Singapore High Court upholds bank’s exercise of contractual discretion in managing credit risk as lender

18 June 2026

Deutsche Bank AG Singapore Branch v ARJ Holding Ltd & Anor [2025] SGHC 163

The General Division of the Singapore High Court in Deutsche Bank AG Singapore Branch v ARJ Holding Ltd & Anor (“HC Decision”), which has now been upheld by the Appellate Division, provides important guidance on the scope of a lender’s exercise of its “absolute discretion” in managing credit and collateral risk.

The court held that the bank in this case (“Bank”) had validly exercised its contractual discretion to reduce the lending value of the borrower’s collateral and terminate the loan facilities following events of default. Significantly, the court recognised that, while the exercise of contractual discretion may be subject to an implied duty of good faith, that duty is narrowly confined and does not prevent a lender from making commercial risk assessments, provided it does not act arbitrarily, capriciously, perversely, or irrationally.

The appeal by ARJ Holding Ltd (“ARJ”) (the borrower) and Mr Mohammad Ahmad Ramadhan Juma (“Mr Juma”) (the guarantor of the facilities) was dismissed in its entirety by the Appellate Division of the Singapore High Court in May 2026.

Allen & Gledhill Partners William Ong and Chua Xinying and Counsel Ivan Lim represented the Bank successfully in both the action and the appeal.

Background

The dispute arose from a private banking relationship under which the Bank extended loan facilities of up to US$400 million to ARJ, secured by a portfolio of securities and supported by a personal guarantee from Mr Juma.

A substantial portion of ARJ’s portfolio comprised two bonds listed on the Frankfurt Stock Exchange (“Bonds”). The Bank’s position was that, in order to benefit from a 30% lending value on the Bonds, ARJ was required to maintain a sufficiently diversified portfolio and ensure that no single security exceeded prescribed concentration limits. ARJ and Mr Juma disputed the existence of these diversification requirements or that these requirements were communicated to them by the Bank.

After repeated warnings and unsuccessful attempts to procure diversification, the Bank informed ARJ that it would progressively reduce the lending value of the Bonds. The resulting shortfall triggered margin calls which ARJ failed to satisfy. The Bank subsequently terminated the facilities and demanded repayment. Shortly thereafter, the Bank discovered information raising concerns as to whether the Bonds had been fully paid for and whether prior representations regarding the Bonds were accurate. The lending value of the Bonds was reduced to nil and the Bank proceeded to liquidate the portfolio.

Decision of High Court (upheld by Appellate Division)

ARJ failed to comply with the requirement to diversify 

An issue in the case was whether ARJ was required to comply with the Bank’s diversification requirements in order to maintain the lending value assigned to the Bonds. ARJ argued that the relevant diversification requirements were either insufficiently certain or had not been properly communicated to them.

The High Court rejected those arguments. It found that the facility documentation permitted the Bank to impose additional requirements relating to the facilities and that the diversification requirements formed part of the parties’ lending arrangements. The court further held that ARJ was aware, at a minimum, of the Bank’s concerns regarding concentration risk and the need to diversify its portfolio. 

The contemporaneous evidence showed that the Bank had repeatedly raised concerns regarding the concentration of the Bonds, requested that steps be taken to address those concerns, and warned that a failure to do so could affect the lending value assigned to the portfolio. Despite repeated assurances that corrective action would be taken, ARJ remained in breach of the diversification requirements.

In those circumstances, the court found that the Bank was entitled to take ARJ’s continued non-compliance into account when exercising its contractual discretion in relation to collateral valuation and margin requirements. The court also rejected ARJ’s reliance on the entire agreement clause, holding that the facility documentation expressly contemplated facilities being provided on additional terms agreed between the parties. 

Is “absolute discretion” conferred by contract truly “absolute” 

The principal issue was whether the Bank had properly exercised its contractual discretion under the Service Agreement. The relevant provisions entitled the Bank, in its “absolute discretion” or “sole discretion”, to determine the amount and acceptability of collateral and to require additional collateral where necessary.

The High Court held that, notwithstanding the contractual language conferring “absolute” discretion, the exercise of such discretion was subject to a limited implied duty of good faith:

• No general duty of good faith: The Court of Appeal in Ng Giap Hon v Westcomb Securities Pte Ltd [2009] 3 SLR(R) 518 (“Ng Giap Hon”) declined to recognise a general duty of good faith implied into all contracts, citing concerns over the doctrine’s uncertain scope and its potential impact on commercial certainty. The High Court distinguished Ng Giap Hon on the basis that it concerned the broader concept of good faith in contract law generally.
• Limited duty of good faith in exercising contractual discretion: By contrast, the HC Decision followed decisions such as Edwards Jason Glenn v Australia and New Zealand Banking Group Ltd [2012] SGHC 61 and MGA International Pte Ltd v Wajilam Exports (Singapore) Pte Ltd [2010] SGHC 319 which recognised a “much narrower doctrine” of good faith in relation to the exercise of contractual discretion. This was based on a “clearly defined scope”, namely, that the exercise of such discretion “should not be arbitrary, capricious or perverse”.

Significantly, on the evidence, it was held that the Bank had good reasons for exercising its discretion and did not act with arbitrariness, capriciousness, or perversity:

• ARJ had remained in breach of the diversification requirements despite repeated assurances and multiple extensions of time;
• The Bonds continued to exceed concentration limits at the time the lending value was reduced;
• Scheduled coupon payments on the Bonds had not been received;
• ARJ’s proposed transfer of the Bonds to another financial institution failed to materialise despite several months having been afforded for that purpose; and
• ARJ’s previous commitments had repeatedly failed to materialise, undermining the credibility of further assurances.

ARJ disputed the Bank’s position that the Bonds were not fully paid for and were ineffectual. On the evidence, however, the High Court found that ARJ had “completely failed” in seeking to show that the Bonds were paid up when transferred to the Bank as security. The High Court found that ARJ did not provide the Bank with adequate collateral, which entitled the Bank to reduce the loan value of the Bonds to nil.

The High Court was further persuaded by the Bank’s evidence that in typical transactions of transfer of securities, there would be a clear exchange of commitment between the two banks by way of a letter of understanding (“LOU”). That ARJ had failed to secure an LOU after several months showed a lack of clear commitment. The Bank was entitled to choose not to wait for the transfer to materialise and could proceed to terminate the loan facilities.

Bank entitled to rely on subsequently discovered grounds for termination which existed at the time of termination 

The HC Decision affirmed the longstanding principle that a party who elects to terminate a contract may subsequently rely on another ground for termination if that ground had existed at the time of termination, regardless of whether he was aware of it at the time, subject to limited exceptions. This is well established by the authorities of Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd [2009] 4 SLR(R) 602 and CAA Technologies Pte Ltd v Newcon Builders Pte Ltd [2017] 2 SLR 940. While it was argued that the principle could only operate as a shield against wrongful termination and not as a sword to claim damages arising from termination, the High Court held that the Bank’s claim was to recover a crystalised debt under the outstanding loan and not to claim for bargain damages unlike in the decision of The Trademark Licensing Co Ltd v Leofelis [2012] EWCA Civ 985.

Post termination, the Bank discovered various other irregularities with ARJ’s financial statements. Had this been known to the Bank prior to termination, this would have constituted an event of default entitling the Bank to terminate the loan facilities. The Bank was therefore entitled to rely on this as further ground to justify termination. 

No duty to await optimal market conditions for liquidation of securities 

ARJ’s counterclaim that the Bank had caused loss by liquidating the securities in adverse market conditions was dismissed. The principle in Beckkett Pte Ltd v Deutsche Bank AG & Anor and another appeal [2009] 3 SLR(R) 452 in the context of a mortgagee’s duty of sale was held to be “equally applicable” to the Bank’s sale of securities. The Bank was therefore not required to wait for the most propitious market conditions to sell, or to delay a sale, in the hope of obtaining a better price.

The High Court agreed with the Bank’s evidence that there is “no perfect way of knowing whether stock markets would have gone up or down” - it was for ARJ to show that it would have been apparent at the time of the liquidation that if the Bank had waited, prices would go upwards, such that the Bank’s proceeding to liquidate would be considered irrational, capricious, perverse, or arbitrary, for which there was no evidence to show as such.

Significance of the decision

The decision provides important guidance on the scope of contractual discretions commonly conferred on lenders under financing and private banking arrangements. It is not uncommon for facility documentation to grant lenders broad or “absolute” discretion in relation to matters such as the determination of lending values, the issuance of margin calls, the acceptance of collateral, and the termination of facilities.

While the court recognised that the exercise of such discretion may be subject to an implied duty of good faith, it emphasised that the duty is a limited one. Importantly, the judgment does not impose a general obligation of reasonableness. Rather, the implied duty requires the lender not to act arbitrarily, capriciously, or irrationally in the exercise of its contractual discretion. Where the lender has acted with good reasons and is able to demonstrate a rational basis for its exercise of discretion, the court is likely to afford deference to commercial risk assessments undertaken in good faith.

The factors considered by the High Court offer useful and practical guidance on how lenders should document, communicate, and justify decisions made pursuant to contractual discretion under their facility documentation.

Reference materials

The judgment is available on the Singapore Courts website www.judiciary.gov.sg.