A bank guarantee typically includes subordination clauses which provide that the amounts owing by the borrower to the guarantor are subordinated to the amounts owing by the borrower to the bank. Additionally, if the borrower makes any payment to the guarantor in breach of the subordination arrangements, the guarantee usually makes the guarantor liable to hold such moneys on trust for, and to pay the moneys over to, the bank. Such trust arrangement creates an interest in rem in favour of the bank over the moneys in question. The bank has a direct claim over those moneys and another person may not deal with the moneys and must instead hold the moneys on trust for the bank.

Section 131 of the Companies Act

The issue which arises is whether such a trust arrangement creates a security over the moneys in question, thereby constituting a charge over the book debts of the guarantor to which section 131 of the Singapore Companies Act ("section 131") applies.

Under section 131, within 30 days after a company creates a charge over its book debts, the company is required to lodge with the Accounting and Corporate Regulatory Authority of Singapore ("ACRA") a statement containing the prescribed particulars of the charge, failing which the charge will be void against the liquidator and any creditor of the company. Applying section 131, if the trust arrangement constitutes a charge over the book debts of the guarantor and the guarantee is not registered with the ACRA, the trust arrangement will be void against the liquidator and any creditor of the guarantor for non-registration.

The English position

This issue as to whether a turnover trust arrangement would constitute a registrable security interest has not been considered by the Singapore courts as yet but was considered by the English courts in the case of In re SSSL Realisations (2002) Ltd (in liquidation) and In re Save Group plc (in liquidation) ([2006] EWCA Civ 7, [2006] 2 WLR 1369) ("In Re SSSL"). In Re SSSL, the courts decided that: (a) the trust provisions did not create any security interest; and (b) even if the trust provisions had constituted a charge, they would not constitute a charge over book debts and therefore would not require registration under the English equivalent of section 131.

Although the rationale behind the finding in (a) above was not explicit, it presumably turned on the fact that the creation of a security interest must involve the retention of an equity of redemption (i.e., the equitable right of the security provider to redeem the charged asset upon repayment of the moneys to the chargee on its due date). As no equity of redemption could arise over the moneys to be held on trust under the trust arrangement, no security interest was created over those moneys.

In relation to the finding in (b) above, the courts drew a distinction between a debt owed to the junior lender and the proceeds of that debt. The courts took the view that the trust provisions would apply only when payment was actually received by the junior lender from the borrower and that the charge (if any) would be over the sum actually received rather than the debt in respect of which it was paid. On this basis, the courts took the view that a sum of cash in the hands of the junior lender would not be regarded as a book debt and as such, even if the trust arrangement constituted a charge, it would not require registration as a charge over book debts under the English equivalent of section 131. The courts, however, did mention that the trust provision in question would have created a charge if it could be construed as applying to all receipts as opposed only to sums received up to the amount owed by the borrower to the senior lender.


In conclusion, while Re SSSL has yet to be considered by the Singapore courts, the judgement supports the argument that no security interest is created pursuant to the relevant trust arrangement where the trust is limited to the amount of the senior debt.