Introduction
The Federal Court in CIMB Bank Berhad v Sebang Gemilang Sdn Bhd(1) reaffirmed the established position in Malaysian law regarding breaches of trust, following the earlier decision in CIMB Bank Bhd v Maybank Trustees Bhd(2).
In Maybank Trustees Bhd, the Federal Court applied the combined objective-subjective test propounded in Twinsectra Ltd v Yardley(3):
There is a standard combining an objective test and a subjective test. Before a finding of dishonesty can be made, it must be established that the defendant’s conduct was dishonest by ordinary standards of reasonable and honest people, and that the defendant realized by those standards that their conduct was dishonest.
In the present case, the majority of the Federal Court held that imputed constructive knowledge of an assignment is insufficient to hold a debtor liable to the assignee for the debt.
Facts
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The appellant partially financed three government projects awarded to the second respondent. A sinking fund account, operated solely by the appellant, was created as additional security.
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A deed of assignment and power of attorney were executed by the second respondent in favour of the first respondent.
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Later, the second respondent requested that one of the first respondent’s directors be added as a signatory to its current account with the appellant, and a board resolution was passed accordingly.
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Upon completion of the projects, the appellant closed the sinking fund at the second respondent’s request and credited the fixed deposit to the second respondent’s current account.
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The first respondent discovered this only when seeking release of the funds after the defects liability period and subsequently sued both the appellant and the second respondent.
High Court and Court of Appeal Decisions
Both courts found in favour of the first respondent, holding that the appellant, despite knowledge of the assignment, committed a breach of trust by releasing funds to the second respondent without informing the first respondent.
Federal Court Decision
The Federal Court considered the following leave question:
Where no written notice of an absolute assignment is given pursuant to Section 4(3) of the Civil Law Act 1956, and the trial court finds that the debtor has knowledge of an assignment between its customer and a third party, can the debtor be held liable to that third party when payment is made to the customer?
Key Points:
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Failure to provide statutory notice in writing does not prevent an assignee from acting as an equitable assignee.
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The central issue was whether the appellant could be held liable when paying the second respondent.
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Four out of five judges held there was no evidence of dishonesty based on ordinary standards of reasonable and honest people. The subjective test confirmed the appellant did not know it was acting dishonestly.
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The appellant acted according to the normal banker-customer relationship.
Appeal Outcome: Allowed in favour of the appellant.
Minority Judgment
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Distinction between:
- An accessory to a breach of trust by a trustee/fiduciary — requires a finding of dishonesty to establish liability.
- A constructive trustee — may be liable for a breach of trust without evidence of dishonesty.
Comment
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Written notice should be given to ensure an absolute legal assignment, though lack of notice does not preclude an equitable assignment.
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The decision underscores that a debtor can only be held liable to an assignee if a prior finding of dishonesty exists.
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The Federal Court maintained a high threshold for debtor liability, preventing overly broad liability based solely on knowledge of an assignment.
Article Author
Gan Khong Aik
Partner, Gan Partnership
E: khongaik@ganlaw.my
