IN THE FEDERAL COURT OF MALAYSIA

(APPELLATE JURISDICTION)
CIVIL APPEAL NO: 02(f)-27-04/2018(S)

BETWEEN

SABAH DEVELOPMENT BANK BERHAD

(COMPANY NO.: 34638-W) … APPELLANT

AND

PETRON OIL (M) SDN BHD

(formerly known as EXXONMOBIL BORNEO SDN. BHD.)
(COMPANY NO.: 8823-D) … RESPONDENT

[Court of Appeal of Malaysia sitting at Kota Kinabalu

Civil Appeal No: S-02(NCVC)-1430-08/2016

Between

Sabah Development Bank Berhad

(Company No.: 34638-W) … Appellant

And

Petron Oil (M) Sdn Bhd

(Formerly Known As Exxonmobil Borneo Sdn. Bhd.)
(Company No.: 8823-D) … Respondent]

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 [In the Matter of Kota Kinabalu High Court
Suit No.: BKI-22NCVC-98/11-2014

Between

Petron Oil (M) Sdn Bhd … Plaintiff

And

Swakaya Sdn Bhd … 1st Defendant

Sabah Development Bank Berhad … 2nd Defendant]

CORAM:

TENGKU MAIMUN BINTI TUAN MAT, CJ

AHMAD BIN HAJI MAAROP, PCA
AZAHAR BIN MOHAMED, CJM
NALLINI PATHMANTHAN, FCJ
RHODZARIAH BINTI BUJANG, JCA

GROUNDS OF JUDGMENT

Introduction

1. The primary issue that arises in this appeal is whether:

(i) an absolute assignee under a letter/contract of

assignment executed earlier in time; or

(ii) a creditor entitled to payment in respect of goods sold and

delivered

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is entitled to monies in a bank account in the name of their common
debtor. The appellant, Sabah Development Bank Berhad (‘the Bank’)
is the absolute assignee of all proceeds of monies in the bank
account of one Swakaya Sdn Bhd (‘Swakaya’) by reason of a sum of
RM85 million loaned to Swakaya, while the respondent, Petron Oil
(M) Sdn Bhd (formerly known as Exxonmobil Borneo Sdn Bhd)
(‘Petron’) is the creditor, by reason of goods sold and delivered on
behalf of Swakaya to Sabah Electricity Board.

2. In the courts below it was determined that it was the respondent,

Petron that was entitled to the proceeds. This conclusion was
premised on the grounds that a constructive trust could be inferred
over the subject monies/proceeds deposited by another entity,
namely the Sabah Electricity Board (‘SESB’) into Swakaya’s bank
account, as payment to Petron for goods sold and delivered. In other
words the constructive trust inferred took priority over the absolute
assignment created by the Bank earlier in time. The appeal turns on
whether this conclusion is correct or flawed.

The Parties in the High Court Suit

3. Petron is a company engaged in the business of marketing

petroleum and petroleum products. It was the plaintiff in the High
Court and is the respondent before us.

4. The 1st defendant in the High Court proceedings was Swakaya,

the debtor, that borrowed monies from the Bank and induced Petron
to supply goods to SESB. Swakaya is not a party in the appeal before

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us. However the actions of Swakaya have far-reaching implications
for the other actors in the events which transpired.

5. The Bank was the 2nd defendant in the High Court proceedings
and is the appellant before us.

The Salient Facts

The Initial Arrangement between SESB, Swakaya and Petron

6. On 19 December 2012, SESB awarded Swakaya a contract to

supply and deliver diesel fuel to SESB’s power stations (‘the SESB
Contract’). The contract sum was five hundred and six million, nine
hundred and fifty two thousand, eight hundred and eighty eight ringgit
and seventy-five sen (RM506,952,888-75);

7. In order to finance and carry out the SESB Contract, Swakaya

applied for and was granted two banking facilities by the Bank
totalling eighty-five million ringgit (RM85 million). Vide the first letter
of offer dated 12 March 2013 Swakaya was granted an initial facility
of RM50 million on specific terms and conditions. A second letter of
offer dated 1 August 2013 for an additional sum of thirty-five million
ringgit (RM35 million) was granted on terms as set out in the second
letter. Swakaya needed this funding to purchase diesel fuel from
various suppliers, including Petron.

8. As security for the initial RM50 million banking facility granted

by the Bank, Swakaya executed an Assignment of Contract
Proceeds agreement dated 3 April 2013. Pursuant to this

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agreement Swakaya assigned absolutely to the Bank all the contract
proceeds from the SESB Contract.

9. Written notice of assignment was given by Swakaya to

SESB in writing on 20 March 2013. Swakaya irrevocably instructed
SESB to remit all contract proceeds arising from the SESB Contract
to a project account with Malayan Banking Berhad, Kota Kinabalu
(‘first project account’). It was expressly specified that the assignment
was given as security for the credit facilities granted to Swakaya by
the Bank.

10. SESB replied on 22 March 2013 acknowledging receipt of

the notice of assignment and agreeing to the same. It further
agreed to comply with the instructions on the remittance of funds. In
other words SESB agreed to make all payments to the first project
account in accordance with the terms of the assignment agreement
between the Bank and Swakaya.

11. Security for the repayment of the additional RM35 million

afforded to Swakaya, came in the form of a Supplemental
Assignment of Contract Proceeds agreement dated 23 August
2013 in favour of the Bank. This amounted to a second absolute
assignment of all contract proceeds, (i.e. payments from SESB) to
the Bank. It reiterated the arrangement between the three parties
whereby SESB, the party paying the funds would remit the same
directly to the first project account, where the assignee, the Bank
could draw directly from that account towards repayment of monies
owed to it by the assignor, Swakaya.

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12. In summary therefore, as security for the abovementioned
facilities, Swakaya absolutely assigned the full contract sum of the
SESB Contract (RM506,952,888-75) to the bank. Swakaya agreed
that the Bank could use the proceeds deposited into the first project
account towards payment of the outstanding credit facilities.

13. One of the terms of the contract for the supply of diesel oil
between Swakaya and SESB was that Swakaya could not assign the
contract or the contract benefits to any other party without the prior
written consent of SESB (see Clause 11.1 of the General Conditions
of the SESB Contract). This clause was expressed to not affect any
right of Swakaya to assign absolutely, or by way of charge any money
due or to become due to it, or which may be payable to Swakaya
under the contract. This enabled Swakaya to absolutely assign
payments received, to the Bank to repay the facilities it had procured.

14. To this end it is pertinent that the Bank’s managers and officer
were appointed the authorised signatories of the designated first
project account, even though the said project account was under
Swakaya’s name.

15. On 1 April 2013, Swakaya entered into a contract with its

suppliers, one of which was Petron. Pursuant to this contract,
Petron would provide diesel fuel for a period of two years for Swakaya
to enable it to fulfil its contract with SESB.

16. Petron was to be paid out of the first project account.

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17. The arrangement between Swakaya, Petron and SESB
commenced in April 2013 and went smoothly at first. However,
problems arose due to Swakaya’s financial problems, and the
arrangement had to be varied.

Swakaya’s Financial Problems

18. In October 2013, the first project account was frozen by the
Malaysian Anti-Corruption Commission (‘MACC’) under the Anti-
Money Laundering Act (‘AMLA’) 2001. Swakaya was denied access
to the funds in the said account and was accordingly unable to use
the funds in that account to purchase diesel fuel to fulfil its legal
obligations under the SESB contract.

19. To address its inability to now pay for fuel it was required to
supply to SESB under the SESB Contract, Swakaya requested
Petron to supply diesel fuel to SESB directly. In return, Swakaya
agreed that SESB could pay Petron directly. Vide a letter dated 24
October 2013, Swakaya informed SESB of the new arrangement.
Swakaya and Petron confirmed this arrangement by a letter
dated 15 November 2013. This letter was signed by Swakaya and
Petron, but not by SESB.

20. This ‘new arrangement’ was organised by Swakaya

notwithstanding its express knowledge and execution of the absolute
assignments it had effected in favour of the Bank. The terms of the
assignment agreements were such that all monies paid by SESB,
including the monies paid into the second project account were
assigned to the Bank for the repayment of credit facilities. Any

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payment directly to a supplier, such as Petron, would contravene the
terms of the absolute assignment agreements between the Bank and
Swakaya.

21. As the Bank was also unable to withdraw monies (owed to it)
from the first project account, Swakaya agreed to open a second
project account, this time with CIMB Bank Berhad (‘the second
project account’). The second project account was opened in
November 2013.

22. Similarly it was requested that all contract proceeds from the
SESB Contract be remitted to the second project account. The Bank
vide letter dated 20 November 2013 informed SESB of the new
project account at CIMB bank, i.e. the existence of the second
project account. The Bank requested that all contract proceeds
from the SESB Contract be remitted to the second project
account. This was entirely in accordance with the assignments made
in favour of the Bank by the debtor, Swakaya as security for the credit
facilities afforded by the Bank.

23. On 18 February 2014 Petron wrote to SESB and copied the

letter to the Bank, seeking that Swakaya and the Bank remit monies
for diesel oil supplied to Petron.

24. By a second notice (undated) issued by Swakaya to SESB,

Swakaya notified SESB of the assignment of all contract
proceeds in favour of the Bank, and irrevocably instructed SESB
to remit all contract proceeds from the SESB contract to the second
project account. This was acknowledged by SESB on 28 February

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2014. Again it was expressly reiterated that the assignment was
security for the credit facilities afforded to Swakaya.

25. In the month of November 2013, Petron had supplied diesel

fuel to SESB directly, for which full payment of RM12,977,480-11 was
remitted to Petron from the second project account. Later, the Bank
explained to the court that the remittance for the supplies in
November 2013 were made by Swakaya to Petron without the Bank’s
knowledge, as this occurred before the assignment of the CIMB
Project Account to the Bank was complete, and prior to the
appointment of the Bank’s employees as signatories to the second
project account. It is not in dispute that the manager and officer of the
bank were only appointed as authorized signatories for second
project account in March 2014.

26. In other words, during the period between the freezing of the
first project account and prior to the setting up of the second project
account, monies were paid out to Petron directly instead of the Bank.

27. The value of the diesel fuel supplied under the ‘new
arrangement’ between Swakaya and Petron amounted to
RM50,094,713-79. Petron was paid a portion of that sum, namely
RM26,027,121-95 directly. The sum of RM24,835,281-62 being the
balance sum claimed by Petron remained outstanding. This was
because after receiving the letter dated 20 November 2013, no direct
payment was made to Petron from the second project account, as
had been held out by Swakaya to Petron under the ‘new
arrangement’. Instead, SESB followed the Bank’s instructions in the

9
letter dated 20 November 2013 and deposited payment into the
second project account.

28. Petron sued Swakaya to recover the balance sum. It also sued
the Bank for allegedly ‘wrongfully’ withdrawing the balance sum from
the second project account to settle part of the loans taken by
Swakaya from the Bank.

THE DECISION OF THE HIGH COURT

29. In the High Court, Petron as plaintiff brought a claim against

Swakaya for the outstanding sum of RM24,835,281-62 due and
owing to it for the supply of diesel oil at Swakaya’s behest to SESB.
Its claim against the Bank is premised on the basis that the Bank
holds the monies paid by SESB in its favour as ‘trustee’ or
‘constructive trustee’ and is liable to Petron for the same.

30. The learned Judicial Commissioner (‘JC’) allowed Petron’s

claim against the defendants and ordered the Bank to return the
monies received by the Bank on the grounds of the subsistence of a
trust or constructive trust in favour of Petron. In brief, the trial
judge accepted Petron’s contentions that by withdrawing the sum of
RM24,835,281-62, the Bank had unjustly enriched itself to offset the
amount owed by Swakaya. In addition, the learned JC found that
there was a constructive trust over the monies since the Bank knew
that the monies were supposed to be remitted to Petron.

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31. The Bank appealed against this decision to the Court of Appeal.
Swakaya did not.

THE DECISION OF THE COURT OF APPEAL

32. The Court of Appeal affirmed the decision of the High Court and
dismissed the Bank’s appeal with costs. It took the view that the issue
was not whether SESB had agreed to pay Petron directly for the
diesel fuel supplied, but whether it was conscionable for the Bank to
claim the monies as its own and to use it for its own benefit, when
SESB’s payment into the second project account was meant for
payment to Petron.

33. The crux of the decision of the Court of Appeal was that the
sum of RM24,835,281-62 was meant as payment for Petron’s sale of
diesel fuel to SESB. It was never meant as repayment of Swakaya’s
loan taken from the bank. There was no evidence that Petron
consented to the money being utilised to reduce Swakaya’s loan.
Hence the court held that the Bank could not unjustly enrich itself by
utilizing the monies for its own benefit.

LEAVE TO APPEAL TO THE FEDERAL COURT

34. Dissatisfied with the decision of the Court of Appeal, the Bank
applied for leave to appeal to the Federal Court. Leave to appeal
against the decision of the Court of Appeal was obtained on 12 April
2018 on the following question of law:

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 “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.”

35. We heard the appeal on 25 June 2019 and reserved our

decision. We now deliver our decision and reasoning below.

OUR DECISION

36. As stated at the outset, the primary issue for determination here
is which of the two creditors who claim competing entitlement, should
prevail:

(i) The Bank in whose favour Swakaya created an absolute

assignment earlier in time over the proceeds of sales of
the SESB Contract (between SESB and Swakaya for the
supply of diesel oil); or

(ii) Petron, who asserts a right to those proceeds in respect

of a debt owed to it by Swakaya for diesel oil supplied
directly to SESB pursuant to its arrangement with
Swakaya vide letter dated 15 November 2013?

37. It is first necessary to examine and comprehend the legal

reasoning and application of the law by the Court of Appeal (and

12
thereby the High Court) to ascertain whether their decisions are
correct or erroneous in any respect.

38. It is trite that an appellate court will not, generally speaking,

intervene unless the lower court is shown to be plainly wrong in
arriving at its judicial decision. (see Gan Yook Chin (P)& Anor v Lee
Ing Chin @ Lee Teck Seng & Ors [2005] 2 MLJ 1, UEM Group
Berhad v Genisys Integrated Pte Ltd [2010] 9 CLJ 785; Dream
Property Sdn Bhd v Atlas Housing Sdn Bhd [2015] 2 MLJ 441;
[2015] 2 CLJ 453; Chow Yee Way & Anor v Choo Ah Pat [1978] 1
LNS 32; Watt v Thomas [1947] AC 484 and the recent English
Supreme Court case of Henderson v Foxworth Investments Ltd
and another [2014] 1 WLR 2600, [2014] UKSC 41, 2014 GWD 23-
437, 2014 SLT 775, [2014] WLR(D) 290, 2014 SCLR 692, UKSC
2013/0083.)

The legal rationale of the High Court

39. The trial judge relied on Takako Sakao(f) v Ng Pek Yuen(f) &
Anor [2009] 6 MLJ 751 (‘Takako Sakao’) as well as Paragon
Finance plc v DB Thakerar & Co [1999] 1 All ER (‘Paragon
Finance’) to conclude that the fact pattern of the instant appeal “falls
squarely” within the parameters of a constructive trust. His Lordship
did not explain precisely where or how such similarity arose. He held
simply that he agreed with Petron that “in the circumstances of the
case” the Bank had received the sum claimed from SESB as a
constructive trustee for the benefit of Petron. Accordingly it was the
duty of the Bank to return the monies to Petron and not keep it for
itself. The trial judge went on to conclude that if the Bank did not do

13
so, it would be unjustly enriched. Accordingly it was a fit case for the
Court to impose a constructive trust seemingly “to satisfy the
demands of justice and good conscience”. Reference was made to
several other cases which simply set out correctly the definition of a
constructive trust.

40. With the greatest of respect, the judgment of the High Court,
which comprises largely of citations for the definition of constructive
trusts, does not in any part of the judgment:

(a) analyse the chronology of facts;

(b) acknowledge or examine the existence of an absolute

assignment in favour of the Bank;

(c) consider the effect of such an absolute assignment in

relation to Petron’s claim;

(d) explain or analyse how a constructive trust arises in the

context of the facts here, given the existence of extensive
borrowings from the Bank by Swakaya which was
secured by contracts of assignment of proceeds
arising/accruing from the sale of diesel fuel to SESB;
(e) explain how the legal concepts of a constructive trust
arise in the context of the various cases cited;

(f) consider whether, if such trust does indeed arise or

subsist, the interplay in law between such a trust and a
valid absolute assignment;

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 (g) consider or apply the principles of unjust enrichment
within a legal context or the factual background of this
case, particularly the existence of a valid, legal,
enforceable absolute assignment of the subject proceeds;

(h) consider the far reaching effects on the banking and

construction industries of holding that a constructive trust
can arise and defeat an absolute assignment of proceeds
created prior to the subsistence of such a trust.

41. Without the application of accepted legal principles in relation

to the law relating to absolute assignments, which comprise a
fundamental aspect of banking law, and on which subject there is
considerable case law, the judgment cannot, with great respect, be
said to be sound. Apart from the absence of accepted basic legal
principles, there is a dearth of legal reasoning, which is a fundamental
requirement of any judgment of the court. It does not shed light on
how the Court reached the conclusion, on the facts of this case, that
a constructive trust arises.

42. It is important that judgments, at first instance or otherwise,

explain fully the basis for reaching a conclusion both on the facts and
the law. This requires the setting out of the salient facts, an
appreciation of those facts, a consideration of the relevant law in
respect of the case and the application of the law to those facts
resulting in a decision that is reasoned. The fact that there has been
an error in the comprehension of the facts, law or applicability of a
legal principle may result in a decision that is erroneous, but it would
still be a legally reasoned judgment in that the method of thought and

15
argument utilized by the judge when applying legal principles to
interactions between persons or entities would be apparent.

43. In the instant case the legal methodology utilized by the trial
judge is stated to be premised on precedent and analogy but the
basis on which precedent and analogy have been applied in the
cases cited to the particular facts of the case before him, is absent.
The similarity of the factual pattern or legal precedent, which
comprises the basis to apply this form of legal reasoning, i.e.
precedent and analogy is not articulated.

44. The case of Tudingan Timur Sdn Bhd v Che Mat bin Padali
(unreported) is entirely inapplicable on the facts and the law as it
involved monies deposited with a third party in the context of a joint
venture. The monies were returned and an employee of one of the
joint venture companies placed the said monies in his personal bank
account. The employee claimed to have passed the monies on to one
of the directors of the company. The Court of Appeal found him liable
to make good the monies when the plaintiff who was the other partner
in the joint venture company sought the return of the monies. It was
observed that the employee had “received the sum ……. as a
constructive trustee for the benefit of the plaintiff”. This last sentence
appears to be the basis on which a constructive trust was found and
applied to the facts of the instant appeal.

45. In similar vein the facts of Takako Sakao are simply not
comparable, let alone on all fours with the facts of the instant appeal.
The application of the principles of law relating to a constructive trust
are simply inapplicable in the context of the instant appeal.

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46. The decision of the High Court is flawed.

The Decision of the Court of Appeal

47. The Court of Appeal treated the appeal as one concerning the
creation of a constructive trust. The facts of the case were therefore
apprehended and dealt with on that basis, namely whether or not the
trial judge was correct in his conclusion that the facts of the case
warranted the imposition of a constructive trust.

48. The full factual matrix was set out as were the contentions of
respective counsel. The primary complaint of the Bank was that the
trial judge had failed to consider the legal effect or the consequences
of the subsistence of the Assignment of Contract Proceeds
agreement between the Bank and Swakaya.

49. More particularly, emphasis was placed on the evidence at the

trial which disclosed that SESB had not expressly agreed to make
direct payments to Petron. The Court of Appeal held that this issue
was not of paramount importance. What was important was “whether
it was conscionable for SDBB to claim the money as its own and to
use it for its own benefit when it was meant as payment to Petron for
the diesel fuel that it supplied and delivered to SESB.”
(SDBB refers to the Bank)

50. It is apparent from the foregoing that the Court of Appeal

viewed the monies in the second project account as being available
for the imposition of a constructive trust in favour of Petron’s claim.
Emphasis was given to the element of “conscionability” in relation to

17
those funds, on the grounds that the Court viewed the monies paid
by SESB as having been meant for payment to Petron. Thereafter
the sole issue before the Court became one of whether or not this
was a fit and proper case for the establishment of a constructive trust.

51. To this end case law in Malaysia, the United Kingdom and the
United States of America was considered and applied. In short the
Court of Appeal concurred with the trial judge that the balance sum
paid by SESB was held by the Bank as constructive trustee for the
benefit of Petron. Accordingly it was the Bank’s duty to return the
monies to “its rightful owner”, Petron.

52. In rejecting the submissions of the Bank that it was entitled to

the monies by reason of the Assignment of Contract Proceeds
agreement entered into with it, as security for the credit facilities
afforded to Swakaya, the Court of Appeal held that this argument was
“structurally flawed” as it ignored the “simple truth” that the balance
sum was meant as payment for Petron’s sale of the diesel fuel to
SESB and was never meant as repayment for Swakaya’s loan with
SSDB or any other purpose.

53. Further, the Court found that there was no evidence that Petron
had consented to the monies being utilized for reducing Swakaya’s
loan totaling RM85 million. It was concluded that it was wrong to say
that Petron had lost its right to the monies merely because Swakaya
had assigned the contract proceeds absolutely to SESB. The Court
went further to state that the Bank had behaved unconscionably in
insisting that it was entitled to the said monies “despite knowing that
Petron was the beneficial owner”. This in turn was because the Court

18
found that the second project account was for the purposes of making
payment to Petron for the diesel supplied and delivered to SESB.
Therefore Petron it concluded, had “better rights over the money” as
it was specifically for the purposes of payment to Petron.

54. With the greatest of respect the Court of Appeal erred in its
findings and conclusions for the following reasons:

(a) It failed to comprehend the effect of the contract for the

assignment of all contract proceeds of the SESB Contract
with Swakaya;

(b) It failed to comprehend the purpose and effect of an

absolute assignment at law;

(c) It failed to appreciate that the absolute assignment

accorded the Bank entitlement to, and priority over all
contract proceeds, whether housed in the first or second
finance project account on the basis of the contract for
the assignment of proceeds;

(d) It failed to comprehend and therefore did not consider the

effect of such a finding on the banking industry;

(e) It erroneously concluded that the second project finance

account was for the purposes of enabling Petron to be
paid out of that account, without realizing that the primary
purpose of the project accounts was to separate and

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 house the contract proceeds of the SESB Contract for the
purposes of repaying the loan afforded by the Bank;

(f) It failed to appreciate that at all material times the

assignment continued to subsist and was valid and
enforceable as security for the loan afforded by the Bank;

(g) It erred in finding that this was an appropriate case for the
imposition of a constructive trust in that the Bank had
never at any point of time displayed deceptive conduct or
dishonesty, nor taken monies not lawfully owing to it;

(h) It erred in finding that the monies in the second finance

project were “meant as payment to Petron” for diesel fuel
that it supplied and delivered to SESB. Accordingly the
factual and legal basis for finding a constructive trust
never subsisted;

(i) It failed to appreciate that in Takako Sakao’s case the

circumstances were such that it was unconscionable for
the owner of the property to assert his beneficial interest
and deny the beneficial interest of another. In the instant
case the Bank was lawfully asserting its prior legal right
and entitlement to the monies in the second project
account by way of priority and security, thus precluding
the imposition of a constructive trust.

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The Effect of the Absolute Assignment given by Swakaya to the
Bank

The Clauses in the Contracts between Swakaya and the Bank

55. It will be recalled that Swakaya provided security for the credit
facilities of RM85 million it procured from the Bank. This took the form
of the assignment of all proceeds received by Swakaya from the
SESB Contract. The provisions of the Assignment of Contract
Proceeds agreement dated 3 April 2013 expressly stipulates in
section 3.1 that:

“………the Assignor as beneficial owner HEREBY

ASSIGNS absolutely to the Assignee all of the Contract Sum
to which the Assignor is or may be entitled….”

56. A similar provision is found in the Supplemental Assignment of

Contract Proceeds dated 23 August 2013. This is not in dispute.

Section 4(3) of the Civil Law Act 1956

57. The absolute assignments thus created are legally valid as the
requisite written notices of assignment were served on SESB.
Section 4(3) of the Civil Law Act 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

21
 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.” [emphasis ours].

Definitions

58. “Assignment” generally means the transfer of existing

proprietary rights, future rights, property, debt or other contractual
rights by one person to another person. In the instant appeal it refers
to the transfer of rights or entitlement to the contract proceeds
received by the debtor, Swakaya to the Bank.

59. “Assignee” is the new creditor, a lender or a buyer of

receivables, transferee or holder of the security. In the instant appeal,
it refers to the Bank.

60. “Assignor” is 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. Here it is
Swakaya.

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61. “Chose in action” is 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.

62. “Obligor” is the debtor in the original contract from which the
assigned receivables arise, the person who owes payment of the
receivable to the assignor. Here it is SESB who makes payment to
Swakaya for diesel oil supplied under the SESB Contract.

The Effect of an Absolute Assignment

63. The effect of an absolute assignment has been considered in

numerous cases. In Damai Freight (M) Sdn Bhd v Affin Bank Bhd
[2015] 4 CLJ 1 the Federal Court explained in full how section 4(3)
was to be construed, as well its effect and consequences.

64. The definition to be accorded to a ‘chose in action’ as

explained in Mozley & Whiteley’s Law Dictionary (10th Edition)
was utilised. It is defined as “a thing of which a person has not the
present enjoyment, but merely a right to recover it (if withheld) by
action”. It is therefore clear that the monies which Swakaya was
entitled to receive from SESB under the SESB Contract for the supply
of diesel oil amounts to a ‘chose in action’. It is indeed something to
which the Bank, as assignee had no present right of enjoyment, but
by reason of the assignment was entitled to a right to recover those
monies by action.

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Were the assignments accorded by Swakaya absolute
assignments or by way of charge or security only?

65. The next issue considered was whether the contract of

assignment did indeed absolutely assign such a chose in action or
merely secured it.

66. Whether or not an assignment is absolute for the purposes of

the statutory regime is ultimately an issue of construction. (see
Mercantile Bank of London Ltd v Evans [1899] 2 QB 613).

67. The case of Hipparion (M) Sdn Bhd v Chung Khiaw Bank
Ltd [1989] 2 CLJ 101; [1989] 2 MLJ 149, SC is authority for the
proposition that the use of the words “absolutely assigns”
demonstrates that the instrument was intended by the parties to be
an absolute assignment and not one by way of charge only.

68. The Bank here holds an absolute assignment, consistent with

the use of the words “assigns absolutely” as employed in section 3.1
of the contract for the assignment of proceeds (see also Nouvau
Mont Dor (M) Sdn Bhd v Faber Development Sdn Bhd (supra);
United General Insurance Co Sdn Bhd v Progress Credit Sdn
Bhd [1988] 1 LNS 8; Chung Khiaw Bank Ltd v Hipparion (M) Sdn
Bhd [1988] 1 CLJ 164; Phileoallied Bank (Malaysia) Bhd v
Bupinder Singh a/l Avatar Singh & Anor [2002] 2 AMR 2081;
[2002] 2 CLJ 621, FC).

69. It is apparent from the use of the words “assigns absolutely” in

the clauses specified in the contract for the assignment of proceeds

24
in the instant case, that the assignment of the chose in action, i.e. the
right to the proceeds paid into the project accounts, is an absolute
assignment and not by way of charge only.

70. In other words the legal entitlement to the contract proceeds,

as and when they are deposited in the project accounts (albeit the
first or second project account) is that of the Bank and not Swakaya
or any other third party. 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 as early as 3 April 2013.

71. It is evident from the statute itself that the effect of an

assignment of a ‘chose in action’ (i.e. the monies paid by SESB to
Swakaya under the SESB Contract for the supply of diesel oil from
Swakaya to the Bank), is to pass and transfer the legal right to that
chose in action to the Bank, as assignee, from the date of notice
being accorded to the obligator, i.e. SESB. This means that as of 3
April 2013, the Bank enjoyed legal title to the monies in the project
account. That is the effect of the absolute assignment (see also Affin
Bank Berhad v ACP Industries Berhad [2014] 1 MLRA 182).

Conditions for the Subsistence of a Valid Absolute Assignment

72. The case of UMW Industries Sdn Bhd v Ah Fook @ Chin

Kim Fook [1996]1 CLJ 379, a decision of this Court, sets out the
conditions necessary for effecting an absolute legal assignment
under section 4 (3) of the Civil Law Act 1956. The conditions are:

25
 (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

73. The conditions specified above are met in the instant case
because the debt or other chose in action was subsisting, namely a
right (on the part of the Bank) to receive, own or recover the contract
proceeds under the SESB Contract. At the time of the assignment by
Swakaya to the Bank (3 April 2013), such a debt or right to the debt
subsisted as the SESB Contract had been executed between
Swakaya and SESB (19 December 2012).

74. As stated earlier the subject matter of the assignment was a

chose in action namely the right to receipt of, and recovery (if witheld)
of the contract proceeds of the SESB Contract.1

1 It is signif icant to note that the assignment was binding on SESB as well ,
in that if it made payment (af ter the assig nment came into eff ect) directly
to Swakaya or a thir d party without the consent of the Bank it might well
open itself to liabilit y t o repay the Bank (see Malayaw ata Steel Berhad
v Government of Malaysia & Anor [1980] 2 MLJ 103) .

26
75. The assignment was in writing, assigned absolutely the
proceeds of the SESB Contract directly to the Bank and notice of
such assignment was properly given to SESB.

76. It is therefore our conclusion that, after construing the relevant

contracts of assignment as a whole, 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. The assignment dated 3 April 2013 and 23 August 2013 was
absolute as Swakaya (assignor) intended to transfer its legal rights
and beneficial interest over the SESB Contract proceeds irrevocably
to the Bank (assignee). The assignment was unconditional and did
not introduce uncertainty to the obligor, as SESB had been given
express notice to make payment to the Bank.

77. From the contemporaneous documents in the appeal records,

express notices of assignment of the Contract proceeds had been
given by Swakaya (assignor) and the Bank (assignee) to SESB
(obligor) on 20 March 2013, 20 November 2013 and February 2014.
By these notices SESB was notified that Swakaya had obtained loan
facilities from the Bank and requested that all contract proceeds due
under the contract be assigned and remitted directly into initially the
first project account, later the second project account for the Bank.

78. SESB’s responses in writing dated 22 March 2013 and 28

February 2014 (for the second project finance account) proved that it
expressly consented to the assignment in writing.

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79. The effect of such consent is comprehensively set out in the old
case of Metzgar ex rel. Uhler v. Metzgar, 1 Rawle 227 (1829) from
the United States of America, where Gibson, CJ. agreed that “notice
puts an end to all privity between the assignor and obligor, and the
assignee becomes the owner of the bond, subject to any existing
equity against the obligee. After the notice of the assignment, a new
contract arises between the obligor and the assignee, who holds a
chose in action no more negotiable than it was in the hands of the
obligee.”

80. For these reasons the assignment of the contract proceeds

under the SESB Contract to the Bank is clear beyond dispute. The
effect was to transfer ownership of all future funds deposited in the
designated accounts to the Bank. As the monies were periodically
deposited ownership of the funds was with the Bank, over and above
other interests, including that of Petron, unless a prior equity
subsisted, which is not the case here.

Did the freezing of the first project account and the creation of
the second project account affect or alter the validity of the
absolute assignment such that Petron acquired any greater
entitlement than the Bank to the contract proceeds of the SESB
Contract?

81. The general rule is 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. It will be recalled that new
arrangements arose by reason of the freezing of the first project
account (with Maybank) by MACC. Vide the new arrangements all

28
contract proceeds from the SESB Contract were to be remitted into
the second project account (the CIMB account). Swakaya entered
into a new agreement with Petron on 15 November 2013 for the direct
supply and delivery of the diesel fuel. However neither SESB nor the
Bank were privy to this arrangement.

82. Petron’s contention is that it enjoyed ownershp over the SESB

contract proceeds paid into the second project account by reason of
the agreement between Swakaya and Petron on 15 November 2013.
It may well be the case that Swakaya held out to Petron or intended
that the proceeds were to be utilised for the supply of petrol. But
legally this is entirely inconsequential, given the existence of the
absolute assignment which had transferred ownership of those
contract proceeds in favour of the Bank with effect from 3 April 2013.

83. In short, Swakaya could not renege from, nor change its
position because the right to those contract proceeds had been
transferred completely to the Bank as of 3 April 2013.

84. The change as to where the monies were deposited did not,
and could not, affect the Bank’s rights under the valid absolute
assignment. A mere change of bank accounts did not, and could not,
affect the absolute assignment which had been effected much earlier.
The existing rights of the Bank were therefore in no way affected. The
Bank’s right to the contract proceeds remained intact notwithstanding
the freezing of the first project account and the opening of the second
project account.

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85. In point of fact, since Swakaya had lost its rights and interest to
the contract proceeds, it could not then resile from the absolute
assignment by entering into a new agreement with Petron. This was
contrary to and contravened the terms of the Assignment of Contract
Proceeds agreement it had executed with the Bank. More importantly
it did not have the effect of diverting funds to Petron because
Swakaya had no legal entitlement to those contract proceeds.

86. Swakaya also had no right to make any payment (the payment
of RM26,027,121-95) to Petron from the second project account
without the consent of the Bank, which was legally entitled to the
SESB contract proceeds. To approve or concede to such a
preference in favour of Petron flouts established principles.

87. As such, there was no basis for the trial judge to effectively
“extinguish” the rights of the Bank as the lawful assignee under the
absolute assignment and impose a constructive trust in favour of
Petron for the sum of RM24,835,281-62 (part of the contract
proceeds) sitting in the second project account simply by virtue of the
new agreement between Petron and Swakaya dated November 2013,
when the absolute assignment in favour of the Bank was valid,
subsisting and had the effect of assigning entitlement to the entirety
of the contract proceeds in favour of the Bank.

88. We now move to consider the application of constructive trusts

in a commercial arrangement such as the present, and whether such
imposition is tenable in light of the existence of a legally valid and
subsisting absolute assignment. This in turn warrants a consideration
of the law relating to the subject.

30
The Law Relating to Constructive Trusts

How does a constructive trust arise?

89. The leading case authorities of Takako Sakao (which

adopted the test in the Paragon Finance) and Carl Zeiss Stiftung
v. Herbert Smith & Co [1969] 2 Ch 276, 300) and Tay Choo Foo v
Tengku Mohd Saad Tengku Mansur & Ors [2009] 2 CLJ 363
(which relied on, among others, the cases of Hussey v. Palmer
[1972] 3 All ER 744 and Westdeutsche Landesbank Girozentrale
v. Islington London Borough Council [1996] AC 669) have
established that a constructive trust arises by operation of law when
the circumstances are such that it would be unconscionable for the
owner of the property in dispute to assert his own beneficial interest
in the property and deny the beneficial interest of another. As
comprehensively expressed in these cases, constructive trust is a
remedial device that is imposed by equity to satisfy the demands of
justice and good conscience without reference to any express or
presumed intention of the parties.

90. And in Malaysian International Trading Corp Sdn Bhd v

RHB Bank Bhd [2016] 2 CLJ 7171 this Court reiterated the
statements above before going on to adopt the approach in
Twinsectra Ltd v Yardley And Others [2002] 2 All ER 377. This
saw the imposition of a two-fold test comprising both an objective and
a subjective test. This test which requires compliance with the
additional subjective honesty ingredient, was approved by this Court
in CIMB Bank Bhd v Maybank Trustees Bhd & Other Appeals
[2014] 3 CLJ 1.

31
91. Applied in the context of the present case, 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 contract proceeds under the SESB
Contract so as to deny a subsisting interest of Petron. Several issues
immediately arise:

(a) Given that the Bank enjoys a legal and valid subsisting
absolute assignment over those contract proceeds can it be
said that it is unconscionable for the Bank to assert a right to
the same, whether housed in project finance account one or two?

92. The answer must be that it is not and cannot be unconscionable

for the Bank to rightfully seek to recover the monies in the second
project finance account because entitlement to those monies (i.e. the
chose in action) was transferred to the Bank as of 3 April 2013. The
fact that Petron had entered into a new contract with Swakaya in
November 2013 makes no difference whatsoever as we have
explored in some detail earlier. 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.

93. If a constructive trust were to applied in such circumstances, 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. It would cast
considerable uncertainty on the law of banking.

32
(b) Where is the evidence of dishonest conduct or dishonesty
on the part of the Bank which is the hallmark and basis for the
imposition of a constructive trust?

94. Again the answer must be that there is simply no such evidence.
Dishonesty or less than honourable conduct, such as it is, can be
attributed only to Swakaya. It was Swakaya that entered into a
contract with Petron, inducing it to continue to supply diesel oil vide
the new contract, without disclosing that the contract proceeds in the
second project finance had already been absolutely assigned to the
Bank for the credit facilities it had been afforded. The Bank was never
made aware of this arrangement at the material time. Neither did
SESB concur with any such arrangement, knowing that it would run
foul of the absolute assignment which it had expressly consented to.

95. It therefore bears repeating that there is simply no basis for the
imposition of a constructive trust in the circumstances of this case.

96. The facts of the instant appeal bear no relation to Takako

Sakao where there was a dishonest appropriation of the innocent
party’s beneficial interest in the property which the wrong-doer
sought to dishonestly appropriate the entirety of the property without
acknowledging the innocent party’s interest. At the risk of repetition,
the Bank here was never, nor is now seeking to appropriate Petron’s
“interest” in the contract proceeds. This is because Petron has no
“interest”, legal or beneficial in the proceeds. This in turn is by reason
of the absolute assignment created prior in time (3 April 2013)
whereby there was a transfer of the entitlement to proceeds
deposited by SESB under the SESB Contract, in favour of the Bank.

33
97. Petron’s recourse is against Swakaya directly as it entered
solely into a contract with Swakaya. Petron did not enter into any
arrangement with the Bank whereby the Bank consented to Petron
being paid out of the contract proceeds. As for SESB, even if it had
knowledge of this new arrangement between Swakaya and Petron, it
had no bearing whatsoever on the absolute assignment, by which
SESB was bound to deposit contract proceeds into a project account
(either 1 or 2) in favour of the Bank.

98. The contract between Swakaya and Petron does not create an
equity giving Petron any interest in the contract proceeds. This is
because Swakaya has no entitlement or right to create any such
interest by reason of the absolute assignment in favour of the Bank.
Further, the contract between Swakaya and Petron merely creates,
at best, a debt due and owing by Swakaya to Petron when it fails to
pay for the diesel petrol supplies.

99. There is therefore no basis for the imposition of a constructive

trust. Petron can lay no claim to the subject matter of the alleged trust
i.e. the contract proceeds because it has simply no interest, legal or
beneficial in the same.

100. It is also clear that a fundamental ‘certainty’ namely the subject

matter of a trust is missing. There is no element of dishonesty, but on
the contrary an absolute legal entitlement to the monies vis a vis the
Bank. There is therefore no basis for invoking the common law
doctrine of a constructive trust.

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101. A perusal of the nature of a constructive trust in Halsbury’s
Laws of England (4th Edition) (which was relied upon by the Court
of Appeal) bears out our conclusion that there is no basis for a
constructive trust to arise. It is said to “arise by operation of law to
specific property which is neither expressly subject to any trusts nor
subject to a resulting trust but which is held by a person in
circumstances where it would be inequitable to allow him to assert
full beneficial ownership of the propery. Such a person will often hold
other property in a fiduciary capacity and it will be by virtue of his
ownership of or dealing with that fiduciary property that he acquired
the specific property subject to the constructive trust.”

102. As has been explained above, it would be completely contrary

to the doctrine of constructive trust under the common law, as well as
established principles of written law to conclude that the Bank held
the balance sum as a trustee in favour of Petron. How can it be
inequitable for the Bank to appropriate those monies, when it is
entitled to do so under the law by reason of the subsistence of a valid,
enforceable and binding legal assignment?

103. Neither can it be said that the Bank holds the monies for Petron
in a fiduciary capacity. There is simply no relationship between the
Bank and Petron that would warrant such a relationship to be imputed.
There is also a requirement that the Bank should have dealt with the
property in such a manner so as to effectively deprive Petron of its
‘interest’ or ‘entitlement’ to a part of the property.

35
104. Again, as explained immediately above, this simply does not
arise as the Bank is dealing entirely in accordance with an absolute
assignment in relation to the contract proceeds. And Petron has no
interest in those proceeds. There can therefore be no question of a
constructive trust arising. To this end the decision of both the Courts
below is necessarily flawed.

Burden of proof

105. In this claim the burden continually remained on Petron as the

plaintiff to establish that it enjoyed a claim superior to that of the Bank
in relation to the contract proceeds under the SESB Contract, on a
balance of probabilities.

106. It is clear to us that Petron failed to discharge the burden on it,

for the reasons cited above.

Entitlement to the Balance Sum

107. Ultimately this claim centred on whether a creditor entitled to

the recovery of a debt pursuant to a claim for monies for goods
supplied can prevail over the holder of an absolute assignment.
Petron is the creditor entitled to a debt due and owing by Swakaya to
it, while the Bank is the absolute assignee of the contract proceeds
under the SESB Contract (comprising the subject matter of this claim)
as a consequence of Swakaya assigning those proceeds to it, as
security for the grant of credit facilities of RM85 million to Swakaya.

36
108. There is no basis in law to support the proposition that Petron’s
mere claim for the recovery of a debt against Swakaya can possibly
prevail against that of the Bank, where the Bank is the lawful
assignee in law in relation to the subject matter of the suit here,
namely the SESB Contract proceeds. It is clear that the Bank’s claim
which arose prior to any claim by Petron, prevails. Petron has no
equity in those SESB contract proceeds.

CONCLUSION

109. To summarise, the court takes the view that:

(i) The Bank obtained and therefore enjoys a valid and

enforceable absolute assignment which complies with
section 4(3) of the Civil Law Act 1956;

(ii) The effect of the absolute assignment under the law is to

transfer the entitlement to the monies from the SESB
contract proceeds (‘the chose in action’) held in either
project account 1 or 2, in favour of the Bank;

(iii) The Bank is and was, therefore at all material times, fully
entitled to utilise the SESB contract proceeds in reducing
the loan sums or credit facilities afforded by it to Swakaya;

(iv) When the “new arrangement” was made vide a contract

between Swakaya and Petron in November 2013, this
had no effect on the absolute assignment created by
Swakaya in favour of the Bank in April 2013 in respect of

37
 the grant of the credit facilities by the Bank. In other words,
the Bank did not at any time lose its entitlement to the
SESB contract proceeds by virtue of the absolute
assignment which remained, and remains valid, binding
and enforceable;

(v) 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. The imposition of such
a constructive trust was therefore erroneous.

Leave Question

“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.”

Answer To Leave Question

For these reasons, the answer to the leave question is in

the negative.

38
110. We are satisfied that the appeal has merits. We therefore allow
the appeal, set aside the decision of the Court of Appeal and dismiss
Petron’s claim against the Bank with costs of RM40,000-00 to be paid
by Petron to the Bank for the present appeal and costs of RM45,000-
00 for the proceedings in the courts below. For avoidance of doubt,
we order that the costs awarded to Petron in the sum of RM30,000-
00 in the High Court and RM15,000-00 in the Court of Appeal, if
already paid, be refunded to the Bank.

111. This judgement is prepared pursuant to section 78(1) of the

Courts of Judicature Act 1964, as Justice Ahmad Maarop has since
retired. This is the judgment of the remaining members of the panel.

Signed
NALLINI PATHMANATHAN
Judge
Federal Court
Malaysia

Dated : 17.2.2020

For the Appellant : Saiful Azian Mokhtar

Messrs Jayasuriya Kah & Co
Advocates and Solicitors
Suite 208, 2ND Floor, Wisma Sabah
88815 Kota Kinabalu
Sabah
For the Respondent : Douglas Lind
(Delonia Chong with her)
Messrs Lind, Willie Wong & Chin
Advocates and Solicitors
Level 7, Wisma Great Eastern
65 Jalan Gaya
88000 Kota Kinabalu
Sabah

39