Published March 13, 2020
The Federal Court of Malaysia recently delivered its decision in the case of Sabah Development Bank Berhad v Petron Oil (M) Sdn Bhd (formerly known as Exxonmobil Borneo Sdn. Bhd.). You can read the Grounds of Judgment dated 17.2.2020 here.
Before I delve into this write-up, I humbly implore everyone to take some time off and have a read of the Grounds Of Judgment, which was delicately and beautifully written by Her Ladyship, Nallini Pathmanathan FCJ.
In essence, the Federal Court allowed Sabah Development Bank Berhad’s appeal and answered the following question of law in NEGATIVE:-
“Whether the proprietary rights and interest of an assignee of a chose in action under a legal and absolute assignment could be defeated by a claim premised on “trust” and/or “constructive trust” by a third party who claimed to have a beneficial interest over the same chose in action?”
The Federal Court (albeit only posed with 1 question of law) discusses in depth on inter alia:-
(i) What is an Absolute Assignment, the Conditions for the Subsistence of a Valid Absolute Assignment as well as the effect of the same;
(ii) How to construe whether the assignments accorded are absolute assignments or by way of charge or security only;
(iii) Whether the validity of an Absolute Assignment would be affected and/or altered by supervening events; and
(iv) How does a constructive trust arise (hallmark and basis for an imposition of a constructive trust);
1. On 19.12.2012, Sabah Electricity Board (‘SESB’) awarded Swakaya Sdn Bhd (‘Swakaya’) a contract to supply and deliver diesel fuel to SESB (‘the SESB Contract’).
2. Sabah Development Bank Berhad (‘Bank’) granted two banking facilities totalling RM82 million to Swakaya and carry out the SESB Contract via two letters of offer dated 12.3.2013 and 1.8.2013.
3. As security for the granted banking facility, Swakaya executed an Assignment of Contract Proceeds agreement dated 3.4.2013 whereby Swakaya assigned absolutely to the Bank all the contract proceeds from the SESB Contract.
4. Swakaya gave written notice of assignment dated 20.3.2013 to SESB and instructed SESB to remit all SESB Contract’s proceed to a Maybank Project Account (‘1st project account’) to which SESB replied on 22.3.2013 acknowledging receipt and agreeing to the same.
5. In short, as security for the banking facilities, Swakaya absolutely assigned the full contract sum of SESB Contract to the Bank and Swakaya agreed that the Bank could use the proceeds deposited into the 1st project account towards payment of the outstanding credit facilities.
6. On 1.4.2013, Swakaya entered into a contract with Petron Oil (M) Sdn Bhd (‘Petron’) whereby Petron would provide diesel fuel for Swakaya to enable it to carry out the SESB Contract and Petron would be paid out of the 1st project account.
7. In October 2013, the 1st project account was frozen by Malaysian Anti-Corruption Commission (‘MACC’) and Swakaya was accordingly unable to use the funds in that account to purchase diesel fuel to fulfil its legal obligations under the SESB Contract.
8. To break the impasse, Swakaya requested Petron to supply diesel fuel to SESB directly and in return, Swakaya agreed that SESB could pay Petron directly. SESB was also informed of this new arrangement.
9. As the Bank was also unable to withdraw monies from the first project account, Swakaya agreed to open a second project account with CIMB Bank Berhad (‘the 2nd project account’) in November 2013 and again, it was requested all SESB Contract’s proceeds be remitted to the 2nd project account.
10. Petron supplied diesel fuel directly to SESB under the ‘new arrangement’ for total amount of RM50,094,713.79 and Petron was paid a portion of that sum directly. The sum of RM24,835,281.62 remained outstanding.
11. Petron sued Swakaya to recover the balance sum and also sued the Bank for allegedly ‘wrongfully’ withdrawing the balance sum from the 2nd project account to settle part of the loans taken by Swakaya from the Bank.
Decisions of the High Court and Court of Appeal
The High Court allowed Petron’s claim against Swakaya and the Bank and held that the Bank had unjustly enriched itself to offset the amount owed by Swakaya and there was a constructive trust over the monies since the Bank knew that the monies were supposed to be remitted to Petron.
The Court of Appeal affirmed the High Court’s decision and held that the sum was meant as payment for Petron’s sale of diesel fuel to SESB and was never meant as repayment of Swakaya’s loan.
Dissatisfied with the decision, the Bank applied for and obtained leave to appeal to the Federal Court.
The Federal Court held that that Swakaya had created, in favour of the Bank, an absolute assignment not purporting to be by way of charge only, within the meaning of Section 4(3) of the Civil Law Act 1956 (‘CLA 1956’).
Section 4(3) of CLA 1956 provides:-
“(3) Any absolute assignment, by writing, under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, shall be, and be deemed to have been, effectual in law, subject to all equities which would have been entitled to priority over the right of the assignee under the law as it existed in the State before the date of the coming into force of this Act, to pass and transfer the legal right to the debt or chose in action, from the date of the notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor.”
The relevant definitions under an absolute assignment are as follows:-
“Assignment” – the transfer of existing proprietary rights, future rights, property, debt or other contractual rights by one person to another person.
“Assignee” - the new creditor, a lender or a buyer of receivables, transferee or holder of the security (the Bank in this case).
“Assignor” – the creditor in the original contract giving rise to the assigned receivables. The assignor is either a borrower (or a third party) who transfers or creates security over a receivable (Swakaya in this case).
“Chose in action” – the real and personal right of property which can only be claimed or enforced by action, and not by the taking of physical possession, because it is not tangible.
“Obligor” – the debtor in the original contract from which the assigned receivables arise, the person who owes payment of the receivable to the assignor (SESB in this case).
The Federal Court relied on its own decision in the case of UMW Industries Sdn Bhd v Ah Fook @ Chin Kim Fook  1 CLJ 379 which sets out the conditions necessary for effecting an absolute legal assignment under Section 4(3) of CLA 1956 as follows:-
(a) The ‘debt or other chose in action’ must be one that is existing;
(b) The assignment must be in writing under the hand of the assignor;
(c) The assignment must be absolute and not by way of charge only; and
(d) There must be express written notice of the assignment to the obligor and held that these conditions are met in the instant case.
It also bears noting that the Federal Court relies on the definition of ‘chose in action’ laid down in Mozley & Whiteley’s Law Dictionary (10th Edition) as “a thing of which a person has not the present enjoyment, but merely a right to recover it (if withheld) by action” and held that the monies which Swakaya was entitled to receive from SESB under the SESB Contract amounts to a ‘chose in action’.
In other words, the effect and consequence of the absolute assignment is therefore that ownership or entitlement to recover and receive the proceeds paid in by SESB was transferred from Swakaya to the Bank and the Bank enjoyed legal title to the monies in the project account.
Whether the validity of an Absolute Assignment would be affected and/or altered by supervening events (freezing of the 1st project account and opening of 2nd project account)?
The Federal Court held that the Bank’s rights to the SESB Contract’s proceeds remained intact notwithstanding the freezing of the 1st project account and opening of the 2nd project account.
It follows from the reasoning that although Swakaya entered into a new agreement with Petron for the direct supply and delivery of diesel fuel, neither SESB nor the Bank were privy to this agreement. As such, Swakaya could not renege from, nor change its position due to the ‘new agreement’ because the right to those contract proceeds had been transferred completely to the Bank as of 3.4.2013 and the change as to where the monies were deposited did not and could not affect the Bank’s rights under the valid absolute assignment.
In short, the general rule remains that an assignment shall be valid and remain in force until and unless the indebtedness is settled in full, or such assignment is terminated by the Bank.
Does constructive trust arise in this case?
The Federal Court cited and referred to a number of authorities (Takako Sakao(f) v Ng Pek Yuen(f) & Anor  6 MLJ 751, Carl Zeiss Stiftung v Herbert Smith & Co  2 Ch 276, 300, Tay Choo Foo v Tengku Mohd saad Tengku Mansur & Ors  2 CLJ 363, Malaysian International Trading Corp Sdn Bhd v RHB Bank Bhd  2 CLJ 7171, CIMB Bank Bhd v Maybank Trustees Bhd & Other Appeals  3 CLJ 1) , and held that the imposition of a constructive trust could only arise by operation of law where the circumstances are such that it would be unconscionable for the Bank to continue to assert a right to the proceeds under the SESB contract so as to deny a subsisting interest of Petron.
In this case, the Federal Court is of the view that the issue of ‘unconscionability’ simply does not arise in the face of clear legal rights created under established principles which comprise the cornerstone of banking law – legal and valid subsisting absolute assignment.
To conclude, the Federal Court held that the contract between Swakaya and Petron does not create an equity giving Petron any interest in the contract proceeds as Swakaya has no entitlement or right to create any such interest by reason of the absolute assignment in favour of the Bank.
The Federal Court further emphasised that there is no basis whatsoever for the application of the common law doctrine of a constructive trust, nor to impose such a trust on the balance sum. Petron had no interest in the balance sum, be it legal or equitable. All Petron had was a right of recovery against Swakaya directly. The ‘new arrangement’ and Swakaya endorsing Petron’s claim for the balance sum did not create any form of ‘equity’ in favour of Petron.
This decision is very much welcomed, especially, I believe, by the banking sector and industry. I wholeheartedly agree with the Federal Court that it would cast considerable uncertainty on the law of banking if a constructive trust were to be applied in such circumstances (where absolute assignment has been created), all security given by a borrower to a banking institution would be rendered nugatory or at the very least put in jeopardy by the possibility of a finding of a constructive trust by a third party claiming the same funds which comprise security for a loan.
This judgment is pragmatic in the sense that if the Federal Court rules otherwise, it would mean that a valid absolute assignment can easily be defeated and as a result, an assignee would be reluctant to accept “assignment of contract proceeds” as security to grant banking facility.On the same token, this also raises another inevitable question on how could Petron, practically, better protect its rights and interest in such circumstances besides, of course, having a valid cause of action against Swakaya. Let me know what you think.
Published by Chuar Kia Lin
Partner of Pierre Chuah & Associates