DGJ v Ocean Tankers (Pte.) Ltd (In Liquidation)

Outcome: The Court of Appeal held that the assignment of claims against a company while that company was in judicial management, made with the purpose of asserting insolvency set-off when that company went into liquidation, was liable to be struck down on public policy grounds for subverting the regime of pari passu distribution among unsecured creditors in liquidation. The court also commented on the interpretative approach to non-assignment clauses and on whether a statutory trust arises in the judicial management of a company.

•  Any assignment would be potentially liable to be struck down if it contravened public policy following the framework set out in UKM v Attorney-General [2019] 3 SLR 874 (“UKM”). The assignments were carried out with the aim of gaining a tactical advantage over other unsecured creditors and had the sole purpose of asserting an insolvency set-off when the company went into liquidation. This was a quintessential example of impermissible debt trafficking, and the assignments were therefore void and unenforceable for subverting the regime of pari passu distribution in liquidation: at [69]–[71] and [87]–[89].

•  Even if the assignment of a bare right to litigate was (a) incidental to a transfer of property or (b) the assignee had a legitimate interest in the outcome of the litigation, there should be a further independent requirement that the assignment must not adversely impact the administration of justice: at [99].

•  A non-assignment clause should ordinarily be construed on the basis that parties to a non-assignment clause are likely to have intended to have wanted to deal only with each other and so to expect that any disputes arising out of their relationship would only involve the original contracting parties. This would generally point in favour of non-assignment clauses prohibiting assignments of both contractual and tortious rights which arise from the underlying contract: at [124]–[125].

•  A statutory trust of the kind arising in liquidation likely does not arise in judicial management: at [154]–[157].

1 Ocean Tankers (Pte) Ltd (“OTPL”) is a Singapore-incorporated company involved in ship chartering, provision of ship management services, and the manufacture and storage of petroleum lubricating oil. The Debtor is a Hong Kong-based company which shared the same parent company as another Singapore-based company (“the Assignor”).

2 Between 24 March and 1 April 2020, the Debtor entered into three charterparties (collectively, the “Charterparties”) with OTPL for the charter of the three vessels. Soon after, between May and August 2020, OTPL applied for and was placed under judicial management under the Companies Act (Cap 50, 2006 Rev Ed) (“CA”).

3 On 24 September 2020, the Debtor commenced arbitration proceedings against OTPL for various alleged breaches of duty. OTPL counterclaimed for other sums owed by the Debtor under the Charterparties. On 20 May 2021, the Debtor acquired two sets of claims from the Assignor, arising from dealings that the latter had with OTPL in respect of other vessels, by way of assignment (“the Assignments”) and sought to set-off OTPL’s counterclaim against the claims under the Assignments (“the Assigned Claims”).

4 The first set of claims (“the Vessel A Claims”) involved the Assignor’s claims in contract against OTPL for alleged non-delivery of diesel cargo, for which the Assignor had obtained a judgment in default of defence in the High Court of Malaya in Kuala Lumpur (“the Default Judgment”).

5 The second set of claims (“the Vessel B Claims”) related to the Assignor’s tortious claims against OTPL involving another vessel (“Vessel B”):

a. The Assignor had contracted to sell 2,100,000 barrels of gasoil to Hin Leong Trading (“HLT”), and further contracted with HLT for the Assignor to purchase 458,000 barrels of gasoil 10 ppm sulphur (“the Cargo”) from HLT on an in-tank basis on board Vessel B (“the Second Sale Contract”). The Assignor had also entered into a storage agreement with OTPL (the “Storage Agreement”), under which OTPL became the demise charterer of Vessel B.

b. Under the Storage Agreement, OTPL agreed to allocate oil storage tanks to the Assignor on board Vessel B for a certain period. The Storage Agreement contained a non-assignment clause (“NAC”). OTPL also issued an in-tank transfer certificate (the “Document”) which evidenced the existence of the Cargo on board Vessel B and the transfer of the Cargo to the Assignor.

c. The Debtor alleged two categories of claims by the Assignor against OTPL in respect of the above transactions. The first category of claims related to causes of action against OTPL in connection with or arising from the Storage Agreement (“the “Vessel B Storage Agreement Claim”) – specifically that OTPL had acted in breach of an implied obligation under the Storage Agreement to not misstate the amount of petroleum products transferred onto or out of Vessel B and/or the fact of such transfer having taken place.

d. The second category of claims related to causes of action against OTPL in connection with or arising from the Document (“the Vessel B Document Claim”) – specifically that OTPL had misrepresented HLT’s transfer of the Cargo to the Assignor on Vessel B, that OTPL had conspired with HLT to misrepresent the transfer of the Cargo, and that OTPL had induced HLT to breach the Second Sale Contract.

6 On 11 June 2021, the Debtor and the Assignor filed revised proofs of debt with the then-judicial managers (“JMs”) of OTPL in respect of the Assigned Claims.

7 On 12 July 2021, the JMs applied in HC/CWU 117/2021 (“CWU 117”) for OTPL to be wound up under the IRDA. They additionally filed two applications in the General Division of the High Court. First, in HC/SUM 3297/2021 (“SUM 3297”), the JMs sought a declaration that the assignments of the Assigned Claims were void and/or unenforceable against OTPL, and as against the JMs/liquidators in the event that OTPL was wound up. Second, in HC/SUM 2989/2021 (“SUM 2989”), the JMs sought directions on two questions of law:

a. Whether a debtor of a company placed in judicial management under Part VIIIA of the CA, who acquires a claim against the company by way of assignment after the date on which an order is made to appoint judicial managers to the company (referring to the Assigned Claims), can assert legal or independent set-off against the company for the value of the Assigned Claims (“Question 1”); and

b. Whether legal or independent set-off, or insolvency set-off, can be asserted by the debtor for the value of the Assigned Claims in the event the company is discharged from judicial management and wound up under the IRDA (“Question 2”).

8 On 16 August 2021, OTPL was ordered to be wound up and the JMs were appointed as its liquidators (henceforth “the Liquidators”).

9 In SUM 3297, the Liquidators contended that the Vessel B Claims were invalidly assigned in breach of the NAC, and more generally that the Assigned Claims were not assignable because these were bare rights of action. The Debtor contended that some of the Vessel B Claims were outside the scope of the NAC because they were tortious in nature. The Judge in the General Division of the High Court (“the Judge”) found that the NAC only barred the assignment of contractual claims, and not tortious claims. The assignment of the Vessel B Document Claim was thus not barred by the NAC, although the Vessel B Storage Agreement Claim was. The Judge found that the effect of the NAC would render assignments in breach of it void both at equity and law, and thus the Vessel B Storage Claim would be void and/or ineffective as against OTPL and the Liquidators. The Judge further found that in any event all of the Vessel B Claims were bare rights to litigate and their assignment was therefore champertous and void and/or ineffective against OTPL and the Liquidators. Conversely, the assignment of the Vessel A Claims, which had merged into the Default Judgment, was a valid assignment of a judgment debt.

10 In SUM 2989, the Judge found it unnecessary to decide Question 1 since it was premised on OTPL being in judicial management, which was no longer the case. In respect of Question 2, the Judge held that insolvency set-off could be asserted in respect of the Vessel A Claims because the relevant time for determining mutuality ought to be the date of commencement of winding up of OTPL, because the reference to “judicial management” in s 219 of the IRDA only included judicial management under the IRDA, and not judicial management under the CA. Assessed at this time, there was mutuality between the claims; the Judge rejected the Liquidators’ argument that upon the making of the judicial management order the assets of OTPL were held on a statutory trust for the benefit of its general pool of unsecured creditors such that OTPL ceased to be the beneficial owner of those assets. Further, neither of the exceptions under s 219(3)(a) or s 219(3)(b) applied to bar insolvency set-off from operating.

11 Both the Liquidators and the Debtor appealed against the Judge’s decision.

12 The overarching inquiry was whether the Assignments should be rendered void, unenforceable and/or ineffective against OTPL on the grounds of public policy. If the Assignments were contrary to public policy and this rendered all the Assignments void, unenforceable and/or ineffective against OTPL, this conclusion would be dispositive of the appeals: at [57].

13 The framework for assessing when an assignment would contravene the law of maintenance and champerty as expressed in Re Vanguard was potentially underinclusive because it neglected to consider public policy where the subject of an assignment was not a bare cause of action and had the potential to encourage artificiality in the way claims are characterised: at [64].

14 The overarching principle underlying the law of assignment is whether upholding the assignment would run contrary to public policy, which inevitably included concerns about the due administration of justice. It followed that any assignment would be potentially liable to be struck down if it contravened public policy. at [69]–[71].

15 A party may seek to impugn a purported assignment on grounds other than the assignment being one of a bare cause of action, following the framework set out in UKM: such party must satisfy the court that there is a relevant public policy consideration, that it is sufficiently clear and defined, and that it operates to circumscribe the assignment. To this end, it would be necessary to consider the effect and purpose of the assignment. If a purported assignment was executed with the aim of allowing a party to assert a right under a statutory regime, this forms part of the relevant context and will need to be considered in that light. The imperative in this context is to look at the substance of the transaction and not merely to its form: at [72]–[74].

16 Where a liquidation forms the backdrop to a dispute, the courts will typically have regard to the public policy that inheres in the insolvency regime even when dealing with questions which may be primarily concerned with matters of private law. Private arrangements which contravene or otherwise undermine the rule of pari passu distribution in liquidation will not be given effect, as part of the general rule that a company and its creditors cannot contract out of insolvency legislation: at [75]–[79].

17 The policy of pari passu distribution is fundamental to the process of liquidation. Two of its salient features are that: (a) it does not prescribe a time at which the arrangement must have been entered into or triggered, and it is enough that the effect of the relevant contractual or other provision is to apply an asset belonging to the debtor at or following the commencement of the insolvency procedure in a non-pari passu way; and (b) it does not matter that the parties might have had good business reasons and did not direct their minds to the question of how the arrangement might be affected by or might affect insolvency proceedings. If the policy of pari passu distribution would operate to strike down arrangements which were not specifically intended to put one or more parties in a preferential position in relation to other creditors in a liquidation, it would apply all the more to arrangements entered into with the deliberate aim of doing so: at [80]–[81].

18 The insolvency set-off mechanism, which is an exception to the pari passu rule, is a concession to the notion that where parties have been dealing with one another in reliance on their ability to secure payment by withholding what is due to them, it would be unjust, on the advent of liquidation, to deprive a solvent party of his security by compelling them to pay what they owed in full while being left to prove for their own claim. It is not meant to encourage parties to engage in the trafficking of debts to avail themselves of the exception and thereby rank in priority to other unsecured creditors: at [82]–[83].

19 Insolvency set-off would be objectionable when a debtor acquires a claim from a creditor of the company in circumstances where the debtor is aware of the company’s inability to pay its debts. First, this would unfairly prejudice other unsecured creditors as the debtors’ debt to the company would be discharged by the full-face value of the debt it purchases from the creditor, causing the company’s assets to be diminished to a greater degree than it would otherwise be but for the assignment. Second, in so far as the creditor assigns its debt to a debtor (who intends to apply it by way of an insolvency set-off) at a price which is more than what the creditor would otherwise receive in dividends from the company, it would have circumvented the pari passu rule and received more than it would otherwise have done so. This unfairly benefits the creditor: at [86].

20 It was necessary to take into account the interests of the general class of unsecured creditors as a dominant and operative concern because they were the very class of persons in whose favour the pari passu regime was meant to operate. The Debtor did not deny that the Assignments were carried out with the aim of gaining a tactical advantage over other unsecured creditors, in anticipation of OTPL’s liquidation, and had the sole purpose of asserting an insolvency set-off when OTPL went into liquidation. This was a quintessential example of impermissible debt trafficking, and the Assignments were therefore void and unenforceable for subverting the regime of pari passu distribution in liquidation: at [87]–[89].

21 In obiter, the Court opined that it was unlikely that s 227D(4)(c) of the CA which imposed a statutory moratorium on the commencement of proceedings applied to the commencement of foreign proceedings against a company in judicial management: at [94].

22 The Court also expressed the preliminary view that the Vessel A Claims had not merged with the Default Judgment because the doctrine of merger does not extend to judgments emanating from a foreign court. In any event, the only practical consequence of merger not having occurred was that the validity of the assignment of the Default Judgment would have to be considered separately from the Vessel A Claims: at [95]–[97].

23 Even if an assignment of a bare cause of action was incidental to a transfer of property or the assignee had a legitimate interest in the outcome of the litigation, the framework in Re Vanguard should be revised to impose a further independent requirement that the assignment must not adversely impact the administration of justice: at [99].

24 Under the revised framework, the assignment of the Default Judgment (though separately invalidated by reason of offending the broader policy in favour of pari passu distribution in an insolvency setting) would not be rendered void by operation of the law of champerty and maintenance provided that it did not adversely impact the administration of justice, because it was an assignment of a species of debt which ought to be treated as a transfer of property: at [102].

25 The Debtor lacked a genuine commercial interest in enforcing the Assigned Claims. First, that the Debtor merely stood to gain from the assignment in the context of its relationship with OTPL could not in itself be sufficient. Second, that the Debtor and the Assignor belonged to the same corporate group could not in itself constitute a sufficient interest so as to justify the Assigned Claims, in the absence of evidence of transactions between the Debtor and Assignor showing a close identity of interest in relation to the Assigned Claims, or showing that that the Debtor was involved in the Assigned Claims prior to the Assignments such that it would have a pre-existing commercial interest: at [110]–[113].

26 A non-assignment clause should ordinarily be construed on the basis that parties to a non-assignment clause are likely to have intended to have wanted to deal only with each other and for any disputes arising out of their relationship to only involve the original contracting parties. This would generally point in favour of non-assignment clauses prohibiting assignments of both contractual and tortious rights which arise from the underlying contract: at [124]–[125].

27 Based on the plain text of the NAC, if the issue had arisen, the Court would have been inclined to find that the NAC prohibited the assignment of both contractual and tortious rights and obligations under the Storage Agreement, and thus covered the tortious Vessel B Document Claim: at [127]–[129].

28 A further bar to the Debtor asserting insolvency set-off in respect of the Vessel B Claims was that those were not provable debts, because OTPL would have been entitled to ignore the assignment of the Vessel B Claims by operation of the NAC and thus could not have been said to be subject to them from the Debtor’s perspective: at [136]–[137].

29 A statutory trust of the kind arising in liquidation likely does not arise in judicial management, as the purpose of a statutory trust does not cohere with the judicial management regime – the purpose of preserving the assets of the company for pari passu distribution among unsecured creditors is not applicable to the latter context: at [153]–[154].

30 The Court was of the view that the relevant time for determining mutuality for the purposes of insolvency set-off was the time of commencement of the winding up of OTPL, being the date of the relevant winding-up application in CWU 117 on 12 July 2021: at [165].