winding up or other creditor acquiring an interest. So, unless this has already occurred, you would not know at this stage whether those Liens are registrable or not, as these are contingent events.

Compared to the overall number of Shipowners' Liens, we would expect that the number affected by winding up or other creditors acquiring an interest, and hence being registrable, to be a small proportion of the whole. In those instances, suffice to say that this will be a matter for prosecutorial discretion. In exercising that discretion, the Registrar of Companies will take a practical and commercial approach and all relevant factors, including the fact that current industry practice is not to register and the fact that it was an open question of whether such Liens were registrable until the Diablo case was decided.

In short, we will take a commonsense approach and also, assuming that the Bill is passed today, we will work to bring the commencement date of the amendments into effect as soon as possible. Mr Speaker, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Ms Indranee Rajah.]

Bill considered in Committee; reported without amendment; read a Third time and passed.