Malayan Banking Bhd v Bakri Navigation Company Ltd [2020] SGCA 41

The Singapore Court of Appeal recently dismissed an appeal by a bank seeking to enforce a floating charge against a third party purchaser. The Court of Appeal determined that crystallization by operation of law did not include transactions that were outside the chargor's ordinary course of business. It also gave guidance as to what type of transactions are outside the ordinary course of a company's business and the subsequent impact on priority.


Malayan Banking Bhd ("Bank") extended credit facilities to NGV Tech Sdn Bhd ("NGV") for the purpose of its ordinary business which was to build vessels. The credit facilities were secured by a series of six debentures ("Debentures") executed by NGV in favour of the Bank which created fixed and floating charges as well as negative pledges in favour of the Bank. NGV also assigned the proceeds of the contract by way of security to the Bank ("Assignment").

NGV subsequently entered into a shipbuilding contract ("Contract") with Bakri Navigation Company Ltd ("Bakri") for, amongst others, Hull No. 1118 ("Ship"). Bakri and NGV later novated the benefit of the Contract to Red Sea Marine Services Ltd ("Red Sea") (Bakri and Rea Sea together, the "Purchasers"). The Bank sought to enforce its rights over the Ship pursuant to the Debentures and the Assignments against the interest of the Purchasers.   

Unbeknownst to the Bank, several transactions were entered into between NGV and Red Sea which were asserted by the Bank to be outside the ordinary course of business of NGV, triggering the automatic crystallisation of the floating charge over the Ship ("Impugned Transactions"). 

  1. NGV and Red Sea entered into agreements to reduce the purchase price of the ship by US$1.5m as liquidated damages for NGV's delay in delivering the Ship. 
  2. NGV entered into two agreements ("Agency Agreements") with Quoin Island Marine WLL ("QIM"). Under the Agency Agreements, and subsequent addenda, QIM was appointed NGV's agent to take over the construction of the Ship.
  3. Red Sea paid NGV's subcontractors US$16.8m in order to complete construction of the Ship. 
  4. NGV agreed to set off its debt against the purchase price of the Ship such that Red Sea became entitled to take delivery of the Ship without payment to NGV. 
  5. Finally, NGV and Red Sea executed contracts transferring title to and possession of the Ship to Red Sea. Red Sea registered the title to the Ship and obtained physical possession of the partly completed Ship.

High Court Decision

Does the right of the Bank over the Ship pursuant to the Debentures and the Assignments prevail over the interest of a third party purchaser without notice?

A chargor cannot freely deal with its assets that are subject to a fixed charge without the consent of the chargee.  On the other hand, a chargor has implied authority and can freely deal with its assets that are subject to a floating charge in its ordinary course of business. As such, a third party who obtains an asset that is subject to a floating charge in the ordinary course of the chargor's business will have priority over the chargee when the charge crystallises. That is so even if the third party had knowledge of the existence of the floating charge. However, if a debenture contained restrictions on dealing and the third party obtained such assets with knowledge of such restrictions, the chargee would have priority over the third party.

Conversely, a third party who obtains such assets outside the ordinary course of the chargor's business would only take the assets free of the chargee's interest if the third party was equity's darling (i.e. a bona fide purchaser of legal title for value without notice). 

Is a fixed or floating charge created over the Ship?

The Debentures created a floating charge and not a fixed charge over the Ship. This was because the Ship was NGV's "stock in trade" and could only have been intended to be dealt with by NGV in its ordinary course of business without the Bank's concurrence.

Did the floating charge automatically crystallise into a fixed charge?

The High Court had to consider if the floating charge was automatically crystallised to a fixed charge due to the sale of the Ship to the Purchasers and the Impugned Transactions.  Under the Debentures, the floating charge over the assets automatically crystallises if: 

  1. NGV pledges or otherwise encumbers in favour of a third party such assets; or 
  2. any person attempts to levy any distress execution, sequestration or other processes against such assets.

The High Court cautioned against a lavish interpretation of automatic crystallisation clauses. The sale (and transactions related to the sale) by NGV to the Purchasers, was not an "encumbrance" or "other processes" under the aforesaid automatic crystallisation provisions of the Debentures. An "encumbrance" is a right created over the debtor's property in favour of a creditor to facilitate the satisfaction of some other rights vested in the creditor (this is commonly a security interest). Likewise, the term "other processes" must be read ejusdem generis (the general term follows particular things of the same kind) with the whole phrase, such processes are thus processes that are put in place through the coercive power of the courts. 

In addition, the High Court also held that merely dealing with an asset which was subject to a floating charge outside the ordinary course of a chargor's business did not crystallise a floating charge. Only if the dealing was otherwise than with a view to continuing to carry on the chargor's business, would the floating charge be crystallised. 

Do the Purchasers have knowledge of, and are they hence bound by, the restrictions under the Debentures and the Assignment?

The High Court held that the Purchasers had no knowledge of the restrictions (including restrictions on dealings and price adjustments) and negative pledge in the Debentures and the Assignment. Although the Debentures and the Assignments were registered in accordance with the laws of Malaysia, it was still not sufficient to fix the Purchasers with constructive notice of the terms of the Debentures and Assignments. The particulars of the Debentures and the Assignments lodged with the Registrar of Companies in Malaysia also did not make any mention of such restrictions on the secured assets. 

Can the Purchasers exercise their right of set-off against the Bank? 

In the event that the Bank succeeded in its claim as chargee, the High Court also commented on whether Red Sea could set-off its expenses on the Ship against the Bank's claim on the same. Given the absence of a contract providing for a right of set-off between Red Sea and the Bank, only an equitable right of set-off was available to Red Sea against the Bank. This equitable right however, was premised on mutuality - that the debts be due between the same parties, in the same right. Prior to the crystallisation of the floating charge, the Bank had no interest in the Ship and Red Sea would only be able to claim against NGV for the expenses. On the other hand, once the floating charge was crystallised, the Bank would have a proprietary interest in the ship and Red Sea might then be able to claim against the Bank for the expenses.

Whether there was conspiracy to cause loss to the Bank?

The High Court held that the high threshold required for conspiracy, whether unlawful means or lawful means conspiracy, was not met in the case. While there were evidential inconsistencies in how the certain contracts related to the sale were arrived at, these in itself were insufficient to show that the Purchasers (amongst others) intended to conspire and injure the Bank. 

The Appeal

The Bank appealed on two grounds:

  1. That its claim to have an interest in the Ship that was superior to that of Red Sea should have been allowed; and
  2. That its claim in conspiracy in respect of the Ship should have succeeded.

Court of Appeal Decision

Crystallisation as a matter of law - does not include transactions that are outside the ordinary course of business

The Court Of Appeal accepted that there are two types of events that can bring about "crystallisation as a matter of law": (a) Winding up of the company; and (b) De facto cessation of trading, which includes disposal of, in substance, the whole of a company's undertaking or trading assets with a view to cessation of trading. Accordingly, the Court of Appeal rejected the Bank's argument that transactions that are merely outside of the ordinary course of the charger's business crystallise the floating charge as a matter of law. 

The Court of Appeal also noted that trading as a going concern does not require the powers of management of the company to remain with the directors. Thus the Bank's argument that NGV was no longer operating as a trading concern after entering the Agency Agreement was rejected.

Transactions outside the ordinary course of business: high threshold to meet

The Court of Appeal held that the Impugned Transactions were not outside NGV's ordinary course of business. The Court of Appeal applied the two-stage test in Ashborder BV v Green Gas Power Ltd [2004] EWHC 15171. 

This test has a high threshold, and it was insufficient that the Impugned Transactions were "extraordinary" or might not have been necessary. There was also no evidence to show that the Impugned Transactions wrongfully preferred the Purchasers and were liable to be avoided on that ground.

Nevertheless, a determination that a transaction is outside the ordinary course of business of the company has an impact on the floating chargee's priority. Where transactions are not done within the powers of the company or the director or are fraudulent transactions, a third party with notice of the fraud may take subject to the prior floating charge. Alternatively, the floating chargee may be entitled to seek judicial remedies to restrain transactions which are outside the ordinary course of business.

Conspiracy: intention to cause damage or injury to the Bank

The appeal on the conspiracy claim was rejected by the Court of Appeal. The respondents entered into the Impugned Transactions for a sound commercial reason which was to prevent NGV from defaulting on its obligation to deliver the Ship. There was no legal or factual basis for the Bank's argument that the respondent had entered into the Impugned Transactions with the intention or predominant intention of injuring the Bank.


There are two key takeaways from this appeal. Firstly, a floating charge is only crystallised by operation of law in two limited circumstances which do not include a transaction that is outside the ordinary course of business of the company.  Secondly, it is also not easy to prove that a transaction is outside its ordinary course of business.  Banks should bear this mind when structuring transactions that are secured by floating charges.  It is also important to understand the chargor's business and modus operandi (method of doing business) and what is in its ordinary course of business in order to mitigate the risk of conflicting third party contractual claims on the secured assets.


1 (a) First, the court is to ascertain, as a matter of fact, whether an objective observer with knowledge of the company would view the transaction as having taken place in the ordinary course of its business.

(b) Second, the court considers whether, on the proper interpretation of the document creating the floating charge, the parties nonetheless did not intend that the transaction should be regarded as being in the ordinary course of business for the purpose of the charge. In this consideration, the mere fact that a transaction is unprecedented, exceptional, liable to be avoided in liquidation as a fraudulent or wrongful preference, or even made in breach of a director's fiduciary duty does not necessarily preclude the transaction from being in the ordinary course of the company's business. However, transactions which are intended to bring to an end, or have the effect of bringing to an end, the company's business are not transactions in the ordinary course of its business.

Originally published May 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.