An unfair preference transaction will only be voided under the Companies Act if it is influenced by a desire to prefer the receiving party in the event of insolvency, and not if it is motivated by proper commercial considerations. In Tam Chee Chong and another v DBS Bank Ltd  SGHC 331, the Singapore High Court had the opportunity to consider what constitutes proper commercial considerations.
Here, the company under judicial management had granted a charge over certain shares to the Defendant bank despite the fact that it had facilities with other banks which contained negative pledges and pari passu undertakings, and had refused to grant similar charges to these other creditor banks. The charge was found to constitute an unfair preference transaction.
Andrew Ang J found that the charge had been granted to put the Defendant in a preferential position because they had been more supportive of the company in the past. There was no proper commercial consideration as no new facilities were granted in exchange for the charge, nor was there any significant extension for payment of loans. Further, the other banks had exerted at least as much pressure on the company to repay their debts as the Defendant did.
This case demonstrates that the Court will not easily accept any alleged commercial consideration offered up as a justification for an unfair preference transaction; their validity and effect on the mind of the company will be examined.
- In 2006, DBS Bank (“the Defendant”) granted banking facilities to Jurong Hi-Tech Industriesand Jurong Technological Industries Corporation (“the Companies”) on an unsecured basis, but with a negative pledge and a pari passu undertaking. The Companies had existing facilities with other banks under similar terms.
- The Defendant continued to provide facilities and funding to the Companies over the next few years. It proved to be more helpful than other banks, granting loans when others would not, eventually emerging as the largest creditor.
- From 2008, the Companies began having trouble paying the amounts due under its various loans, and the banks began pressing for payment of overdue amounts.
- The Companies promised payment from, inter alia, the sale of its shares in MAP Technology Holdings (“the MAP shares”). ABN AMRO and Rabobank requested security over these shares, but the Companies refused on the grounds of the negative pledges and pari passu undertakings.
- Some banks eventually began to demand payment of all amounts outstanding. The Defendant also started requesting payment of certain loans, although it stopped short of threatening to call default.
- On 29 October 2008, the Defendant set the date of repayment of the Companies’ Ad Hoc Short Term Loans at 14 November.
- On 13 November, the Defendant asked for a charge over the MAP shares (“the Charge”). This was granted by the Companies. No new loans were extended to the Companies at the time of the Charge, or after the Charge was granted.
- The repayment of the loans was extended by 2 weeks, and the Defendant continued to rollover the loans until 14 January 2009.
- The Companies then received letters of demand from its creditor banks, and eventually from the Defendant on 14 January 2009. They entered judicial management on 20 February, whereupon the judicial managers applied to set aside the Charge as an unfair preference.
An unfair preference will not be found unless the individual who gave the preference was influenced by a desire to put the recipient into a position which, in the event of judicial management or insolvency, would be better than he would have been in if the transaction had not occurred. The Court thus had to determine whether the Charge was made with the requisite desire to prefer.
Holding Of The High Court
It was held that in making the Charge in favour of the Defendant, the Companies were influenced by the desire to prefer. The Court rejected the Defendant’s argument that the Charge was made for proper commercial considerations.
The law regarding the test for the desire to prefer is uncontroversial.
- There does not need to be direct evidence of the desire to prefer; it may be inferred from the surrounding circumstances.
- The desire to prefer need only be one of the operating factors; it need not be the factor which “tipped the scales”.
- It is not an unfair preference if the company is influenced not by the desire to prefer but by “proper commercial considerations”.
On the facts, the Court found that the Companies desired to put the Defendant in a better position.
- The Companies’ chairperson testified that the Companies were willing to grant the Charge to the Defendant because the Defendant had been supportive of the Companies, extending facilities when other banks were unwilling.
- The Companies chose to grant the Charge to the Defendant even though other banks were exerting as much, if not more, pressure on the Companies. Another creditor bank had even issued a formal letter of demand, while there had been no sign that the Defendant intended to recall facilities until 13 November, when the Charge was granted.
It was also determined that there was no valid commercial reason for granting the Charge to the Defendant.
- No new facilities were granted to the Companies as a result of the Charge.
- The Defendant alleged that it provided a two-week extension for payment in exchange for the Charge, but this was rejected by the Court as the Companies were unaware of the extension. Further, a two week extension was unlikely to constitute proper commercial consideration as the Companies were in dire financial straits, and could not possibly carry on business for any decent length of time even if the Defendant did not recall its facilities.
- It was argued that the Charge was granted to avert recall while the Companies pursued a valuable deal which could have brought in US$160 million. However, the Court found this untenable as the Companies were heavily indebted to other banks which would not sit by and wait for the deal to conclude.
- The Court also doubted that the Charge was given due to any pressure or threat from the Defendant, especially where other banks had taken more concrete steps to stress the seriousness of their demands.
Therefore, in granting the Charge to the Defendant at a time when other banks were also asking for repayment and security, the Companies were not motivated by any proper commercial considerations, but by the desire to prefer the Defendant.
Recipients of unfair preference transactions cannot use “proper commercial considerations” as some form of panacea for the effect of voidability; it must be shown that the transaction was driven only by commercial considerations, and not by the desire to prefer. After all, all if not most transactions are likely to have at least some commercial justification behind them. What is clear from the above case is that so long as a desire to prefer was but one of the motivating factors, that fact by itself could lead to the Court avoiding the transaction. To avoid a transaction as an undue preference, there is no longer a need to show that there was a dominant intention to prefer one creditor over the others.
Further, the Court will thoroughly assess the validity of any proffered commercial consideration to see if it indeed played a part in the insolvent company’s decision to go through with the impugned transaction. It will not accept considerations which have been tagged onto the transaction ex post facto.