CIVIL LAW (AMENDMENT) BILL

Order for Second Reading read.

The Minister for Law (Prof. S. Jayakumar): Sir, I beg to move, "That the Bill be now read a Second time."

Sir, this Bill seeks to amend the Civil Law Act, Chapter 43, to clarify the common law position that banks can take charges over cash deposits received from their customers. Why is this amendment necessary? It is because some confusion has arisen in this area of the law due to an English case known as Re Charge Card Services Ltd [1986] which ruled that it was conceptually not possible for a bank to take a charge over its own debt, that is, a deposit received from its own customer which is regarded in law as a debt owing from the bank to a depositor.

That decision was widely criticised in the United Kingdom, not least by bankers who were aggrieved that such an essential and well-established form of security had now been denied to them. Hong Kong, in June 1991, amended its law to clarify the Charge Card Services Ltd case. Our Bill is modelled on the Hong Kong Law Amendment and Reform (Consolidation)(Amendment) Ordinance 1991.

This amendment makes it clear that a person, say, A, can effectively create, in favour of another person, say, B, a legal or equitable charge or mortgage over a debt owed by B to A in order to secure a loan. For example, a customer of a bank can create a charge over his cash deposits, in favour of the bank for a loan transaction or an overdraft. In fact, this form of security is a routine transaction which is of immense importance in daily banking and business practice.

The ruling in Re Charge Card Services Ltd case is an unnecessary impediment to the financial and business communities to arrange secured financing for business and development projects. This amendment was requested by the Monetary Authority of Singapore on the advice of the Attorney-General and it is supported by the Association of Banks in Singapore.

Sir, I beg to move.

Question proposed.

Assoc. Prof. Walter Woon (Nominated Member): Mr Speaker, Sir, I rise to support this Bill.

In the light of the next Bill, the Interpretation (Amendment) Bill, may I thank the Minister for the clarification on the source of the legislation. May I say that it is a very useful thing if we are going to allow reference to Parliamentary debates that the Ministerial statement that precedes the Bill should give the source of the legislation as well as the rationale for the legislation.

May I make just one other brief point? If it is desired to amend the Civil Law Act, may I suggest to the Minister that priority should be given to the amendment of section 5. For the information of hon. Members of this House, section 5 effects an importation of English law and it may come as a surprise to hon. Members that, although we claim to be a financial centre, much of our financial and commercial law is, in fact, English, so that if the Parliament of the United Kingdom in Westminster changes the law, let us say, on agency, on sale of goods, by that same token, the law in Singapore is changed. This situation is clearly anomalous given our independent status. I understand that steps are being taken to effect an amendment of section 5 and I can only hope the Minister can enlighten the House on what these steps are and when they will be taken.

Mr Heng Chiang Meng: Sir, I also rise to support this Bill. But I would like to caution that we go a bit slow on this question of adding new laws on our own because of our financial centre status. We are an international financial centre and it is not just acceptance of the law in Singapore. The key point is the acceptance of the law which is used to govern financial transactions by all parties involved, usually foreign parties. In this respect, the concept of English law in financial transactions or contracts is quite widely accepted by most people who are party to such transactions. It is, therefore, important that, for the sake of credibility, and the fact that the people feel they can have recourse to law, such law should continue to be used as long as the international financial community accepts it. In fact, if I am not mistaken, there are a lot of contracts signed in Singapore where they specifically state that the enactment of those contracts is within the English law, or the law of the State of New York or any other place. It is stated clearly as part of the documentation.

Mr K. Shanmugam (Sembawang GRC): Sir, I welcome the Bill. However, I have one concern about the precise wording of the proposed amendment and its possible consequences.

I am worried about the retrospective operation of the amendment in that it seeks to declare that it has always been possible to create a charge over a cash deposit. In order to understand why this may create a problem, I think it is necessary to know the previous state of the law and the banking practice.

Prior to 1986, prior to the Charge Card case, the commercial community proceeded on the basis that it was legally possible to create a charge over a cash deposit in favour of the bank holding that deposit. Charges over cash deposits were a very useful and extremely common form of security. There was some academic argument as to whether such charges were conceptually possible but for all practical purposes, the commercial community proceeded on the basis that such charges were, in fact, possible.

At the same time, there was some question as to whether this sort of charges were registrable with the Registry of Companies under section 131(3)(f) of the Companies Act. Essentially, pursuant to that section of the Companies Act, all charges over a company's book debts had to be registered. The question was whether a company would treat a bank deposit as a 'book debt' owing by the bank to the company. If it was a 'book debt' then it had to be registered. If it was not a 'book debt' then the charge need not be registered.

The question of registration was not simply one of academic interest. It had serious practical consequences. If the charge had to be registered and it was not, and the company went into liquidation, then the charge would be void as against the company's liquidator. The bank would then lose its security. The bank may have other rights, like a right to set-off, but it would not have been prudent to rely on those rights alone.

Many, if not most banks, took the prudent course and registered these charges.

In 1986, the High Court of England's decision in the Charge Card case was delivered. That decision suggested that it was not possible for a bank to take a charge over a cash deposit placed with it. It caused, as the Minister has pointed out, much consternation among the banking community in the United Kingdom and here. And it affected a most important and valuable form of security.

In 1986, also, the English High Court ruled in the case of Bright Life Ltd that a cash deposit in a bank, on the facts of that case, was not a book debt of the company placing the deposit.

The combined result of those two cases was that since about 1987, the legal position was believed to be that:

(i) it was not possible to create a charge over a bank deposit in favour of the bank holding that deposit;

(ii) in any event such a "charge" was not registrable under section 131(3)(f) of the Companies Act because it was probably not a book debt.

Despite this prevailing legal view, lawyers, being what they are, advised their clients to register the so-called charge with the Registry of Companies. However, my understanding is that the ROC has taken the view that these so-called "charges" were not registrable. Probably, therefore, we have a lot of these which are not registered covering millions of dollars.

In this prevailing climate, we now have this amendment. It is to be welcomed because it gives back to the banks the clear right to take security over cash deposits. That can only help and we are following Hong Kong in this respect. I fully support that. The problem, however, is with the declaration that it has always been possible to create such charges. From about 1987 onwards, the better view was that it was not possible to create such charges.

I appreciate that the amendment follows word for word the amendment in Hong Kong. Nevertheless, I would suggest that we reconsider this position for the following reasons. Take a case of a company going into liquidation after this Bill becomes law. Assume that the company had placed a bank deposit with a bank prior to this Bill. The documentation would have been drafted to give the bank various rights, but it may not purport to give the bank a "charge". It is also entirely probable that the bank's rights would not have been registered with the ROC. In such a situation, the company's liquidator could argue:

(1) that the bank deposit, despite whatever terminology, was in fact a "charge";

(2) by reason of the amendments, it has always (during the pre-amendment period) been possible to create such a charge; and

(3) therefore, the charge is void as against the liquidator for non-registration under section 131(3)(f). For that last proposition, the liquidator will have to argue that the decision in Bright Life is not applicable in Singapore. The legal position there is not as clear as one would like.

If the liquidator succeeds in that argument, then that places at risk probably millions of dollars worth of security that might have been taken by banks.

To avoid all this, I would suggest that there be no retrospectivity. If, however, the Minister feels that there is a compelling need for retrospectivity, then I would suggest that the Bill be delayed until the Minister for Finance has had an option to consider section 131 of the Companies Act. The Minister probably has other things on his mind today, but he may wish to amend that section to make it clear that it does not apply to cash deposits with banks. One way or the other, I think there must be some certainty because we are dealing with a very important commercial question. I understand from what the Minister has said that the banking community might have supported the Bill, but I wonder if the concerns raised by me have been considered.

I would also point out the following differences between Hong Kong and ourselves:

(1) The Hong Kong legislation was passed in 1991. There was a shorter hiatus between the Charge Card case and the actual passing of legislation in Hong Kong.

(2) I am not sure what position the Hong Kong Registry of Companies took vis-a-vis such proposed charges. If they had allowed registration of such charges, then those banks would not be affected.

At the least, I would suggest that before passing this amendment in its present form the Minister consider sending it to a Select Committee.

Mr Davinder Singh (Toa Payoh GRC): Mr Speaker, Sir, I wish to speak on the Bill as well, but I take a different point of view from Mr Shanmugam. I think he makes two different points here. The first is that there will be a difficulty if the position in relation to the nature of the charge, ie, that it is one over possibly a book debt is not clarified. That, in my view, is a different problem altogether. It is important that there must be retrospective effect because you do not want a situation, after this Bill is passed, where banks have to call upon their customers, ask them to redo the entire transaction so that they fall within the ambit of this particular provision, giving rise to a whole series of problems including what in law is called consideration for the original loan, etc, etc. What we want to do is to be practical in the climate that we have today. Charges have been taken or purportedly taken by banks over deposits. You do not want banks and financial institutions to have to recommence the transactions to retake the charges so as to fall within the ambit of this legislation.

The other problem my Hon. Friend, Mr Shanmugam, raises is an important one. But I do not think it is the difficulty that arises from this amendment. It is a difficulty which exists as a result of an English decision which says that a cash deposit is not a book debt and whether we want to follow that or take a different course is a totally different matter. I do not think that the mere fact of non-registration of an earlier charge on account of an advice or view taken that it is not a book debt would affect the operation of this section.

Prof. Jayakumar: Sir, it must be quite obvious to everyone that this is quite a technical area. I am not sure whether the non-lawyers know what is going on here.

Mr Speaker, Sir, first, on the points raised by Mr Walter Woon. He asked if we also have in mind amendments to section 5. I agree with him that it is time that we removed the uncertainty as to the extent of applicability of English law to Singapore, especially in regard to statute law. Indeed, this is high on the law reform agenda of the Ministry of Law and the Attorney-General's Chambers. But we will have to carefully consider the approach. There are many approaches. For example, should we declare what are the statutes in England which will apply or should we re-enact them as part of the corpus of Singapore law and so on? But this is an important area and I hope to be able to bring up legislation in the course of this year.

On the point raised by Mr Shanmugam, I will have to carefully consider what he has said and I note that Mr Davinder Singh disagrees. Sir, a consequence of the English decision was that it was not necessary to register particulars of the charge with the Registrar of Companies. Many banks continue to take such charges after that English case on the basis that the decision might be over-ruled or changed. Those who did naturally would have registered the particulars of the charge with the Registrar of Companies. Those banks which accepted the decision as correct would naturally not have taken any charges on cash deposits. They would have taken some other kind of security. They would also have taken letters of set-off which would entitle the banks to set-off the customer's indebtedness against such cash deposits.

My reaction to Mr Shanmugam's point is that the amendment will not affect the rights of banks. Either they have continued to take such charges or they have not. If they have, they would or should have registered. If they have not, the amendment does not affect them. If they have, then the amendment declares that the charges are valid.

If the banks have acted on the basis that that English case was the law, then they would not have accepted charges over cash deposit as security, in which case the amendment does not make their position worse. They can create such charges after the amendment. In any event, if any bank or lender is affected by the amendment, I guess he can apply to court for extension of time to register the charges. But I do not think this is necessary for the reasons I have given. As I said, the amendment was requested by the Association of Banks in Singapore as well as the MAS. I assume that they have considered the point. But in any case, before the Act comes into operation, there is time and to relieve Mr Shanmugam of any anxiety, I will ask the Minister for Finance to take another look at it, but there is no reason to hold up the passage of this legislation or to send it to Select Committee.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Prof. S. Jayakumar].

Bill considered in Committee; reported without amendment; read a Third time and passed.