Court of Appeal · Decided 27 April 2009

Beckkett Pte Ltd v Deutsche Bank AG and Another and Another Appeal

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[2009] SGCA 18Case no. CA 125/2007, 126/2007

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Unfair Contract Terms Act 1977

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Chan Sek Keong CJ (delivering the judgment of the court):
Introduction
[1] The proceedings before us are an appeal (Civil Appeal No 125 of 2007) by Beckkett Pte Ltd (“Beckkett”), a Singapore company, and a cross-appeal (Civil Appeal No 126 of 2007) by Deutsche Bank AG (“the Bank”), a German bank with a branch in Singapore, against the decisions of Kan Ting Chiu J (“the Judge”) on a claim by Beckkett and a counterclaim by the Bank in Suit No 326 of 2004 (see Beckkett Pte Ltd v Deutsche Bank AG [2008] 2 SLR 189 (“the Judgment”)). The Judge dismissed both the claim and the counterclaim.
[2] The claim by Beckkett is for various reliefs against the Bank and PT Dianlia Setyamukti (“DSM”), an Indonesian company, in connection with the sale by the Bank to DSM of shares in four Indonesian companies which were pledged to the Bank (“the Pledged Shares”) to secure the repayment of a bridging loan of US$100m made by the Bank (“the Bridging Loan”) to PT Asminco Bara Utama (“Asminco”), an Indonesian company. The Bridging Loan was guaranteed by Beckkett, its ultimate parent company. The counterclaim by the Bank is against Beckkett as guarantor for payment of the unpaid balance of the Bridging Loan after accounting for the proceeds of sale of the Pledged Shares.
The background
The Swabara group of companies
[3] Beckkett is an investment holding company incorporated in Singapore. Prior to February 2002, Beckkett owned approximately 74.2% of the issued share capital of an Indonesian company, PT Swabara Mining and Energy (“SME”). SME, in turn, owned 99.9% of the share capital of Asminco which owned 40% of the shares in PT Adaro Indonesia (“Adaro”), an Indonesian company, and 40% of the shares in PT Indonesia Bulk Terminal (“IBT”), an Indonesian company. Beckkett and these four Indonesian companies are collectively referred to in this judgment as “the Swabara Group”. The main and most substantial asset in the Swabara Group was the indirect holding (through Asminco) of a 40% share in Adaro. Adaro owned a coal mine in Kalimantan (one of the largest in Indonesia) which produced a low-ash, low-energy coal known as “Envirocoal”. This asset was the “crown jewel” of the Swabara Group. IBT owned and operated a bulk terminal for Adaro’s coal mine.
[4] Beckkett itself is a wholly-owned subsidiary of Asian Mining Energy Corporation (“ASMEC”), a company incorporated in Mauritius whose shareholders were divided into three groups as follows:
(a) Metropolitan Investment Corporation (“MIC”) owning 29.191% of its shares;
(b) PT Unigaruda Masabadi (“UM”), owning 29.191% of its shares; and
(c) Indopac Development Corporation Ltd (“Indopac”), Timko Company Ltd (“Timko”) and Jade Age International Corporation (“Jade Age”), collectively owning 41.618% of its shares.
[5] MIC was part of the group of companies called “the Tirtamas Group”, owned and controlled by Mr Hashim Djojhadikusumo (“Hashim”) while UM was part of another group of companies called “the RGM Group”, owned and controlled by Mr Sukanto Tanoto (“Sukanto”). MIC and UM will be referred to collectively as “the Passive Shareholders”. Together they owned 58.382% of ASMEC and thus controlled Beckkett.
[6] Indopac, Timko and Jade Age, on the other hand, were companies controlled by a group of four individuals who also held various management positions in the Swabara Group. These four individuals are:
(a) Graeme Robertson – Chairman, Chief Executive Officer and President Director of SME, Asminco, Adaro and IBT, as well as the managing director of New Hope Corporation Limited (“New Hope”) which is also a shareholder of Adaro, and sole executive director of Indocoal Pty Ltd;
(b) Allan Buckler – Chief Operations Officer and director of SME, Adaro, IBT, as well as Chief Operations Officer and director of New Hope;
(c) Terry Smith – Deputy Operations Director and Commissioner of SME, Adaro and IBT, as well as Operations Officer and director of New Hope; and
(d) Indra Aman – General Legal Counsel and director of SME and Adaro, as well as President Commissioner of Asminco.
The four individuals are collectively referred to as “the Management Group” in this judgment.
The Bridging Loan and the share pledge agreements
[7] Prior to 1997, Asminco owned 15% of the shares in Adaro and 20% of the shares in IBT. In December 1997, Asminco acquired a further 25% of Adaro shares and 10% of IBT shares from the Tirtamas Group and another 10% of IBT shares from a company called Swabara Bumi. Asminco obtained the Bridging Loan from the Bank to fund the purchase. The Bridging Loan was provided subject to the terms of a bridge facility agreement dated 24 October 1997. The Bridging Loan was intended to be repaid in six months from the proceeds of a syndicated loan and a convertible bond to be arranged by Deutsche Morgan Grenfell, but subject to market circumstances and on a “best efforts” basis.
[8] The following securities were given by the Swabara Group to secure the repayment of the Bridging Loan:
(a) the joint and several guarantee of Beckkett and SME (“the Guarantee”); and
(b) the Pledged Shares comprising: (i) Beckkett’s 74.2% shareholding in SME (“the SME Shares”); (ii) SME’s 99.9% shareholding in Asminco (“the Asminco Shares”); (iii) Asminco’s 40% shareholding in Adaro (“the Adaro Shares”); and (iv) Asminco’s 40% shareholding in IBT (“the IBT Shares”), each pledge being subject to a separate share pledge agreement (collectively “the SP Agreements”) containing identical terms and conditions.
Beckkett was both a pledgor of the SME Shares and a guarantor to secure the repayment of the Bridging Loan. The Guarantee is governed by English law, while all the SP Agreements are governed by Indonesian law.
[9] The Bridging Loan was disbursed in October 1997 and used to pay off a US$16.5m loan extended by Sukanto to ASMEC, and the remaining $83.5m was used to acquire the additional 25% shareholding in Adaro and the 20% shareholding in IBT (see [7] above).
[10] Asminco defaulted in repaying the Bridging Loan when it became due in May 1998. The Bank agreed to roll over the Bridging Loan for three months to enable Asminco to obtain alternative financing, but Asminco defaulted again. Thereafter, Asminco remained in default, and for about three years from August 1998 to June 2001, Beckkett was either unable or unwilling to repay the Bridging Loan. During this period, the Bank made numerous efforts to refinance and restructure the Bridging Loan. It held at least 19 restructuring meetings with the Management Group, but without success. The Bank also made two refinancing proposals on 2 December 1998 and 19 April 1999 but these were rejected by Beckkett. In January 2000, the Bank sought partial repayment of the Bridging Loan and also a proposal from Beckkett on how to repay the balance, but this attempt was also ignored. According to the Bank (and Beckkett has not denied this), the shareholders of Beckkett refused to provide Asminco with funds to repay the Bridging Loan and refused to agree to sell the Pledged Shares or to obtain refinancing from third parties to repay the Bridging Loan.
The sale of the Pledged Shares
[11] The impasse came to a head at a meeting on 27 June 2001 when the Bank informed Beckkett’s shareholders that, unless they put in money to repay the Bridging Loan or voluntarily gave up their shares, the Bank would have to take action to enforce the security. As Beckkett remained intransigent, the Bank entered into negotiations to sell the Pledged Shares to DSM. Beckkett was deliberately kept in the dark about the negotiations. On 21 November 2001, the Bank and DSM agreed to the sale and purchase of the Pledged Shares at about US$46m on the terms of a sale and enforcement agreement governed by Singapore law (“the S&E Agreement”). The sale price was allocated among the Pledged Shares as follows:
[12] The sale was completed on 15 February 2002 and the Pledged Shares were transferred to DSM and its nominees as follows:
[13] Beckkett was informed of the sale on 18 February 2002 when it received a letter from the Bank’s Indonesian lawyers disclosing the sale of the SME Shares for US$800,000. That notification was followed on 14 March 2002 by a letter from the Bank’s Singapore solicitors demanding payment from Beckkett of US$86,888,969.31, being the balance of the Bridging Loan and interest thereon (“the Unpaid Loan”) as at 21 February 2002. Apart from the name of the purchaser of the SME Shares and the price at which the SME Shares were sold, Beckkett was not provided with any other details on the sale of the Pledged Shares. Beckkett had to commence pre-action discovery proceedings in May 2002 against the Bank before it was eventually given the details of the sale of the Pledged Shares. These are not the only unusual features in the case. For example, there is no evidence before the court as to whether the Bank had obtained a valuation of the further 25% Adaro shares and 20% IBT shares when it provided the Bridging Loan to Asminco to finance the purchase of the shares.
[14] Beckkett refused to pay the Unpaid Loan and commenced an action on 27 April 2004 against the Bank to set aside the sale of all the Pledged Shares and/or for damages for selling the Pledged Shares at an undervalue. Beckkett joined DSM as a second defendant on 28 February 2005 after obtaining information on the role of DSM in the purchase of the Pledged Shares.
[15] Adaro and IBT were eventually sold to an international consortium of investors and financiers in 2005 pursuant to a US$950m leveraged buyout, which was completed sometime in June 2005. However, prior to this event, Beckkett had unsuccessfully applied to the High Court for an injunction to restrain the sale by DSM of the Adaro Shares and the IBT Shares. The application was dismissed on the ground that damages would be an adequate remedy (see Beckkett Pte Ltd v Deustche Bank AG [2005] SGHC 105). The grounds of the judgment of the court did not indicate whether or not Beckkett offered to pay the Unpaid Loan in order to redeem the Adaro Shares and the IBT Shares.
Beckkett’s claims in Suit No 326 of 2004
[16] The reliefs claimed by Beckkett against the Bank and DSM are for:
(a) a declaration that the sale of the Pledged Shares was invalid, null and void and for an order to set it aside;
(b) a declaration that the equity of redemption over the Pledged Shares be restored to Beckkett, SME and Asminco;
(c) an order that the Bank and DSM return the Pledged Shares to Beckkett, SME and Asminco;
(d) alternatively, damages to be assessed.
[17] Beckkett’s claims against the Bank were based on the following grounds:
(a) The Bank failed to exercise the power of sale for a proper purpose and in good faith.
(b) The Bank failed to take reasonable care to obtain a proper price for the Pledged Shares in selling them at a grossly undervalued price of US$46m.
(c) The Bank conspired with DSM to sell the Pledged Shares to DSM, as a front for the Management Group, at an undervalue.
[18] Beckkett’s claims against DSM were based on the following grounds:
(a) DSM, as a front for the Management Group, conspired with the Bank to purchase the Pledged Shares at an undervalue.
(b) DSM was not a bona fide purchaser as it had notice that the Bank was in breach of its duties as pledgee when DSM purchased the Pledged Shares at US$46m.
[19] The Bank and DSM joined issue with Beckkett on all these allegations.
[20] The trial began on 20 February 2006. After the close of Beckkett’s case on 18 July 2006, the Bank made a submission of no case to answer on 19 July 2006 and elected not to call any evidence on its counterclaim. DSM, however, elected to give evidence. The trial concluded on 21 September 2007 after the filing of written submissions, followed by a last round of oral submissions.
Decision of the trial judge
[21] In a reserved judgment (ie, the Judgment, see [1] above), the Judge made the following findings:
(a) The Bank did not act with due care in the sale of the Pledged Shares with respect to the Asminco Shares, the Adaro Shares and the IBT Shares (at [151]), and the SME shares (at [152]).
(b) Beckkett, as pledgor of the SME Shares, had a direct claim for damages against the Bank if the SME Shares were sold at an undervalue, but Beckkett failed to prove that those shares were sold at an undervalue (at [112]–[113]).
(c) Beckkett had no standing to set aside the sale of the Pledged Shares (other than the SME Shares) which it did not own or pledge to the Bank (at [144]).
(d) (d)Beckkett, as guarantor of the Bridging Loan, did not have a direct claim for damages for the sale of the Asminco Shares, the Adaro Shares and the IBT Shares at an undervalue as Beckkett did not own these shares (at [87] and [142]), but it was entitled to raise any undervalue in their sale by way of defence to the Bank’s counterclaim (at [87]).
(e) Beckkett was under a duty to adduce evidence at the trial of the actual loss it had suffered arising from the sale of the Pledged Shares by reason of an order made by an assistant registrar on 18 November 2005 (“the Bifurcation Order”), and since it had failed to adduce any evidence of such loss, it could not make out its claim for damages against the Bank (at [146]–[149]).
(f) Beckkett had failed to prove that the Bank and DSM had conspired with each other in the sale of the Pledged Shares to DSM as a front for the Management Group (at [114]–[124]) and that DSM was not a bona fide purchaser of the Pledged Shares (at [130]–[134]).
(g) The sale of the Pledged Shares was carried out by unlawful means (in that no valid court approval had been obtained from the Indonesian courts), but there was no conspiracy between DSM and the Bank with the intention to injure Beckkett (at [125]–[127] and [138]–[141]).
(h) Even if Beckkett had made out a case against the Bank and DSM, it was not equitable for the court to aside the sale of the Pledged Shares as (at [144]):
[22] In the result, the Judge dismissed Beckkett’s claim to set aside the sale of the Pledged Shares, awarded nominal damages of $1,000 to Beckkett in relation to the Bank’s failure to discharge its duties in selling the SME Shares and dismissed the Bank’s counterclaim against Beckkett for lack of proof (at [152]).
Issues on appeal in Beckkett’s claim and the Bank’s counterclaim
Beckkett’s appeal
[23] Beckkett has appealed on the following grounds:
(a) The Judge erred in finding that DSM was a bona fide purchaser for value without notice in that:
(i) DSM had notice of the Bank’s breach of mortgagee’s duties, especially to act in good faith and for a proper purpose in the sale of the Pledged Shares;
(ii) DSM itself did not act in good faith in the purchase of the Pledged Shares; and
(iii) DSM had conspired with the Bank to injure it (Beckkett) through unlawful means.
Accordingly, the sale of the Pledged Shares should have been set aside.
(b) Even if the proper remedy lay in damages, the Judge erred in awarding Beckkett nominal damages of $1,000 since Beckkett had proved that the Adaro Shares and the IBT Shares had been sold at an undervalue, and the Judge should have ordered that the loss to Beckkett arising from the sale of the Pledged Shares be assessed.
(c) The Bifurcation Order did not require Beckkett to adduce evidence of its actual loss at the trial but only to establish liability against the Bank for breach of duty in selling the Pledged Shares at an undervalue, which Beckkett had established.
(d) The Judge erred in holding that DSM and the Bank did not conspire to injure Beckkett through unlawful means as:
(i) the implementation of the S&E Agreement involved the use of unlawful means; and
(ii) the terms of the S&E Agreement clearly evinced an intention on the part of the Bank and DSM to injure Beckkett.
The Bank’s cross-appeal on the counterclaim
[24] With respect to the cross-appeal, the Bank’s contention was that the Judge was wrong in dismissing it as Beckkett had admitted receipt of the Bank’s letter of demand for repayment of the Unpaid Loan and had acknowledged the debt in its own audited annual accounts.
Issues for the court’s decision
[25] Having regard to the grounds of appeal and the arguments of counsel before us, the following are the issues for the decision of this court:
(a) Did the Bank exercise the power of sale in good faith and for a proper purpose when it sold the Pledged Shares to DSM?
(b) Did the Bank take reasonable care to obtain the best price for the Pledged Shares when it sold them at US$46m to DSM, ie, did the Bank take care not to sell the Pledged Shares at an undervalue?
(c) If the Bank sold the Pledged Shares at an undervalue in breach of its duty as pledgee, was it necessary for Beckkett to adduce at the trial evidence of its actual loss, given the Bifurcation Order?
(d) Was DSM a bona fide purchaser of the Pledged Shares?
(e) Was there a conspiracy between the Bank and DSM to sell the Pledged Shares by unlawful means to injure Beckkett?
(f) If issue (d) or (e) or both are established, should the court set aside the sale of the Pledged Shares?
(g) Did the Bank prove its counterclaim on the evidence before the court?
[26] Before we consider the grounds of the appeal, it is desirable that, at the outset, we clarify the nomenclature and the law applicable to the issues set out at [25] above. Although the shares were “pledged” to the Bank under the SP Agreements, it is common ground between the parties that: (a) the duties of the Bank as pledgee would be the same as those of a mortgagee; and (b) Singapore law (unless expressly provided otherwise) would apply to determine the rights and liabilities of the parties in relation to the sale of the Pledged Shares. Accordingly, in this judgment, the terms “pledge”, “pledgor” and “pledgee” are used interchangeably with the terms “mortgage”, “mortgagor” and “mortgagee”.
Beckkett’s appeal: Duties of mortgagee owed to mortgagor in sale of mortgaged property
[27] It is settled law that a mortgagee, in exercising his power of sale, has a duty to act in good faith and also a duty to take reasonable care to obtain the true market value or the proper price of the mortgaged property at the date on which he decides to sell the property. In Good Property Land Development Pte Ltd v Societe General [1989] SLR 229 (“Good Property Land”), the High Court held (at 234, [4]–[5]), following the decision of the English Court of Appeal in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (“Cuckmere”), which was approved by the Privy Council in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, that:
Good Property Land was followed in several High Court decisions (Kian Choon Investments (Pte) Ltd v Societe General [1990] SLR 167 (“Kian Choon”), Sri Jaya (Sendirian) Berhad v RHB Bank Berhad [2001] 1 SLR 486 and Tai Sea Nyong v Overseas Union Bank Ltd [2002] 4 SLR 811), and approved by this court in How Seen Ghee v Development Bank of Singapore Ltd [1994] 1 SLR 526. Cuckmere was earlier followed by this court in Ng Muimui v Indian Overseas Bank Ltd [1984-1985] SLR 286, Malayan Banking Berhad v Hwang Rose [1997] 2 SLR 1, and Lee Nyet Khiong v Lee Nyet Yun Janet [1997] 2 SLR 713 (“Lee Nyet Khiong”).
[28] In the interest of clarity, it may be pertinent to note that a breach of the two duties of a mortgagee ordinarily results in a mortgagor claiming different reliefs. A failure to take reasonable steps to obtain the true market value or proper price (which for convenience, we will refer to as “the best price” in this judgment) for the security will usually lead to a claim for damages, but not a claim to set aside the sale, for the obvious reason that the complaint here would not be that the mortgagee is not entitled to sell but that the mortgagee has sold at an undervalue. On the other hand, where there is a breach of the duty to act in good faith, the sale itself may be bad in law. An example would be a sale involving a conflict of interest on the part of the mortgagee, ie, where the mortgagee has sold the property to his nominee or to any family relation or any company in which he has an interest or where the sale is effected for the purpose of preventing the mortgagor from redeeming the security. Where the purchaser is an independent third party, the mortgagor must prove that the purchaser is not a bona fide purchaser or that the purchaser has notice of bad faith or impropriety on the part of the mortgagee. In such a case, the court may set aside the sale in order to allow the mortgagor to redeem the security. A completed sale by a mortgagee is not liable to be set aside merely because it has taken place at an undervalue, as undervalue is not, by itself, evidence of bad faith or impropriety (see Danckwerts LJ’s judgment in Property & Bloodstock Ltd v Emerton [1968] Ch 94 at 114, cited with approval by Pumfrey J in Corbett v Halifax Building Society [2003] 1 WLR 964 (“Corbett”) at [27] and [33]).
[29] The difference between the two remedies is discussed in Kevin Gray & Susan Francis Gray, Elements of Land Law (Oxford University Press, 5th Ed, 2009) at para 6.4.57:
[30] In this judgment, we will examine, inter alia, these two issues separately:
(a) with respect to Beckkett’s claim against the Bank for damages, whether the Bank took reasonable steps to obtain the best price for the Pledged Shares; and
(b) with respect to Beckkett’s claim to set aside the sale of the Pledged Shares to DSM, whether the Bank acted in bad faith or for an improper purpose, and whether DSM had notice of such bad faith or impropriety.
Beckkett’s claim against the Bank for damages
Clause 5(a) of the SP Agreements: Effect on duties of the Bank
[31] The Bank argued, on the basis of contract, that Beckkett, as pledgor, had waived any claim for breach of the Bank’s duty to obtain the best price for the Pledged Shares on the ground that cl 5(a) of the SP Agreements expressly gave the Bank the right to sell them in any way and at any price of its choice. This argument, which was advanced before the Judge, was not dealt with by him in the Judgment. As it has been argued before us, we will now consider it.
[32] Clause 5(a) of each of the SP Agreements (which are subject to Indonesian law) reads:
[33] The Bank’s arguments on cl 5(a) are:
(a) that cl 5(a) vests in the Bank the sole right to determine the price (whatever it may be and howsoever it is arrived at) at which to sell the Pledged Shares (“Proposition 1”);
(b) that cl 5(a) gives the Bank the right to do whatever is necessary to sell the Pledged Shares to a third party and to set the terms and conditions of the sale (“Proposition 2”); and
(c) that cl 5(a) releases and waives any rights to claim back the Pledged Shares (“Proposition 3”).
[34] In support of these propositions, the Bank relies on the evidence of Beckkett’s expert witness, Harahap, on the effect of cl 5(a) under Indonesian law. With respect to Proposition 1, Harahap’s answer under cross-examination was as follows:
In relation to Proposition 2, Harahap’s answer was as follows:
As regards Proposition 3, Harahap’s answer was as follows:
[35] In our view, the answers of Harahap do not support the meaning the Bank attempts to attribute to cl 5(a) or the three propositions of the Bank. The answer with respect to Proposition 1 went no further than that the contractual terms (such as cl 5(a)) were effective under Indonesian law. And the same answers were given with respect to Propositions 2 and 3. Counsel for the Bank proved, through Harahap, that cl 5(a) was valid under Indonesian law and no more. But Harahap was not asked, and he did not answer, whether what the Bank had actually done was covered by cl 5(a). The Judge was fully aware of this point as shown by the following exchange:
[36] In our view, cl 5(a) is not a carte blanche to the Bank for it to do anything it likes. It is intended to provide that, so long as the pledgee discharges its obligations (and here we are referring to obligations implied by law) in exercising the power of sale, it may sell the Pledged Shares “at such price and upon such terms and conditions as the Bank shall in its sole discretion determine” [emphasis added]. Clause 5(a) cannot be interpreted as an immunity clause against the Bank acting arbitrarily and in reckless disregard of the rights of the pledgor.
[37] Clauses, like cl 5(a), in security agreements have been examined by the Singapore and English courts. Such clauses are narrowly construed (see Fisher and Lightwood’s Law of Mortgage (LexisNexis Butterworths, 12th Ed, 2006) (“Fisher”) at para 30.22, p 630). In Bishop v Bonham [1988] 1 WLR 742 (“Bishop”), the mortgagee relied on the following clause:
[38] The English Court of Appeal held that the general duties to take care to obtain a proper price and to act in good faith in realising a mortgagee security were obligations implied by the mortgagee-mortgagor relationship which could only be excluded by clear and express words. Such words are construed strictly. The Court of Appeal (at 752), cited Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 where the House of Lords held at 850:
[39] The mortgagee in Bishop ran a similar argument (to that of the Bank in the present case) that words such as “as you may think fit” empowered the mortgagee, absent fraud, to sell without taking any precaution or without making inquiries at all. The Court of Appeal rejected the argument at 753–754, stating that:
[40] In Kian Choon ([27] supra), L P Thean J adopted the same approach. There, the mortgagee relied on the following parts of an exclusion clause:
After referring to Bishop, Thean J stated that he did not propose to put a final construction on the clause (as he was dealing with the issue of injunctive relief in that case), but his prima facie view (at 181, [34]) was that the clause did not:
[41] We would also construe cl 5(a) strictly, and so construed, it does not pass muster as an immunity clause. In fact, cl 5(a) implicitly and expressly obliges the Bank to obey whatever laws that may be applicable in order to “pass good title” and even expressly provides that, if the collateral is sold by private treaty, the Bank’s discretion is circumscribed “to the fullest extent permitted by law”. In the circumstances, the Bank’s claim of immunity from breach of mortgagee’s duties under cl 5(a) fails.
Is proof of loss necessary before a pledgee can be liable for breach of duties?
[42] In the court below, the Bank argued that if Beckkett failed to prove that it had suffered any loss as a result of the sale of the Pledged Shares to DSM, then its claims against the Bank, including the claim to set aside the sale, must be dismissed, whether or not the Bank had breached its pledgee’s duties (including that of good faith). In support of this argument, the Bank relied on the following passage from the judgment of the High Court in Good Property Land ([27] supra) at 237–238, [10]:
[43] The Judge rejected the Bank’s argument on the ground that the High Court’s decision in Good Property Land did not have the effect contended by the Bank (see [89] of the Judgment). The Judge also pointed out that subsequent decisions which followed or approved Good Property Land did not construe the law in the manner suggested by the Bank.
[44] We agree with the Judge. The question of setting aside the sale of the security in Good Property Land did not arise as the purchaser there was not made a party to the proceedings. In that case, the bank had negotiated unsuccessfully with various buyers but eventually decided to sell the security (a hotel) by closed tender to 43 selected brokers and hotel owners. Before the tender closed, the bank called it off and sold the hotel by private treaty for about $181m based on expert valuations. An interested party (who had offered a lower price earlier) made a higher offer of $186m after he learnt of the sale at $181m. The mortgagor sought to set aside the sale on the ground of bad faith. At the hearing, the mortgagor admitted that it wanted to set aside the sale not to redeem the security but to have it sold again so that it could fetch a higher price. The court found that, since the bank had taken reasonable steps to sell the hotel at the best price, there was no breach of duty on its part, and the fact that a higher price was offered after the sale did not prove that the bank had not obtained the best price at the material time. It was in that context that the court held that, if the bank had obtained the best price at the time of sale, the mortgagor would have suffered no loss, and therefore the other issues of bad faith, fraud or negligence on the part of the bank became irrelevant.
[45] In Lee Nyet Khiong ([27] supra), this court analysed the mortgagee’s duty to obtain the best price. Its analysis included an examination of the process of selling the collateral, ie, the steps taken by the mortgagee in the factual matrix of the case. A sale at a reasonable price does not mean that there is no breach of the duty to take reasonable efforts to obtain the best price. In Lee Nyet Khiong, this court held at [36] that:
In that case, the advertisement for the sale of the mortgaged property gave a woefully inadequate description of the property. It did not provide details which would have attracted a wider group of potential purchasers. The advertisement appeared only once, meaning that the chance of potential purchasers missing it was high. Further, only two weeks was allowed for the submission of tenders, which was wholly unreasonable, given that the mortgaged property was worth a large sum of money and a prospective purchaser would have had to make necessary searches and investigations and organise his finances. The mortgagee also discarded a second offer, which was significantly higher, without exploring it or entering into negotiations, ignoring the commonsensical approach which would have been to indicate the second offer to the first offeror to see if he would be prepared to match it. It was on the basis of these facts that the court held that the mortgagee had breached its duty to take reasonable steps to obtain the best price.
[46] Lee Nyet Khiong may be contrasted with Roberto Building Material Pte Ltd v Oversea-Chinese Banking Corp (No 2) [2003] 3 SLR 217 (“Roberto Building Material”). In that case, the sale price was lower than the book price of the security. The court said at [63]:
In that case, the court noted that the receiver had, following expert advice, exposed the mortgaged securities to as wide a market as possible. In effecting the sale, the receiver also took care to appoint two different professional firms, one to value the securities and the other to conduct the auction. On those facts, the court held that the fact of the sale price of the securities being much lower than their book value did not per se suggest a lack of reasonable care on the part of the receiver and that it was the process of effecting the sale that was critical. Accordingly, the court held that the receiver had not breached his duty.
Did the Bank take reasonable steps to obtain the best price?
[47] Beckkett’s case on the issue of whether the Bank had taken reasonable steps to obtain the best price for the Pledged Shares is straightforward. It is that the Bank did not do so in that it:
(a) failed to advertise and publicise the sale of the Pledged Shares, and in particular the Adaro Shares and the IBT Shares, to the attention of potential competitive bidders;
(b) failed to accept its own internal valuations and/or to obtain independent valuations of the Pledged Shares; and
(c) failed to negotiate with DSM for the best price for the Pledged Shares (in particular, the Adaro Shares and the IBT Shares) by reference to its internal valuations or any independent valuations.
[48] Before Beckkett commenced these proceedings against the Bank, it had no information on how the sale of the Pledged Shares had been effected or what steps had been taken by the Bank to obtain the best price for them. Accordingly, Beckkett had to seek evidence through the court’s discovery process to prove these allegations. It was on this basis that Beckkett was able to obtain certain documents that it is now relying on as evidence of the Bank’s breach of duties as a mortgagee. On the basis of these documents disclosed, the Judge found that the Bank had failed to take due care when it sold the Pledged Shares in the manner that it did, ie, by private treaty to DSM without any independent valuation and without notice to other potential buyers (see [150]–[152] of the Judgment).
[49] In support of its allegations against the Bank in reliance on the Bank’s own documents, Beckkett also highlighted the omission of the Bank to disclose the following types of evidence to the court:
(a) minutes or notes of meetings or correspondence between the Bank and potential purchasers;
(b) information and data relating to the operations, coal resources, profits, cash flows and financial reports of SME, Asminco, Adaro and IBT which the Bank would have provided to the purchasers to enable them to know the value of the Pledged Shares and make a competitive bid for them;
(c) internal documentation on the process of the sale of the Pledged Shares and the negotiation of their price;
(d) minutes of meetings with or written advice from the Bank’s coal mining experts or consultants; and
(e) instructions to the Bank’s marketing agents and valuers for the sale of the Pledged Shares.
[50] Before us, the Bank has not made any serious attempt to argue that the Judge was wrong to find that it had not taken reasonable steps to obtain the best price for the Pledged Shares. In our view, any such attempt would have been futile, given the evidence adduced before and accepted by the Judge and in the light of the law as stated by this court in Lee Nyet Khiong and Roberto Building Material. We have no doubt that, on the evidence, the Bank had failed to take reasonable steps to obtain the best price for the Pledged Shares, particularly in relation to the Adaro Shares and the IBT Shares. We will elaborate on our reasons for finding so below.
[51] We agree with Beckkett’s submission that the Adaro Shares and the IBT Shares were “unusual” assets in that they could not be easily priced except by experts familiar with the coal industry and the global market for the type of coal produced by Adaro. A valuation by such experts is essential to ascertain the best price for the Adaro Shares and the IBT Shares. In Fisher ([37] supra), the authors had this to say at para 30.30:
Similarly, in Clyde Croft & Jan Johannsson, The Mortgagee’s Power of Sale (LexisNexis Butterworths, 2nd Ed, 2004), the authors state at para 8.5 that:
[52] We should point out that DSM did produce in evidence a valuation report given by an Indonesian firm of valuers. However, the valuation was obtained, not for the purpose of negotiating the price with the Bank, but for the purpose of justifying the sale price of US$46m in an application to obtain the court approvals of the South Jakarta District Court for the sale of the Pledged Shares to it (see [97] below). The Judge, correctly, ignored this valuation as having no probative value. In our view, the facts speak for themselves as to a real likelihood of an undervalue. In 1997, the Bank lent US$100m to finance the purchase of 25% of Adaro’s equity and 20% of IBT’s equity. In 2001, the Bank sold Beckkett’s 40% share in Adaro and 40% share in IBT for US$44.2m and US$1m respectively, without giving any explanation as to how it had arrived at such prices and why it considered them to be, collectively, the best price it could have obtained. In our view, this fact in itself is sufficient to show a prima facie undervalue with regard to these shares in the absence of any evidence that there was a collapse in the Indonesian or world market for coal or some other fact affecting the value of the shares in Adaro.
[53] Accordingly, we affirm the Judge’s finding that the Bank had failed to discharge its duty to take reasonable steps to obtain the best price for the Pledged Shares, in particular the Adaro Shares, and that Beckkett is entitled to damages against the Bank for any loss it might have suffered as a result.
Was the sale of the Pledged Shares for US$46m at an undervalue?
[54] We next consider whether Beckkett has proved that the sale price of the Pledged Shares at US$46m was a sale at an undervalue. We have mentioned earlier (see [21] and [22] above) that the Judge found that Beckkett had failed to prove that the SME Shares had been sold at an undervalue but that he made no finding on whether the Adaro Shares and the IBT Shares had been sold at an undervalue, even though he had made an extensive examination of the valuation reports on those shares. In our view, the Judge should have made a finding on whether the Adaro Shares and the IBT Shares had been sold at an undervalue as the Bank owed a duty to Beckkett, as guarantor of the Bridging Loan, to account for the proceeds of any sale of those shares, particularly where, as here, the Bank was also suing Beckkett (by way of a counterclaim) for the Unpaid Loan. In our view, a finding on whether the Adaro Shares and the IBT Shares were sold at an undervalue should still have been made for the reason that any diminution in the value of those shares would have resulted in a diminution in the value of the SME shares pledged by Beckkett. In this connection, Beckkett has accepted, correctly, that it has no direct claim for damages for this loss since it did not own those shares. Its argument, however, is that the Bank sold the SME shares at less than their market value since the Adaro Shares and the IBT Shares were sold at an undervalue.
[55] In the Judgment, the Judge dealt with this argument in two ways. First, he accepted the Bank’s submission that Beckkett was not entitled to claim for reflective loss arising from the sale of the shares at an undervalue because Beckkett failed to “render the principle [of no reflective loss as laid down in Johnson v Gore Wood & Co [2002] 2 AC 1 (“Johnson”), referred to by this court in Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] 2 SLR 597 (“Townsing”)] inapplicable by removing the risk of double recovery and prejudice to the other shareholders or creditors of Asminco and SME in allowing Beckkett to proceed with its claim, as suggested in Townsing” (at [104]). Reference may also be made to the recent English case of Barclays Bank plc v Kufner [2009] 1 All ER (Comm) 1 which applied the principle to a claim by a guarantor of a loan against a bank for negligence in depriving the corporate principal debtor (of which the guarantor was a shareholder) of a yacht which the debtor could have used to repay the loan. In that case, the court held that the principle of no reflective loss was applicable because the debtor was in a position to sue the bank for negligence (at [43]).
[56] In our view, the Judge’s finding in the present case that there was a risk of double recovery is not supported by the evidence as the SME Shares and the Asminco Shares had been sold to DSM’s nominees. The new owners of SME and Asminco would have no reason to sue the Bank nor would they be able to sue the Bank since they had purchased their respective shares from the Bank, and the Bank would, accordingly, never be subject to any action for double recovery. To apply the principle of reflective loss against Beckkett on the facts of this case would cause grave injustice to Beckkett.
[57] Secondly, the Judge held that, even if Beckkett could claim reflective loss from the sale of those shares, it did not follow that the SME Shares had a market value of more than US$800,000 as that depended on what liabilities SME had and on its value as a going concern. We agree with this conclusion, but, in our view, Beckkett is entitled to claim for any loss arising from the undervaluation of the SME Shares flowing from the sale of the Adaro Shares and the IBT Shares at an undervalue. The Judge found on the evidence that “[Beckkett] had not done enough to establish the value of SME, or the value of the SME shares Beckkett [had] pledged to [the Bank]” (at [112] of the Judgment). This was a critical finding against Beckkett. Was this a correct finding on the evidence? We now examine the evidence, particularly with reference to the valuations of the Adaro Shares and the IBT Shares.
(1) Valuation of the Adaro Shares and the IBT Shares
[58] Beckkett’s case is that the Adaro Shares and the IBT Shares were sold to DSM at a gross undervalue. Beckkett initially relied on its own valuation and on the Bank’s internal valuations to prove the undervalue. With regard to the former, Beckkett referred to an equity valuation of the Adaro Shares and the IBT Shares prepared by its expert, one Jugmans. His evidence, and the evidence of two other witnesses (whose valuations Jugmans had referred to) showed the combined value of the Adaro Shares and the IBT Shares to be between US$210.8m and US$249.8m. The Judge found that Jugmans’ valuation contained incorrect assumptions, information gaps and other deficiencies, and implicitly accepted the Bank’s submission that the evidence of the three experts “was so flawed in theory and practice that no reliance could be placed on them” (at [145] of the Judgment). As a result, Beckkett ultimately reverted to its reliance on the Bank’s own valuations on the equity values of the Adaro Shares and the IBT Shares.
[59] The Bank’s own internal valuations were as follows:
(a) a valuation undertaken by Deutsche Capital Singapore and prepared for the Bank which priced the combined value of Adaro and IBT at US$689.3m as at August 1999;
(b) an offer from AG Rheinbraun (a reputable German company) made in October 1999 to purchase majority interests in Adaro and IBT on the basis that the combined enterprise value of the two companies was US$650m, with an indication that the figure could be increased by up to another US$50m;
(c) an internal memo of the Bank dated 19 November 1999 to which was attached a valuation, based on a combined discounted cash flow enterprise (equity plus debt), of between US$568m and US$1,060m; and
(d) a combined discounted cash flow valuation dated 28 December 2000 of the enterprise value of Adaro and IBT at US$785m, and equity value at US$666.8m.
Beckkett also produced evidence that, in January 2005, Adaro and IBT were valued at US$950m in a leveraged buyout by an international consortium of investors. However, there was some evidence that coal prices had experienced an unprecedented hike between 2003 and 2004 to reach historic highs.
[60] On the basis of the Bank’s internal valuations and using the illustration given by the Judge at [97] of the Judgment, Beckkett submitted that the value of US$240m for its 40% holdings in Adaro and IBT, after deducting the amount of US$132m being the amount owing to the Bank under the Bridging Loan, gave a surplus (or a loss in value of the SME Shares) of US$77.7m (and after accounting for the Judge’s decision to reduce this figure by 10% in view of Beckkett’s 40% indirect minority interests). Beckkett contended that, in comparison with this valuation, the sale of the Adaro Shares and the IBT Shares in January 2002 to DSM at US$44.2m and US$1m respectively was at a gross undervalue.
[61] In response, the Bank questioned the reliability of its own valuations on the ground that they had not been tested by cross-examination, to which the Judge correctly observed that the Bank had not explained why the valuations were unreliable and what the proper valuation should be (see the Judgment at [99]). However, having rejected the Bank’s criticisms of its own internal valuations, the Judge also ignored them as being unhelpful in determining the value of the Adaro Shares and the IBT Shares at the date of their sale. Having rejected all the valuations adduced by Beckkett, the Judge held that there was no evidence before him that the Adaro Shares and the IBT Shares had been sold at an undervalue. This decision was critical to Beckkett’s entire claim for damages, which was dismissed on this ground, even though the Bank had breached its duties as mortgagee in the sale of the Pledged Shares. The Judge further held that, even if the Adaro Shares and the IBT Shares had been sold at an undervalue, this was an irrelevant issue as Beckkett did not own these shares. The Judge was of the view that the relevant issue before him was whether the SME Shares had been sold at an undervalue, ie, whether the sale price of US$800,000 for Beckkett’s 74.2% shareholding in SME was at an undervalue. That depended on the financial condition of SME, which represented the true market value of the SME Shares. He concluded that Beckkett “had not done enough to establish the value of SME” (at [112]). In the result, the Judge rejected Beckkett’s contention that the SME Shares had been sold at an undervalue. We turn now to examine this aspect of the Judge’s decision.
(2) Valuation of the SME Shares
[62] The only evidence available before the Judge was SME’s unaudited 2001 consolidated financial statements (“SME’s 2001 financial statements”). At [110]–[113] of the Judgment, he said:
[63] Before us, Beckkett has contended that the Judge’s analysis of the value of SME was wrong for the following reasons:
(a) SME was not a debt-laden company, SME’s 2001 financial statements were unaudited, and DSM had refused to produce SME’s audited statements and also those of Asminco for 2001 and beyond.
(b) On the basis of SME’s 2001 financial statements, the SME Shares had “negative equity only if the 40% stakes in Adaro and IBT were reflected at their historical net book cost of US$102 million instead of at their market value”. But, if the historical book cost was replaced by the combined market value of Adaro and IBT of about US$240m (based on the 2000 equity values of Adaro and IBT of US$605.3m and US$61.5m respectively in the Bank’s internal valuation of 2000), Beckkett submitted, on its calculations, that SME would have a positive value of US$118m in shareholders’ equity.
(c) The Judge’s valuation of the SME Shares as having negative value and his consequent finding that the sale of the SME Shares at US$800,000 was not at an undervalue was based on a miscalculation. He had taken the value of the SME Shares as being US$96.9m (which, to begin with, was the value of SME Shares put forward by Beckkett prior to the 10% discount for minority interest (see [60] above)) and had deducted the amount of the Unpaid Loan from this figure to conclude that the SME Shares had a negative value. The figure of US$96.9m was in fact the net value of the SME Shares after taking into account the amount of the Unpaid Loan. The Judge had thus double-counted the Unpaid Loan in his valuation of the SME Shares. When properly calculated, based on the market value of US$240m for the 40% shareholding in Adaro and IBT (at [97] of the Judgment), the computation should have yielded a finding that SME had a positive equity value of at least US$118m.
[64] Although the Judge made a detailed analysis of the value of the SME Shares, he was fully aware that it was an exercise in futility without evidence as to the value of the Adaro Shares and the IBT Shares, since the value of those shares were imputable to the value of the SME Shares. Without a finding on the market value of SME’s indirect 40% shareholding in Adaro and IBT (held through Asminco) when these shares were sold by the Bank, it was clearly impossible for him to determine the value of the SME Shares. SME’s 2001 financial statements would disclose the total debts of SME as at 2001, but it could shed no light as to SME’s value as a going concern or its net asset value without imputing a market value to its 40% shareholdings in Adaro and IBT (held through Asminco). Their investment value was stated at US$102m, but there was no evidence as to whether this represented the book value or the market value (Beckkett contends the figure represented the historic book value as mentioned at [63(b)] above). However, it seems unlikely that it represented their market value as it bore no resemblance whatever to the price at which the Bank sold them in May 2001 (at US$45.2m). Furthermore, for the same reason, the Judge’s conclusion that the SME Shares were not sold at an undervalue, based on the assumption (at [111] of the Judgment) that the fair market value of those shares was US$96.9m, was clearly a mistake. As pointed out by counsel for Beckkett, the US$96.9m was the value of the Adaro Shares and the IBT Shares on the assumption that the Bridging Loan had been discounted or fully paid. The correct finding should have been that there was no evidence to show what the value of the SME Shares was, and therefore there was no evidence that the sale of the SME Shares at US$800,000 was at an undervalue. We might add that, by parity of reasoning, even if the SME Shares had been sold for US$1.00, there would still be no evidence that that was at an undervalue in these circumstances.
[65] As a result of the Judge’s finding that the SME Shares were not sold at an undervalue and/or that there was no evidence that they had been sold at an undervalue, the Judge dismissed Beckkett’s claim for damages on the ground that no loss at all had been proved. This finding relates to two separate issues of fact: (a) the sale at an undervalue; and (b) the resultant loss. We agree with the logic that if there was no sale at an undervalue, there could be no liability for loss, but we respectfully disagree that there was no evidence of undervalue with respect to the sale of the Pledged Shares at US$46m. In our view, there was ample prima facie evidence that the Pledged Shares, especially the Adaro Shares, had been sold at an undervalue. The value of the SME shares would be determined substantially by the value of the Adaro Shares (although not so much the IBT Shares, whose value was dependent on Adaro being a viable coal-producing company). We will now examine this aspect of the case.
[66] What then is the evidence of undervaluation? The first piece of evidence was the Bank’s own internal valuations of the Adaro Shares and the IBT Shares as at 1999 and 2000. The internal valuation of Deutsche Capital Singapore for the Bank had priced Adaro and IBT at US$689.3m as at August 1999 while the combined discounted cash flow valuation dated 28 December 2000 found that Adaro and IBT had an equity value of US$666.8m. As at those dates, the Adaro Shares and the IBT Shares together had a market value many times higher than the price of US$45.2m at which they were sold to DSM, even if allowances were to be made to the different bases on which the valuations were made. Beckkett had produced these valuations, not to prove the value of the Pledged Shares at the date they were sold to DSM, but to show that they had been sold at a gross undervalue.
[67] The second piece of evidence is the disparity between the sale price and the price at which the Swabara Group bought the Adaro Shares and the IBT Shares in 1997. As mentioned earlier, Adaro’s coal mine in Kalimantan, which produced a low-ash, low-energy coal known as “Envirocoal”, was the “crown jewel” of the Swabara Group. In 1997, the Swabara Group purchased 25% of Adaro’s equity and 20% of IBT’s equity using the US$100m loan which it had obtained from the Bank. Four years later in 2001, the Bank sold 40% of Adaro’s equity and 40% of IBT’s equity (and also the SME Shares and the Asminco Shares) at a total price of US$46m (of which US$800,000 was for the SME Shares). This price was roughly about 25%–30% of the combined price at which the Swabara Group financed its earlier purchase of 25% of Adaro’s equity and 20% of IBT’s equity. No explanation was given by the Bank as to why or how the value of the Adaro Shares and IBT Shares had fallen so drastically during this period. Indeed, the Bank’s internal valuations (although they referred to the value of Adaro and IBT as operating companies) showed that the Adaro Shares and the IBT Shares had increased in value in 2000. This meant that the value of the shares had fallen by more than 50% in less than one year!
[68] In the present case, we are satisfied that the Pledged Shares had been sold at an undervalue. However, the law also requires that Beckkett must prove that it has suffered a loss as a result of the Bank breaching its duty to obtain the best price for the Pledged Shares. To do this, Beckkett must adduce evidence of the best price the Pledged Shares could have fetched if the Bank had discharged its duty in the exercise of its power of sale. With respect to this issue, the Judge decided that Beckkett had failed to adduce sufficient evidence of its loss, and accordingly dismissed its claim. The Judge made this ruling on the basis that Beckkett was under an obligation to adduce evidence of its actual loss at the trial of the action, and not at an inquiry for damages after liability had first been determined. In connection with this issue, it may be pertinent to note that in Apple Fields Ltd v Damesh Holdings Ltd [2004] 1 NZLR 721 (“Apple Fields”), the Privy Council said at [22]:
(3) The Bifurcation Order
[69] The Judge, in a reserved judgment, held that Beckkett had an obligation to adduce evidence of its loss at the trial itself under the terms of what is known as the Bifurcation Order (see [21(e)] above). The issue had been raised during the trial when counsel for Beckkett was cross-examining one of DSM’s witnesses. Counsel for DSM objected to the line of questioning by counsel for Beckkett. There was an exchange of comments and views among all three counsel as well as the Judge on the purpose of the Bifurcation Order. At the conclusion of this exchange, the Judge did not rule expressly on this issue. That this was the case is evidenced in Beckkett’s written submissions (filed after the trial had concluded) on this aspect of the case. At paras 561, 569, 570 and 581 of its written submissions, Beckkett argued as follows:
[70] The Judge dealt with these submissions at [147]–[149] as follows:
The Judge held that the Bifurcation Order meant that the issues of liability and damages based on the value of the Pledged Shares at 2001 were to be determined at the trial, but that the damages based on their 2005 value were to be deferred to a later stage because the parties were not ready to deal with them at that stage.
[71] The issue as to whether Beckkett was obliged to prove its actual loss at trial by reason of the Bifurcation Order is critical to the success of Beckkett’s appeal in the present case. If the Judge’s decision, that Beckkett had such an obligation and was fully aware of it, is correct, that would be the end of this appeal. It is therefore necessary for us to examine carefully the background to the making of the Bifurcation Order so as to determine its purpose.
[72] The application for the Bifurcation Order was made by DSM after Beckkett had filed its amended statement of claim in which it claimed against the Bank and DSM for the following reliefs: (a) an order to set aside the sale of the Pledged Shares; and (b) in the alternative, for damages to be assessed, either at their 2001 value or 2005 value, whichever was appropriate under the law. Beckkett sought damages, to be assessed at 2001, against the Bank because its case was that the Bank had sold the Pledged Shares in 2001 in breach of its mortgagee’s duties. Beckkett sought damages against DSM calculated as at 2005 because DSM (who was joined as the second defendant in 2005) had sold the Adaro Shares and the IBT Shares to an international consortium in 2005. Accordingly, DSM would not have been in a position to return the Pledged Shares, and therefore might have to pay damages on the basis of their 2005 value. Beckkett also claimed damages at their 2005 value against the Bank on the basis that, if it were entitled to set aside the sale, it should be awarded damages as at 2005 since the Pledged Shares, and in particular the Adaro Shares and IBT Shares, could not be restored to them. This would explain why Beckkett was claiming damages based on their 2005 value (which had puzzled the Judge). The reason why the claim for damages based on the value of the Pledged Shares as at 2005 was deferred under the Bifurcation Order was not because the parties were not ready to deal with that claim but because it was neither convenient nor efficient to do so until the court had determined the issue of whether the sale could or should be set aside, having regard to the fact that DSM had already disposed of the Adaro Shares and the IBT Shares.
[73] It was against this background that DSM made an application on 11 November 2005 in Summons in Chambers No 5762 of 2005 for the following order:
In this application, the phrase “current market value” referred to the market value as at 2005 (either because DSM was joined as the second defendant on 28 February 2005 or because the application was made in 2005). When this application came before the assistant registrar (“the AR”) on 18 November 2005 (see [21(e)] above), Beckkett opposed the application on the ground that since valuations of the Pledged Shares as at 2001 would be produced, there should be no reason why the same valuers could not value them as at 2005. DSM disagreed, and argued that, until the court had decided the issue whether Beckkett was entitled to set aside the sale vis-à-vis DSM, it was neither necessary nor efficient to hear any evidence on the 2005 value of the Adaro Shares and the IBT Shares at the trial. DSM wanted its liability to be determined first, and for damages computed as at the 2005 value to be assessed at a subsequent hearing. The Bank supported the application.
[74] After hearing arguments, the AR made the following order:
[75] It seems clear to us that DSM’s application and the Bifurcation Order were solely concerned with the 2005 value of the Pledged Shares and nothing more. We have mentioned earlier that the issue of the scope of the Bifurcation Order was considered by the Judge but he made no decision on it. This issue surfaced between Beckkett and DSM when one Soeryadjaya (a witness for DSM) was cross-examined by Mr Chong, counsel for Beckkett. This took place after Beckkett had closed its case against the Bank and the Bank had elected not to give evidence. Mr Chong wanted to elicit, from Soeryadjaya, evidence on the dealings between Adaro and a company called Coaltrade, which he considered to be relevant in showing the true value of the Adaro Shares as at 2001. Allegations were made by Beckkett that Adaro’s profits had been siphoned to Coaltrade such that Adaro appeared to be less profitable than it really was. Counsel for DSM, Mr Tan, objected to this line of questioning on the grounds that it was irrelevant as DSM did not even know about the existence of Coaltrade until after the sale of the Pledged Shares in 2001 and that Beckkett simply had no basis to make such allegations. The exchanges between Mr Chong, Mr Tan, counsel for the Bank (Mr Ang), and the Judge then proceeded as follows:
[76] Mr Chong’s questions to Soeryadjaya on Coaltrade were directed at eliciting evidence to show that the Adaro Shares had been sold to DSM at an undervalue with DSM’s knowledge. Mr Chong wanted to prove undervalue, not actual loss, in order to show that DSM had conspired with the Bank to purchase the Adaro Shares at an undervalue and that the sale should be set aside. In this context, Mr Chong referred to the restoration of the equity of redemption, and argued that, “[b]ut, for whatever reason, if that could not be performed … then there will be an issue of damages, and that issue would have a further issue as to whether damages [are] to be assessed by reference to 2001 or 2005” (see [75] above). Clearly, Mr Chong’s statement was a reference to liability being determined at the trial, and damages only later, if liability should be determined against DSM.
[77] Mr Chong’s understanding of the Bifurcation Order was that the quantification of damages as at 2005 valuations would follow only after the court had decided whether to set aside the sale of the Pledged Shares (assuming there was a legal basis to set it aside). Mr Ang’s understanding was also the same: He said, “Your Honour, we take the view that it actually covers everything except the quantification.” Similarly, Mr Tan also had the same understanding: He said, “Your Honour only determines liability, all the rest is bifurcated.” Finally, even the Judge appears to have been of the same understanding since he said, “So whether or not there should be recovery of the shares is something to be done in these proceedings?”, to which Mr Tan replied, “Yes” (see [75] above).
[78] The Bifurcation Order was therefore “very narrow” as explained by Mr Chong. The Bifurcation Order was limited, on the issue of liability, to the remedy of setting aside the sale of the Pledged Shares; and on the issue of damages, to the extent of damages which would be necessary to compensate Beckkett for its loss should DSM not be able to restore the Pledged Shares to Beckkett, ie, damages at 2005 valuations. The Bifurcation Order was not concerned with liability arising from the breach of the duty to obtain the best price, or with damages arising from this breach, ie, damages at 2001 valuations. That this was clearly Mr Chong’s position is shown by Beckkett’s written submissions that it did not have to prove actual loss at the trial but only undervalue since such damages were to be assessed, as pleaded by Beckkett.
[79] In our view, the Judge was wrong to have interpreted the Bifurcation Order as obliging Beckkett to adduce evidence of actual loss at the trial. This ruling is not supported by the evidence and the reasons for DSM’s application for the order. DSM took out the application for its own convenience, and not for the Bank’s convenience. Beckkett had never pleaded nor agreed that, if it was entitled to damages against the Bank or DSM as at 2001 valuations, it had to adduce all its evidence at the trial. All three counsel did not have such an understanding, as Beckkett’s pleaded case, from inception until its final pleading, was for damages to be assessed. In its re-amended statement of claim dated 28 December 2005 (which was filed after the making of the Bifurcation Order), Beckkett proceeded on this basis:
[80] In our view, the Bifurcation Order said nothing about damages as at 2001 valuations having to be assessed at the trial. There is nothing in DSM’s application or the arguments of the parties before the AR that suggested such a requirement. On the contrary, Beckkett’s final pleadings suggested otherwise. Further, Beckkett had proceeded with its case on that understanding, as confirmed by its counsel’s remarks during the exchanges with the Judge and counsel for the Bank and DSM, and also by its written submissions on this point.
[81] Apart from the evidence, there are other reasons why, in our view, the Judge’s dismissal of Beckkett’s claim for damages against the Bank should not stand. The first reason is that the Bifurcation Order was only a procedural order which was not binding on the Judge. If there was any doubt as to its scope, and if it was necessary to modify or set aside the Bifurcation Order in the interest of justice, the Judge had the power to do so, and to give such directions as he thought fit. The second reason is that, and this is more important, he should have ruled on the dispute when it arose so that, if his ruling were inimical to Beckkett’s claim for damages (as it was), Beckkett would have been apprised thereof and given an opportunity to decide whether to apply to re-open its case to adduce evidence of actual loss on the basis of the Judge’s interpretation of the Bifurcation Order. Although both Beckkett and the Bank had closed their cases, it would have been within the power of the Judge to grant the application as it is difficult to see how the Bank could have been prejudiced by such a ruling since it had given no evidence at all. Of course, after Beckkett has adduced evidence of its actual loss, the Bank would then have another chance to elect whether or not to open its case. The third reason is that the omission by the Judge in not ruling on this disputed point and then deciding it against Beckkett in a reserved judgment might be seen to have denied Beckkett a fair trial in relation to its claim for damages.
Beckkett’s claim to set aside the sale of the Pledged Shares
[82] It may be recalled that Beckkett’s claim to set aside the sale of the Pledged Shares to DSM is based on allegations that DSM was not a bona fide purchaser for value without notice as: (a) DSM had notice of the Bank’s lack of good faith and/or impropriety in exercising its power of sale; and (b) DSM had conspired with the Bank to injure Beckkett through unlawful means (by buying the Pledged Shares at an undervalue). The Bank has denied such allegations and also contended that, in any event, Beckkett had no standing to set aside the Pledged Shares (other than the SME Shares) as it neither owned nor pledged those shares; and that, in any event, it would be inequitable, having regard to all the circumstances of the case, to set aside the sale. We will consider the issue of standing first, followed by the question of whether DSM was a bona fide purchaser.
Can Beckkett set aside the sale of the Pledged Shares?
[83] The Judge agreed with the submission of the Bank that Beckkett had no locus standi to set aside the sale of the Pledged Shares, except for the SME Shares (at [144] of the Judgment). Before us, Beckkett has contended that it was competent to set aside the sale of the Pledged Shares as the Bank had sold them as one lot to DSM under a single agreement: there was only one transaction, and the values of the different shares could not be segregated. Beckkett argued that the whole transaction had to be unravelled for it to be even able to recover the SME Shares it had pledged. Further, given that it would be impossible for SME and Asminco to sue for their shares which they had respectively pledged since they were now controlled by DSM’s nominees (see also [56] above), Beckkett was effectively the only party that could sue to recover the Pledged Shares. It was further argued that, since Beckkett had at least the standing to sue for the recovery of the SME Shares (as owner and pledgor of those shares), then following the corporate chain downstream, Beckkett should have an interest in the Adaro Shares and the IBT Shares through the two subsidiary companies, SME and Asminco. Beckkett’s interest in SME gave it an interest in Asminco and, in turn, Adaro and IBT, because the value of the shares in SME (which itself had an interest in Asminco) was ultimately dependent on the value of the shares in Adaro and IBT. It was argued that the law recognised this as a fact, but regulated the ability of a shareholder to bring a claim for reflective loss, only because it would otherwise give rise to a problem of multiple plaintiffs or claims (see Townsing ([55] supra)). Since, in the present case, there could be no possibility of SME or Asminco suing the Bank for selling the Adaro Shares and the IBT Shares at an undervalue, the only claimant would be Beckkett and the question of double recovery would not arise. Hence, it was argued that the principle prohibiting reflective loss (which was concerned primarily with preventing double recovery) did not apply, and Beckkett should be entitled to claim an interest in the Adaro Shares and the IBT Shares for the purpose of setting aside their sale.
[84] We are sympathetic to Beckkett’s position. However, its predicament is one of its own making, as it could have arranged the security transaction in such a way that it was the only pledgor. It is not doubted that Beckkett has a commercial interest in 40% each of the Adaro Shares and the IBT Shares through SME and then Asminco. For practical purposes, SME and Asminco could perhaps be regarded as a single corporate entity since SME owned 99.9% of Asminco. The latter was merely a corporate vehicle used to hold the Adaro Shares and the IBT Shares. But Beckkett and SME were clearly separate entities as Beckkett owned only 74.2% of SME, and therefore the separate legal personality principle applied (see Albacruz v Albazero (The Albazero) [1977] AC 774 at 807, PP v Lew Syn Pau [2006] 4 SLR 210, Macaura v Northern Assurance Company, Limited [1925] AC 619, The Maritime Trader [1981] 2 Lloyd’s Rep 153 and The Gramophone and Typewriter, Limited v Stanley [1908] 2 KB 89). The Judge was correct to hold that Beckkett had no standing to set aside the sale of the Pledged Shares.
[85] As regards the “no reflective loss” principle, we agree with counsel for Beckkett that it had no application here as there is no question of double recovery (see [56] above). However, this does not mean that Beckkett would then become entitled to set aside the sale of the Pledged Shares (other than the SME Shares). The principle of “no reflective loss” is concerned with claims for damages for breach of duty, not claims to set aside transactions. Beckkett cannot rely on the non-application of this principle as the basis to set aside the sale of the Pledged Shares. We agree with the Judge that “Beckkett has no claim to the shares except for the SME shares it pledged” (at [144] of the Judgment). Beckkett had an equity of redemption in the SME Shares but not in the other pledged shares. However, even this equity of redemption would be extinguished under the law upon the sale of the Pledged Shares unless the sale was in bad faith and/or improper (see Waring v London and Manchester Assurance Company, Limited [1935] Ch 310 (“Waring”) at 317–318 and also Fisher ([37] supra) at para 47.2).

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Beckkett Pte Ltd v Deutsche Bank AG and Another and Another Appeal

Laws this judgment relies on

Grounds of decision

Introduction

The background

The Swabara group of companies

The Bridging Loan and the share pledge agreements

The sale of the Pledged Shares

Beckkett’s claims in Suit No 326 of 2004

Decision of the trial judge

Issues on appeal in Beckkett’s claim and the Bank’s counterclaim

Beckkett’s appeal

The Bank’s cross-appeal on the counterclaim

Issues for the court’s decision

(d) Was DSM a bona fide purchaser of the Pledged Shares?

(e) Was there a conspiracy between the Bank and DSM to sell the Pledged Shares by unlawful means to injure Beckkett?

(f) If issue (d) or (e) or both are established, should the court set aside the sale of the Pledged Shares?

(g) Did the Bank prove its counterclaim on the evidence before the court?

Beckkett’s appeal: Duties of mortgagee owed to mortgagor in sale of mortgaged property

Beckkett’s claim against the Bank for damages

Clause 5(a) of the SP Agreements: Effect on duties of the Bank

Is proof of loss necessary before a pledgee can be liable for breach of duties?

Did the Bank take reasonable steps to obtain the best price?

Was the sale of the Pledged Shares for US$46m at an undervalue?

(1) Valuation of the Adaro Shares and the IBT Shares

(2) Valuation of the SME Shares

(3) The Bifurcation Order

Beckkett’s claim to set aside the sale of the Pledged Shares

Can Beckkett set aside the sale of the Pledged Shares?