DGJ v Ocean Tankers (Pte) Ltd (in liquidation) and another appeal 

Rethinking Assignments in Insolvency:

DGJ v Ocean Tankers (Pte) Ltd (in liquidation) and another appeal

[2024] SGCA 57; [2024] 2 SLR 790

I. Executive Summary

Central to this case is a core public policy concern in insolvency law – the rule of pari passu distribution. Can a debtor owing money to a company in liquidation be allowed to secure an assignment of claims to itself just before compulsory liquidation, with the aim of later reducing its debt through insolvency set-off? In DGJ v Ocean Tankers (Pte) Ltd (in liquidation) and another appeal [2024] 2 SLR 790, the Singapore Court of Appeal (“CA”) addressed this question, including the concern that this would sidestep the pari passu rule. 

The case is one in a series of appeals concerning the collapse and subsequent bankruptcy of Hin Leong Trading (“HLT”) and its group of companies, once a giant in Singapore’s oil trading industry. In this case, a debtor of one of the HLT companies, Ocean Tankers (Pte) Ltd (“OTPL”), had attempted to improve its position in OTPL’s insolvency proceedings by procuring from a third party an assignment of claims against OTPL while OTPL was under judicial management, intending to set off those claims against its own debt. However, the judical managers (who later became the liquidators) of OTPL sought a declaration that the set-off was ineffective. The CA ruled in the liquidators’ favour. The CA held that such assignments can be struck down on public policy grounds, such as in this case, where they are an improper circumvention of the pari passu distribution regime by allowing preferential debt reduction outside the collective insolvency process.

Stressing this public policy, the CA rejected the debtor’s attempt to bypass the pari passu distribution regime. As a result, the assignments were considered ineffective against the company, leaving no room for an insolvency set-off to operate. The CA also took the opportunity to discuss in obiter remarks other related issues, including whether assignments offend the laws of maintenance and champerty and whether OTPL had a “genuine commercial interest” in taking the assignments due to its relationship with the assignor

II. Material Facts

The relevant parties were as follows:

(a) OTPL, the respondent, a Singapore-incorporated arm of HLT involved in ship chartering, ship management services, and the manufacture and storage of petroleum lubricating oil. As it had entered compulsory liquidation, it was represented by its liquidators (the “Liquidators”);

(b) The “Debtor”, the appellant, a Hong Kong-incorporated company owing debts to OTPL and which had also later become the assignee of certain claims held against OTPL; and

(c) The “Assignor”, a Singapore-based company owned by the same parent company as the Debtor. It initially held claims against OTPL, which it subsequently assigned to the Debtor.

In 2020, OTPL and the Debtor entered into three charterparties (or contracts) for the charter of three vessels. Around the same time, OTPL became financially distressed and was placed under judicial management on 7 August 2020. In September 2020, the Debtor commenced an arbitration case against OTPL, alleging that OTPL had failed to keep various promises under the charterparties. OTPL counterclaimed in the arbitration for freight, demurrage, and other sums owed by the Debtor under the Charterparties (the “Counterclaims”).

In turn, the Debtor acquired, via two deeds of assignment (the “Assignments”), two sets of claims from the Assignor (the “Assigned Claims”). The Assigned Claims concerned vessels not covered under the three charterparties, namely: (a) claims based on a past judgment against OTPL for not delivering fuel for a different ship (“the Vessel A Claims”), and (b) claims relating to disputes over how OTPL managed oil storage for another ship (“the Vessel B Claims”).

The Vessel A Claims concerned the Assignor’s claims against OTPL for breach of contract, deceit, negligence, and/or breach of bailment due to the alleged non-delivery of 342,660 barrels of ultra-low sulphur diesel cargo, which were to have been carried on board the vessel. The Vessel B Claims concerned the Assignor’s claims against OTPL related to a storage agreement for cargo aboard Vessel B. These claims included a claim that related to OTPL’s breach of an implied obligation under a storage agreement (“the Storage Agreement Claim”), and a claim that stemmed from OTPL’s misrepresentation of the transfer of cargo and its conspiracy with HLT to induce a breach of contract (“the Document Claim”). The Debtor sought to set off the Counterclaims against these Assigned Claims in the present appeals.

In June 2021, the Debtor and the Assignor revised their filed claims against OTPL, stating that the Debtor was the legal assignee of the Assigned Claims and that its claim was not to be double counted with the Assignor’s claim. The Debtor essentially claimed that the Counterclaims ought to be set off against the Assigned Claims, as the Assignments should be recognised as being effective. OTPL’s then judicial managers filed two key applications in response: one sought to declare the Assignments void and unenforceable, and the other challenged the Debtor’s ability to effect a set-off of the Assigned Claims.

Subsequently, OTPL was wound up and the judicial managers became the Liquidators. 

III. Issues

The main issue was whether the Debtor could proceed with using the Assignments to offset the debt it owed to OTPL.

• The CA ultimately held that the Assignments were ineffective against OTPL as they contravened public policy, which left no room for insolvency set-off to operate. Accordingly, the CA dismissed the appeal. 

Nonetheless, the CA further took the opportunity, in obiter remarks, to discuss the rest of the issues raised:

• Whether the Vessel A Claims merged into a default judgment previously obtained by the Assignor against OTPL;
• Whether the Assignments offended the laws of maintenance and champerty;
• Whether the Debtor had a genuine commercial interest in taking the Assignments by reason of its relationship with the Assignor;
• Whether the non-assignment clause barred the assignment of the tortious Vessel B Claims
• Whether a statutory trust arose over the assets of a company placed under judicial management.
  

A. The Assignments were ineffective as against OTPL on public policy grounds

The CA began by noting that it was undisputed that the Assignments were meant to allow the Debtor to exercise insolvency set-off in respect of those claims, and thereby circumvent pari passu distribution in OTPL’s liquidation. If the Assignments were contrary to public policy, and if this rendered them void, unenforceable and/or ineffective against OTPL, that would be dispositive of the appeals. 

(i)  Previous test

Up to this point, the test in Singapore for striking down an assignment was expressed in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 (“Re Vanguard”). That test applied only to assignments of bare causes of action, as opposed to claims for debts or claims based on property rights. Such assignments were considered invalid unless any one of these three exceptions were made out:

(a) it was incidental to a transfer of property,
(b) the assignee had a legitimate or genuine commercial interest in the litigation’s outcome, or
(c) there was no realistic possibility of such an assignment harming the administration of justice (including whether the assignment conflicted with existing public policy directed to protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and the policy in favour of ensuring access to justice).

However, the CA considered that this test failed to include public policy concerns in cases where the assignment was not a bare cause of action. This could lead to artificial classifications, where parties might attempt to present bare causes of action as property claims to bypass restrictions. Further (as stated in Re Vanguard), the public policy concerns underlying the law of assignment must go beyond the search for a genuine commercial interest. The broader principle is whether upholding an assignment offends public policy, including the administration of justice. It follows that concerns of public policy cannot be confined to situations involving assignments of bare causes of action. 

This is especially true because the rule in Re Vanguard arose from the policy against champerty and maintenance. Maintenance refers to assistance or encouragement given to a litigant by someone with no interest in the case and no legally recognised justification. Champerty, a form of maintenance, involves doing so in exchange for a share of the proceeds from the suit (if successful). The policy against both is in turn concerned with the policy of preserving and protecting the due administration of justice. It would thus be illogical to suggest that the public policy concerns about assignments are confined to the policy against champerty and maintenance. Nothing insulates the law of assignment from broader public policy considerations, especially the proper administration of justice. An assignment that contravenes public policy may be rendered void or unenforceable, just as with other contracts.

Therefore, just like any other contract void for illegality, any assignment is potentially liable to be struck down if it contravenes public policy. And insofar as assignments of bare causes of action are concerned, the Re Vanguard test continues to apply. The burden remains on the party asserting validity to prove that the assignment falls within one of the Re Vanguard exceptions and thus does not contravene the policy against maintenance. By establishing that the assignee comes within the exceptions in Re Vanguard, the assignee would in effect be showing that the policy concerns underlying the prohibition against champerty and maintenance are not engaged. 

(ii)  Modified test

Given the above, the CA modified the existing test. First, it held that the Re Vanguard test still applies to assignments of bare causes of action: a party who seeks to assert that the assignment of a bare cause of action is valid has the burden of proving that the assignment does not contravene the policy against maintenance, by showing that he comes within any of the exceptions set out in Re Vanguard (as stated above). 

However, following the framework set out in UKM v Attorney-General [2019] 3 SLR 874 (“UKM”), the CA held that a party may also seek to impugn a purported assignment on other grounds, by first showing that there is a relevant public policy consideration that is sufficiently clear and defined and which circumscribes the assignment. To this end, the court will consider the effect and purpose of the assignment. If a purported assignment was executed with the aim of allowing a party to assert a right under a statutory regime, this forms part of the relevant context and will need to be considered in that light. It will be necessary to look to the substance of the transaction and not merely its form. 

The CA then considered assignments in the context of insolvency and liquidation.

(iii) Public policy against improper circumventions of the pari passu distribution regime

Where a liquidation forms the backdrop to a dispute, even when dealing with questions which may be primarily concerned with matters of private law, the courts must still consider public policy that inheres in the insolvency regime. The policy that private arrangements which contravene or otherwise undermine the rule of pari passu distribution in liquidation will not be given effect to is fundamental to insolvency law. It ensures that creditors recover debts through a structured, collective enforcement process, rather than a “grab race” favouring only the swiftest creditors. 

Two features of this policy are salient. First, it does not prescribe when the arrangement must have been entered into or triggered. It is enough that the effect is to apply an asset belonging to the debtor at or following the commencement of the insolvency procedure in a non-pari passu way; it does not matter that the parties might have had good business reasons and did not consider how the arrangement might be affected by or might affect insolvency proceedings. Further, if the pari passu distribution policy would strike down even arrangements not intended to prefer one or more of the parties in relation to other creditors in a liquidation, it must all the more apply to arrangements entered into with the deliberate aim of doing so.

(iv) Abuses of insolvency set-off

The Debtor sought to evade the pari passu rule by relying on one of its exceptions, the insolvency set-off mechanism. 

The CA observed that the ambit of this exception is narrowly circumscribed by statute. Its availability is a concession to the notion that where parties have dealt in reliance on their ability to withhold payment, it would be unjust, on liquidation, to compel the solvent party to pay in full and prove for its own claim. It is not meant to encourage the trafficking of debts to gain priority over other unsecured creditors. Insolvency set-off is objectionable where a debtor acquires a claim knowing the company is insolvent, as it both (a) diminishes the estate by discharging debt at full-face value, causing the company’s assets to be diminished to a greater degree than they would otherwise have been but for the assignment and hence unfairly prejudicing the other unsecured creditors; and (b) insofar as the creditor assigns its debt to a debtor (who intends to apply it by way of an insolvency set-off) at a price which is more than what the creditor would otherwise receive in dividends from the company, it would allow the assigning creditor to circumvent the pari passu rule by receiving more than its dividend entitlement, thus unfairly benefiting such creditor.

The CA noted that any outcome from the case would affect not only the Debtor and OTPL but also the general class of unsecured creditors. The CA stressed that their interests had to be considered because the pari passu regime was designed to protect them as a class. Counsel for the Debtor did not deny that the Assignments were carried out to gain a tactical advantage over other unsecured creditors in the liquidation process. Indeed, the Assignments were executed in anticipation of OTPL’s liquidation, and it was never suggested by the Debtor that they were, at the time of the Assignments, under the impression that OTPL was going to survive. The Assignments were for the purpose of asserting an insolvency set-off when OTPL went into liquidation; this was a quintessential example of impermissible debt trafficking.

Therefore, the CA held that the Assignments were void and unenforceable for subverting the rule of pari passu distribution in liquidation. It would be contrary to the interest in ensuring the orderly distribution of assets among the body of unsecured creditors to permit a given creditor and debtor to traffic in debts in order to secure priority for their debts and so deprive the insolvent company of the full value of its assets that should be available for distribution.

B. Other matters discussed 

The CA’s finding that the Assignments were ineffective were sufficient to dispose of the appeals in favour of the Liquidators. Nonetheless it took the opportunity to express its views on some of the remaining arguments in the case.

(i) Whether the Vessel A Claims merged into the Default Judgment

The Assignor had previously obtained a default judgment (“Default Judgment”) against OTPL in the High Court of Malaya in Kuala Lumpur, Malaysia, in respect of the Vessel A Claims. Under Singapore law, when a judgment has been given on a cause of action, the doctrine of merger operates to merge the cause of action with the judgment of the court, such that the cause of action ceases to have an independent existence. The Liquidators also argued that the Vessel A Claims had merged into the Default Judgment and thus was not a valid assignment of a judgment debt. 

The CA expressed the preliminary view that the Vessel A Claims would not merge into the Default Judgment, because the doctrine of merger does not extend to judgments emanating from a foreign court. In any case, the validity of the Default Judgment as a debt was a separate matter from whether a foreign default judgment and its underlying cause of action merged. The only practical consequence of merger not having occurred would be that the validity of the assignment of the Default Judgment would have to be considered separately from the Vessel A Claims, with the approach to the latter being the same as the approach towards the Vessel B Claims – that is, whether the Assignments were champertous and/or otherwise contrary to public policy.

(ii) Whether the Assignments offended the laws of maintenance and champerty

Because the CA was of the view that there was no merger of the Vessel A Claims with the Default Judgment, both Vessel A and Vessel B Claims had to be assessed for whether they were champertous. 

The CA considered that the appropriate framework for assessing whether an assignment was champertous should be refined, such that even if either of the first two Re Vanguard exceptions as stated above (incidental to a transfer of property; and assignee had a legitimate or genuine commercial interest in the litigation’s outcome) were satisfied, there should be a further independent requirement that the assignment must not adversely impact the administration of justice (the third Re Vanguard exception). Under this refined test, the assignment of the Default Judgment would not be considered champertous since it was a debt, not a bare right to litigate, and thus was enforceable as property. The CA also noted that the lack of formal enforcement of the Default Judgment did not preclude its recognition as a debt.  

(iii) Whether the Debtor had a genuine commercial interest in the Assigned Claims

The Debtor argued that it had a “genuine commercial interest” in enforcing the Assigned Claims, because both the Vessel A Claims and Vessel B Claims were directly related to the rights, title, interest and benefits in and to the subject matter of the assignment, and also because it had an interest in asserting set-off. It further argued that it had a genuine commercial interest in seeking to reduce its parent group’s liability to OTPL. However, the CA disagreed with both arguments. 

The CA clarified that, in determining whether a “genuine commercial interest” existed, the courts should look at the totality of the transaction. When an assignment involves a cause of action, courts must find a genuine commercial interest beyond just the assignee’s right in acquiring the cause of action and its accompanying monetary rewards. A genuine commercial interest may be demonstrated by: (a) the assignor and assignee falling into one of the (developing, and not closed) recognised categories by which the assignee will be found to have a genuine and pre-existing commercial interest (for example, an insurer-insured relationship), (b) the assignor and assignee sharing a close identity of interest, or (c) the cause of action not possessing a solely personal character. 

The CA stated that, looking at the totality of the transactions, the Debtor had no genuine commercial interest in enforcing the Assignments that should be upheld by the court. This was for two reasons. First, in considering the sufficiency of the Debtor’s interest as the assignee, the focus is on the interest as between the assignor and assignee, such as a pre-existing debtor-creditor relationship. That the Debtor stood to gain from the assignment in the context of its relationship with OTPL could not in itself be sufficient. Otherwise, any assignment of any claim would involve a genuine commercial interest. Second, the mere fact that the Debtor and Assignor belonged to the same corporate group could not, without more, cloak the transaction with legitimacy or imbue it with a genuine commercial interest where there is in fact none. 

(iv) Whether the non-assignment clause barred the assignment of the tortious Vessel B Claims

The Storage Agreement Claim arose from an agreement between the Assignor and OTPL that contained a non-assignment clause (the “Clause”). The Clause prohibited any assignment or novation of the rights and obligations under the agreement “without the prior written consent” of the other party. It was undisputed that the Assignor failed to obtain such consent, and the Debtor did not allege that OTPL unreasonably withheld it. The issue was whether the Clause extended to tortious claims, such that the assignment of the tortious Document Claim breached the clause and rendered the assignment unenforceable.

The CA stated that the construction of any non-assignment clause should be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be settled as between each other, and that they would be content for other questions to be decided between one original party to the contract and an assignee. 

The CA further considered that parties to a non-assignment clause are likely to have intended to have wanted to deal only with each other and so to expect that any disputes arising out of their relationship would only involve the original contracting parties. Such a clause should ordinarily be construed on this basis unless a contextual or literal interpretation of the clause leads to a different conclusion. This would generally point in favour of non-assignment clauses prohibiting assignments of both contractual and tortious rights which arise from the underlying contract. 

As applied to the Clause, the CA considered that the plain wording of the Clause within the context of the Storage Agreement did not inevitably lead to the conclusion that the parties intended to prohibit the transfer of their contractual but not tortious rights and obligations. Accordingly, if the issue had arisen, the CA would have found that the Clause prohibited the assignment of both contractual and tortious rights and obligations under the Storage Agreement. The Clause would thus cover the Document Claim, which parties accepted was tortious in nature.

As to the Debtor’s argument that it could still rely on the assigned claims for set-off despite breaching the Clause, the CA considered that a non-compliant assignment is ineffective only as against the obligor, and not between the assignor and assignee. Accordingly, even if the Assigned Claims were validly assigned as between those parties, OTPL could nonetheless disregard the Assignment and treat the claims as still belonging to the Assignor, on the basis that the Debtor violated the Clause. The CA held that OTPL could assert a defence at law or in equity against liability to the assignee. It further noted that, since the claims were not provable debts under insolvency law, it was unnecessary to decide whether the Debtor had acquired any rights to them for set-off purposes.

(v) Whether a statutory trust arose over the assets of a company placed under judicial management

Finally, the CA considered whether a statutory trust arose over the assets of OTPL when it entered into judicial management under the CA. The CA clarified that a statutory trust of the kind that arises in liquidation does not apply in the judicial management of a company. It explained that the purpose of a statutory trust does not cohere with the judicial management regime: it is intended to preserve a company’s assets for the purpose of pari passu distribution among unsecured creditors. Conversely, the judicial manager is concerned with, among other things, the survival of the company as a going concern and a more advantageous realisation of the company’s assets or property than on a winding up. These functions do not require that the assets of the company be ringfenced via a statutory trust; indeed, it may be counterproductive to ringfence the assets of the company at this stage as the company may still have the potential to trade out of its financial difficulties.

IV. Conclusion and Lessons Learnt

This case sends a strong message to lawyers that the Singapore courts are committed to safeguarding the integrity of the insolvency regime, refusing to allow parties to circumvent the pari passu distribution of a company’s property through assignments aimed at manufacturing insolvency set-off, particularly when such assignments are ineffective and undermine statutory protections. Prospective debtors should exercise caution and avoid exploiting legal mechanisms to gain an unfair advantage in insolvency proceedings.

Written by: Lovein Sui, 4^th-Year LLB student, Singapore Management University Yong Pung How School of Law. 

Edited by: Ong Ee Ing, Principal Lecturer, Singapore Management University Yong Pung How School of Law.