www.ipsofactoJ.com/appeal/index.htm [2000] Part 4 Case 7 [CAM]    

 

COURT OF APPEAL, MALAYSIA

Coram

SHAIK DAUD JCA

Ka Wah Bank Ltd

- vs -

Hong Leong Bank Bhd

MOKTHAR SIDIN JCA

HAIDAR MOHD NOOR JCA

24 AUGUST 2000

Judgment

Mokhtar Sidin, JCA

(delivering the judgment of the court)

  1. The facts in respect of this appeal are as follows:

  2. The fourth respondent defaulted on the loan facility given by the first respondent. The first respondent then demanded from the appellant payment for the sum as stated in the letter of credit.

  3. On July 24, 1986 the appellant paid the sum demanded. In making the payment the appellant informed the first respondent that the appellant now stood in the position of a surety and as such was entitled to the shares subjected to the first and second respondents' rights against Nadinusa. This was not disputed.

  4. On September 24, 1986 the first respondent wrote to the fourth respondent stating that it had received dividends amounting to RM607,500 paid by Supreme Finance (M) Bhd on the shares ("the dividends") which were paid on August 20, 1986. A copy of the letter was extended to the appellant.

  5. On October 21, 1986 the appellant demanded from the first respondent that the dividends be paid to them. When the first respondent failed to comply with the said demand the appellant took the present originating summons seeking the following:

    1. A declaration that the appellant stands in the position of a surety or alternatively, in a position analogous to that of a surety under the standby letter of credit No HOSLC 860001 for the sum of RM31,250,000 ("the said letter of credit") issued by the appellant in favour of the first respondent as security for a term loan of RM30,000,000 granted by the first and second respondents in favour of the fourth respondent.

    2. A declaration that the appellant as a surety or alternatively, standing in the position analogous to that of a surety is entitled upon honouring the said letter of credit by effecting payment in full to the first and second respondents, to be subrogated to the rights of the first and second respondents under the principal loan agreement dated September 20, 1985 entered into between the fourth respondent and the first and second respondents.

    3. A declaration that the appellant as subrogatee is entitled to the benefit of the securities deposited and/or listed under the said principal loan agreement namely:

      1. the 4,050,000 shares in Supreme Finance (M) Bhd pledged by the fourth respondent;

      2. the 4,050,000 shares in Supreme Finance (M) Bhd pledged by Supreme Corporation Bhd;

      3. a corporate guarantee by Supreme Corporation Bhd; and

      4. the guarantee and/or guarantees executed by Hashbudin Hashim, Megat Majid Megat Ayob; and Anuar Othman.

    4. A declaration that the 4,050,000 shares in Supreme Finance (M) Bhd referred to in paragraph (3)(a) above and registered in the name of the third respondent as nominee shall be held by the third respondent on behalf of and for the benefit of the appellant;

    5. A declaration that the appellant shall be entitled to receive the dividends of RM607,500 paid on the 4,050,000 shares in Supreme Finance (M) Bhd referred to in paragraph (3)(a) above;

    6. An order that the first and second respondents should execute all such documents and do all whatsoever acts matters and things necessary to give effect to the appellant's rights of subrogation and the appellant's rights as subrogatee to the benefit of the securities deposited and / or listed under the said principal loan agreement.

  6. It is clear to us that the first, second and third respondents are not interested in the outcome of this appeal and as to whom the dividends should be paid. The dispute as to who is entitled to the dividends is between the appellant and the fourth respondent. We were informed that the dividends had been deposited in court pending the outcome of this appeal.

  7. We were informed by the parties that, apart from the present appeal, there were several other suits between the appellant and the fourth respondent. Sometime in May 1988, the appellant and the fourth respondent came to an agreement in respect of the other suits. Subsequently, the appellant disputed that there was a binding settlement between the parties.

  8. As a result of this denial by the appellant, in November 1988, the fourth respondent and one Hashbudin (a director and shareholder of the fourth respondent) filed Suit No D4-22-22 4-88; which suit was heard by Dr Zakaria Mohd Yatim J (as he then was) who on December 3, 1993 decided in favour of the fourth respondent and the said Hashbudin. The learned Judge there found that the agreement in May 1988 between the appellant and the fourth respondent was valid and ordered specific performance of that agreement. Amongst others, the terms of the settlement were:

    (a)

    that Nadinusa would deposit its SF share certificates and transfer forms to Ka Wah Bank whereupon Ka Wah Bank would withdraw all pending actions (including the present appeal); and

    (b)

    upon Nadinusa's depositing the said shares and duly executed transfer forms, Ka Wah Bank is entitled to retain all benefits securing from the above stated shares from May 20, 1988.

  9. Apparently, the appellant was not happy with that decision especially the one in paragraph (b) and it appealed to the Federal Court.

  10. When the appeal against the decision of Dr. Zakaria Mohd Yatim J to the Federal Court was still pending, the application by the fourth respondent in the present appeal was heard by another Judge (the trial Judge in the present appeal). Before the learned trial Judge, the appellant claimed that the above stated order did not include the dividends. The order did not touch on the dividends which were left open. That being the case the appellant is still entitled to the dividends. As such the appellant is entitled to the declaration as stated earlier. On the other hand, the fourth respondent claimed that the order of Dr Zakaria Mohd Yatim J made it clear that the appellant is only entitled to the benefits under those shares (including dividends) accruing after May 20, 1988. Any benefit prior to that date belonged to the fourth respondent. Since the dividends were paid on August 20, 1986, they rightly belonged to the fourth respondent. That is the main issue in this case.

  11. The learned trial Judge in the court below found in favour of the fourth respondent and dismissed the appellant's claim. In his judgment the learned trial Judge said:

    Once again, with respect, I disagree. Regarding paragraph (2), no doubt there was no specific mention that the dividend be paid to any party, but the learned Judge did hold that the letter which concluded the negotiation was the letter dated May 20, 1988, wherein one of the terms stated was upon Nadinusa depositing the said shares and the duly executed transfer forms, Ka Wah Bank is entitled to retain all benefits accruing to the said shares from the date thereof. Therefore even though there was no specific order on the dividend, there was an express term of the settlement that Ka Wah Bank would be entitled to the benefits from the date May 20, 1988, and by necessary implication, Ka Wah Bank would not therefore be entitled to any benefits prior to that date. lf Ka Wah Bank is not entitled to the dividend, I would hold that Nadinusa is, and in so holding, I do not think it goes beyond the judgment of Justice Zakaria.

  12. Against that decision the appellant have now appealed to this court. Before the appeal was heard the Federal Court gave their decision. It was contended by counsel for the appellant that the learned trial Judge had erred when he made his decision based on the decision of Dr. Zakaria Yatim J. As a matter of interest part of that decision had been overruled by the Federal Court. To be fair to the learned trial Judge when he gave his decision he had before him only the judgment of Dr. Zakaria Mohd Yatim J. The Federal Court gave their decision after the learned trial Judge gave his decision. As such when the learned trial Judge gave his decision in 1996, he was not aware that part of Dr Zakaria Mohd Yatim's decision had been overruled.

  13. Perusing the judgment of the Federal Court it is clear to us that the Federal Court reversed the decision of Dr. Zakaria Mohd Yatim J in respect of the benefits arising from where it was held that there was no settlement in respect of the benefits arising from the shares. Looking at the judgment of the learned trial Judge cited above it is clear to us that his decision was on the premise that there was a settlement in respect of the benefits arising from the shares as decided by Dr Zakaria Mohd Yatim J. Since the Federal Court had held that there was no such settlement, the basis upon which the learned trial Judge gave his decision had been nullified. As such his decision is no longer valid.

  14. In view of what is stated above, it is clear to us that this court has to evaluate the evidence as a whole. The court has to disregard the judgment of the learned trial Judge.

  15. As we understand it, counsel for the appellant contended that the appellant has the right over the dividends because of the following grounds:

    1. There was an express agreement between the appellant and the fourth respondent whereby the fourth respondent was to hand over the shares which were pledged to the first respondent, in the event the appellant had to pay the first respondent under the letter of credit; and

    2. by the doctrine of subrogation.

  16. Counsel for the appellant referred to a letter dated October 7, 1985 which reads as follows:

    The Ka Wah Bank Ltd.

    232 Des Voeux Road Central

    Hong Kong.

    October 7, 1985

    Dear Sir,

    Re: 4,050,000 shares in Supreme Finance (M) Bhd.

    With reference to the Standby L/C for MYR31,250,000.00 issued by your Bank in favour of Malayan United Bank Bhd, we hereby undertake to deposit with you as securities the 4,050,000 shares of the Supreme Finance (M) Bhd which we previously authorized you to release to and deposit with Malayan United Bank Bhd in the event of any claims by the Malayan United Bank Bhd under the said Standby L/C.

    Sgd.

  17. It is clear to us that the shares mentioned in the letter are the shares pledged to the first respondent. As we have stated that the event had taken place, that is the first respondent had demanded and the appellant had paid the first respondent the sum guaranteed by the letter of credit on July 24, 1986. The appellant, when they paid the amount demanded, informed the first respondent that they now stood in the position of surety. By right, the fourth respondent or the third respondent should have forwarded the shares to the appellant when the payment was made by the appellant as security. That was the undertaking given by the fourth respondent in the above-stated letter. The shares were never given to the appellant until Dr Zakaria Mohd Yatim J made the order to do so on December 3, 1993. It is clear to us that when the fourth respondent failed to deliver the shares to the appellant, they had defaulted in their undertaking and had withheld the shares unlawfully.

  18. From the events that took place it is not disputed that the appellant pursuant to the letter of credit, paid the first respondent the amount guaranteed under that letter of credit on July 24, 1986. The shares should have been forwarded to the appellant as security on that date or soon afterwards.

  19. The relevant parties and authorities should have been informed of the status of the shares. None of this took place. It was not clear in whose possession the shares were but from the judgment of Dr. Zakaria Mohd Yatim J it could be inferred that the shares were in the possession of the fourth respondent. This is further strengthened by the fact that when the first respondent received the dividends on September 2, 1986 they informed the fourth respondent that the shares had been returned to the fourth respondent.

  20. If the shares were handed to the appellant in accordance with the undertaking and the various parties or authorities had been informed of that, it is most likely that the dividends would be paid to the appellant. The date of payment of the dividends was August 20, 1986, which was about a month after the appellant made the payment pursuant to the letter of credit.

  21. By right the appellant should have become the owner of the shares on July 24, 1986 and whatever benefits accruing from the shares after that date belonged to the appellant. On the facts it is clear to us that by July 24, 1986 the shares should be in the hands of the appellant as security and whatever benefits should be paid to the appellant.

  22. As we have stated earlier, the shares were not handed to the appellant as security. It was not known in whose hand the shares were. By virtue of the letter by the appellant informing the first respondent that they were stepping into the shoes of the first respondent as surety, the appellant had established the right of subrogation as from that date.

  23. In Duncan, Fox, & Co etc v The North and South Wales Bank, etc [1880] VI App Cases 1, in December 1874 one of the partners of SR & Sons deposited with the N & SW Bank the title deeds of two of his own freehold properties, and signed a memorandum acknowledging them to be deposited as securities for what the N & SW Bank might advance to the firm in the way of discounts. In November 1875, D & Co sold to R & Sons a cargo of corn to be paid for in cash. Cash was paid only for part. R & Sons offered a bill of exchange for the rest, which was declined. D & Co were customers of the N & SW Bank. R & Sons said if D & Co would inquire of those bankers they would find it would be all right with the R & Sons' bills. The bank manager refused to discount the bill without the indorsement of D & Co, but said that he believed D & Co would incur no more than a nominal liability by putting their names on the bill. D & Co thereupon consented to take the bill, indorsed it in the ordinary way, and it was discounted by the bank and carried to their credit.

  24. In January, 1876, R & Sons stopped payment. The bill became due in February, and was dishonoured. D & Co, who then became acquainted with the fact that securities had been deposited with the bankers to cover advances on R & Sons' bills, brought an action against the N&SW Bank to have the benefit, so far as they would go, of the securities deposited in December 1874, claiming to be sureties to the bankers for what was due upon the bill. It was held by the House of Lords that D & Co were sureties on the bill, and that as such they were entitled to the benefit of these securities. At pp 10 and 11 Lord Selborne, LC said:

    The question, therefore, as to the proper appropriation of the 5921 19s 6d and the remaining securities, is between the respondents, claiming in right of Samuel Collins Radford (one of the acceptors), and the appellants, the indorsers of the bills of exchange; and it ought, I conceive, to be determined upon the same principles as if the appellants had actually paid the bills, and as if the bank had paid the proceeds of the securities either to the appellants, or into court in this action. If, in either of those events, Samuel Collins Radford would have been entitled to an order against the appellants for repayment, or for payment out of court of such proceeds, to be applied as part of his estate under the inspectorship deed, your Lordships' judgment ought now to be for the respondents; if not, the appellants are right. The Vice-Chancellor of the Palatine Court of Lancaster thought that the appellants were right; and, with the utmost respect to the Court of Appeal (which thought otherwise), I am of the same opinion.

    In examining the principles and authorities applicable to this question, it seems to me to be important to distinguish between three kinds of cases:

    (1)

    Those in which there is an agreement to constitute, for a particular purpose, the relation of principal and surety, to which agreement the creditor thereby secured is a party;

    (2)

    Those in which there is a similar agreement between the principal and surety only, to which the creditor is a stranger; and

    (3)

    Those in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one o f those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid.

  25. It is clear to us that the present appeal falls within the third category stated above. From the evidence, the primary liability in the present appeal was upon the fourth respondent and the secondary liability was upon the appellant. Thus when the first respondent demanded payment from the appellant under the standby letter of credit, the appellant complied. This took place on July 24, 1986. In our view as from that date the appellant stepped into the shoes of the first respondent and became the main creditor. The appellant had clearly the right of subrogation. That being the case the appellant was entitled to all the benefits accruing from the shares and this includes any dividend paid after that date and as such the dividends should be paid to the appellant.

  26. For the reasons we have stated above, we are of the view that the appellant is entitled to those dividends and accordingly we allowed the appeal with costs here and below. The order of the learned trial Judge is set aside. Deposit is refunded to the appellant.

Cases

Duncan, Fox, & Co and Robinson & Co v The North and South Wales Bank, SC Radford, Radford & Sons, and Balfour, Williamson & Co [1880] VI App Cases 1

Representations

Ira Biswas (Chooi & Co) for Appellant

Manjit Singh and Balvinder Singh Kenth (Sri Ram & Co) for Fourth Respondent

Notes:-

This decision is also reported at [2000] 4 AMR 4155

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