Bank Law of Singapore

BANKING LAW IN SINGAPORE

SECTION-1    

22.1.1     In Singapore, the laws regulating banking are found in the relevant Acts passed by Parliament (and their related subsidiary legislation), the common law and principles and rules of equity.

22.1.2     The common law and principles and rules of equity are derived from case law. The main source of common law in Singapore is the common law of England, first received into Singapore in 1826 by the Second Charter of Justice. The Application of English Law Act, (Cap 7A, 1994 Rev Ed) provides for the continued application in Singapore of English common law (including the principles and rules of equity) so far as it was part of Singapore law immediately before 12 November 1993, subject to such modifications as the circumstances in Singapore require.

22.1.3     While a substantial body of “home-grown” case law has been built up in Singapore, judges can, and do, continue to refer to English court decisions and, increasingly, Australian judgments and, to a lesser extent, judgments from Canada, New Zealand, South Africa and other Commonwealth jurisdictions, for guidance.

22.1.4     Those decisions, which are of persuasive value, as well as the writings of academics and legal experts, together with the relevant Acts (principally the Banking Act (Cap 19, 2003 Rev Ed), the Monetary Authority of Singapore Act (Cap 186, 1999 Rev Ed) and the Bills of Exchange Act (Cap 23, 2004 Rev Ed)), that are continually reviewed, have greatly helped to ensure that the legal framework for banking in Singapore keeps pace with the latest developments in the financial world and have played a large part in the evolution of banking in Singapore.

BANKER-CUSTOMER RELATIONSHIP

SECTION -2    

22.2.1     In Singapore, the relationship between banker and customer is largely governed by the common law. However, in certain matters, the most notable of which is banking secrecy, the Banking Act (Cap 19, 2003 Rev Ed) applies. A bank’s duty of secrecy in Singapore is more extensively discussed later in this paper.

22.2.2     The establishment of a banker and customer relationship is significant as it gives rise to the rights and duties of a banker, e.g. the banker’s duty of care in carrying out the customer’s mandate. In the most common scenario, the banker and customer relationship is established upon the opening of an account by the customer with the bank.

Nature of Relationship

22.2.3     Whether the customer is depositing money with the bank, or the bank is extending a loan or other banking facilities to the customer, the nature of the relationship between banker and customer is essentially one of contract. However, where the bank is holding the customer’s deposits, it is a special feature of the contractual relationship that the bank is able to use the money received from the customer for the bank’s purposes, subject to its undertaking to repay the money to the customer (with or without interest) either on demand or at a pre-determined time.

Duty of Care

22.2.4          A banker owes a duty of care to its customer to carry out the customer’s instructions with reasonable care. For instance, a banker must not make payment from the customer’s account except in accordance with the customer’s mandate and must take reasonable care to ensure that the person paid is entitled to receive the payment. A banker is also under a duty to make reasonable attempts to contact the customer to obtain his instructions, for example, whether to renew a fixed deposit

SECTION 3     BANKING SECRECY

22.3.1     Licensed banks in Singapore are subject to statutory obligations of secrecy with respect to information relating to its customers and their accounts. This is dealt with in section 47 of the Banking Act (Cap 19, 2003 Rev Ed).

22.3.2     In 2001, the Banking (Amendment) Act 2001 (the ‘Amendment Act’) repealed section 47 and re-enacted it in a substantially different form. The legislative move marked a policy change in Singapore’s regulatory approach to banking secrecy, the Monetary Authority of Singapore (the ‘MAS’) having recognised that the previous provision had impeded banks seeking to take advantage of potential operational benefits and savings. For instance, under the previous regime, banks had encountered difficulty in securitising mortgage loans or outsourcing data processing to third parties. The current section 47 extends the circumstances under which banks may disclose customer information.

General Prohibition Against Disclosure

22.3.3     Section 47 provides that customer information shall not, in any way, be disclosed by a bank ((as defined in the Banking Act (Cap 19, 2003 Rev Ed), that is, a bank incorporated in Singapore or the branches and offices located within Singapore of a bank incorporated outside Singapore), or any of its officers, to any other person except as expressly provided in the Banking Act (Cap 19, 2003 Rev Ed) (and elaborated on in the Third Schedule thereof). Consequently, the confidentiality obligation under section 47 extends to the bank as well as its officers. An ‘officer’ is defined in section 2(1) of the Banking Act (Cap 19, 2003 Rev Ed) to include a director, secretary, employee, receiver, manager and liquidator.

22.3.4     The term ‘customer information’ is defined in section 40A of the Banking Act (Cap 19, 2003 Rev Ed) to mean:

•  Any information relating to, or any particulars of, an account of a customer of the bank, whether the account is in respect of a loan, investment or any other type of transaction, but does not include any information that is not referable to any named customer or group of named customers; or

• Deposit information’, which is, in turn, defined to mean any information relating to any deposit of a customer of the bank, funds of a customer under management by the bank, or any safe deposit box maintained by, or any safe custody arrangements made by, a customer with the bank, but, again, excluding any information that is not referable to any named person or group of named persons.

 22.3.5     Section 47 and the Third Schedule to the Banking Act (Cap 19, 2003 Rev Ed) apply not only to banks but also to merchant banks approved as financial institutions in Singapore under the Monetary Authority of Singapore Act (Cap 186, 1999 Rev Ed). For this purpose, the modified section 47 and Third Schedule, which apply to merchant banks, are set out in the Banking Regulations (Reg 5, 2004 Rev Ed).

Exceptions to Banking Secrecy

22.3.6     The exceptions to banking secrecy are divided into two categories, set out in Part I and Part II of the Third Schedule to the Banking Act (Cap 19, 2003 Rev Ed). Where disclosure of customer information is made pursuant to an exception in Part I of the Third Schedule, the recipient of the information is not prohibited from further disclosing the information to any other person. In contrast, the recipient of information disclosed under an exception enumerated in Part II of the Third Schedule is prohibited from further disclosing the customer information to any other person, except as authorised under the Third Schedule or if required to do so by an order of the court. This obligation continues after termination of the recipient’s appointment, employment or other office in which the information was received.

Exceptions in Part I of the Third Schedule

22.3.7     The purposes for which disclosure of customer information is allowed (and further disclosure is not prohibited), as provided in Part I of the Third Schedule, are where:

1.  Disclosure is permitted in writing by the customer or, if he is deceased, his appointed personal representative;

2. Disclosure is solely in connection with an application for a grant of probate or letters of administration in respect of a deceased customer’s estate;

3. Disclosure is solely in connection with the bankruptcy of a customer who is an individual, or the insolvency of a customer which is a body corporate;

4. Disclosure is solely with a view to the institution of, or solely in connection with, the conduct of certain types of proceedings, such as proceedings between the bank and the customer or his surety relating to the banking transaction of the customer;

5. Disclosure is to a police officer or public officer or a court where it is necessary for reasons of investigation or prosecution;

6. Disclosure is necessary for compliance with a garnishee order served on the bank attaching moneys in the account of the customer;

7. Disclosure is necessary for compliance with an order of the Supreme Court or a judge thereof pursuant to the powers conferred under Part IV of the Evidence Act (Cap 97, 1997 Rev Ed);

8. (provided that the bank is the branch of a bank incorporated outside Singapore) disclosure is strictly necessary for compliance with a request made by its parent supervisory authority solely in connection with the supervision of the bank. However, no deposit information may be disclosed to the parent supervisory authority; and

9. Disclosure is in compliance with the provisions of the Banking Act (Cap 19, 2003 Rev Ed), or any notice or directive issued by the MAS to banks.

Exceptions in Part II of the Third Schedule

22.3.8  The purposes for which disclosure of customer information is allowed (but further disclosure is prohibited), as provided in Part II of the Third Schedule, are where:

1. Disclosure is solely in connection with the performance of duties as an officer, or a professional adviser of the bank;

2. Disclosure is solely in connection with the conduct of internal audit of the bank or the performance of risk management. In the case of disclosure by a bank which is the branch of a bank incorporated outside Singapore, such disclosure may be made to its head office or parent bank or any branch or related corporation designated in writing by its head office. In the case of a bank incorporated in Singapore, such disclosure may be made to the parent bank or any related corporation of the bank designated in writing by its head office;

3. Disclosure solely in connection with the outsourcing of the bank’s operational functions is made to any person, including the head office of the bank or any branch outside Singapore, which is engaged by the bank to perform the outsourced functions. If any outsourced function is to be performed outside Singapore, reference must be made to the MAS Notice to Banks entitled ‘Banking Secrecy – Conditions for Outsourcing’ (‘MAS 634’). Amongst other things, MAS 634 requires banks to notify the MAS of all outsourcing arrangements involving the disclosure of customer information upon entering into the relevant outsourcing agreement;

4. Disclosure is solely in connection with (i) the merger or proposed merger of the bank or its financial holding company with another company, or (ii) any acquisition or issue, or proposed acquisition or issue, of any part of the share capital of the bank or its financial holding company;

5. Disclosure is solely in connection with the restructure, transfer or sale, or proposed restructure, transfer or sale, of credit facilities. In this case, the information may be disclosed to any transferee, purchaser or any other person participating or otherwise involved in the restructure, transfer or sale, or proposed restructure, transfer or sale, including lawyers or other professional advisers. However, no customer information other than information relating to the relevant credit facilities may be disclosed. This exception would appear to permit disclosure of information relating to loans or other credit facilities where a bank wishes to sell such loans as such or, pursuant to an asset securitisation;

6. Disclosure is by a bank in Singapore which has issued a credit or charge card to a customer, to other financial institutions in Singapore which issues credit or charge cards notifying of the suspension or cancellation of the card by the bank by reason of the customer’s default in payment. Information that may be disclosed is the customer’s name and identity, the amount of the debt outstanding on the credit or charge card, and the date of suspension or cancellation of the card;

7. Disclosure is of customer information (excluding deposit information) which is strictly necessary (i) for the collation, synthesis or processing of customer information by a credit bureau for assessing the credit-worthiness of the customers of banks, or (ii) for the assessment, by certain specified members of the credit bureau, of the credit-worthiness of the customers of banks, subject to such conditions as may be specified by the MAS;

8. Disclosure of information of a general nature (not related to the details of the customer’s account) made to another bank or merchant bank in Singapore where it is strictly necessary for the assessment of the credit-worthiness of the customer in connection with or relating to a bona fide commercial transaction or a prospective commercial transaction; or

9. Disclosure is to any financial institution in Singapore regulated by the MAS solely in connection with the promotion, to customers of the bank in Singapore, of financial products and services made available in Singapore by any such financial institution. No customer information, other than the customer’s name, identity, address and contact number, may be disclosed under this exception.

 Penalties

 22.3.9     Contravention of section 47 is an offence. Upon conviction, an individual may be punished with a fine not exceeding S$125,000, or imprisonment for a term not exceeding three years, or both. In the case of a corporation, a fine not exceeding S$250,000 may be imposed.

 Contractual and Common Law Duties of Confidentiality

 22.3.10    The statutory secrecy regime does not prevent a bank from contracting with its customers to assume a higher standard of confidentiality. This is provided for in section 47(8). The statutory regime also does not override those common law duties of confidentiality on a bank which arise out of the banker customer relationship. In fact, the Banking Act (Cap 19, 2003 Rev Ed) implicitly acknowledges that those duties co-exist with the bank’s statutory obligations under section 47.

SECTION 4     LENDING AND SECURITY

22.4.1     In Singapore, the business of lending is regulated by various statutes depending on the type of institution that is providing the funds.

22.4.2     For example, banks and finance companies are licensed or regulated under the Banking Act (Cap 19, 2003 Rev Ed) and the Finance Companies Act (Cap 108, 2000 Rev Ed) respectively.

22.4.3     Every person (other than banks or finance companies licensed to carry on their respective businesses in Singapore) who carries on the business of moneylending in Singapore (other than banks or finance companies licensed to carry on their respective businesses in Singapore) must be licensed under the Moneylenders Act (Cap 188, 1985 Rev Ed) or must otherwise be exempted from its provisions, pursuant to section 36. Moneylending without such a licence, or exemption, is an offence and renders the borrower’s obligation to repay unenforceable.

22.4.4     Security for a loan is taken by a bank in Singapore to avoid the effects, in the winding-up or bankruptcy of its borrowing customer, of the pari passu distribution of the assets of that borrowing customer. Such securities may be classified as proprietary security or possessory security.

22.4.5     Proprietary security confers on the secured creditor a right of ownership to the property that is subject to the security. Possession of the property remains with the person providing the security. The two most common proprietary securities are the mortgage and the charge. 

22.4.6     In contrast, the legal effectiveness of a possessory security is dependent upon the creditor obtaining and retaining possession of the property that is the subject of the security. The most common possessory securities are the pledge and the lien.

22.4.7     In addition to proprietary and possessory security, a bank may enhance its position by obtaining personal security in the form of an agreement by a third party to undertake a personal obligation to pay the bank if the borrowing customer defaults. There are two types of such personal security, namely, guarantees and indemnities. While the taking of such personal security does not usually result in the bank acquiring rights over the assets of the relevant third party, such guarantees and indemnities are nonetheless useful in providing further recourse for the bank in the event of its borrowing customer’s default.

22.4.8     In determining whether a security interest is created by a particular transaction, and the nature of that security interest, the courts look to the substance of the parties’ agreement rather than the label applied by the parties or the form of the documents. The true nature of the transaction should be ascertained from the documents against the surrounding circumstances in which they came into being.

22.4.9     Apart from the security rights in favour of the bank under charges, mortgages, pledges, and liens, the Companies Act (Cap 50, 1994 Rev Ed) provides for a distinct regime for the taking of security over scripless shares (or book entry securities) listed on the Singapore Exchange Securities Trading Limited.

22.4.10    In addition to the proprietary, possessory and personal security which are available to a bank in Singapore to secure the obligations of its borrowing customer, the bank may also avail itself of its common law right to combine accounts and contractual rights of set-off against the borrowing customer’s accounts with the bank. Unless the bank and its customer have agreed otherwise, a bank is entitled to combine accounts maintained with the bank by a customer in his own right against a debt payable by the customer to the bank and to treat the balance, if any, as the the amount actually standing to the customer’s credit. This right to combine all the accounts of a customer is regarded as a right of set-off which, in practice, is usually fortified by contract to circumvent the limitations of this right under the common law. For example, contractual provisions are usually introduced to entitle a bank to set-off a sum presently due to, or from, the customer with a sum payable by, or, as the case may be, to the customer at a future date to combine different kinds of accounts maintained by the customer in different currencies.

SECTION 5     CHARGES

22.5.1     A security interest by way of charge arises when the owner of a property gives the right to his creditor to resort to the property for payment of a debt or claim. In the event of the chargor’s insolvency, the chargee may enforce the security in priority to the claims of unsecured creditors.

22.5.2     In practice, the terms “mortgage” and “charge” are often used interchangeably. Statutory usage has also tended to assimilate mortgages and charges as well. For example, a mortgage under the Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed) is defined to include a charge. However, there are differences between the two types of security.

22.5.3     A charge is created by the contractual acts of the parties. Unlike a mortgage, a charge does not involve a transfer of ownership to the chargee. Also unlike possessory securities such as the pledge and lien, the effectiveness of a charge is not dependent upon the chargee obtaining and retaining possession of the charged property. In the event of default, the chargee has the right to realise the charged property, through judicial process, whether by way of order for sale or the appointment of a receiver.

Creation of Charge

22.5.4     A charge takes effect by way of an agreement between debtor and creditor without title or possession in the property passing to the chargee.

22.5.5     There is generally no formal requirement as to the agreement creating the charge. However, there are two important instances whereby writing is required. First, section 6(d) of the Civil Law Act (Cap 43, 1999 Rev Ed) provides that no action shall be brought against any person upon any contract for the disposition of interest in immovable property unless the agreement is in writing and signed. Accordingly, a charge created in respect of an interest in land will not be enforceable unless the contract between the parties is in writing and signed. The second exception relates to promises to answer for the debt of another. Pursuant to section 6(b) of the Civil Law Act (Cap 43), no action shall be brought against a defendant upon a promise to answer for the debt of another person unless the promise is in writing and signed. Consequently a charge created over the chargor’s assets to secure the debt of the bank’s borrowing customer, for instance, a charge given by a holding company to secure a loan given by the chargee to a subsidiary of the holding company, must be in writing and signed.

Types of Charges

22.5.6     A charge may be fixed or floating. All floating charges must be registered under section 131 of the Companies Act (Cap 50, 1994 Rev Ed) but only fixed charges over one or more of the specific types of assets listed in section 131 need to be registered.

22.5.7     A fixed charge is one that fastens on assets that are identifiable and ascertainable, such as land, shares, ships and aircraft. The fixed charge encumbers the charged asset immediately from the time it is created. The chargor is unable to deal with a charged asset without the consent of the chargee.

22.5.8     In contrast, a floating charge creates an immediate security interest, but does not specifically attach to the individual assets until ‘crystallisation’. The assets secured by a floating charge are always generally identified in the charging document by referring to all of, or, as the case may be, all of an identifiable class or type of, the “undertaking and assets” of the chargee, both present and future.

22.5.9     The labelling of a charge as fixed or floating is not determinative of the nature of the charge. The critical feature distinguishing a floating charge from a fixed charge is whether the chargor is at liberty to deal with the assets.

22.5.10    The true nature of a charge must be ascertained by considering the terms of the security agreement, and the factual and commercial matrix in which the agreement is created and performed. As such, a charge over uncollected book debts which leaves the chargor free to collect them and use the proceeds in the ordinary course of business is a floating charge, even if expressed as a fixed charge over the uncollected book debts and a floating charge over the proceeds.

22.5.11    The main disadvantage of having a floating rather than a fixed charge is the treatment of floating charge holders in the winding up of the charging company. Fixed charge holders and persons to whom statutory preferential debts are owed have priority over floating charge holders for the payment of their debts.

Registration Requirements

22.5.12    Section 131(1) of the Companies Act (Cap 50, 1994 Rev Ed) provides that a charge that is created by a company incorporated in Singapore (or the branch of a foreign corporation registered in Singapore under Division 2 of Part XI of the Act) and to which section 131 applies must be lodged with the Registrar of Companies for registration within 30 days after the creation of the charge, in the case where the document creating the charge is executed in Singapore, and within 37 days after the creation of the charge, in the case where the document creating the charge is executed outside Singapore.

22.5.13    Charges that are subject to registration under section 131 are:

•             a charge to secure any issue of debentures;

•             a charge on uncalled share capital of a company;

•             a charge on shares of a subsidiary of a company which are owned by the company;

•             a charge or an assignment created or evidenced by an instrument which if executed by an individual, would require registration as a bill of sale;

•             a charge on land wherever situate or any interest therein;

•             a charge on book debts of the company;

•             a floating charge on the undertaking or property of a company;

•             a charge on calls made but not paid;

•             a charge on a ship or aircraft or any share in a ship or aircraft; and

•             a charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under a copyright.

22.5.14    A charge that is not registered under section 131 of the Companies Act (Cap 50, 1994 Rev Ed) within the time limit is void against the liquidator and other creditors of the company. In the event of insolvency of the chargor company, the chargee of an unregistered charge will lose its security and can only claim as an unsecured creditor of the company.

22.5.15    Notwithstanding the failure to register a charge as required under section 131 of the Companies Act (Cap 50, 1994 Rev Ed), the underlying debt due from the chargor company to the chargee is not affected by the avoidance of the charge against the liquidator and creditors of the company. However, pursuant to section 131(2), the money secured by the charge will become immediately repayable if the charge becomes void for non-registration.

22.5.16    Registration constitutes notice of the existence (but not necessarily the particulars) of the charge to all persons dealing with the charged property who might reasonably be expected to search the register of all matters for which registration is prescribed.

22.5.17    Apart from registration under the Companies Act (Cap 50, 1994 Rev Ed), there may be additional registration requirements depending on the nature of the charged asset. For example, a charge over real property governed by the Land Titles Act (Cap 157, 2004 Rev Ed) must be in the prescribed form and registered thereunder. Similarly, security given over a ship for a loan must be in the prescribed form and registered with the Registrar of Singapore ships. When an individual creates a charge over his property, the charge is subject to the registration requirements of the Bills of Sale Act (Cap 24, 1985 Rev Ed) if the charge constitutes a bill of sale. Under the Bills of Sale Act (Cap 24, 1985 Rev Ed), in order to be effective as security, the bill of sale must secure at least S$100, should not be made or given wholly or partly in consideration of a pre-exisiting debt has to be executed in the prescribed form and must be registered within three days of its execution.

Enforcement of Charges

22.5.18    Some of the rights of enforcement available to a chargee of charged property may be exercised even before a payment default. Upon any dealing inconsistent with the charge, the chargee has not merely a personal remedy for breach of contract, but has other remedies such as an injunction, notwithstanding that there has been no failure to pay. A chargee can also obtain the appointment of a receiver prior to default on grounds of jeopardy of security. However, the power of sale arises as a remedy only upon default in payment of the secured debt. In the event of default in payment by the chargor, the chargee is entitled to look to the property and its proceeds for the discharge of the liability.

SECTION 6     MORTGAGES

22.6.1     In most cases, where a bank obtains security in the form of a mortgage, the mortgagor transfers ownership of the asset that is the subject of the security to the mortgagee. The transfer of ownership is subject to the mortgagor’s right to redeem, which entitles the mortgagor to call for the re-transfer ownership to the mortgagor when the secured debt is satisfied (this is known as the mortgagor’s equity of redemption).

22.6.2     As mentioned above, despite the technical differences between a mortgage and a charge, the terms are often used interchangeably. From the perspective of the secured creditor, a mortgage and charge will yield the same practical result although the nature of the security is different. A mortgage may be viewed as an ‘enhanced charge’ as it gives not only rights of appropriation over an asset (as a charge does), but also entails a transfer of ownership of either legal or equitable title to the mortgagee.

Creation of Mortgage

22.6.3     As in the case of a charge, there is generally no formal requirement on the agreement creating a mortgage. However, formal requirements must be observed depending on the nature of the property which is the subject of the mortgage. The provisions of sections 6(d) and 6(b) of the Civil Law Act (Cap 43, 1994 Rev Ed), which have been discussed above, would similarly apply to mortgages in the circumstances described.

Types of Mortgages

22.6.4     A mortgage can be either legal or equitable. The mortgage will be equitable where:

•            the formalities necessary to create a legal mortgage have not been fully complied with;

•            the mortgagor’s interest in the asset being mortgaged is itself an equitable interest; or

•            the parties have entered into an agreement to create a legal mortgage in the future over the asset in question.

22.6.5     Generally, the main difference between a legal and an equitable mortgage is that an equitable mortgage loses priority to a subsequent legal mortgage if the subsequent mortgagee was a purchaser for value in good faith without actual or constructive notice of the prior equitable mortgage.

22.6.6     Different rules of priority apply where a mortgage is taken over land. In Singapore, the rules of priority applicable to legal and equitable mortgages over land that is not regulated under the Land Titles Act (Cap 157, 2004 Rev Ed) are governed by the Registration of Deeds Act (Cap 269, 1989 Rev Ed). Section 14 of the Registration of Deeds Act (Cap 269, 1989 Rev Ed) provides that all instruments entitled to be registered under the Registration of Deeds Act (Cap 269, 1989 Rev Ed) will have priority according to the date of their registration and not according to the date of the instruments or of their execution. Pursuant to section 6, a charge by reason of a deposit of title deeds will have no effect or priority as against a subsequent assurance for value unless and until a memorandum of charge signed by the person against whom the charge is claimed, has been registered in accordance with the Registration of Deeds Act (Cap 269, 1989 Rev Ed). Where the mortgaged land is governed by the Land Titles Act (Cap 157, 2004 Rev Ed), priority is determined according to the date of registration of the instrument of legal mortgage. In the case of an equitable mortgage, a caveat may be lodged to protect the mortgagee’s interest.

Registration requirements

22.6.7     The Companies Act (Cap 50, 1994 Rev Ed) defines a charge to include a mortgage and the provisions of section 131 of the Companies Act (Cap 50, 1994 Rev Ed) in relation to the registration of charges applies to mortgages.

22.6.8     Apart from registration under the Companies Act (Cap 50, 1994 Rev Ed), there may be additional registration requirements depending on the nature of the mortgaged asset. For instance, a mortgage over real property governed by the Land Titles Act (Cap 157, 2004 Rev Ed) must be in the prescribed form and registered under that Act. It is the act of such registration that creates the mortgage. Further, it is provided that a registered mortgage shall not operate as a transfer of the land mortgaged but shall take effect as security only.

22.6.9     Pursuant to section 53 of the Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed), a mortgage of land will be void at law unless it is by deed in the English language. If, however, the subject matter of the mortgage is not land, then there is no requirement for the mortgage to be executed by deed. Nevertheless, in practice, it is advantageous for the mortgage to be executed by deed as, in order to enforce a deed, it is not necessary to show that consideration passed between the contracting parties. At common law, a promise is not binding as a contract unless it is either made in a deed or supported by consideration.

22.6.10    There are also practical issues to be taken into consideration when creating a mortgage. For example, in the case of a mortgage of shares, a mortgage is created through a transfer of title in the subject shares to the mortgagee, following which the shares are registered in the name of the mortgagee. Pursuant to section 195(4) of the Companies Act (Cap 50, 1994 Rev Ed), the mortgagor’s interest cannot be reflected in the share register. Hence, in practice, the mortgage is effected by delivery of the share certificate and its related transfer form, duly executed by the mortgagor, together with a document setting out the circumstances of the transfer and providing for re-transfer to the mortgagor upon repayment of the loan.

 Continue …….

 

SECTION 11     ISLAMIC BANKING

 22.11.1    Recent years have witnessed a growing impetus for Islamic financial services to become part of Singapore’s continuing development as an international financial centre. Financial institutions have been encouraged to add Islamic financial products and services to the range of conventional financial services and products that are already available in Singapore. Whereas some jurisdictions have established a separate regulatory framework for Islamic financial services, the financial authorities in Singapore have decided that, for the time being, both Islamic and conventional banking shall be accommodated within a common regulatory framework. Towards this end, some legislative changes have taken place to facilitate the growth, within that current framework, of Islamic banking in Singapore.

Singapore Banks may offer Murabaha Financing

22.11.2    The Banking Regulations issued under the Banking Act have been amended so that, with effect from 29 September 2005, banks in Singapore have been able to offer an important form of Islamic finance known as Murabaha. Murabaha (which essentially involves the bank purchasing the relevant asset and selling it to the customer on “cost-plus” deferred payment terms) is commonly used for short-term financing and in trade finance. The amendment was necessary as, pursuant to section 30 of the Banking Act (Cap 19, 2003 Rev Ed), banks in Singapore were not allowed to engage in non-financial businesses (including trading).

22.11.3    Following the amendment, a bank in Singapore may carry on a business which involves the purchasing and selling of assets if such business is carried out under the following arrangements:

·   The bank, at the request of and for the purpose of financing the purchase of each of those assets by a customer, purchases the asset from the seller in circumstances where the asset is existing at the time of the purchase;

·  The bank sells the asset to the customer;

·  The customer is under a legal obligation to the bank to take delivery of the asset;

  

·  The amount payable by the customer for the asset (the marked-up price) is greater than the amount paid by the bank for the asset (the original price), and the difference between the marked-up price and original price is the profit or return to the bank for providing such financing to the customer;

· The bank does not derive any gain or suffer any loss from any movement in the market value of the asset other than as part of the profit or return; and

  

·  The marked-up price or any part thereof is not required to be paid until after the date of the sale.

Overall Policy in Relation to Tax Treatment of Islamic Contracts

22.11.4    In his 2006 Budget Speech, the Prime Minister (and Minister for Finance) announced that the overall policy approach towards the tax treatment of Islamic financing contracts is to align the tax treatment of such contracts with the treatment of conventional financing contracts to which they are equivalent. The rationale for this approach is to give the industry maximum flexibility for innovation while avoiding any unintended tax consequences.

The following serve to illustrate this policy approach:

·       Mark-up is equivalent to interest for income tax purposes. The mark-up or profit comprised in the “cost-plus” price payable by a bank’s customer in a Murabaha transaction will be treated as economically equivalent to the interest element in a conventional financing transaction. Any gains or profits accrued and any expenses incurred, in lieu of interest, will be regarded as interest. The Income Tax (Amendment) Bill 2006 was introduced in Parliament on 8 November 2006 to implement this.

·      Murabaha financing for non-residential property. The mark-up or profit comprised in the selling price of non-residential property bought by a bank and sold to its customer under an Islamic property financing arrangement will be exempt from goods and services tax (“GST”). This is to align such arrangements with conventional property financing arrangements under which interest is exempted from GST. The bank will be allowed to claim GST on the purchase of the property from the vendor in full. In a consultation paper issued by the MAS on 8 September 2006 in relation to proposed amendments to the Goods and Services Tax Act, it was proposed that such GST treatment would apply to qualifying Islamic financial arrangements entered into between a bank and its customer on or after 17 February 2006.

·      Remission of stamp duty for Sukuk financial arrangements. A Sukuk is an Islamic trust or negotiable instrument which represents an undivided proportionate ownership interest in an asset with the corresponding right to regular periodic income streams from the asset. As such, it is seen as being equivalent to a conventional secured bond or debt security. A typical Sukuk arrangement would involve the transfer of title or ownership of the underlying asset with consequential stamp duty implications. Pursuant to the Stamp Duties (Qualifying Islamic Financing Arrangements) (Remission) Rules 2005, where, under a Sukuk financing arrangement which involves a transfer of assets, the stamp duty on the related transfer instruments is in excess of that which would be chargeable in the case of an equivalent bond issue, the amount of such excess may be remitted, subject to conditions. The instrument relating to the initial purchase of the immovable property by the bank must have been executed on or after 1 January 2005.