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Court rules on banks’ rights under absolute assignment after issue of title to land

Introduction.

One of the issues which the Malaysian banking industry has faced is whether a bank can exercise its rights to sell land under an absolute assignment without first creating a charge over the land where title to the land has been issued. The

courts have issued differing opinions in this regard.

In Ooi Chin Nee v Citibank Bhd v Chew Ai Eng Sdn Bhd and OCBC Bank (Malaysia) Bhd, the courts held that a charge is required in order for a bank to exercise its rights to the land where title to the land has been issued. Banks have no right to auction land unilaterally. Conversely, it is also a well-settled principle that an absolute assignment creates an equitable mortgage. This was evident in Chuah Eng Khong v Malayan Banking Bhd, where the court ruled in favour of effecting and recognising the contractual rights between the parties in the absence of any statutory provisions or common law which required the equitable mortgagee to obtain a court order in order to realise its security under the absolute assignment of rights to the land. Notwithstanding this, in Damai Freight (M) Sdn Bhd v Affin Bank Berhad the Federal Court took a clear stance and clarified all uncertainties in this regard.

The Selangor state government sold a piece of land to Perbadanan Kemajuan Negeri Selangor (PKNS). While waiting for the title document to the land to be issued, PKNS entered into a lease agreement with the appellant, Damai Freight (M) Sdn Bhd. The appellant obtained loans from Bank Buruh (Malaysia) Bhd (BBMB) pursuant to a loan agreement with assignment by assigning BBMB all of its rights, title and interest under the principal agreement. Subsequently, BBMB transferred and vested its business and assets — including the loan agreement — to the respondent, Affin Bank Berhad. The appellant defaulted on its loan repayments and thus was indebted to the respondent. The respondent subsequently put the land up for public auction. It had no knowledge that the title to the land had been issued to PKNS.

The high court ruled in favour of the appellant, holding that the bank had to create a charge over the land before realising its security under the absolute assignment, as the title document had been issued. The bank could not proceed by way of a private sale.

The Court of Appeal overturned this decision. The matter subsequently came before the Federal Court, which had to decide whether a bank can realise its security under an absolute assignment after the Land Office has issued a title

document without resorting to the remedies under the National Land Code, 1965.

The Federal Court unanimously affirmed the Court of Appeal’s decision and dismissed the appeal. It held that the bank had secured all of the borrower’s rights, title and interest under the absolute assignment, even though no charge was created. Further, the bank did not lose its security or power of sale under the loan agreement, as the absolute assignment under the agreement survived, despite the fact that the title document was issued later. As such, the bank was entitled to realise its security for the loans by auctioning the land. There was no need to create a charge or resort to the remedies under the National Land Code. Section 206(3) of the National Land Code recognises the contractual obligation of any transaction relating to alienated land or any interest therein which is provided for in the loan agreement.

The Federal Court’s decision is welcomed, as it clarifies a situation which has long plagued the banking industry. In accordance with the decision, a bank with absolute assignment of the rights to land may realise its security under the

assignment without creating a charge, regardless of any subsequent issue of a title document. This safeguards the bank’s position as a lender in the event that the borrower defaults on its loan repayments; and the bank will always secure its right to sell ‘chose in action’ under the absolute assignment in a recovery action.

This landmark decision has removed the doubt and confusion surrounding this area of law. Further, it will prevent future defaulting borrowers from bringing actions against banks despite no charge being created, which will in turn reduce

unnecessary litigation and save the courts time and effort.

This article is authored by:

Gan Khong Aik Partner Gan Partnership E: [email protected]

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Malaysia – Statutory Assignment Vs Equitable Assignment.

December 4, 2023 by Rohin Pujari

This article attempts to provide a brief overview of the differences between statutory assignment and equitable assignment. The actual application of the general rules described here would be subject to the applicable distinct facts and circumstances.

What is Assignment?

An assignment is a transfer of rights or liabilities such as those that arise under an instrument, chose in action[1], or debt. An assignment can either be a statutory assignment or an equitable assignment.

In Malaysia, an assignment complying with Section 4(3) of the Civil Law Act 1956 was described as a ‘statutory assignment’ and an assignment not complying with Section 4(3) of the Civil Law Act 1956 was a ‘non-statutory assignment’ i.e., an equitable assignment.[2] The conditions of a statutory assignment are as follows:[3]

(a) it must be absolute and did not purport to be by way of charge only;

(b) the assignment was in writing under the hand of the assignor; and

(c) express notice in writing thereof had been given to the debtor or trustee.

Meanwhile, an equitable assignment gives the assignee a right enforceable only in equity. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear.[4]

Rules that Govern Assignments

(a) Notice

Written notice is an essential part of a statutory assignment. Therefore, it is ineffective unless strictly accurate – accurate, for instance, as regards the date of the assignment and the amount due from the debtor.[5]

However, notice is not necessary to perfect an equitable assignment. Even without notice to the debtor the title to the assignee is complete, not only against the assignor personally, but also against the persons who stand in the same position as the assignor, as, for instance, his trustee in bankruptcy, a judgement creditor or a person claiming under a later assignment made without consideration.[6]

In regard to the form of notice, as mentioned earlier, a statutory assignment must comply with the form of notice required under Section 4(3) of the Civil Law Act 1956, whilst for an equitable assignment, no particular form is required to constitute a valid equitable assignment.

Additionally, it must be noted that although notice is not required for equitable assignments, an assignee must give notice to the debtor in order to get priority over other assignee(s). In this regard, the Federal Court in Public Finance Bhd v Scotch Leasing Sdn Bhd (In Receivership) (Perwira Habib Bank Malaysia, Intervener) [1996] 2 MLJ 369 explained in detail about the importance of notice:

“ We need to say a few words more about the great desirability of giving notice of assignment of a debt by an assignee to the debtor, even though absence of such notice does not affect the validity of the equitable assignment as between the assignor and the assignee. If notice is not given, the assignee must give credit for any payment made to the assignor by the debtor. This rule means that, by extension, even if the assignor assigns once more the debt to another person in fraud or otherwise on the earlier assignee, and that other person gives notice to the debtor; and if the debtor pays that other person or the second assignee, then the earlier assignee must still give credit to the debtor for his payment thus, for the debtor cannot be blamed for doing lawfully in ignorance of the title of the earlier assignee who has failed to give notice of the assignment to the debtor. Notice to debtor is for the protection of the assignee himself. It is this effect of what the debtor does lawfully as described that dims the view of the true role of the nemo dat rule in the resolution of disputed claims to a same debt. The money paid to the ‘second assignee’ can, of course, be recovered by the earlier assignee on the nemo dat principle. ”

(b)  An assignee takes subject to equities

For both statutory assignment and equitable assignment, the assignee takes ‘subject to equities’, that is, subject to all such defences as might have prevailed against the assignor.

The general rule, both at law and in equity, is that no person can acquire title to a chose in action…from one who has himself no title to it.[7] In other words, the assignee can be in a no better position than the assignor was prior to the assignment.[8]

(c)  Rights incapable of assignment

Some choses in action are not assignable, and not every right which arises under or out of a contract can be assigned.[9] An example of rights incapable of assignment is where the nature of the contract is intended to be personal, therefore, it will be meaningless if it is assigned to another person.

Effect of Assignment

A statutory assignment has the sole intended effect of facilitating an assignee to sue in his own name directly irrespective of whether the chose in action is an equitable chose in action or a legal chose in action.[10]

Meanwhile, the effect of an equitable assignment depends on whether the assignment is absolute or not. An absolute assignment of an equitable chose in action entitles the assignee to bring an action in his own name.[11] But a non-absolute assignment of an equitable chose in action does not entitle the assignee to sue in his own name but requires him to join the assignor as a party.[12]

For further information, please contact:

Nur Izzatie Azlan, Azmi & Associates

[email protected]

• ‘Chose in action’ is a known legal expression used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession (Associated Tractors Sdn Bhd v Woo Sai Wa [1997] 5 MLJ 441 (High Court)).  
• MBF Factors Sdn Bhd v Tay Hing Ju (T/A New General Trading) [2002] 5 MLJ 536 (High Court).  
• Ibid.  
• Williams Brandt Sons & Co v Dunlop Rubber Co [1905] AC 454 (House of Lords).  
• Leong, A. P. B. (1998). Cheshire, Fifoot and Furmston’s Law of Contract (2nd ed.). Butterworths Asia, at page 861.  
• Guest, A. G. (1984). Anson’s law of contract, at page 400.  
• Meagher, R. P., Heydon, J. D., & Leeming, M. J. (2022). Meagher, Gummow and Lehane’s Equity Doctrine and Remedies (4th ed., p. 284). Butterworths LexisNexis.  
• Guest, A. G. (1984). Anson’s law of contract, at page 402.  
• Lim Chon Jet @ Lim Chon Jat & Ors v Wee Ai Hua & Anor [2022] 6 MLJ 243 (Court of Appeal).  

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© The Sun   (Used by permission) by Roger Tan

(The full version of this Q & A meant for members of the Bar can be downloaded here ) The Housing Development (Control and Licensing) (Amendment) Act 2007 (“Amendment Act”) which amended the Housing Development (Control and Licensing) Act 1966 (“Act 118”) came into force on April 12, 2007. Since then, the Conveyancing Practice Committee of the Bar Council (“CPC”) has received numerous queries from lawyers, developers and the public on the operation of some of the amendments. While it is not the policy of CPC to proffer any legal opinion on questions of law posed to them, the CPC has decided that in order to assist the affected parties and subject to the disclaimer below, our views on some of the queries are as follows:

Section 22D(1)of Act 118 stipulates beyond any doubt that the consent of the developer is not required for the absolute assignment of rights or interests in a housing accommodation. In a case where the developer is not the proprietor of the land, is it necessary to obtain the proprietor’s consent to the assignment? As the consent of the proprietor to an assignment was not required before the amendment, it is also, therefore, not required after the amendment. The CPC is of the view that an absolute assignment is good if served by way of a notice pursuant to section 4(3) of the Civil Law Act 1956. What section 22D seeks to do is to restate the position of the law and to provide penal sanctions against a developer who requires consent to an assignment. The CPC notes that under both the current Schedules G and H agreements, the duty to obtain the issue document of title or the strata title, as the case may be, and to deliver the same together with an instrument of transfer lies with the developer. The CPC also notes that in a case of a sale of property for which no title has been issued at the time of sale and the developer is not the proprietor of the land, it has been the practice of solicitors for the purchaser or the purchaser’s financier to obtain the proprietor’s undertaking to deliver the issue document of title to the purchaser or the financier, when issued. It would therefore be prudent for a purchaser or financier to give notice of assignment to the proprietor as well, in which case, the undertaking from the proprietor to deliver title when issued is no longer necessary. To reinforce this point, the amended Schedules G & H should be brought in line with section 22D by expressly stipulating that a purchaser may assign his rights and benefits under the sale and purchase agreement after the completion date without the consent of either the developer or the proprietor. Since the developer’s consent has been dispensed with, there is no longer a need for the consent page to the deed of assignment between the assignor (vendor) and the assignee (purchaser). However, the consent page normally contains an undertaking by the developer to deliver the strata title and a valid and registrable instrument of transfer thereof in favour of the assignee. Is it necessary to request the developer to issue an undertaking by way of a separate letter to the new purchaser or to the new purchaser’s financier? The obligation of the developer to deliver the strata title when issued together with the instrument of transfer and the right of the first purchaser to the same is already set out in clause 11 of the Schedule H agreement. In an assignment from a first purchaser to a second purchaser, all the rights and interests of the first purchaser are assigned to the second purchaser. When the second purchaser requires financing, all the rights and interests which he obtained from the first purchaser are in turn assigned to the second purchaser’s financier. Hence no further undertaking from the developer, by way of a separate letter or otherwise, is necessary. Section 22(D)(4) states that the purchaser or his financier or their respective solicitors may request for the necessary confirmation from the developer, subject to payment of a fee not exceeding RM50 for every request for confirmation. Previously, it has been a normal practice to require the vendor to apply for the developer's consent, at the vendor's own cost and expense, and the developer's administrative fee usually includes the replies or confirmations made to the relevant solicitors. Section 22(D)(4) provides that the purchaser should pay the RM50.00 for every request made. Shouldn't the vendor be paying for this? The law now requires the purchaser to seek the necessary confirmation from the developer, and to pay to the developer for every request made. The Vendor is not required to pay for this. In a sub–sale transaction, the SPA was signed before April 12 and the developer has given its conditional consent before April 12. The developer's consent was conditional, inter alia, upon: (i) the vendor paying the administrative charges of RM500.00; (ii) the purchaser signing a fresh deed of mutual covenants with the developer; and (iii) the developer endorsing its consent on the deed of assignment. All these conditions have not been complied with by the vendor and purchaser at this moment. 1. Is the developer's consent or the endorsement of its consent on the deed of assignment still required in the above case? 2. Do the vendor and the purchaser still need to comply with the developer's conditions imposed before April 12, since the developer is now not permitted to impose any conditions under the section 22D? 3. Can the developer still insist on the compliance by the vendor and the purchaser of its conditions which were imposed before the section 22D came into force? The answer to all the above three questions is “No”. If an application had been made for the developer’s consent before April 12, and all the conditions and payments imposed or required by the developer have been fulfilled or paid, and the developer had endorsed its consent to the deed of assignment before April 12, then the parties to the transaction should continue and complete the transaction accordingly. If the developer’s consent, conditional or otherwise, was granted before April 12, and the conditions or payments imposed or required have not been fulfilled or paid and the developer has not endorsed its consent on the assignment, then the pursuit of the developer’s consent should be abandoned as it no longer required. Parties are, however, required to comply with section 22(D)(2) and 22(D)(4). After April 12, no developer is permitted to require any consent, and this will include endorsement of any consent granted before April 12. It follows that as the breach can only occur after April 12, the question of whether the legislation has any retrospective effect does not arise. In a sub–sale of property where the individual strata title has not been issued, in view of the new section 22D, please confirm the conditions precedent to such an agreement (if any) as we are of the view that the vendor should obtain the developer’s written confirmation on the status or details of the property before the completion period can commence. Before the Amendment Act, it had been the practice to require the vendor to obtain the developer’s consent and the obtaining of such consent is usually made a condition precedent to the completion of a sale and purchase transaction. After the amendment, there should be no longer any condition precedent relating to obtaining the developer’s consent. However this should not affect the requirement of other consents from any other relevant body or authority required under any other written law, which may continue to be made as conditions precedent. The amendment refers to any sub–sale or re–financing. In direct purchases from a developer, is the developer’s endorsement of consent necessary for the Deed of Assignment (by way of security)? Section 22(D) applies to all these cases: (a) financing of the acquisition by the first purchaser from the developer; (b) sub–sale between the first purchaser and the second purchaser and purchasers subsequent thereto; and (c) financing of the acquisition by the second purchaser and purchasers subsequent thereto. Is the consent of the developer still required for a Deed of Receipt and Reassignment? A Deed of Receipt and Reassignment is essentially an instrument where the financier assigns the rights and interests back to the purchaser/borrower. As such, consent of the developer is not required. No amendments have yet been made to the Schedule G and H agreement under the 1989 Regulations. The existing provisions in the Schedule G and H SPA state that the developer shall endorse its consent to the purchaser’s assignment to any third party and charge an administrative fee of RM500 or 0.5% of the purchase price whichever shall be lower. In the event of a sub–sale of a property where no individual document of title has been issued, the principal SPA (whether under Schedule G or H) having such exiting provisions would be inconsistent with the Amendment Act. Are the parties still bound by the existing provisions? We understand the amended Regulations are expected to be out soon. In the meantime, where there is inconsistency, the parent Act will prevail, meaning that from April 12, no consent is required and no administrative fee is required to be paid. Does the definition of “housing accommodation” in the amended Act include serviced suites or apartments? If the serviced suites or serviced apartments are intended for human habitation or partly for human habitation and partly for business premises, then they will fall within the definition of housing accommodation as amended. It does not matter if the accommodation is erected on a land designated or approved for commercial development as the Amendment Act has removed these words from the definition of housing accommodation inserted by the 2002 Amendment Act. Does Section 22(D) apply to a housing development undertaken by DBKL, Perbadanan Kemajuan Negeri Selangor (PKNS) or the Perbadanan Kemajuan of other States? Unless exempted by the Minister under section 2(2), all housing developers have to comply with Act 118 since 2002. Prior to December 1, 2002, Act 118 did not apply to any society registered or incorporated under any written law relating to co–operative societies and any body or agency established and incorporated by statute and under the control of the Federal Government or the Government of any State. The writer is the Chairman of the Conveyancing Practice Committee, Bar Council Malaysia www.malaysianbar.org.my Note: This column is brought to you by the Malaysian Bar Council for your information only. It does not constitute legal advice. You should therefore seek professional legal advice for your specific needs. Neither the Malaysian Bar nor the Sun Media Corp Sdn Bhd shall be liable to any reader who suffers losses as a result of relying on this column.

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• Case Update: Absolute Assignment - How Powerful Is It?

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);

Salient Facts

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.

Absolute Assignment

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 [1996] 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 [2009] 6 MLJ 751, Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch 276, 300, Tay Choo Foo v Tengku Mohd saad Tengku Mansur & Ors [2009] 2 CLJ 363, Malaysian International Trading Corp Sdn Bhd v RHB Bank Bhd [2016] 2 CLJ 7171, CIMB Bank Bhd v Maybank Trustees Bhd & Other Appeals [2014] 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

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Statutory Assignment vs Equitable Assignment

This article attempts to provide a brief overview of the differences between statutory assignment and equitable assignment. The actual application of the general rules described here would be subject to the applicable distinct facts and circumstances.

What is Assignment?

An assignment is a transfer of rights or liabilities such as those that arise under an instrument, chose in action 1 , or debt. An assignment can either be a statutory assignment or an equitable assignment.

In Malaysia, an assignment complying with Section 4(3) of the Civil Law Act 1956 was described as a ‘statutory assignment’ and an assignment not complying with Section 4(3) of the Civil Law Act 1956 was a ‘non-statutory assignment’ i.e., an equitable assignment. 2 The conditions of a statutory assignment are as follows: 3

(a) it must be absolute and did not purport to be by way of charge only;

(b) the assignment was in writing under the hand of the assignor; and

(c) express notice in writing thereof had been given to the debtor or trustee.

Meanwhile, an equitable assignment gives the assignee a right enforceable only in equity. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear. 4

Rules that Govern Assignments

Written notice is an essential part of a statutory assignment. Therefore, it is ineffective unless strictly accurate – accurate, for instance, as regards the date of the assignment and the amount due from the debtor. 5

However, notice is not necessary to perfect an equitable assignment. Even without notice to the debtor the title to the assignee is complete, not only against the assignor personally, but also against the persons who stand in the same position as the assignor, as, for instance, his trustee in bankruptcy, a judgement creditor or a person claiming under a later assignment made without consideration. 6

In regard to the form of notice, as mentioned earlier, a statutory assignment must comply with the form of notice required under Section 4(3) of the Civil Law Act 1956, whilst for an equitable assignment, no particular form is required to constitute a valid equitable assignment.

Additionally, it must be noted that although notice is not required for equitable assignments, an assignee must give notice to the debtor in order to get priority over other assignee(s). In this regard, the Federal Court in Public Finance Bhd v Scotch Leasing Sdn Bhd (In Receivership) (Perwira Habib Bank Malaysia, Intervener) [1996] 2 MLJ 369 explained in detail about the importance of notice:

“ We need to say a few words more about the great desirability of giving notice of assignment of a debt by an assignee to the debtor, even though absence of such notice does not affect the validity of the equitable assignment as between the assignor and the assignee. If notice is not given, the assignee must give credit for any payment made to the assignor by the debtor. This rule means that, by extension, even if the assignor assigns once more the debt to another person in fraud or otherwise on the earlier assignee, and that other person gives notice to the debtor; and if the debtor pays that other person or the second assignee, then the earlier assignee must still give credit to the debtor for his payment thus, for the debtor cannot be blamed for doing lawfully in ignorance of the title of the earlier assignee who has failed to give notice of the assignment to the debtor. Notice to debtor is for the protection of the assignee himself. It is this effect of what the debtor does lawfully as described that dims the view of the true role of the nemo dat rule in the resolution of disputed claims to a same debt. The money paid to the ‘second assignee’ can, of course, be recovered by the earlier assignee on the nemo dat principle. ”

(b) An assignee takes subject to equities

For both statutory assignment and equitable assignment, the assignee takes ‘subject to equities’, that is, subject to all such defences as might have prevailed against the assignor.

The general rule, both at law and in equity, is that no person can acquire title to a chose in action…from one who has himself no title to it. 7 In other words, the assignee can be in a no better position than the assignor was prior to the assignment. 8

(c) Rights incapable of assignment

Some choses in action are not assignable, and not every right which arises under or out of a contract can be assigned. 9 An example of rights incapable of assignment is where the nature of the contract is intended to be personal, therefore, it will be meaningless if it is assigned to another person.

Effect of Assignment

A statutory assignment has the sole intended effect of facilitating an assignee to sue in his own name directly irrespective of whether the chose in action is an equitable chose in action or a legal chose in action. 10

Meanwhile, the effect of an equitable assignment depends on whether the assignment is absolute or not. An absolute assignment of an equitable chose in action entitles the assignee to bring an action in his own name. 11 But a non-absolute assignment of an equitable chose in action does not entitle the assignee to sue in his own name but requires him to join the assignor as a party. 12

• ‘Chose in action’ is a known legal expression used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession (Associated Tractors Sdn Bhd v Woo Sai Wa [1997] 5 MLJ 441 (High Court)).
• MBF Factors Sdn Bhd v Tay Hing Ju (T/A New General Trading) [2002] 5 MLJ 536 (High Court).
• Williams Brandt Sons & Co v Dunlop Rubber Co [1905] AC 454 (House of Lords).
• Leong, A. P. B. (1998). Cheshire, Fifoot and Furmston’s Law of Contract (2nd ed.). Butterworths Asia, at page 861.
• Guest, A. G. (1984). Anson’s law of contract, at page 400.
• Meagher, R. P., Heydon, J. D., & Leeming, M. J. (2022). Meagher, Gummow and Lehane’s Equity Doctrine and Remedies (4th ed., p. 284). Butterworths LexisNexis.
• Guest, A. G. (1984). Anson’s law of contract, at page 402.
• Lim Chon Jet @ Lim Chon Jat & Ors v Wee Ai Hua & Anor [2022] 6 MLJ 243 (Court of Appeal).

Written by:

Nur Izzatie Azlan & Narina Aireen Hilmy Zaini  ( [email protected] )

Corporate Communications Azmi & Associates 28 November 2023

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