Pars Ram Brothers (Pte) Ltd (in creditors' voluntary liquidation) v Australian & New Zealand Banking Group Ltd and others  SGHC 38
In the above case, the Singapore High Court considered the status of security interests in commingled stock and whether the said security interests survived commingling. This is the first decision of its kind in Singapore and in the UK.
Pars Ram Brothers (Pte) Ltd (in creditors' voluntary liquidation) (the "Company") was a family business which operated in the spice trading industry. To finance its trading business, the Company obtained trade financing facilities from banks. As security for the financing, the Company would deliver the shipping documents to the financing bank under a pledge. To enable the Company to sell the goods to its customers, the financing bank would release the shipping documents to the Company under a trust receipt executed by the Company.
The Company entered into voluntary liquidation in November 2015 and liquidators from Deloitte & Touche LLP were appointed. At the time of liquidation, the liquidators found that the Company held various categories of pepper stock at a warehouse. While the categories of pepper stock were distinguishable from one another, within each category, bags of stock financed by one bank were commingled with bags of stock financed by other banks and were thus incapable of identification. This arose from the manner in which incoming and outgoing shipments were handled by the warehouseman - incoming shipments were stacked with existing goods in the same category, and when bags of stock from a category were delivered out, they were randomly picked from existing bags within that category.
The liquidators were able to identify the specific shipments comprising the mixed bulk in each category and the banks which financed the shipments after the latest "NIL" balance in the warehouse ledger, by matching the shipment details with the particulars of trust receipts.
Issue before the court
The court had to determine whether the gross sale proceeds of 12 categories of pepper stock amounting to approximately S$6.9 million should be held for the benefit of the general pool of the Company's creditors or paid to the banks who could assert a security interest in the pepper stock which they financed. The central legal issue was whether the commingling (such that identification was impossible) effectively destroyed the banks' security interest.
The Honourable Justice Steven Chong referred to English, Australian and New Zealand authorities which dealt with commingling of ownership interests. The position established by these cases was that where goods belonging to various owners were inextricably mixed such that they were indistinguishable from one another, and the mixture was caused by neither of the owners, the contributors held the mixed bulk as co-owners.
The court found no principled reason to make a distinction between ownership and security interests in a mixture. Since the banks already possessed perfected security interests by virtue of the underlying pledges prior to the mixture, the failure to segregate the pledged goods did not negate the existence of the banks' security. The ascertainment of part of the bulk was not necessary to create or perfect the banks' security interests in the stock financed by them.
In the cases which dealt with commingling of ownership interests, the courts were fashioning a solution to resolve a practical and evidential difficulty posed by the mixture, while being mindful that the relevant legal interests ought to ideally remain unaltered. Accordingly, the court found that in the present case, the issue of identifying whose interest remained in the mixed bulk was an evidential one.
The court held that the just solution was for the mixed stock to be divided among the contributing banks in proportion to the value of their respective contributions. The court drew an analogy to a proposition in the tracing of mixed funds in equity—"where claimants to a mixed fund are each innocent contributors, they share pari passu". It was not disputed that if the banks had a subsisting security interest in the stock, this interest could be traced into the proceeds of sale.
Accordingly, the court declared that the gross sale proceeds of the 12 categories of pepper stock amounting to S$6,907,771.67 should be paid (in proportions to be resolved separately) to the banks who could assert a security interest in the underlying stock which they financed, save that the proceeds proportional to the bags of stock which were not financed by the banks be paid to the pool of general creditors.
This decision provides some reassurance to secured bank creditors. The commingling of goods would not extinguish the security interests. However, it must be noted that a critical aspect of this case was the ability of the liquidators to identify the incoming stock by reference to the warehouse ledger and the ability of the liquidators to identify the banks which had financed the specific shipments by reference to the shipping documents and the trust receipts. The decision, while clarifying the law on security interests in commingled goods, serves as a timely reminder to financing banks to ensure that their security documents and trust receipts are in order and accurately describe the goods that they have financed as this would assist in the identification of their interests in the incoming shipment notwithstanding the fact that the stock is ultimately mixed.
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