Common Issues Arising from the Moratorium against Enforcement of Security and Repossession of Goods under Quasi-Security Arrangements
By Jo Tay and Ee Jia Min (Allen & Gledhill LLP)
Under the Insolvency, Restructuring & Dissolution Act 2018 (the “IRDA”), there are various forms of moratoriums available to aid a debtor company seeking to formally restructure its debts either through a creditor scheme of arrangement or judicial management (“JM”). These types of moratoriums are procedural in nature and do not affect substantive rights. Amongst others, there is a specific moratorium against the enforcement of security and repossession of goods under quasi-security arrangements (the “Security Moratorium”). Under this moratorium “(…) no step may be taken to enforce any security over any property of the company, or to repossess any goods under any chattels leasing agreement, hire-purchase agreement or retention of title agreement, except with the leave of the Court and subject to any terms as the Court may impose (…)”
Here, we examine common financing arrangements and how they interact with the Security Moratorium. We also examine some common questions that arise in practice.
Effects of the Security Moratorium on various arrangements
The Security Moratorium prevents creditors from enforcing their rights under security and quasi-security arrangements.
A) Security interests
Security interests are proprietary interests that creditors acquire in a debtor’s property, to support an obligation owed by the debtor. They can be created consensually, or they may arise by operation of law. In Singapore, four forms of consensual security interests at common law are recognised, i.e., pledge, lien, mortgage and charge.
Pledges involve delivery by the pledger of tangible property to the pledgee as security for the payment of a debt or performance of another obligation, and confer on the pledgee the right to possess the asset, and the right to sell the asset on default.
Bills of lading are sometimes pledged to a financier. Where a bill of lading is pledged to a financier, and the financier releases the bill of lading under a trust receipt to the company (as buyer) so that the company can sell the goods in order to raise funds to pay the financier, does the arrangement remain a pledge? Depending on the facts, complex issues of re-characterisation may arise, such as whether such an arrangement amounts to a charge and whether payment received from the sale of goods are held on trust for the financier or under a charge. In the face of the Security Moratorium, it would generally benefit the financier to assert that the sums are held on trust for it.
A lien is generally the right to retain possession of goods or other tangible property until the relevant indebtedness is paid or the obligations are performed. It can arise by operation of law, by statute or by contract. In practice, liens may feature in arrangements such as laundry or storage services.
Is the lien-holder required to deliver up the goods to the company, when he or she learns of the Security Moratorium? Generally, no. However, if the lien-holder makes an unqualified refusal to hand over the goods, that would constitute a step in the enforcement of security, in breach of the Security Moratorium.
Other issues may also present themselves in this context, such as whether a contractual lien with a right of sale may be re-characterised as a charge, as seen in Re Cosslett (Contractors) Ltd  Ch 495. This could then lead to further issues such as whether it will be void against the liquidator and the creditors of the company for want of registration.
A mortgage is a non-possessory security, and can be legal or equitable. A legal mortgage involves the assignment of legal title from the mortgagor to the mortgagee, with the mortgagor having an equity of redemption. In Singapore, a mortgage shall not operate as a transfer of the land mortgaged, but shall have effect as a security only.
How should the property be sold? Where the bank has a mortgage over the company’s property and both parties agree for the property to be sold, their views may diverge on whether the sale should be carried out as a mortgagor’s sale or as a mortgagee’s or receiver’s sale. However, the Security Moratorium presents the company with a bargaining chip as it prevents the bank from enforcing its mortgage. In this situation, the bank can either apply for leave to enforce its rights under the mortgage, or negotiate with the company for greater oversight over the sale process.
A charge is a non-possessory equitable security, under which the charger retains ownership and possession of the asset, but the creditor obtains a new form of proprietary interest over the asset. Charges can be taken over existing and future assets, and over tangible or intangible property. Depending on the agreement amongst parties, a charge may be fixed or floating.
When notice is required to crystallise the floating charge, does the Security Moratorium bar the issuance of such a notice? While this appears to be untested in Singapore, it has been observed that service of such a notice is not a step to enforce security. If so, it should not be barred by the Security Moratorium.
Can a creditor take steps to register a charge out of time, in the face of a Security Moratorium? Technically, an application to register a charge out of time perfects the security and does not constitute enforcement of security. It follows that it should not be barred by the Security Moratorium.
B) Quasi-security arrangements
The Security Moratorium also affects certain types of quasi-security arrangements as described below, where title remains with the creditor but the company is in possession of the asset in question. It bars the creditor from taking possession of the asset, even though the creditor is the owner.
Hire purchase agreement
Hire-purchase agreements are commonly encountered where the company has obtained financing for a vehicle or for construction equipment.
Where the financier terminates the hire-purchase agreement prior to the commencement of the company’s formal restructuring proceedings, does the Security Moratorium prevent the financier from repossessing the goods, given that there is technically no longer any hire-purchase agreement? The English court in Re David Meek  BCLC 680 used a purposive interpretation and held that it would apply where the goods are in the company’s possession at the relevant time and that possession should be attributable to, or derive its legal origin at some time from, a hire-purchase agreement. However, it need not be a hire-purchase agreement still subsisting.
Chattels leasing agreement
A chattels leasing agreement means an agreement, which is capable of subsisting for more than three months for the bailment of goods. A common example is a bareboat charter.
Can intangible assets be held under a “chattels leasing agreement”? Unlikely, since a bailment requires transfer of possession. For example, in the context of crypto-assets held by intermediaries, it has been observed by the UK Jurisdiction Taskforce in “Legal Statement on Cryptoassets and Smart Contracts” (November 2019) that the crypto-assets are purely virtual and therefore cannot be the object of a bailment.
Retention of title agreement
A “retention of title agreement” is defined under the IRDA as an agreement for the sale of goods to a company being an agreement that does not constitute a charge of goods, but under which, if the seller is not paid and the company is wound up, the seller will have priority over all other creditors of the company as respects the goods or any property representing the goods.
Are “conditional sale agreements” also retention of title agreements? In Singapore, conditional sale agreements are specifically excluded from the definition of hire-purchase agreements. However, practically speaking, contracts that are in the nature of conditional sale agreements are likely to fall within the scope of a “retention of title agreement”, and thus in practice, would likely be affected by the Security Moratorium as well.
Seeking leave to enforce
Even if the arrangement falls within the scope of the Security Moratorium, the creditor may apply for leave to enforce its security or repossess the goods in question. In this regard, the Singapore Courts are likely to consider the factors listed in Re Atlantic Computer Systems (No.1)  BCLC 606 (decided in the context of administration), which should be familiar to insolvency practitioners and law students alike. Briefly:
(1) The starting point is that the creditor’s proprietary rights will be respected, and the creditor should not be prevented from exercising its property rights if doing so is unlikely to impede the company’s attempts to restructure.
(2) In all other cases, the court should carry out a balancing exercise between the legitimate interests of the secured creditor and the legitimate interests of the other creditors. In doing so, great importance and weight is typically given to the creditor’s proprietary interests.
(3) Leave should be granted if the secured creditor is able to show that a significant loss would be caused by a refusal. However, if the creditor is fully secured, delay in enforcement is likely to be considered less prejudicial than in cases where the security is insufficient to cover the outstanding debt.
(4) If substantially greater loss is likely to be caused to others by granting leave, the court may refuse to do so. The court will assess these losses with regard to inter alia the company’s financial position and the prospects of a successful restructuring.
However, is seeking leave always the best solution for the creditor? Not necessarily, especially if it results in drawn-out litigation. The company may seek to show that that there is more value in leaving the assets with the company or that there is little to be gained from taking immediate enforcement action. In such situations it may be better for the company and the creditor to reach a consensual solution, e.g., timelines for repossession, with a view to reducing time and costs expended on litigation.
(*) The full version of this article was published in the SAL Practitioner (Insolvency and Restructuring) on 7 December 2021.