Background

This case concerned competing claims for the vessel Safir Kish 4. The first plaintiff was the shipbuilder. The second plaintiff was Malayan Banking Berhad (the bank). The bank had provided various credit facilities to the shipbuilder for its shipbuilding business. The first defendant was a private limited company incorporated under the Labuan Companies Act 1990. The second defendant was a director of the first defendant. The third defendant was a company incorporated in Iran.

The shipbuilder created a total of six debentures in favour of the bank to secure the repayment of the credit facilities. The debentures had been lodged with the Malaysia Companies Commission (CCM). Consequently, the CCM issued certificates of registration of charge pursuant to Section 111(2) of the Companies Act 1965 for all six debentures.

On March 27 2008 the shipbuilder entered into two contracts (the Borcos contracts) with Syarikat Borcos Shipping Sdn Bhd. Only one of the two contracts was adduced in the case at hand. The terms of the contract, among other things, stated as follows:

  • The shipbuilder agreed to build a "52M Super Fast Multipurpose Utility" vessel for Borcos known as Hull 1160.
  • The contract price for designing, building and delivering the ship was RM23 million.
  • The ship would be delivered on or within 16 months of the effective date. The effective date was set as the date on which the first instalment of RM230,000 was paid by Borcos and an irrevocable letter of undertaking was issued by Borcos to pay the second instalment of RM22.3 million.

The bank provided financing to the shipbuilder to build two ships for Borcos. The full purchase price for the two Borcos contracts had not been paid to the shipbuilder or the bank. By way of a letter dated February 27 2009, the bank agreed to the shipbuilder's assignment of the proceeds from the two Borcos contracts to the bank.

On March 6 2010 the shipbuilder entered into a shipbuilding contract with the third defendant. The shipbuilding contract provided that the shipbuilder was to build and deliver two ships (Hull 1159 and 1160) to the third defendant, and payment was to be made by way of an "irrevocable by sight letter of credit", issued in accordance with the Uniform Customs and Practice for Documentary Credits on behalf of the third defendant by Refah Kargaran Bank (RK Bank) in Iran.

A pro forma invoice dated March 6 2010 was issued by the shipbuilder to the third defendant for payment of the ship and Hull 1159. On May 25 2010 RK Bank issued a letter of credit to the bank.

On May 26 2010 the shipbuilder issued a bill of sale acknowledging receipt of the third defendant's payment and, in consideration of the payment, transferred all shares in the ship to the third defendant. The shipbuilder held that it had the power to transfer the ship free from encumbrances and mortgages.

On August 30 2012 the Registrar of Malaysian Ships issued a certificate of Malaysian registry, stating that the ship had been registered under the name Safir Kish 4 and that the shipbuilder was its owner.

On September 17 2012 the shipbuilder, third defendant and Shanghai Sea Pride Shipping Ltd (SSPSL) entered into an agreement. The SSPSL agreement set out as follows:

  • The shipbuilder confirmed receipt of the sale price of $470,247.
  • The shipbuilder agreed to sign a new purchase contract with SSPSL and deliver the ship to SSPSL before October 7 2012.
  • The shipbuilder declared that it has no right to claim any new payment before delivery of the ship to SSPSL.
  • SSPSL confirmed that it would pay the agreed purchase price to the third defendant.

On October 29 2012 the shipbuilder and third defendant entered into a settlement agreement wherein the shipbuilder confirmed that:

  • the third defendant was the beneficial owner of the ship and the shipbuilder had no further claim over the ship;
  • it had received $8,508,854.81 from the third defendant; and
  • it would help the third defendant to find a purchaser for the ship.

On November 5 2012 the shipbuilder entered into a further agreement with the third defendant, wherein it was provided that:

  • the SSPSL agreement was cancelled due to the Ministry of International Trade and Industry's objection in this regard;
  • as owner of the ship, the third defendant had either to sell the ship to LNG Ventures Ltd or Lalship Sdn Bhd or transfer ownership to a trustee company represented by the second defendant; and
  • the shipbuilder had no right to claim against the trustee company.

On March 14 2013 a winding-up petition was presented against the shipbuilder by Nordic International Ltd.

On March 20 2013 the bank's solicitors gave notice to the shipbuilder that pursuant to the terms and conditions of the debentures, all floating charges had been converted into fixed charges with immediate effect.

On March 27 2013 the shipbuilder executed a bill of sale in favour of the first defendant (second bill of sale). According to the second bill of sale, in consideration of the $8.5 million paid by the first defendant to the shipbuilder, the shipbuilder agreed to transfer all of its shares in the ship to the first defendant.

On April 23 2013 the ship was transferred from the shipbuilder to the first defendant and registered in the first defendant's name. The transfer and registration was recorded in the Register Book of the Registrar of Malaysian Ships at Port Klang.

On April 3 2013 the bank appointed Duar Tuan Kiat as the receiver and manager of the shipbuilder.

On May 14 2013 the winding-up petition was allowed by the high court and the shipbuilder was wound up.

On July 12 2013 the shipbuilder, first defendant and third defendant concluded an agreement which, among other things, stated that:

  • the shipbuilder had built the ship and the third defendant had paid the full price to the shipbuilder;
  • the second bill of sale in favour of the first defendant had been executed and registered in the Register Book;
  • the first defendant was the registered owner of the ship and the third defendant had paid for the ship;
  • the first defendant would refund to the third defendant an agreed amount within an agreed timeframe; and
  • the shipbuilder would deliver the ship to the first defendant by September 11 2013.

On October 25 2013 the first defendant's solicitors informed the receiver and manager that the first defendant was the registered owner of the ship and that the second bill of sale and original certificate of Malaysian registry with the endorsement of the transfer of the ship's ownership to the first defendant were in the first defendant's possession. On October 30 2013 the first defendant's solicitors put the receiver and manager on notice that the first defendant wanted delivery of the ship by November 6 2013.

The defendants had failed to pay any sum to the bank in order to redeem the ship. As of May 31 2013 the shipbuilder owed an outstanding sum in excess of RM732 million to the bank under the credit facilities. In light of this, the bank commenced a suit in the high court against the guarantors for the credit facilities. On November 21 2013 the bank obtained summary judgment for the outstanding sum owed with interest against the guarantors.

Legal proceedings

Plaintiffs' suit

On June 19 2014 the shipbuilder and the bank (the plaintiffs) filed suit against the defendants seeking for the:

  • second bill of sale to be declared null and void in transferring any right, interest or shares in the ship to the first defendant;
  • registration and transfer of the ship from the shipbuilder to the first defendant to be cancelled or declared null and void;
  • ship to be retransferred and reregistered in the shipbuilder's name with immediate effect;
  • defendants to deliver the original copy of the certificate of Malaysian registry and the second bill of sale, together with all other original certificates or documents in relation thereto, to the receiver and manager within two days of the judgment on the plaintiffs' suit;
  • Registrar of Malaysian Ships to be directed to do all that was necessary to enact the judgment; and
  • defendants to pay the fees of the plaintiffs' attorneys.

Defendants' counterclaim

The defendants denied the plaintiffs' suit and filed a counterclaim against the plaintiffs and receiver and manager. In the counterclaim, the defendants sought:

  • a declaration under Section 223 of the Companies Act 1965 in order to validate the transfer of ownership of the ship to the first defendant and its subsequent registration;
  • alternatively, a declaration that the third defendant was the beneficial owner of the ship and was entitled to transfer the ship to the first defendant or any other person;
  • a refund from the shipbuilder for the alleged overpayment to the third defendant;
  • interest on the alleged overpayment to be paid from January 29 2013 to May 14 2013;
  • late delivery charges at a rate of 2% per month of the contract price of the ship from October 25 2010 until the actual delivery of the ship;
  • a refund of $50,000 paid by the third defendant to Etamar Shipping and Services (which had agreed to transport the ship from Port Klang to Iran);
  • deprivation of the first defendant's use and possession of the ship from March 27 2013, the date of transfer of ownership of the ship or, alternatively, loss or damage to be assessed by the court;
  • the lost income suffered by the first defendant based on the prevailing market rate for chartering ships of a similar nature from August 1 2013, the date of receipt of a letter of intent from Prosper Energy Systems Group Sdn Bhd;
  • costs to repair the ship and certification costs or, alternatively, loss or damage to be assessed by the court; and
  • other costs.

The defendants' counterclaim against the receiver and manager sought:

  • deprivation of the first defendant's use and possession of the ship from March 27 2013, the date of transfer of ownership of the ship or, alternatively, loss or damage to be assessed by the court;
  • costs to repair the ship and certification costs or, alternatively, loss or damage to be assessed by the court; and
  • other costs.

Bifurcation of issues

The main issue in the plaintiffs' suit and the defendants' counterclaim was which party had priority over the ship. The priority issue was separate from the monetary aspect of the defendants' counterclaim. The court, relying on Order 15, Rule 5(1) of the Rules of Court 2012, ordered that the priority issue be tried separately from the defendants' monetary counterclaim. The court's reasoning for this was that the priority issue could be expeditiously and economically disposed of first, before the likely lengthy trial in respect of the defendants' monetary counterclaim. Further, after the court decided on the priority issue, the parties may have wished to reconsider their legal position in respect of the defendants' monetary counterclaim.

Issues at trial

The following issues arose for the court's determination:

  • Was the ship subject to a fixed charge or a floating charge in the first of six debentures created by the shipbuilder in favour of the bank?
  • If the ship was subject to a floating charge, had the floating charge crystallised pursuant to the automatic crystallisation clause in the first debenture so as to subject the ship to a fixed charge and give priority to the bank?
  • Did the Merchant Shipping Ordinance 1952 influence the question of which party had priority over the ship?
  • Was the sale of the ship after the shipbuilder's winding up invalid under:
    • Section 293(1) of the Companies Act 1965, read with Section 53(1) of the Bankruptcy Act 1967; or
    • Section 223 of the Companies Act 1965.
  • Was the sale of the ship to an Iranian purchaser prohibited by Sections 8 and 9 of the Strategic Trade Act 2010?
  • Once the bank had priority over the ship due to the automatic crystallisation of the floating charge in the debenture, could the purchaser rely on the exception of "bona fide purchaser for valuable consideration without notice of Bank's charge"? Further, if the purchaser could rely on this exception:
    • was the exception proven in this case and, in particular, would case law consider the purchaser to have notice of the bank's charge which had been registered with the Companies Commission of Malaysia;
    • should an adverse inference under Section 114(g) of the Evidence Act 1950 be drawn against the purchaser for failing to call a material witness in order to prove that the shipbuilder had sold the ship to the purchaser; and
    • should the court exercise its discretion to order specific performance of the shipbuilding contract under Section 21 of the Specific Relief Act 1950?

Decision

The court's decision can be summarised as follows:

  • The ship did not form part of the first fixed charge under Clause 3.1(a)(i) of the first debenture, instead falling within the scope of the first floating charge under Clause 3.1(b) of the first debenture.
  • The automatic crystallisation clause under Clause 4.3 of the first debenture was valid and had been triggered when the shipbuilder entered into the shipbuilding contract on March 6 2010 without the bank's prior written consent. On the automatic crystallisation of the first floating charge under the first debenture, the ship became subject to a fixed charge in favour of the bank.
  • Once the ship was subject to a fixed charge in the bank's favour, the third defendant and all other parties, including the first defendant, could not lawfully obtain any title or interest in the ship without paying the shipbuilder's secured debt due to the bank.
  • The bank's priority over the ship was not postponed by:
    • the Register Book;
    • the Certificate of Malaysian Registry;
    • the first and second bills of sale; or
    • its failure to register the six debentures with the Registrar of Malaysian Ships.
  • The impugned agreements(1) were void under Section 293(1) of the Companies Act 1965, read with Section 53(1) of the Bankruptcy Act 1967, for contravening the undue preference rule.
  • The shipbuilder's disposition (the agreement dated July 12 2013, which provided that the third defendant had paid the sale price for the ship and the second bill of sale had been executed and registered in the Register Book) was void under Section 223 of the Companies Act 1965 and thus the court could not validate the shipbuilder's disposition pursuant to Section 223.
  • The Strategic Trade Act 2010 did not apply to the ship.
  • The equitable doctrines did not apply in this case and thus could not resolve the priority issue, as there had been an automatic crystallisation of the first floating charge under the first debenture.
  • Assuming that the equitable doctrine of a good-faith purchaser for valuable consideration without notice of the bank's charge applied in this case:
    • the third defendant had failed to discharge its legal burden to prove on a balance of probabilities that the third defendant was a good-faith purchaser of the ship for valuable consideration without notice of the bank's charge; and
    • the first defendant could not rely on the second bill of sale, as it was invalidated by Section 223 of the Companies Act 1965.

Based on the above reasons, the following orders were made:

  • The plaintiffs' suit was allowed with costs.
  • The defendants' non-monetary counterclaim was dismissed with costs.
  • The second bill of sale was declared null, void and ineffective in transferring any right, interest or share in the ship to the first defendant.
  • The registration and transfer of the ship from the shipbuilder to the first defendant was cancelled and declared null and void.
  • The ship was ordered to be retransferred and reregistered in the shipbuilder's name within 14 days of the date of the oral judgment, which was delivered on March 30 2015.
  • The defendants were ordered to deliver the original copy of the certificate of Malaysian registry and the second bill of sale, together with all other original certificates and documents to the receiver and manger within 14 days from the date of the oral judgment, which was delivered on March 30 2015.
  • The Registrar of Malaysian Ships was directed to do whatever was necessary to give effect to the judgment.

For further information on this topic please contact Rajasingam Gothandapani or Aswath Ramakrishnan at Shearn Delamore & Co by telephone (+60 3 2070 0644) or email (rajasingam@shearndelamore.com or aswath@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

Endnotes

(1) The 11th and 12th variations of the shipbuilding contract agreed on October 10 2012 and January 28 2013, respectively; the SSPSL agreement dated September 17 2012; the settlement agreement dated October 29 2012; the agreement dated November 5 2012; the second bill of sale and the agreement dated July 12 2013.

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