Reprinted with permission.
This article was first published in INSOL International’s December News Update.
On 16 October 2017, Originating Summons No. 1178 of 2017 (“OS 1178”) and No. 1180 of 2017 (“OS 1180”) was filed by Jurong Aromatics Corporation (Receivers and Managers Appointed) and its two receivers and managers (collectively the “Plaintiffs”) against BP Singapore Pte Ltd (“BP”) and Glencore Singapore Pte Ltd (“Glencore”) respectively (collectively the “Defendants”). OS 1178 and OS 1180 sought, among other things, a declaration that the Defendants are not entitled to claim set-off against three sums the Defendants owed to the Plaintiffs amounting to USD57,559,438.39 under certain agreements (“Relevant Debts”). The Plaintiffs also sought a declaration that in failing to pay the Relevant Debts due, the Defendants are in breach of the relevant agreements, with damages to-be assessed. The Defendants resisted the Plaintiffs’ claims, contending essentially that set-off is available by operation of law.
On 3 October 2018, the High Court of the Republic of Singapore (“Singapore Court”) handed down its judgment in Jurong Aromatics Corporation Pte Ltd (Receivers and Managers Appointed) & 2 Ors vs BP Singapore Pte Ltd and Glencore Singapore Pte Ltd (in OS 1178 and OS 1180 respectively) ruling entirely in the favour of the Plaintiffs. The ruling found that the Plaintiffs are entitled to the Relevant Debts from the Defendants and that no set-off is available.
JAC was incorporated on 30 May 2005 as a joint venture project for the purposes of, inter alia, constructing, developing and operating a condensate splitter integrated with an aromatics plant (“Plant”). The Defendants were both suppliers and customers of JAC.
In March 2011, Glencore and JAC entered into an agreement for the supply of condensate by Glencore to JAC (“Glencore FSA”). In the same month, Glencore and JAC also entered into an agreement for the purchase by Glencore of cargoes of product produced by JAC from the condensates supplied by Glencore and others (“Glencore POA”). BP entered into similar arrangements with JAC – there was a feedstock supply agreement (“BP FSA”) and a product offtake agreement (“BP POA”).
Construction of the USD2.4 billion Plant was funded by, inter alia, various loan facilities (“Senior Loan Facilities”) provided by JAC’s senior lenders (“Senior Lenders”). The Senior Lenders obtained from JAC a comprehensive security package to secure their loans, by way of a debenture dated 30 April 2011 (“Debenture”) entered into between JAC, and BNP Paribas Singapore Branch (“Security Agent”) (for and on behalf of the Senior Lenders). The Senior Lenders took security in the form of, inter alia, (i) a first fixed charge over all of JAC’s assets including both present and future book debts, and (ii) a first floating charge over all of JAC’s assets, both present and future (collectively, the “Charged Assets”). There was also an assignment between JAC and the Agent on 28 April 2011 (“Assignment”), under which receivables payable to JAC under the Glencore FSA and Glencore POA amongst other agreements, were assigned to the Senior Lenders.
On 23 December 2014, a set-off agreement was entered into between Glencore and JAC for the set-off of specific mutual claims arising out of the Glencore FSA and Glencore POA (“Set-Off Agreement”).
In December 2014, JAC encountered operational difficulties, sustained substantial trading losses and was required to shut down the Plant. On 27 May 2015, JAC’s Senior Lenders issued a notice of event of default to JAC and on 28 September 2015, the Security Agent of the Senior Lenders exercised their right to appoint Cosimo Borrelli and Jason Kardachi as joint and several receivers and managers (“Receivers”) of JAC pursuant to the Debenture.
After securing control over the assets of JAC, the Receivers undertook a detailed review of JAC’s operational and financial position and recommended that the Senior Lenders support tolling the Plant.
In January 2016, the Senior Lenders agreed to provide further funding to JAC to support the Receivers’ recommendations to toll the Plant with BP and Glencore (“Tolling”) while undertaking, in parallel, an international sale process.
Tolling negotiations concluded on 19 April 2016 (“Tolling Agreement”) and the Plant successfully started up on 12 July 2016. By the end of 2016, it was determined that (i) all rectification works undertaken during the initial shutdown period were useful and (ii) JAC was proven as it broadly performed beyond expectation following various capacity tests that were conducted during its operational period. It was on this basis that the Receivers commenced an international sale process of the Plant on 30 September 2016 in parallel with Tolling.
In March 2017, ExxonMobil Asia Pacific Pte Ltd (“ExxonMobil”) was selected by the Receivers as the preferred buyer of the Plant and arrangements began for the sale of the Plant.
During the sale process, ExxonMobil indicated that a ‘hot transition’ of the Plant was preferable as it would minimise any operational risks and costs associated with shutting down and restarting the Plant. To facilitate the sale of a ‘live’ Plant, the Receivers entered into various agreements with ExxonMobil, BP and Glencore for a ‘hot transition’ of the Plant to ExxonMobil. Among other things, these agreements included the “Transitional Agreement” and the “Transitional Supplemental Agreement” and contemplated the sale of the Plant to take place on or around 28 August 2017 (“Completion”).
On 28 August 2017, JAC completed the sale of the Plant as planned and the sale proceeds from the Sale was paid out directly to the Senior Lenders by ExxonMobil immediately thereafter (“Proceeds”). On the same day, Glencore filed a winding-up petition against JAC (“Winding-up Application”).
Following this, the Receivers and their solicitors issued invoices and/or demands in September 2017 and October 2018 in respect of the Relevant Debts owed by the Defendants to JAC comprising:
- the August 2017 tolling fee debt arising from the Tolling Agreement (“Tolling Fee Debt”);
- a final payment amount arising from the Transitional Supplemental Agreement (“Final Payment Amount”); and
- in relation to Glencore, debt arising from the Set-Off Agreement (“Set-Off Agreement Debt”).
At around the same time, BP and Glencore each claimed that they are entitled to apply, by operation of law, mandatory set-off between:
- the Relevant Debts owed by them to JAC; and
- debts owed to them by JAC under the BP FSA and Glencore FSA (“Feedstock Debt”).
The central question of law before the Singapore Court that needed to be addressed was whether the Relevant Debts are subject to mandatory [insolvency] set-off by operation of law, pursuant to Section 88(1) of the Bankruptcy Act, read with Section 327(2) of the Companies Act.
Section 88(1) of the Bankruptcy Act reads:
“Where there have been any mutual credits, mutual debts or other mutual dealings between a bankrupt and any creditor, the debts and liabilities to which each party is or may become subject as a result of such mutual credits, debts or dealings shall be set-off against each other and only the balance shall be a debt provable in bankruptcy”.
Section 327(2) of the Companies Act reads:
“Subject to section 328, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the law relating to bankruptcy in relation to the estates of bankrupt persons, and all persons, who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section”.
Section 88(1) of the Bankruptcy essentially prescribes a requirement of mutuality for insolvency set-off to operate – only strictly “mutual credits, mutual debts or other mutual dealings between a bankrupt and any creditor … shall be set-off against each other”.
The Singapore Court of Appeal in Good Property Land Development Pte Ltd (in liquidation) v Societe-Generale  1 SLR(R) 884 (“Good Property”) has held (at ) that for such requirement of mutuality to exist, the following two conditions must be satisfied:
- each claimant must be personally liable for the debt it owes to the other claimant. In the Court of Appeal’s words, “[m]utuality sees through to the real beneficial ownership, regardless of who is the legal, nominal, titular or procedural holder of the claim or procedurally the appropriate plaintiff”; and
- each claimant must beneficially own the claim which is owed to it by the other claimant and its ownership interest in that claim must be clear and ascertained without inquiry.
Singapore Court Decision
Justice Aedit Abdullah (“Justice Aedit”) held that as the Relevant Debts were charged to the Senior Lenders, mutuality between the Relevant Debts and the Feedstock Debt was destroyed and insolvency set-off is therefore inapplicable. Justice Aedit explained that whilst the Defendants’ claims are against JAC (i.e. the company), the claims against the Defendants are in respect of the Charged Assets, whose equitable interest lies with the Senior Lenders (rather than JAC, the company). He further explained that under the fixed charge and crystalised floating charge which cover future receivables, once the receivables arose, they were subject to the interest of the Senior Lenders. Accordingly, the receivables could not be an asset of JAC without ever being free from the interest of the Senior Lenders – the equitable interest in the receivables arose in favour of the chargee as soon as the receivables were due to JAC. There is thus no mutuality.
The Defendants had vigorously fought to establish that mutuality existed, inter alia, on the following basis:
- prohibition of assignment clauses – as JAC was prohibited from assigning or charging the legal or beneficial ownership of the debts, or creating any kind of security over them due to the presence of express prohibition against assignment clauses in the relevant agreements, the Relevant Debts could not have been assigned to the Senior Lenders and are therefore subject to insolvency set-off; and
- waiver / decrystallisation of Senior Lenders’ interests – because JAC (through the Receivers) had an ability to freely control the Charged Assets, the Senior Lenders relinquished / did not exercise control over the charges (or the Relevant Debts) and this led to a waiver, decrystallisation or discharge of the security, thereby resulting in the Relevant Debts being owned by JAC (the company) rather than the Senior Lenders.
The Defendants also relied on equitable set-off and argued that even if insolvency set-off were not applicable, the requirements for equitable set-off are satisfied given that the Feedstock Debt and the Relevant Debts are so closely connected that it would be manifestly unjust or inequitable if the set-off is not allowed.
However, Justice Aedit disagreed with the Defendants’ arguments and, in addition to the reasons set out at paragraph 24 above, was satisfied that no mutuality existed on the following grounds:
- prohibition of assignment clauses – there was never any point at which the prohibition against assignment clauses could operate. Therefore, even if the clauses prohibited charges in addition to assignments, the clauses would at most prevent the creation of new encumbrances, and not affect the ones already operating against the assets. Further, there was also insufficient evidence that parties intended for the charges to be precluded from applying to the Relevant Debts and accordingly, the charges held by the Senior Lenders were not precluded by the prohibition of assignment clauses.
- waiver / decrystallisation of Senior Lenders’ interests – as the Receivers were appointed by the Agent in respect of the Charged Assets and the activities of the Receivers including the use of the funds were pursuant to that appointment, there was control exercised by the Receivers, and that this constituted control exercised by the Senior Lenders. Hence, there was no ceding of control by the Senior Lenders releasing their security in the charges, not any waiver or decrystallisation.
In respect of the Defendants’ arguments on equitable set-off, Justice Aedit noted that the two key requirements for such set-off are, in any case, not met. As the respective debts arose out of separate arrangements and transactions, they (i) cannot be said to be closely connected and (ii) it would not be unjust or inequitable to disallow the set-off.
This matter sets precedent in respect of the ambit and effect of a charge particularly in cases of insolvency and enforcement involving a receiver and manager and provides much needed comfort and clarity on the manner in which the security interest of secured parties are protected. While sufficient legal and textbook authorities are available to ascertain the effects of a charge, this is the first time that the above-mentioned elements have been addressed in the context of a receivership in Singapore.