* Kohe Hasan is a Partner in Reed Smith's Singapore office and a Director of Resource Law LLC. Li Seah Ang is an Associate of Resource Law LLC.
Introduction
The primary focus of the Companies (Amendment) Bill 2018 (the “Bill”) is to provide that a shipowner’s lien over freight, sub-freights, sub-hires or for any amount due under any charter no longer needs to be registered pursuant to section 131 of the Companies Act (Cap. 50, 2006 Rev Ed) (the “Companies Act”). Under the proposed amendments, ‘shipowner’ will include a registered owner, a disponent owner or a bareboat charterer of a ship.
The Diablo Fortune case
The Bill for the proposed amendment of section 131 of the Companies Act stems from the recent decision of the Singapore Court of Appeal in Diablo Fortune v Duncan Lindsay and another [2018] SGCA 26 (“Diablo Fortune”), where the Court of Appeal affirmed the decision of Judicial Commissioner Audrey Lim in the High Court. In that case, Diablo Fortune Inc, as the owners of the vessel “V8 STEALTH II” (the “Vessel”), had bareboat chartered the Vessel to Siva Ships International Pte Ltd (“Siva Ships”) pursuant to a BIMCO Standard Bareboat Charter (the “Bareboat Charter”). Siva Ships subsequently entered into a pooling agreement under which the Vessel was sub-chartered to another company and earned charterhire. Siva Ships then went into liquidation and Diablo Fortune Inc sought to enforce a lien over sub-hire pursuant to clause 18 of the Bareboat Charter (the “Lien”). The sub-hire payments to Siva Ships that fell due were however withheld pending the resolution of the dispute over the validity of the Lien. The liquidators applied to the High Court for a determination that the Lien was a charge that was void for want of registration. Diablo Fortune Inc submitted that the Lien was merely a contractual right of interception and there was no need for registration.
In the High Court decision, the issue of whether a shipowner’s lien is a charge on the company’s property and whether it is registrable under section 131 of the Companies Act was considered for the first time. Audrey Lim JC held that a 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) of the Companies Act as a floating charge. In Diablo Fortune, since the Lien had not been registered, the High Court held that the Lien was void against the liquidators and creditors of Siva Ships. The Court of Appeal upheld the decision of the High Court and dismissed Diablo Fortune Inc’s appeal.
A Statutory Exemption
This decision highlighted the tension between insolvency practitioners and the maritime industry in such cases. From the perspective of maritime practitioners, the decision in Diablo Fortune gave rise to several practical difficulties.
First, such a contractual lien would have to be registered as a charge with the Accounting and Corporate Regulatory Authority within 30 days. However, vessels are typically subject to a continuous series of charterparties and some of which could be completed before the expiration of the 30-day registration period. Besides the impracticality and inconvenience of imposing a registration requirement would also result in an enormous administrative burden given that large numbers of charterparties are concluded every day. Equally important is the fact that registering shipowners’ liens as charges had never been part of the maritime landscape in Singapore.
Comment
To address these concerns, the Singapore government has sought to amend the Companies Act to exempt shipowners’ liens from registration. The proposed amendments under the Bill mirrors section 334(4) of the Hong Kong Companies Ordinance, which excludes shipowners’ liens from the requirement of registration by stipulating that such liens do not amount to a charge.
However, there are significant differences between the positions in Hong Kong and Singapore. For instance, under the Hong Kong legislation, a shipowner’s lien is not registrable because it is not even a security charge to begin with. This means that in the event of a liquidation, the shipowner’s lien will rank after secured claims and pari passu with other unsecured claims. On the other hand, in Singapore, although a shipowner’s lien is exempted from registration under the amendments, it still remains a security charge that takes priority over unsecured creditors and other secured creditors whose security was created after the relevant shipowner’s lien was created notwithstanding that it is not registrable.
In our view, the passing of the Bill will afford better protection to shipowners. With the amendments, as well as the incorporation of the UNCITRAL Model Law on Cross-Border Insolvency to the Companies Act in May 2017, it is evident that Singapore is taking great strides to achieve its aim of becoming the leading international debt restructuring hub in Asia. The amendments will certainly enhance the business-friendly maritime environment in Singapore and continue to strengthen its position as a global maritime and legal hub.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, “Reed Smith”). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith’s Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2018-183
