Leong Wai Hong and Lam Wai Loon discuss the Sediabena Case
The last two issues of Legal Insights featured articles which discussed the grounds of decision of the High Court and the Court of Appeal in Sediabena Sdn Bhd & 1 Other v Qimonda Malaysia Sdn Bhd (In Liquidation) (“Sediabena”).
To recap, the High Court in Sediabena decided on 22 April 2011 that retention monies retained by the employer, Qimonda Malaysia Sdn Bhd ("Employer"), under the building contract were monies held on trust for the contractors, Sediabena Sdn Bhd and APC Corporate Holdings Sdn Bhd ("Contractors"), and that therefore, the Contractors were entitled to these retention monies which had not been set aside in a separate account but had been mixed with the general funds of the Employer.
The appeal by the liquidators of the Employer against the decision of the High Court was dismissed by the Court of Appeal on 12 July 2011.
Thereafter, the liquidators applied to the Federal Court for leave to appeal against the decision of the Court of Appeal. The liquidators’ application was dismissed by the apex court on 30 October 2011. With that, the litigation drew to a conclusion with a favourable outcome for the Contractors.
This article examines the differences between the approaches taken by the Malaysian Courts in Sediabena and the English Courts in dealing with the right of recovery of retention monies by a contractor after the liquidation of an employer.
THE SEDIABENA CASE
In Sediabena, the building contract for a construction project provided that the Employer was entitled to retain 10% of the total certified amount for the work done and materials supplied by the Contractors under every Certificate of Payment issued by the Consulting Engineer, subject to the maximum amount of the total retention monies being limited to RM6,127,884.50.
The Employer was obliged under the building contract to release one half of the retention monies after the issuance of the Handing Over Certificate and the other half after the issuance of the Maintenance Certificate or Certificate of Statutory Completion for the Works, whichever is the later.
The Contractors completed and handed over the works to the Employer. Accordingly, the Consulting Engineer recommended the release of part of the retention monies to the Contractors. The Employer did not release the retention monies to the Contractors as recommended. Soon thereafter, the Employer declared voluntary liquidation.
At the time of its liquidation, the Employer had not set aside the retention monies in a separate account but its general funds exceeded the total amount of the retention monies.
The Contractors requested the liquidators of the Employer to release to them the retention monies on the basis that the retention monies were monies held on trust by the Employer in favour of the Contractors.
The Contractors' request was rejected by the liquidators citing, in the main, that the building contract did not provide that the retention monies are trust monies. The liquidators further contended that as the Employer had not set aside the retention monies in a separate account, the said retention monies had become part of the general funds.
Given the position taken by the liquidators, the Contractors commenced proceedings in the High Court against the liquidators, seeking an order declaring the retention monies as trust monies and compelling the liquidators to release the retention monies to the Contractors.
On the application of the Contractors, the High Court Judge issued an interim injunction order to compel the liquidators to set aside and preserve the retention monies in a separate account pending the disposal of the full trial.
After hearing testimonies of the witnesses and submissions from counsel, the High Court ruled in favour of the Contractors and declared that the retention monies were monies held on trust by the Employer for the Contractors and ordered the liquidators to release the same to the Contractors.
As mentioned earlier, the decision of the High Court Judge was upheld by the Court of Appeal and the liquidators’ application for leave to appeal against the decision of the Court of Appeal was dismissed by the Federal Court.
THE ENGLISH APPROACH
The English principles in this area can be traced back to the Chancery Division Court case of Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 34 (“Rayack”). Rayack concerned an application by a contractor under a building contract for, inter alia, an injunction to compel the employer to pay all retention monies under the contract into a separate account to be applied only in accordance with the trust provision in the building contract.
The employer was solvent at the time of the contractor’s application. The application was grounded upon the specific provision in the building contract which stated that the employer’s interest in the retention monies so retained was fiduciary as trustee for the contractor.
In allowing the contractor’s application, the Chancery Court held that the trust provision in the building contract effectively imposed an obligation on the employer to appropriate and set aside any retention monies so retained by it.
The Chancery Court went further to opine, obiter dicta, that the contractor’s beneficial interest in the retention monies could only subsist in a fund so appropriated and set aside, and that in the absence of such appropriation and setting aside, the contractor would run the risk of being ranked as an unsecured creditor with regard to the retention monies in the event of liquidation of the employer.
These principles were extended in another Chancery Division Court case of Re Jartay Developments Ltd  22 BLR 134 ("Re Jartay") to disallow a similar application by the sub-contractor for an order to release the retention monies retained under the sub-contract as the contractor has gone into voluntary liquidation. Nourse J held that if the application had been made before the employer went into liquidation, the Court would have followed Rayack to allow the application.
The principles in Rayack were subsequently applied by the English Court of Appeal in Wates Construction (London) Ltd v Franthom Property Ltd (1991) 53 BLR 27 ("Wates Construction"), a case that involved a solvent employer, and Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in receivership)  BCLC 350 ("Mac-Jordan"), a case that involved an insolvent employer.
Unlike the English cases discussed above, there was no provision in the building contract in Sediabena which declared that the employer’s interest in the retention monies was fiduciary as trustee for the contractors. In spite of this, the High Court construed the provision dealing with retention monies as evincing an intention of the parties to treat the retention monies as trust monies and accordingly, implied a trust with regard to the retention monies.
In coming to this conclusion, the High Court applied the Malaysian Supreme Court decision in Geh Cheng Hooi & Ors v Equipment Dynamics Sdn Bhd and other appeals  1 MLJ 293 ("Geh Cheng Hooi") which held that a trust can be imported into a commercial relationship in appropriate circumstances even where there was no express trust provision in the contract.
In arriving at its decision in Geh Cheng Hooi, the Supreme Court had referred to Re Kayford Ltd  1 All ER 604 where Megarry J held that it is well settled that a trust can be created without the use of words like 'trust' or 'confidence' or similar expressions and that the question is whether in substance a sufficient intention to create a trust had been manifested.
The Supreme Court also referred to Megarry J's observation in Re Kayford Ltd that payment into a separate bank account is a useful, though by no means conclusive, indication of an intention to create a trust and that there is nothing to prevent a company from binding itself by a trust even if there are no effective banking arrangements.
In affirming the High Court decision, the Court of Appeal went on to hold that retention monies in construction contracts were, by their nature and purpose, trust monies. This is predicated upon the fact that the building contracts in this case recognized the retention monies as monies belonging to the contractors but were retained by the employer for the specific purpose stated in the contract. The Court of Appeal was of the view that if the retention monies were not applied for that purpose, the monies were to be returned to the contractors.
The recognition in Sediabena of retention sums under a construction contract as trust monies is not new and accords with the decisions of the Malaysian High Court in Syarikat Pembinaan Who Heng Sdn Bhd v Meda Property Services Sdn Bhd (unreported), Kumpulan Liziz Sdn Bhd v Pembinaan OCK Sdn Bhd  4 CLJ 709, ABB Transmission & Distribution Sdn Bhd v Sri Antan Sdn Bhd  10 CLJ 1 and Merino-O.D.D. Sdn Bhd v PECD Construction Sdn Bhd  MLJU 671.
The decision in Sediabena on the status of retention monies is consistent with the English cases of Rayack and Wates Construction in a situation where the employer has not gone into liquidation. The difference however is where the employer has gone into liquidation. In this situation, the English Courts in Re Jartay and Mac-Jordan held that the retention monies ceased to be trust monies if such monies have not been set aside in a separate account and in such event, the contractor's claim for the retention monies would rank as an unsecured debt.
The Courts in Sediabena declined to follow Re Jartay and Mac-Jordan. Instead, the Malaysian Courts held that the contractors’ beneficial interest in the retention monies could survive the liquidation of the employer, irrespective of whether or not the monies have been appropriated and set aside in a separate bank account. The liquidators would then bear the burden to account for the monies, failing which, the amount up to the total retention monies in the general funds would belong to the trust concerned.
In adopting the above position, the Courts in Sediabena followed Geh Cheng Hooi where the Supreme Court applied the long established principles laid down by the English Courts in Re Hallet’s Estate (1880) 13 Ch 696 which held that if money held by a person in a fiduciary character, though not a trustee, has been paid by him to his account at his bankers, the person for whom he held the money can follow it, and Re Tilley's Will Trust (1967) Ch 1179 which held that if a trustee mixes trust assets with his own, the onus lies on the trustee to distinguish the separate assets, and to the extent that he fails to do so, they belong to the trust.
It is interesting to note that the tracing principles laid down in Re Hallet's Estate and Re Tilley's Will Trust were not referred to in Re Jartay and Mac-Jordan. It is possible that the English Courts in these cases may have come to a different decision had they considered those cases.
The decisions in Sediabena are significant for the construction industry in Malaysia. They have enhanced a contractor’s prospects of recovering retention monies in the event of the employer’s liquidation as they enable a contractor, in appropriate circumstances, to recover the retention monies from the general funds of the employer.