Lessons from the Jurong Aromatics case: non-assignment, crystallisation and set-off

On 3 October 2018, the Singapore High Court delivered its judgment on Jurong Aromatics Corp Pte Ltd (receivers and managers appointed) and others v BP Singapore Pte Ltd and another matter [2018] SGHC 215.

This case is significant as it addresses issues such as the distinction between a charge and an assignment, the effect of non-assignment clauses on a charge, the crystallisation and decrystallisation of floating charges, the effect of fixed charges and crystallised floating charges on insolvency set-off, and the interaction between insolvency set-off and equitable set-off.

Facts

Jurong Aromatics Corporation Pte Ltd ("JAC") and its two receivers and managers (collectively, the "Plaintiffs"), sought declarations against BP Singapore Pte Ltd ("BP") and Glencore Singapore Pte Ltd ("Glencore") respectively (collectively, the "Defendants") that the Defendants were not entitled to set off debts owed to the Plaintiffs under various agreements between the parties. The Defendants resisted the Plaintiffs' claims, arguing that set-off was available.

The salient facts surrounding the dispute are as follows:

• JAC was the operator of a condensate splitter integrated with an aromatics plant (the "Plant").

• The Defendants were both suppliers and customers of JAC.

• In March 2011, Glencore and JAC entered into an agreement for the supply of condensate by Glencore to JAC (the "Glencore–JAC Feedstock Supply Agreement") and an agreement for the purchase by Glencore of products produced by JAC from the condensates supplied by Glencore and others (the "Glencore–JAC Product Offtake Agreement"). BP entered into similar arrangements with JAC. There was a BP–JAC Feedstock Supply Agreement and a BP–JAC Product Offtake Agreement.

• In 2011, a syndicate of lenders (the "Senior Lenders") provided a senior secured facility to JAC, under which approximately US$1.6 billion of loans were made. The following security was provided by JAC to the Senior Lenders:

• an assignment of receivables payable to JAC under the Glencore–JAC Feedstock Supply Agreement and Glencore–JAC Product Offtake Agreement, amongst other agreements; and
• a debenture, which included a first fixed charge over present and future book debts and a first floating charge over all present and future assets of JAC (the "Debenture").

• On 23 December 2014, a set-off agreement was entered into between Glencore and JAC for the set-off of mutual claims arising out of the Glencore–JAC Feedstock Supply Agreement and Glencore–JAC Product Offtake Agreement. (the "Set-Off Agreement").

• In 2014 and 2015, JAC encountered difficulties. On 28 September 2015, receivers and managers were appointed, and they took control and managed the assets of JAC.

• A tolling agreement was entered into on 19 April 2016 between JAC and the Defendants (the "Tolling Agreement"), under which the Defendants continued to supply feedstock to JAC for processing into products and would thereafter receive and sell the products. In exchange, JAC received a tolling fee for its services. This allowed the Plant to continue operating while a purchaser was sought for the Plant.

• Subsequently, a purchaser for the Plant, ExxonMobil Asia Pacific Pte Ltd ("ExxonMobil"), was found. Agreements were entered into between BP, Glencore, ExxonMobil and JAC on 16 June 2017 (the "Transitional Agreement" and the "Transitional Supplemental Agreement") to allow the Plant to be transferred to ExxonMobil without having to be shut down. This required that provisions be made in relation to the raw materials used and the products manufactured during the transfer process.

• The Plaintiffs sought to claim amounts due from both Defendants under the Tolling Agreement (the "tolling fee debt") and the Transitional Supplemental Agreement (the "final payment amount debt"). In relation to Glencore, the Plaintiffs claimed the debt arising from the Set-Off Agreement (the "Set-Off Agreement debt"). The Plaintiffs argued that the Defendants were not entitled to set off the debt owed by the Defendants to JAC against the debt owed to the Defendants under their respective Feedstock Supply Agreements (the "feedstock debt") because the former debt had been charged to the Senior Lenders and hence there was no mutuality between the claims.

• The Defendants argued that there was mutuality because the tolling fee debt, final payment amount debt and Set-Off Agreement debt had not been effectively assigned or charged to the Senior Lenders due to a prohibition against assignment in the Tolling Agreement, the Transitional Agreement and the Set-Off Agreement. Insolvency set-off could therefore apply.

Decision

What was the effect of the prohibition against assignment on the charging of receivables?

The court sought to distinguish between a charge and an assignment, rejecting the view that a charge was a species of assignment. While an assignment involves a transfer of an interest or a part of it, the court viewed a charge as an equitable encumbrance upon the charged property which does not involve a transfer of ownership of an existing interest or part of an interest in the charged property.

This distinction was of significance in the case because the relevant prohibitions in the Tolling Agreement, the Transitional Agreement and the Set-Off Agreement only mentioned a restriction on "assignment", but not on the creation of charges. The court thus held that these prohibitions did not restrict the charging of the receivables under these agreements.

In any case, even if the prohibitions could be read to cover charges or had expressly included charges, the court was of the view that such prohibitions would not be effective in the present case as the floating charge (which had crystallised) and the fixed charge were already in operation when the prohibition against assignment clauses in the agreements came into being. Accordingly, there was no scintilla of time for the receivables under those agreements to operate free of the chargee's interest. Instead, the receivables would be encumbered by the pre-existing charges from the moment such receivables arose.

Was there any estoppel, waiver or decrystallisation which released the Senior Lenders' interest in the receivables?

The Defendants argued that the Senior Lenders did not have a fixed charge over JAC's assets as they had not exercised control over these assets. In a similar vein, even if the floating charge had crystallised at some point, it had subsequently decrystallised due to the ceding of control over the charged assets by the Senior Lenders.  

The court held that the floating charge had crystallised by the appointment of the receivers and managers by the Senior Lenders, thereby giving effect to the automatic crystallisation clause in the Debenture. Further, there was control exercised by the receivers and managers, and this constituted control exercised by the Senior Lenders.

While the court accepted that decrystallisation was possible in principle, it stated that there would need to be clear evidence before the court would conclude that there had been decrystallisation. The court also accepted that it may be possible for a chargee to waive its rights or be estopped from enforcing its rights as a chargee. However, this would need to be on the basis of a clear and unequivocal representation. On the facts of the case, the court found that there was no decrystallisation, waiver or estoppel releasing the Senior Lenders' interest in the receivables.

Was either insolvency set-off or equitable set-off applicable?

The court held that insolvency set-off could only operate in respect of claims that are mutual i.e. the debts must be due between the same parties, in the same right. On the facts of the case, the Defendants' claims were against JAC qua the company. However, the claims against the Defendants were in respect of the charged assets, whose equitable interest was with the Senior Lenders. The mutuality required for insolvency set-off to operate was thus missing.

The Defendants also argued that equitable set-off ought to apply. The court viewed equitable set-off as being applicable where there is a "close relationship or connection between the dealings and the transactions which give rise to the respective claims, such that it would offend one's sense of fairness or justice to allow one claim to be enforced without regard to the other".

While the court accepted that equitable set-off was not precluded by the statutory provisions on insolvency set-off, it held that equitable set-off was not established on the facts of the case because of a lack of a close connection between the cross claims (i.e. the feedstock debt on the one hand, and the tolling fee debt, final payment amount debt and Set-Off Agreement debt on the other hand).

Conclusions

• The judicial recognition of automatic crystallisation clauses will be welcomed by lenders, as it is a standard provision in debentures.

• The requirement that decrystallisation must take place on the basis of a clear and unequivocal representation will also be welcomed by lenders.

• A contractual prohibition against the creation of security over rights in an agreement will not be effective if there is a pre-existing fixed charge or crystallised floating charge over all present and future assets. If a counterparty wishes to maintain mutuality in order to ensure that certain types of set-off can apply, it will have to seek a release of the chargee's rights over the relevant assets. It is also a salutary reminder that a security assignment or a fixed charge (including a crystallised floating charge) will operate to destroy mutuality that is required for certain types of set-off.

• Although not expressly stated, the court appears to have taken the position that mutuality of claims is only destroyed by a fixed charge or a crystallised floating charge, and not a floating charge that has yet to crystallise. This is implicit in the court's statement that assets that were subject to a floating charge became subject to the equitable interest of the Senior Lenders when the floating charge crystallised (para [59]). This would be consistent with the notion that, prior to crystallisation, a chargor is free to deal with and dispose of assets that are subject to a floating charge.