Pars Ram Brother (Singapore Company) was engaged in the spice business. The Singapore Company obtained trade financing facilities from various banks to finance its business. As security for the financing, the Singapore Company had pledged the goods financed by each bank under a pledge arrangement.
The Singapore Company entered into voluntary liquidation. The liquidator discovered that the Singapore Company had commingled the goods by stacking them together without segregation. This made it impossible to identify incoming goods financed by each bank from existing goods financed by other banks.
The Singapore High Court (Singapore Court) had to determine how the commingling of goods that are subject to several security interests would affect the security interest of each bank.
The Singapore Court referred to English, Australian and New Zealand cases. As there was little direct authority on this issue, the Singapore Court also referred to Philip Wood’s Comparative Law of Security Interest and Title Finance. The Singapore Court held that Wood’s commentary ‘squarely addresses the situation where goods in which one secured party has a perfected security interest are commingled with goods in which another secured party has a perfected security interest’ and referred to Wood’s citation of Article 9 of the Uniform Commercial Code as authority in such a scenario that if neither party has priority, ‘each secured party is allocated the proportion of the product or mass that the value of that secured party’s collateral bore to the sum of the values of both parties’ collateral at the time that the collateral became commingled’.
The High Court concluded that since each bank already possessed a perfected security interest by virtue of the underlying pledge, the failure by the Singapore Company to segregate the goods did not negate the existence of each bank’s security interest. Accordingly, the commingled goods should be divided among the banks ‘rateably in proportion to the value of their respective contributions’.
Banks who provide trade financing facilities secured by pledges over goods may find it impractical to ensure goods pledged to them are segregated or stored in a manner capable of separate identification.
Had the Court held that the banks’ security interests had been extinguished due to the failure to segregate the goods, proceeds from the sale of commingled goods would have been held for the benefit of the general pool of the Singapore Company’s creditors, including unsecured creditors.
However, this decision provides some reassurance to banks engaging in such financing as it clarifies the legal position that even if other banks have security interests in commingled goods, their security interests remain intact in circumstances where the pledged goods cannot be independently identified.