1. Ngv Tech Sdn Bhd(Company No : 235885-M)(Receiver And Manager Appointed) (In Liquidation)2. Malayan Banking Berhad … PlaintiffsAnd1. Ramsstech Ltd(Company No : Ll09280)2. Mohamad Rafie Bin Ab. Malek3. Kish Acme Tower Company …Defendants(By Original Action)Between1. Ramsstech Ltd(Company No : Ll09280)2. Mohamad Rafie Bin Ab. Malek3. Kish Acme Tower Company … PlaintiffsAnd1. Ngv Tech Sdn Bhd(Company No : 235885-M)

  

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IN THE HIGH COURT OF MALAYA AT KUALA LUMPUR IN THE FEDERAL TERRITORY OF KUALA LUMPUR, MALAYSIA SUMMONS NO: 27NCC-40-06/2014

 

BETWEEN

 

1. NGV TECH SDN BHD

 

(Company No : 235885-M)

 

(Receiver and Manager Appointed) (In Liquidation)

 

2. MALAYAN BANKING BERHAD

 

AND

 

1. RAMSSTECH LTD (Company No : LL09280)

 

2. MOHAMAD RAFIE BIN AB. MALEK

 

3. KISH ACME TOWER COMPANY

 

(By Original Action)

 

BETWEEN

 

1. RAMSSTECH LTD (Company No : LL09280)

 

2. MOHAMAD RAFIE BIN AB. MALEK

 

3. KISH ACME TOWER COMPANY

 

AND

 

1. NGV TECH SDN BHD (Company No : 235885-M)

 

2. MALAYAN BANKING BERHAD

 

3. DUAR TUAN KIAT (NRIC No : 610323-10-5375)

 

(By Counterclaim)

 

… PLAINTIFFS

 

…DEFENDANTS

 

… PLAINTIFFS

 

. DEFENDANTS

 

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JUDGMENT

 

A. Introduction

 

1. In this case, there are competing claims to a ship named “Safir Kish 4″ The first claimant to the ship is the bank (Bank) which has given credit facilities to the builder of the ship (Ship Builder) secured by debentures given by the Ship Builder in the Bank’s favour. The other claimant to the ship is the party to whom the Ship Builder has agreed to build and sell (Purchaser). To resolve this dispute, the following issues arise:

 

(a) whether the ship is subject to a “fixed charge” or a floating charge in the first of six debentures created by the Ship Builder in favour of the Bank;

 

(b) if the ship is subject to a floating charge, has the floating charge crystallised pursuant to an “automatic crystallization” clause in the first debenture so as to subject the ship to a fixed charge and to give priority to the Bank?;

 

(c) whether provisions in the Merchant Shipping Ordinance 1952 (MSO) affect the question of who has priority to the Ship;

 

(d) whether the sale of the ship after the winding up of the Ship Builder, is invalid –

 

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(i) for being an undue preference under s 293(1) of the Companies Act 1965 (CA) read with s 53(1) of the Bankruptcy Act 1967 (BA); and/or

 

(ii) under s 223 CA;

 

(e) whether the sale of the ship to an Iranian Purchaser is prohibited by ss 8 and 9 of the Strategic Trade Act 2010 (STA); and

 

(f) once the Bank has priority to the ship due to the automatic crystallization of floating charge in the debenture, can the Purchaser rely on the exception of “bona fide purchaser for valuable consideration without notice of Bank’s charge”? If the Purchaser can rely on such an exception –

 

(i) has such an exception being proven in this case and in particular, would case law consider the Purchaser as having “notice” of the Bank’s charge which has been registered with the Companies Commission of Malaysia (SSM)?;

 

(ii) whether an adverse inference under s 114(g) of the Evidence Act 1950 (EA) should be drawn against Purchaser for failing to call a material witness in this case to prove the sale of the ship by the Ship Builder to the Purchaser; and

 

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(iii) whether this court should exercise its discretion to order specific performance (SP) of the shipbuilding contract under s 21 of the Specific Relief Act 1950 (SRA).

 

B. Background

 

2. The first plaintiff (1st Plaintiff) in this case is the Ship Builder. The Bank is second plaintiff (2nd Plaintiff) which has given various credit facilities totalling RM884,330,000 to the Ship Builder for a period of time from 8.9.2004 to 3.5.2012 (Credit Facilities). The Credit Facilities have been fully utilised by the Ship Builder for, among others, the Ship Builder’s ship building business.

 

3. The first defendant (1st Defendant) is a private limited company incorporated under the Labuan Companies Act 1990 (LCA). The second defendant (2nd Defendant) is a director of the 1st Defendant who instructs and/or directs the 1st Defendant.

 

4. The third defendant (3rd Defendant) is a company incorporated in Iran.

 

5. This judgment will refer to the Ship Builder and the Bank collectively as the Plaintiffs. The 1st, 2nd and 3rd Defendants will be collectively called the Defendants in this case.

 

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6. To secure the Ship Builder’s repayment of the Credit Facilities, the Ship Builder has, among others, created a total of 6 debentures in favour of the Bank (6 Debentures). The 6 Debentures are as follows:

 

(a) the first debenture (1st Debenture) was created on 24.1.2008;

 

(b) the second debenture (2nd Debenture) was created on 11.6.2010; and

 

(c) the third to sixth debentures were all created on 26.6.2012.

 

Dato’ Zulkifli bin Shariff (Dato’ Zulkifli), the executive chairman of the Ship Builder’s board of directors (BOD), and Encik Jamalolail bin Mohd. Yatim (SD2), the Ship Builder’s then managing director (MD), signed the 6 Debentures on behalf of the Ship Builder. SD2 has been subpoenaed by the Defendants to testify in this case.

 

7. The Ship Builder has lodged with the SSM, “Statement Of Particulars To Be Lodged With The Charge” in Form 34 (Form 34) of the Second Schedule to the Companies Regulations 1966 (CR) for the 6 Debentures pursuant to ss 108(1) and 110(1) CA. Form 34 for the 6 Debentures have been signed by Dato’ Zulkifli on behalf of the Ship Builder. Form 34 for the 1st Debenture has been lodged on 28.1.2008.

 

8. Consequently, SSM has issued pursuant to s 111(2) CA for all the 6 Debentures, “Certificates of Registration of Charge” in Form 40 (Form

 

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40) of the Second Schedule to the CR. Form 40 for the 1st Debenture has been issued by the SSM on 29.1.2008.

 

9. On 27.3.2008, the Ship Builder entered into 2 contracts (2 Borcos Contracts) with Syarikat Borcos Shipping Sdn. Bhd. (Borcos). Only 1 of the 2 Borcos Contracts has been adduced in this case. According to the Borcos Contract (p. 1-88 of Bundle G) –

 

(a) the Ship Builder agreed to build a “52M Super Fast Multipurpose Utility’ vessel for Borcos known as 11 Hull No. 1160’ (Ship);

 

(b) the contract price for designing, building and delivering the Ship was RM23 million – article 2.1; and

 

(c) the Ship would be delivered on or within 16 months from “Effective Date” defined in article 19 – article 7(1). Article 19(1) defined “Effective Date” as the date of the payment of the first instalment of RM230,000 by Borcos and an irrevocable letter of undertaking by Borcos to pay the second instalment of RM22,270,000.

 

Dato’ Zulkifli and SD2, signed the Borcos Contract on behalf of the Ship Builder.

 

10. The Bank has provided financing to the Ship Builder to build the 2 vessels for the 2 Borcos Contracts. The full purchase price for the 2 Borcos Contracts had not been paid to the Ship Builder or the Bank.

 

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11. By way of a letter dated 27.2.2009 from the Bank to the Ship Builder (Bank’s Letter dated 27.2.2009), the Bank agreed to the Ship Builder’s assignment of the proceeds of the 2 Borcos Contracts to the Bank. The Ship Builder issued a letter dated 2.3.2009 to Borcos (Ship Builder’s Letter dated 2.3.2009) which stated as follows:

 

“ We hereby irrevocably authorize you to direct all payments to our Project/Collection Account with [Bank] at its branch office Jln Yong Shook Lin for the credit of the account of Maybank-NGV Tech Sdn Bhd, bearing account no. 5141 8734 1185 as and when such proceeds shall become due and payable by virtue of the Letter of Award for 52 meters Superfast Multipurpose Utility Vessel for [Borcos].

 

This letter and the jurisdiction herein are irrevocable and may not be modified or varied without the consent in writing of [the Bank].”

 

(emphasis added).

 

12. On 6.3.2010, the Ship Builder entered into a shipbuilding contract with the 3rd Defendant (Shipbuilding Contract). The Shipbuilding Contract provided, among others –

 

(a) the Ship Builder to build and deliver to the 3rd Defendant 2 vessels with Hull Nos. 1159 and 1160 – clause 1.1;

 

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(b) the 3rd Defendant shall pay to the Ship Builder the price of US$16,400,000 for the 2 vessels – clause 2.1;

 

(c) the sum of US$16,400,000 shall be paid by the 3rd Defendant by way of an “irrevocable by sight letter of credit (LC), established within 4 weeks from the date of signing of the Shipbuilding Contract, in a form acceptable to the Ship Builder, issued in accordance with the Uniform Customs and Practice for Documentary Credits on behalf of the 3rd Defendant by “Refah Kargaran Bank’ in Iran (RK Bank) or acknowledged by a Malaysian bank under which the Ship Builder shall be entitled to make a partial or single draw – clause 2.2; and

 

(d) the Ship Builder undertakes to complete construction of both vessels and deliver them to the 3rd Defendant within “ninety (120) days” from which the LC has been received by the Ship Builder -clause 3.1.

 

SD2 signed the Shipbuilding Contract on behalf of the Ship Builder.

 

13. A “pro forma” invoice dated 6.3.2010 had been issued by the Ship Builder to the 3rd Defendant for the payment of the Ship and Hull No. 1159 (Pro Forma Invoice dated 6.3.2010). The Pro Forma Invoice dated 6.3.2010 provided for the 3rd Defendant’s payment for the 2 vessels by way of LC to the Bank (2nd Plaintiff) or CIMB Bank Bhd. (CIMB). The Pro Forma Invoice dated 6.3.2010 was signed by SD2 on behalf of the Ship Builder.

 

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14. On 25.5.2010, RK Bank issued a LC to the Bank.

 

15. On 26.5.2010 –

 

(a) the Ship Builder issued a Bill of Sale (1st Bill of Sale) stating, among others –

 

(i) the Ship Builder acknowledged receipt of United Arab Emirates (UAE) Dirham 30,036,600 from the 3rd Defendant as payment for the Ship in accordance with the Shipbuilding Contract;

 

(ii) in consideration of the above payment by the 3rd Defendant, the Ship Builder transferred all shares in the Ship to the 3rd Defendant; and

 

(iii) the Ship Builder covenanted that the Ship Builder had the power to transfer the Ship free from encumbrances and mortgages.

 

SD2 signed the 1st Bill of Sale on behalf of the Ship Builder; and

 

(b) the Ship Builder issued the “Builder’s Certificate” dated 26.5.2010 (Builder’s Certificate) and the “Declaration of Warranty” dated 26.5.2010 (Declaration of Warranty) in respect of the Ship. SD2

 

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signed the Builder’s Certificate and the Declaration of Warranty on behalf of the Ship Builder.

 

16. The Ship Builder and the 3rd Defendant entered into “Minutes of Understanding” dated 2.10.2010 (MOU). Dato’ Zulkifli signed the MOU on the Ship Builder’s behalf.

 

17. On 29.8.2012, Dato’ Zulkifli sent an email to the Bank (Dato’ Zulkifli’s Email dated 29.8.2012) which stated as follows (with all its grammatical and spelling errors):

 

“Dear all,

 

Msg fm my managing director. Was call for a meeting with Police Intelligent frm Bukit Aman this morning. They advice that we should not deliver the 52m vessel to the Iranian. Too high risk. They told me that the minit vessel move to Iran UN will imposed sanction to NGV.

 

All companies associated with NGV will also affected, Including Maybank. Hope you agree for NGV not to sent this vessel to Iran.

 

I will sent a letter to MITI that we decided not to sent the vessel to Iran.

 

We will find new buyer to replace the Iranian.

 

Thk u

 

(emphasis added).

 

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18. The Registrar of Malaysian Ships at Port Klang issued a “Certificate of Malaysian Registry’ on 30.8.2012 (Certificate of Malaysian Registry) stating that the Ship had been registered with the name of “Safir Kish 4 and the Ship Builder was the owner of the Ship.

 

19. On 17.9.2012, the Ship Builder, the 3rd Defendant and Shanghai Sea Pride Shipping Ltd. (SSPSL) entered into an agreement (SSPSL Agreement). The SSPSL Agreement provided, among others:

 

(a) the Ship Builder confirmed receipt of the sale price of US$8,470,247 (Sale Price), inclusive of overpayment of US$270,247 (Alleged Overpayment);

 

(b) the Ship Builder would sign a “new purchase contract with SSPSL;

 

(c) the Ship Builder would deliver the Ship to SSPSL pursuant to the “new” purchase contract with SSPSL before 7.10.2012;

 

(d) the Ship Builder “declares” that it has no right to claim any “neW payment before delivery of the Ship to SSPSL; and

 

(e) SSPSL would pay the agreed purchase price to the 3rd Defendant.

 

SD2 signed the SSPSL Agreement on behalf of the Ship Builder.

 

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20. Between 26.5.2010 and 28.1.2013, the Ship Builder and the 3rd Defendant entered into 12 agreements to vary the Shipbuilding Contract (12 Variations of Shipbuilding Contract). The 12 Variations of Shipbuilding Contract had been signed by SD2 on behalf of the Ship Builder.

 

21. There was a series of agreements between the Ship Builder, the 3rd Defendant and various third party contractors between 13.4.2012 and 4.8.2012 (Agreements With Third Party Contractors). According to the Agreements With Third Party Contractors, at the request of the Ship Builder, the 3rd Defendant had paid various third party contractors for work done in respect of the Ship and installation of equipment in the Ship. SD2 signed the Agreements With Third Party Contractors on behalf of the Ship Builder. I must highlight a two-page contract entitled “Agreement for Towing and Loading of SK-4 [Ship]” dated 9.7.2012 (Agreement With Third Party Contractor dated 9.7.2012) (Bundle B, p. 300-301) which is completely written by hand.

 

22. The Ship Builder and the 3rd Defendant entered into a “Settlement Agreement’ on 29.10.2012 (Settlement Agreement) wherein, among others –

 

(a) the Ship Builder confirmed that the 3rd Defendant was the beneficial owner of the Ship and the Ship Builder had no further claim over the Ship;

 

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(b) the Ship Builder confirmed that the Ship Builder had received the sum of US$8,508,854.81 from the 3rd Defendant;

 

(c) the Ship Builder would help the 3rd Defendant to find a purchaser for the Ship and the purchase price paid by the new purchaser would not be transferred to the Ship Builder’s account but would be “wire transferred” to the 3rd Defendant’s account outside of Iran – clause 4E (Clause 4E of Settlement Agreement); and

 

(d) the Settlement Agreement was on a “strictly without prejudice basis” and would not be divulged to the court! (Clause 7 of Settlement Agreement)

 

SD2 signed the Settlement Agreement on behalf of the Ship Builder.

 

Interestingly, there is a confirmation of the Settlement Agreement by

 

the Ship Builder’s BOD by Dato’ Zulkifli.

 

23. The Ship Builder entered into an agreement on 5.11.2012 with the 3rd

 

Defendant (Agreement dated 5.11.2012). The Agreement dated

 

5.11.2012 provided, among others, as follows:

 

(a) the SSPSL Agreement was cancelled due to the objection of the Ministry of International Trade and Industry (MITI);

 

(b) the 3rd Defendant as owner of the Ship had the following 2 options

 

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(i) the 3rd Defendant had the first option to sell the Ship to LNG Ventures Ltd. (LNGVL) or Lalship Sdn. Bhd. (LSB); or

 

(ii) the second option was for the 3rd Defendant to transfer ownership of the Ship to a “trustee company’ represented by the 2nd Defendant; and

 

(c) the Ship Builder has no right to claim against the “trustee company’.

 

SD2 signed the Agreement dated 5.11.2012 for the Ship Builder while the 2nd Defendant signed the Agreement dated 5.11.2012 as a representative of the “trustee company’.

 

24. On 14.3.2013, a winding up petition (WU Petition) was presented against the Ship Builder by Nordic International Ltd. in the Kuala Lumpur High Court (KLHC). The WU Petition was –

 

(a) gazetted in the official Gazette of the Federation on 11.4.2013 (Gazette Notification); and

 

(b) advertised in the “New Straits Times” and “Harian Metro” on 25.3.2013 (2 Newspaper Advertisements).

 

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25. On 20.3.2013, the Bank’s then solicitors, Messrs Skrine, sent a letter to the Ship Builder to give notice that pursuant to the terms and conditions of the Debentures, “the floating charges over all of [the Ship Builder’s] properties, assets and rights from time to time and at any time subject to the floating charges (including all vessels constructed, being constructed or to be constructed by [the Ship Builder] are hereby converted into fixed charges with immediate effect’ (Messrs Skrine’s Letter dated 20.3.2013).

 

26. The Ship Builder executed a bill of sale with the serial number of 02358 on 27.3.2013 in favour of the 1st Defendant (2nd Bill of Sale). According to the 2nd Bill of Sale, in consideration of US$8,500,000 paid by the 1st Defendant to the Ship Builder, the Ship Builder transferred all shares owned by the Ship Builder in the Ship to the 1st Defendant. Dato’ Zulkifli and SD2 signed the 2nd Bill of Sale on behalf of the Ship Builder.

 

27. On 23.4.2013, the Ship was transferred from the Ship Builder to the 1st Defendant and such a transfer was registered in the “Register Book’ of the Registrar of Malaysian Ships (Register Book) at Port Klang.

 

28. The Bank appointed Mr. Duar Tuan Kiat as the receiver and manager (R&M) over the Ship Builder on 3.4.2013.

 

29. On 14.5.2013, the KLHC –

 

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(a) allowed the WU Petition and wound up the Ship Builder (Ship Builder’s Winding Up); and

 

(b) appointed Mr. Lim Tian Huat as the liquidator for the Ship Builder (Liquidator).

 

30. The Ship Builder, the 1st and 3rd Defendants concluded an agreement

 

on 12.7.2013 (Agreement dated 12.7.2013) which stated, among

 

others:

 

(a) the Ship Builder had built the Ship and the 3rd Defendant had paid the full price to the Ship Builder;

 

(b) the 2nd Bill of Sale in favour of the 1st Defendant had been executed and registered in the Register Book;

 

(c) the 1st Defendant was the registered owner of the Ship;

 

(d) as payment of the price of the Ship had been paid by the 3rd Defendant, the 1st Defendant would refund to the 3rd Defendant an agreed amount within an agreed period of time; and

 

(e) the Ship Builder would deliver the Ship to the 1st Defendant latest by 11.9.2013.

 

Dato’ Zulkifli signed the Agreement dated 12.7.2013 on behalf of the

 

Ship Builder.

 

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31. On 25.10.2013, by way of an email from the 1st Defendant’s solicitors, Messrs Rahayu Partnership (Messrs RP), to the R&M’s representative (Messrs RP’s Email dated 25.10.2013), Messrs RP informed the R&M, among others –

 

(a) Messrs RP acts for the 1st Defendant; and

 

(b) the 1st Defendant is the registered owner of the Ship. The original 2nd Bill of Sale and the original Certificate of Malaysian Registry with the endorsement of the transfer of the ownership of the Ship to the 1st Defendant, are in the possession of the 1st Defendant.

 

32. Messrs RP sent an email dated 30.10.2013 to the R&M’s representative (Messrs RP’s Email dated 30.10.2013) stating that the 1st Defendant had instructed Messrs RP to put the R&M on notice that the 1st Defendant wanted delivery of the Ship by 6.11.2013!

 

33. The Defendants have not paid any sum to the Bank to “redeem” the Ship. As at 31.5.2013, the Ship Builder owed an outstanding total sum of RM732,481,943,08 to the Bank under the Credit Facilities (Ship Builder’s Debt To The Bank).

 

34. The Bank has commenced a suit in KLHC Suit No. 22NCC-457-07/2013 against the following guarantors for the Credit Facilities (Guarantors):

 

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(a) Dato’ Zulkifli;

 

(b) SD2; and

 

(c) Puan Faridah bt. Harun.

 

35. On 21.11.2013, the Bank has obtained summary judgment for a total sum of RM732,481,943.08 with interest accrued thereon against the Guarantors (Summary Judgment).

 

C. Legal proceedings

 

C1. Suit by Ship Builder and Bank

 

36. On 19.6.2014, the Plaintiffs file this suit against the Defendants (Plaintiffs’ Suit) and apply for, among others, the following relief:

 

(a) the 2nd Bill of Sale be declared as null and void in transferring any right, interest and shares in the Ship to the 1st Defendant;

 

(b) the registration and transfer of the Ship from the Ship Builder to the 1st Defendant be cancelled and/or be declared null and void;

 

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(c) the Ship be re-transferred and re-registered in the name of the Ship Builder with immediate effect;

 

(d) the Defendants do within 2 days from the date of the judgment of the Plaintiffs’ Suit, deliver to the R&M the original copy of the Certificate of Malaysian Registry and the 2nd Bill of Sale together with all other original certificates or documents in relation thereto;

 

(e) the Registrar of Malaysian Ships be directed to do all that is necessary to give to the judgment sought herein; and

 

(f) the Defendants to pay costs of the Plaintiffs’ Suit on a solicitor-client basis.

 

C2. Defendants’ counterclaim

 

37. The Defendants denied the Plaintiffs’ Suit and filed a counterclaim against the Plaintiffs and the R&M (Defendants’ Counterclaim). In the Defendants’ Counterclaim against the Ship Builder and the Bank, the Defendants seek, among others, the following relief:

 

(a) a declaration under s 223 CA to validate the transfer of ownership of the Ship to the 1st Defendant and its subsequent registration;

 

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(b) alternatively, a declaration that the 3rd Defendant is the beneficial owner of the Ship and is entitled to transfer the Ship to the 1st Defendant or any other person;

 

(c) the Ship Builder to refund the Alleged Overpayment to the 3rd Defendant;

 

(d) interest on the Alleged Overpayment from 29.1.2013 to 14.5.2013;

 

(e) late delivery charges at the rate of 2% per month of the contract price of the Ship from 25.10.2010 until the actual delivery of the Ship;

 

(f) to refund to the 3rd Defendant a sum of US$50,000 paid by the 3rd Defendant to Etamar Shipping and Services (Etamar) (which had agreed to transport the Ship from Port Klang to Iran);

 

(g) deprivation of the 1st Defendant’s use and possession of the Ship from 27.3.2013, the date of transfer of ownership of the Ship or alternatively, loss or damage to be assessed by this court;

 

(h) loss of income suffered by the 1st Defendant based on prevailing market rate for the charter of the Ship based on vessels of a similar nature from 1.8.2013, the date of receipt of a letter of intent from Prosper Energy Systems Group Sdn. Bhd. (Prosper Energy);

 

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(i) cost of repair of the Ship and certification cost of the Ship or alternatively, loss or damage to be assessed by this court; and

 

(j) costs.

 

38. The Defendants counterclaimed against the R&M as follows:

 

(a) deprivation of the 1st Defendant’s use and possession of the Ship from 27.3.2013, the date of transfer of ownership of the Ship or alternatively, loss or damage to be assessed by this court;

 

(b) cost of repair of the Ship and certification cost of the Ship or alternatively, loss or damage to be assessed by this court; and

 

(c) costs.

 

C3. Separate trials

 

39. Order 15 rules 5(1) and 13A(1) of the Rules of Court 2012 (RC) read as follows:

 

“5(1) If claims in respect of two or more causes of action are included by a plaintiff in the same action or by a defendant in a counterclaim, or if two or more plaintiffs or defendants are parties to the same action, and it appears to the Court that the joinder of causes

 

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of action or of parties, as the case may be, may embarrass or delay the trial or is otherwise inconvenient, the Court may order separate trials or

 

make such other order as may be expedient.

 

13A(1) At any stage in an action to which this rule applies, the Court may, on the application of any party or of its own motion, direct that a notice of the action be served on any person who is not a party thereto but who will or may be affected by any judgment given therein”

 

40. In Kok Wee Kiat v KL Stock Exchange Bhd & Ors [1977] 1 MLJ 109, at 111, Ali FJ in the Federal Court considered Order 18 rule 1 of the then applicable Rules of the Supreme Court 1957 (RSC) and held as follows:

 

The Order, as it appears to me, was made under Order 18 rule 1 [RSC] which provides as follows:

 

“Subject to the following Rules of this Order, the plaintiff may unite in the same action several causes of action; but if it appear to the court or a judge that any causes of action cannot be conveniently tried or disposed of together, the court or judge may order separate trials of any of such causes of action to be had, or may make such other order as may be necessary or expedient for the separate disposal thereof.”

 

The learned judge has very wide powers under the Rules to make the Order which is nothing more than a direction that the trial of the action be conducted in a particular manner. As the

 

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learned judge will no doubt be hearing the action himself I do not think it is right or proper for this court to order that the trial be conducted in a manner different from what the learned judge has directed ”

 

(emphasis added).

 

41. Based on Kok Wee Kiat and Order 15 rule 5(1) RC, this court has a wide discretion to decide whether to order a joint or separate trial of a suit and a counterclaim filed in the suit.

 

42. The main issue in the Plaintiffs’ Suit and the Defendants’ Counterclaim is which party has priority to the Ship (Priority Issue). The Priority Issue is separate from the monetary aspect of the Defendants’ Counterclaim (Defendants’ Monetary Counterclaim). On 5.12.2014, I proposed to learned counsel of all parties that the Priority Issue be tried first and separately from the Defendants’ Monetary Counterclaim under Order 15 rule 5(1) RC. The reasons for this proposal are as follows:

 

(a) the Priority Issue can be expeditiously and economically disposed of first before a probably lengthy trial of the Defendants’ Monetary Counterclaim; and

 

(b) after the court has decided on the Priority Issue, all the parties may wish to re-consider their legal position in respect of the Defendants’ Monetary Counterclaim.

 

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43. All the parties consented on 5.12.2014 for the Priority Issue to be heard first and be tried separately from the Defendants’ Monetary Counterclaim.

 

44. The Liquidator was not present during the pre-trial case management for this matter. The Liquidator was also not present on the first day of the trial regarding the Priority Issue. I direct the Plaintiffs’ solicitor to serve notice of this case on the Liquidator under Order 15 rule 13A(1) RC and to inform the Liquidator that the Liquidator will be bound by any decision of this court even if the Liquidator is not present in this case. I refer to Tradium Sdn Bhd v Zain Azahari bin Zainal Abidin & Anor [1995] 1 MLJ 668, at 673-674, as follows:

 

(a) a property development company (Proposed Intervener) knew about judicial review proceedings in the High Court to quash Dewan Bandaraya Kuala Lumpur’s (DBKL) approval for the Proposed Intervener’s property development project (DBKL’s Approval) and yet the Proposed Intervener did not intervene in the High Court proceedings;

 

(b) the High Court issued a certiorari order to quash DBKL’s Approval and DBKL appealed to the Court of Appeal against that order; and

 

(c) the Proposed Intervener only applied to intervene in the appeal but this application was disallowed by the Court of Appeal on the

 

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ground that the Proposed Intervener should have applied to intervene as a party in the High Court.

 

D. Plaintiffs’ case

 

45. The Plaintiffs called the following witnesses:

 

(a) the R&M;

 

(b) Mr. Leow Boon Lai, a specialist of the Bank’s “Remedial Asset Reconstruction 2 Department (SP2); and

 

(c) Ms. Leong May Lee, a senior executive director of Messrs Ernest & Young (SP3). SP3 is the authorised representative of the R&M.

 

46. R&M testified, among others, as follows:

 

(a) the R&M’s duties include, among others –

 

(i) to oversee and manage day-to-day affairs of the receivership of the Ship Builder; and

 

(ii) to take steps to realise quickly all assets of the Ship Builder which have been charged to the Bank so as to maximise recovery of the Ship Builder’s Debt To The Bank;

 

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(b) when the R&M was appointed, the Ship was in a “less than pristine condition” and the defects and deterioration on the Ship were already present at the time of appointment of the R&M;

 

(c) the R&M has placed security guards to protect the Ship;

 

(d) the R&M wanted to sell the Ship and place the sale proceeds with the court or a stakeholder pending the disposal of this case but the Defendants did not agree. As the Ship Builder is already insolvent, the R&M has “little” funds to maintain and preserve the Ship. During cross-examination, SP1 said that the Ship was left on an “as is where is basis” ;

 

(e) the R&M was not aware of the Defendants claims to the Ship until Messrs RP’s Email dated 25.10.2013. The R&M attempted unsuccessfully to get information and verification of the Defendants’ claims to the Ship from the Ship Builder’s directors. The R&M did not receive any document from the Ship Builder’s directors to substantiate the Defendants’ claims to the Ship; and

 

(f) the R&M deny any liability to the Defendants.

 

47. SP2’s witness statement asserted that the Bank did not know about the events which had allegedly occurred regarding the Ship Builder and the Defendants. Until the Bank had been informed by the R&M (after the R&M had been informed by the Defendants’ solicitors by way of Messrs RP’s Email dated 25.10.2013), the Bank had no knowledge of the following documents:

 

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(a) the Ship Building Contract;

 

(b) the MOU;

 

(c) the SSPL Agreement;

 

(d) the 12 Variations of Shipbuilding Contract;

 

(e) the Agreements With Third Party Contractors;

 

(f) the Settlement Agreement;

 

(g) the Agreement dated 5.11.2012;

 

(h) the 1st and 2nd Bills of Sale; and

 

(i) the Agreement dated 12.7.2013.

 

48. During SP2’s cross-examination, SP2 testified as follows, among others:

 

(a) as at September 2009, according to one Puan Nurul Hasna, the Bank’s accounts manager (Puan Nurul), 75% of the Ship had been built; and

 

27

 

(b) SP2 admitted that SP2 did not inspect the Ship in 2009.

 

SP2 clarified the following during re-examination –

 

(i) the Bank financed the Ship Builder’s operations, including the construction of the Ship. As “part and parcel of the requirement’ of the Bank, Puan Nurul would do “regular site visits” to check on the progress of the Ship Builder’s construction of all its vessels, including the Ship. It is to be noted that Puan Nurul has not been called by the Plaintiffs to testify in this case. I will deal with the weight of such evidence later in this judgment; and

 

(ii) there was no payment to the Bank by any party to redeem the Ship by way of the Ship Builder’s account with –

 

(1) the Bank (2nd Plaintiff); or

 

(2) CIMB.

 

49. SP3 gave the following evidence, among others:

 

(a) when the R&M entered the Ship Builder’s office upon the appointment of the R&M, the R&M did not find any document in the Ship Builder’s office to support the Defendants’ claim to the Ship. The Ship Builder’s records and bank accounts did not reveal payment of the full purchase price of the Ship;

 

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(b) the R&M did not receive co-operation of the Ship Builder’s directors and officers;

 

(c) the R&M found that the Ship Builder’s records were not well kept. In fact, there were reasons for the R&M to doubt the accuracy of the Ship Builder’s accounting records. For the audit of the Ship Builder’s financial year ending 30.6.2010, the Ship Builder’s statutory auditor expressed the concern that there was duplication of entries in the Ship Builder’s accounting records;

 

(d) there was a table which showed that Dato’ Zulkifli had personally received 4 payments amounting to RM7 million for the Ship from the 3rd Defendant. There was an email dated 1.2.2011 from Dato’ Zulkifli to Mr. Mansoor Karimi Dastnaei (SD4), the 3rd Defendant’s MD and general manager (GM), confirming Dato’ Zulkifli’s receipt of RM1.5 million (Dato’ Zulkifli’s Email dated 1.2.2011). There was no record of any authorisation from the Ship Builder for Dato’ Zulkifli to receive personally any payment of the purchase price of the Ship from the 3rd Defendant;

 

(e) the Borcos Contract was not completed. The partially completed Ship was then sold by the Ship Builder to the 3rd Defendant by way of the Shipbuilding Contract. That was the reason why the Shipbuilding Contract only provided “ninety (120 days)” for the Ship Builder to complete construction of the Ship and to deliver the Ship to the 3rd Defendant;

 

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(f) the R&M did not know about the presentation of the WU Petition on 14.3.2013. The R&M only discovered the WU Petition through a company search conducted by a credit reporting agency, RAM Credit Info, on 3.5.2013;

 

(g) the R&M placed the following advertisements to sell the Ship (R&M’s Proposed Sale) –

 

(i) advertisement in the STAR newspaper dated 21.10.2013; and

 

(ii) advertisement in the Edge Malaysia newspaper dated 28.10.2013;

 

(h) the R&M informed the Ship Builder’s BOD of the R&M’s Proposed Sale by way of a letter dated 31.10.2013 (R&M’s Letter dated 31.10.2013). The Ship Builder’s directors did not reply to R&M’s Letter dated 31.10.2013 to inform the R&M that the Ship had already been sold to the 1st or 3rd Defendant;

 

(i) SD2 sent an email dated 25.10.2013 to the R&M to offer his “limited” assistance to show the Ship to potential purchasers (SD2’s Email dated 25.10.2013). SD2’s Email dated 25.10.2013 did not inform the R&M that the Ship had already been sold to the 1st Defendant or the 3rd Defendant;

 

30

 

(j) after the advertisement of the R&M’s Proposed Sale, the R&M received Messrs RP’s Email dated 25.10.2013;

 

(k) on 29.10.2013, the R&M’s representatives met with the Ship Builder’s directors in respect of the 1st Defendant’s claim to the Ship as stated in Messrs RP’s Email dated 25.10.2013 (Meeting on 29.10.2013). At the Meeting on 29.10.2013, Dato’ Zulkifli and SD2 –

 

(i) informed R&M that the 3rd Defendant had not paid the full purchase price of the Ship and hence, the Ship should not be delivered to the 3rd Defendant; and

 

(ii) did not inform the R&M that the Ship had been transferred to the 1st or 3rd Defendant; and

 

(l) on 12.11.2013, the R&M sent a letter to the Ship Builder’s BOD regarding the 1st Defendant’s claim to the Ship by way of Messrs RP’s Email dated 25.10.2013 (R&M’s Letter dated 12.11.2013). R&M’s Letter dated 12.11.2013 requested the Ship Builder’s BOD to give the R&M a written explanation with complete details and documents regarding the 1st Defendant’s claim to the Ship. There was no reply by the Ship Builder’s BOD to R&M’s Letter dated 12.11.2013; and

 

31

 

(m) the R&M was unable to find any document in the Ship Builder’s office to support payments made in respect of the Agreements With Third Party Contractors.

 

50. When cross-examined, SP3 gave the following evidence, among others:

 

(a) the Bank did not do a search of the Register Book; and

 

(b) SP3 did not discuss with Dato’ Zulkifli regarding Dato’ Zulkifli’s personal receipt of cash payments for the Ship from the 3rd Defendant.

 

E. Defendants’ case

 

51. The following witnesses testified for the Defendants:

 

(a) Mr. Khosrow Moshtarikhah (SD1);

 

(b) SD2;

 

(c) Mr. Kazem Mirzaee Kondori (SD3);

 

(d) SD4;

 

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(e) Encik Ahmad Khairudin bin Ismail, the director of the Central Region in the Marine Department (SD5); and

 

(f) the 2nd Defendant.

 

52. Based on SDI’s impressive “curriculum vitae”, SD1 is a highly qualified expert in various aspects of shipping. I have no hesitation to find that SD1 is an expert in shipping matters within the meaning of s 45(1) and (2) EA. I rely on the following judgment of the Supreme Court by Mohamed Azmi SCJ in Junaidi Abdullah v Public Prosecutor [1993] 3 MLJ 217, at 229:

 

—In our view, the test to be applied for the purpose of s 45 [EA] 1950 is this. First, does the nature of the evidence require special skill? Second, if so, has the witness acquired the necessary skill either by academic qualification or experience so that he has adequate knowledge to express an opinion on the matter under enquiry? The answer to both questions must necessarily depend on the facts of each particular case. The speciality of the skill required of an expert witness under s 45 would depend on the scientific nature and complexity of the evidence sought to be proved. The more scientific and complex the subject matter, the more extensive and deeper will the court be required to enquire into the ascertainment o f his qualification or experience in the particular field of art, trade or profession. But in the final analysis in a non-jury trial, it is for the trial judge himself as both judge of fact and law to determine the weight to be attached to such evidence notwithstanding the outstanding qualification or experience (or the lack of it) of the expert. To use the words of Suffian LP at p 323 in Muhamed bin Sulaiman when he applied the case of PP v Virammal, the jurors themselves, ‘could have used a magnifying glass, or their own eyes and their own mind to the evidence and [verify] the results submitted to them’ by the expert witness. The lack of qualification or experience on the part of

 

33

 

the expert must necessarily affect the weight of the evidence rather than admissibility. But where the evidence is of a complex and scientific nature, the absence of both qualification or experience can certainly affect admissibility. No hard and fast rule should be laid down on the issue of the competency of an expert witness. In an uncomplicated matter, considerable laxity must however be applied in practice (see the judgment of Abdoolcader FJ in Dato Mokhtar bin Hashim’s case 15 at p 278).’

 

(emphasis added).

 

53. SD1 testified that SD1 had been appointed by the 3rd Defendant In April 2010 to provide consultancy service in respect of the Ship until its delivery to the 3rd Defendant. SD1 gave the following evidence, among others:

 

(a) SD1 advised the 3rd Defendant in respect of the Agreement With Third Party Contractor dated 9.7.2012;

 

(b) SD1 conducted a survey on the condition of the Ship on 6.11.2014 (SDI’s Inspection) and gave a detailed report, “Condition Survey Report’ (SDI’s Report). According to SDI’s Report –

 

(i) the Ship has major problems due to aging and lack of maintenance; and

 

(ii) a sum of US$355,000 is required to repair the Ship. SD1 gave a detailed breakdown on how SD1 computed the sum of US$355,000;

 

34

 

(c) during SDI’s Inspection, the Ship has only 4 toilets, 1 main switchboard and 1 “shipset carpentry” item. There were however invoices for the payment of 207 toilet cubicles, 6 sets of main switchboards and 7 “shipset carpentry’ items!; and

 

(d) when SD1 was first engaged to provide consultancy service for the 3rd Defendant and when SD1 was present at the Ship Builder’s shipyard, SD1 was of the expert opinion that –

 

(i) 40% of the structural part of the Ship was complete; and

 

(ii) 60% of the Ship’s machinery was complete.

 

54. During cross-examination, SD1 gave the following evidence:

 

(a) there are 2 major stages in ship construction, namely Bill of Sale and Protocol of Delivery. When a Bill of Sale is received by a party, the party is the owner of the vessel. When the purchaser of a vessel signs a Protocol of Delivery, the ship builder may present the Protocol of Delivery for payment in respect of the delivery of the ship; and

 

(b) SD1 admitted that SDI’s Report did not contain any supporting document. SD1 further admitted that the sum of US$355,000 to repair the Ship, was merely SDI’s opinion. SD1 insisted that the sum of US$355,000 was the minimum amount to repair the Ship.

 

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55. SD1 has explained during his re-examination that there is no need for SDI’s Report to contain any supporting document because SD1 has 40 years of extensive experience in shipping. According to SD1, SDI’s Report is “100% complete”. At this juncture, I remind myself that only the Priority Issue is to be decided. The Defendants’ Monetary Counterclaim has yet to be tried. Accordingly, nothing in this judgment should be taken to have any effect on the trial of the Defendants’ Monetary Counterclaim.

 

56. SD2 was subpoenaed by the Defendants to give evidence in this case. SD2’s examination-in-chief discloses the following evidence, among others –

 

(a) the 3rd Defendant paid various third party contractors as stated in the Agreements With Third Party Contractors;

 

(b) the 3rd Defendant had paid US$8,470,247 to the Ship Builder. In other words, SD2 testified that the 3rd Defendant had not only paid the full purchase price for the Ship as provided in the Shipbuilding Contract but the 3rd Defendant had also made the Alleged Overpayment to the Ship Builder;

 

(c) the Ship was 95% completed. The other 5% concerns testing of the Ship which can be carried out in Iran; and

 

(d) SD2 did not inform the 3rd Defendant regarding the WU Petition.

 

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57. During SD2’s cross-examination –

 

(a) SD2 was aware of the Bank’s Credit Facilities to the Ship Builder but SD2 claimed that SD2 was not involved in the Credit Facilities. According to SD2, Dato’ Zulkifli was involved in the Credit Facilities. SD2 however knew that the Credit Facilities funded the Ship Builder’s operations but SD2 was not sure whether the Credit Facilities funded the construction of the Ship;

 

(b) SD2 had read the Debentures when the Debentures were being prepared;

 

(c) SD2 was aware that the proceeds of the sale of ships by the Ship Builder would be used to repay the Credit Facilities. Subsequently in SD2’s cross-examination, SD2 said he was not sure and did not know whether the sale proceeds of the Ship would be used to reduce the Credit Facilities;

 

(d) SD2 testified that payment by Borcos for the Ship was not substantial;

 

(e) SD2 was aware of the contents of the agreements signed by SD2 on the Ship Builder’s behalf with the 3rd Defendant. Despite being aware of these agreements, SD2 did not inform the Bank of these agreements. Nor did SD2 inform the R&M regarding these

 

37

 

agreements. SD2 could not give a reason why SD2 did not inform the Bank and the R&M of the Ship Builder’s agreements with the 3rd Defendant;

 

(f) SD2 was not aware of the following matters –

 

(i) how the Ship Builder would repay the Credit Facilities to the Bank. This was because SD2 was involved in technical and day-to-day operation of the Ship Builder and SD2 was not involved in the Ship Builder’s repayment of the Credit Facilities;

 

(ii) the payment for the Ship was to be made to the Bank by way of the LC; and

 

(iii) SD2 was not aware of the provisions of the STA when SD2 signed the agreements on the Ship Builder’s behalf with the 3rd Defendant. SD2 only became aware of the prohibition on the export of the Ship to Iran after SD2 met MITI in August 2012. This was because MITI refused to issue a permit for the Ship Builder to deliver the Ship to Iran;

 

(g) SD2 was “not sure” –

 

(i) the Bank would only disclaim the Bank’s charge over the Ship if the Bank had been paid for the Ship;

 

38

 

(ii) the agreements signed by SD2 on the Ship Builder’s behalf, had been prepared with the assistance of lawyers. This was because those agreements were prepared by the 3rd Defendant and not by the Ship Builder; and

 

(iii) whether Dato’ Zulkifli or another employee of the Ship Builder had informed the Bank about the agreements between the Ship Builder and the 3rd Defendant;

 

(h) when the Ship Builder entered into the Ship Building Contract with the 3rd Defendant, the hull of the Ship had not been fully completed but the Ship’s shell had been constructed;

 

(i) if there were no funding problem, the Ship would have been constructed in about 18 months. SD2 was confident that the Ship would be completed within 90 to 120 days from the LC;

 

(j) SD2 was only aware of payment made by the 3rd Defendant to the Ship Builder by way of the LC. Despite the various agreements stating that the 3rd Defendant had paid the Ship Builder, SD2 did not know as a fact that such payments had been actually made. SD2 was only “advised’ by Dato’ Zulkifli that 3rd Defendant had paid the Ship Builder before SD2 signed the agreements with the 3rd Defendant on the Ship Builder’s behalf;

 

(k) SD2 testified that the third party contractors “verified’ that they had received payments but SD2 did not know whether the 3rd

 

39

 

Defendant or the Bank had paid them. This was because Dato’ Zulkifli dealt with the Ship Builder’s finances;

 

(l) when shown Clause 7 of Settlement Agreement (the Ship Builder and the 3rd Defendant agreed not to disclose the contents of the Settlement Agreement to court), SD2 said he did not know why the contents of the Settlement Agreement could not be disclosed to court;

 

(m) at the request of the 3rd Defendant’s bank (RK Bank), the Ship Builder submitted 4 documents, namely the Pro Forma Invoice dated 6.3.2010, the 1st Bill of Sale, the Builder’s Certificate and the Declaration of Warranty, to obtain payment of 25% of the purchase price under the LC (25% Payment Under LC). SD2 signed the Builder’s Certificate and the Declaration of Warranty on behalf of the Ship Builder. SD2 admitted that despite the Declaration of Warranty stating the construction of the Ship had been completed, the Ship was not complete on the date of the Declaration of Warranty!;

 

(n) when questioned about the 1st and 2nd Bills of Sale, SD2 firstly said that SD2 was not sure as SD2 did not do the “process of registering” the Ship. SD2 later said the 1st Bill of Sale was to claim for 25% Payment Under LC; and

 

(o) SD2 testified that SD2 signed all the documents on behalf of the Ship Builder as requested by the 3rd Defendant! SD2 further

 

40

 

stated that as the Ship Builder’s MD, SD2 would sign documents on behalf of the Ship Builder as requested by Dato’ Zulkifli!

 

58. SD2 was re-examined as follows, among others:

 

(a) the Ship Builder would take “two years plus” to complete the construction of the Ship; and

 

(b) SD2 testified that SD2 would not sign any agreement if SD2 knew such an agreement would be “untrue, false or inaccurate”.

 

59. SD3 is the “head’ of the 3rd Defendant’s BOD. On behalf of the 3rd

 

Defendant, SD3 signed the MOU and the Agreement dated 12.7.2013.

 

SD3 testified, among others, as follows:

 

(a) SD3 was shocked about the Plaintiffs’ Suit because the 3rd Defendant had not only paid the full purchase price of US$8,200,000 for the Ship but the 3rd Defendant had also made the Alleged Overpayment to the Ship Builder. The 3rd Defendant had similarly paid the Ship Builder for ship with Hull No. 1159 which had been fully built and delivered to the 3rd Defendant as “Safir Kish 3” (SK3);

 

(b) at all meetings with Dato’ Zulkifli and SD2, both of them did not reveal to SD3 that there were Debentures created by the Ship Builder over the Ship in favour of the Bank;

 

41

 

(c) Dato’ Zulkifli and SD2 did not inform SD3 at any time about the filing of the WU Petition;

 

(d) at the material time, the 3rd Defendant as a foreign company, had no knowledge of Malaysian law. Nor was the 3rd Defendant legally represented at the material time;

 

(e) the 3rd Defendant has business dealings with the 2nd Defendant since 2005. The 2nd Defendant has proven to be trustworthy and reliable. Accordingly, the 3rd Defendant sought the 2nd Defendant’s assistance in respect of the Ship;

 

(f) on or around August 2012, MITI refused to issue an export license for the Ship Builder to deliver the Ship to the 3rd Defendant [due to pressure from sanctions imposed by the United States of America (USA) against Iran];

 

(g) SD2 informed SD3 that the Ship could be sold to any buyer so long as the Ship was not delivered to Iran. Hence, the 3rd Defendant sold the Ship, first to SSPSL and then to LGNVL. When the Ship could not be sold to SSPSL and LGNVL, the 3rd Defendant requested for the 2nd Defendant to be a trustee for the 3rd Defendant in respect of the Ship. The 2nd Defendant then incorporated the 1st Defendant to which the Ship was transferred from the 3rd Defendant; and

 

(h) after discussion with the 2nd Defendant, the 3rd Defendant agreed for the 1st Defendant to lease the Ship. This is because MITI’s approval for the export of the Ship may take some time and there

 

42

 

is a possibility that the purchaser of the Ship may face financial difficulties to complete the sale.

 

60. During cross-examination –

 

(a) SD3 testified that the 3rd Defendant had bought more than 20 ships in Iran and had contracted for 4 ships to be built in Malaysia for about US$24 million. The 3rd Defendant did not engage Malaysian lawyers in respect of the purchase of 4 ships from Malaysia but had appointed “consultants”, namely –

 

(i) an Iranian named Mr. Alaei who is a qualified lawyer in Iran; and

 

(ii) SD1;

 

(b) the 3rd Defendant was supposed to pay for the Ship by way of LC but half way, the Bank revoked the LC. The 3rd Defendant had paid for SK3 by way of LC;

 

(c) SD4 dealt with the Ship on behalf of the 3rd Defendant from the beginning and reported the progress of the shipbuilding of the Ship to the 3rd Defendant;

 

(d) SD3 admitted that the 3rd Defendant’s purchase of the Ship at US8.2 million was a “valuable transaction” but the 3rd Defendant

 

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did not check whether any party had an interest in the Ship before the 3rd Defendant entered into the Shipbuilding Contract;

 

(e) SD3 agreed that “normally’, cash would not be used to purchase ships from foreign countries because there would be a risk that the cash may not be paid to the intended recipient;

 

(f) SD3 stated that the 3rd Defendant paid the Ship Builder in cash through “money-changers” [now known as licensees of “money services business” or their agents under the Money Services Business Act 2011]. SD3 had no personal knowledge that the cash paid by the 3rd Defendant to Dato’ Zulkifli, was banked into the Ship Builder’s bank account;

 

(g) SD3 agreed that before the Ship Builder could receive payment under the LC, the 1st Bill of Sale, the Builder’s Certificate and the Declaration of Warranty should be produced by the Ship Builder. SD3 testified that SD3 had seen the 1st Bill of Sale, the Builder’s Certificate and the Declaration of Warranty. SD3 admitted that on 26.5.2010, the construction of the Ship had not been completed and the sum of approximately UAE Dirham 30 million had not been paid to the Ship Builder. SD3 agreed that the Builder’s Certificate and the Declaration of Warranty stating the Ship had been completed, was not true;

 

(h) SD3 was asked about a document dated 29.12.2010 (p. 11 of Bundle D) which was sent to the Bank (Notification dated

 

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29.12.2010). According to the Notification dated 29.12.2010, the LC had expired. Despite the Notification dated 29.12.2010, SD3 disagreed with the Plaintiffs’ learned counsel that the Bank did not revoke the LC; and

 

(i) SD3 knew that the Ship Builder could not get MITI’s export license to deliver the Ship to the 3rd Defendant as well as to SSPSL. SD3 agreed that the incorporation of the 1st Defendant was for the 1st Defendant to sell the Ship and for the sale proceeds to be sent by the 1st Defendant to the 3rd Defendant;

 

61. SD4’s 2 witness statements stated the following, among others:

 

(a) the 3rd Defendant has previously purchased 2 vessels of 34 meters from the Ship Builder. As the 3rd Defendant has found these 2 vessels of 34 meters to be of good quality, the 3rd Defendant has decided to buy the Ship and SK3 from the Ship Builder;

 

(b) SK3 was launched at the Ship Builder’s dockyard by our Honourable Prime Minister (PM) who had expressed his appreciation for the 3rd Defendant’s engagement of the Ship Builder to build the Ship and SK3;

 

(c) RK Bank had issued the LC to the Bank (2nd Plaintiff) for full payment of the purchase price of the Ship. However, only 25% of the LC had been used for both the Ship and SK3. This was due to the “sanctions” imposed on the banks. The Bank (2nd Plaintiff)

 

45

 

subsequently did not agree to extend the LC and had knowledge of the subsequent cancellation of the LC;

 

(d) initially, the Bank (2nd Plaintiff) was supposed to issue a bank guarantee to RK Bank but subsequently, the Ship Builder informed the 3rd Defendant that the Bank (2nd Plaintiff) would not issue the bank guarantee. After discussion between the Ship Builder and the 3rd Defendant with their respective banks, the Bank (2nd Plaintiff) had accepted the following 3 documents in place of the bank guarantee –

 

(i) the Builder’s Certificate;

 

(ii) the Declaration of Warranty; and

 

(iii) the 1st Bill of Sale;

 

(e) SD2 informed the 3rd Defendant that the Bank did not provide financing for the Ship and to expedite the construction of the Ship, the 3rd Defendant should make arrangements to pay third party contractors for work done in respect of the Ship and installation of equipment in the Ship. As such, after the 3rd Defendant received third party contractors’ invoices from the Ship Builder, the 3rd Defendant would make arrangements to pay these third party contractors. The 3rd Defendant was unable to pay directly to these third party contractors due to the sanctions imposed against Iran;

 

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(f) the Ship Builder and the 3rd Defendant subsequently agreed for the balance purchase price of the Ship to be paid in cash. A sum of RM6.2 million had been paid in cash by the 3rd Defendant to the Ship Builder;

 

(g) on behalf of the 3rd Defendant, SD4 had signed an agreement with Etamar to transport the Ship from Port Klang to Iran. On or about 10.7.2012, the 3rd Defendant had made a part payment of US$50,000 to Etamar. As the Ship could not be delivered to Iran, Etamar terminated the contract to transport the Ship to Iran and forfeited US$50,000;

 

(h) despite the 3rd Defendant’s full payment of the price for the Ship to the Ship Builder, the Ship was registered in the Ship Builder’s name due to the “prohibition” caused by sanctions from USA. The Ship Builder held the Ship in trust for the benefit of the 3rd Defendant;

 

(i) the 3rd Defendant had conducted a search of the Register Book of the Registrar of Malaysian Ships and found that the Ship was free from encumbrances. During cross-examination, SD4 said he could not recall who did the search of the Register Book for the 3rd Defendant;

 

(j) SD4 had met Dato’ Zulkifli and SD2 on numerous occasions but both of them did not inform SD4 of –

 

(i) the Debentures created over the Ship by the Ship Builder in the Bank’s favour; and

 

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(ii) the presentation of the WU Petition; and

 

(k) the 3rd Defendant is an “innocent’ purchaser of the Ship who –

 

(i) has not only paid the full purchase price of the Ship but has also made the Alleged Overpayment to the Ship Builder; and

 

(ii) has no notice of the Debentures and the WU Petition.

 

62. SD4’s cross-examination reveals the following:

 

(a) the drafts of all the agreements signed by the 3rd Defendant, had been prepared by the Ship Builder. In fact, SD4 said the drafts of the Variations of Shipbuilding Contract had been prepared by SD2 in SD2’s office. The 3rd Defendant’s internal Iranian lawyer and SD4 would check the drafts and after the 3rd Defendant’s approval, the contracts would be signed by the Ship Builder and the 3rd Defendant. The 3rd Defendant did not engage Malaysian lawyers to peruse the draft agreements because the 3rd Defendant trusted the Ship Builder;

 

(b) there was a typographical error in clause 3.1 of the Shipbuilding Contract (Clause 3.1 of Shipbuilding Contract). The words “ninety (120)” in Clause 3.1 of Shipbuilding Contract should read 90 days. SD4 testified that both the Ship Builder and 3rd Defendant knew that the building of the Ship could not be

 

48

 

completed within 90 days from the date of receipt of the LC by the Ship Builder;

 

(c) the 3rd Defendant was aware that the Ship Builder had an earlier contract to build the Ship for Borcos. The 3rd Defendant requested the Ship Builder to cancel the Borcos Contract and after such a cancellation, the 3rd Defendant would then enter into a contract with the Ship Builder;

 

(d) SD4 did not know about the enforcement of the STA. According to SD4, the PM attended the launching of SK3 and there was no problem regarding the delivery of SK3 to the 3rd Defendant in Iran;

 

(e) SD4 was asked about clause 3 of the third Variation of Shipbuilding Contract (p. 240 of Bundle B) (Clause 3 of 3rd Variation of Shipbuilding Contract) which provided for payment of the Sale Price when the LC was revoked. In the event the LC was revoked, Clause 3(E) of 3rd Variation of Shipbuilding Contract provided that the balance of the “cost of the Ship would be paid after the delivery of the Ship. SD4 disagreed with the Plaintiffs’ learned counsel that Clause 3(E) of 3rd Variation of Shipbuilding Contract stated that the 3rd Defendant had not paid the balance of the Sale Price to the Ship Builder;

 

(f) when shown the 1st Bill of Sale, SD4 disagreed with the Plaintiffs’ learned counsel’s statement that the 3rd Defendant had not paid more than UAE Dirham 30 million to the Ship Builder as of 26.5.2010;

 

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(g) SD4 was not aware that the agreements signed by the 3rd Defendant had only been stamped under the Stamp Act 1949 on 13.2.2014, after such a matter was raised by the Plaintiffs’ solicitors;

 

(h) SD4 maintained that the cash payments made by the 3rd Defendant through “money-changers” to Dato’ Zulkifli were made to the Ship Builder as Dato’ Zulkifli received the cash payments on behalf of the Ship Builder. Despite lengthy questioning by the Plaintiffs’ learned counsel that the 3rd Defendant could not be certain that Dato’ Zulkifli would bank in the cash given by the 3rd Defendant into the Ship Builder’s bank account, SD4 insisted that the Ship Builder would had received the cash payments (received by Dato’ Zulkifli from the 3rd Defendant);

 

(i) SD4 agreed that there was no document to show that the 3rd Defendant had paid the third party contractors as stated in the Agreements With Third Party Contractors;

 

(j) SD2 informed SD4 that if the Ship could be transferred to a “Malaysian trustee” of the 3rd Defendant, MITI’s approval would not be required. Hence, the 3rd Defendant requested for assistance from the 2nd Defendant who agreed to be the 3rd Defendant’s trustee. SD4 did not consult a Malaysian lawyer on whether such an arrangement would be valid. When the 3rd Defendant signed the Agreement dated 5.11.2012, the 3rd Defendant did not check what was Malaysian law regarding the functions of a trustee company;

 

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(k) SD2 disagreed with the statement of the Plaintiffs’ learned counsel that MITI refused to allow the Ship to be transferred to SSPSL because SSPSL was “connected’ to the 3rd Defendant;

 

(l) when asked about Clause 4E of Settlement Agreement, SD4 testified that the purchase price to be paid by the new purchaser of the Ship from the 3rd Defendant was to be “wire transferred” to the 3rd Defendant’s account outside Iran because the 3rd Defendant had to use this sum of money for 3 other projects in Korea and Turkey;

 

(m) SD4 was questioned about Clause 7 of Settlement Agreement (contents of the Settlement Agreement would not be disclosed to court) and SD4 answered that “maybe [the 3rd Defendant] worried about that if [the 3rd Defendant] has a fault in future … and maybe some problem for [the 3rd Defendant]”;

 

(n) SD4 testified that he was not aware of the following –

 

(i) there is a registry of companies in Malaysia; and

 

(ii) if one is dealing with a company’s assets in Malaysia, it is the norm to conduct a search of the company’s records with registry of companies in Malaysia;

 

(o) SD4 understands the concept of crystallisation of a floating charge; and

 

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(р) the 3rd Defendant was not involved in the preparation of the 2nd Bill of Sale. SD2 informed the 3rd Defendant regarding the 2nd Bill of Sale

 

63. During SD4’s re-examination, SD4 clarified that he signed the Shipbuilding Contract on behalf of the 3rd Defendant despite knowing that the construction of the Ship would not be completed within 90 days from the date of receipt of the LC by the Ship Builder because of the limitation period of the LC imposed by RK Bank.

 

64. SD5 gave the following evidence:

 

(a) the Certificate of Malaysian Registry has been issued for the Ship from the Registry of Malaysian Ships in Port Klang;

 

(b) the 2nd Bill of Sale has been registered in the Register Book; and

 

(с) according to the records of the Registry of Malaysian Ships, no mortgage over the Ship has been registered; and

 

(d) SD5 does not know what is a debenture.

 

65. The 2nd Defendant testified as follows:

 

(a) the 2nd Defendant is a businessman who has dealings in ‘‘international business”. The 2nd Defendant is also a ‘‘supplier’ to Petronas. The 2nd Defendant has business dealings with the 3rd

 

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Defendant since 2005. In the course of the 2nd Defendant’s business, he has conducted SSM searches. During crossexamination –

 

(i) the 2nd Defendant agreed that a SSM search of a company could show that the company’s assets had been encumbered;

 

(ii) the 2nd Defendant agreed that if the 2nd Defendant’s company was going to acquire an asset of a company, it would be a “normal course of conduct’ for the 2nd Defendant’s company to do a SSM search to ascertain the status of the asset to be acquired;

 

(iii) in this case, the 2nd Defendant did not do a SSM search in respect of the Ship Builder because the 2nd Defendant had met SD2 and the 3rd Defendant and “it seemed all to be okay’. The 2nd Defendant trusted SD2 and the Ship Builder. The 2nd Defendant further agreed that by not doing a SSM search in respect of the Ship Builder, the Defendants were not able to confirm whether the Ship was encumbered or not;

 

(iv) the 2nd Defendant agreed that if the Ship was subject to a “specific charge”, the Ship could not be sold without the consent of the charge. The 2nd Defendant however asserted that neither Dato’ Zulkifli nor SD2 inform him that the Ship had been charged to the Bank; and

 

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(v) when asked by the Plaintiffs’ learned counsel on whether the 2nd Defendant understood that a floating charge would become a fixed charge upon the crystallization of the floating charge, the 2nd Defendant answered “Yes, some sort, yes”. Subsequently, the 2nd Defendant agreed that he understood the legal effect of the crystallization of a floating charge;

 

(b) in or around August 2011, when MITI refused to issue an export license for the Ship to be sent to Iran, the 2nd Defendant agreed to be a trustee for the 3rd Defendant;

 

(c) the 2nd Defendant signed the Agreement dated 5.11.2012 as a representative of the 3rd Defendant’s trustee company;

 

(d) on 9.11.2012, the 2nd Defendant arranged for the incorporation of the 1st Defendant under LCA. This was the first time the 2nd Defendant himself arranged for the incorporation of a company. The 2nd Defendant is the sole director and shareholder of the 1st Defendant (this is provided in the LCA). It is clear that the alter ego or controller of the 1st Defendant is the 2nd Defendant. The 1st Defendant was formed so that the 3rd Defendant could transfer the Ship to the 1st Defendant after the sale of the Ship by the 3rd Defendant to SSPSL and LNGVL respectively had “failed”. During cross-examination, the 2nd Defendant testified that he arranged for the incorporation of the 1st Defendant himself for the first time without any legal advice;

 

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(e) by way of MITI’s letter dated 13.12.2012 to LSB which was copied to the Ship Builder (MITI’s Letter dated 13.12.2012), MITI gave an export permit for the Ship Builder to export the Ship. MITI’s Letter dated 13.12.2012 stated, among others –

 

(i) the Ship Builder had sold the Ship to LNGVL, a joint venture company of LSB which was incorporated in the British Virgin Island; and

 

(ii) the “Strategic Trade Secretariat had approved an export permit for the Ship Builder to export the Ship to LNGVL. This permit was subject to –

 

(1) the conditions and requirements of the STA and the Strategic Trade Regulations 2010 (STR); and

 

(2) the Ship was for use in Nigeria and any change in ownership or use outside Nigeria would have to obtain the consent of the Strategic Trade Controller (Controller).

 

MITI’s Letter dated 13.12.2012 was signed by the Controller;

 

(f) the sale of the Ship to LNGVL, the first option under the Agreement dated 5.11.2012, did not materialize because LNGVL did not have sufficient funds to complete the sale;

 

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(g) the 2nd Bill of Sale was to give effect to the second option under the Agreement dated 5.11.2012. The 1st Defendant did not pay anything to the 3rd Defendant for the 2nd Bill of Sale. When the 2nd Bill of Sale was executed on 27.3.2013, the 1st and 2nd Defendants had no knowledge about the WU Petition;

 

(h) when the Ship was transferred from the Ship Builder to the 1st Defendant on 23.4.2013, MITI did not object to such a transfer. The 1st and 2nd Defendants have possession of the original 2nd Bill of Sale and Certificate of Malaysian Registry. The 2nd Defendant had “in depth” discussions with SD2 and SD2 also proposed that the “best option” was for the Ship to be transferred to the 1st Defendant. The 2nd Defendant himself presented to the Registry of Malaysian Ships the documents regarding the registration of the Ship in the 1st Defendant’s name;

 

(i) at all material times, the Defendants are “innocent’ purchaser of the Ship who have acted in good faith and without notice of –

 

(i) the WU Petition; and/or

 

(ii) the abuse of authority by the Ship Builder.

 

The 2nd Defendant agreed during cross-examination that SD2 had not seen any evidence of actual payment of the Sale Price by the 3rd Defendant to the Ship Builder;

 

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(j) the draft of the Agreement dated 12.7.2013 had been prepared by the 2nd Defendant. Dato’ Zulkifli negotiated the Agreement dated 12.7.2013 on behalf of the Ship Builder. When the Agreement dated 12.7.2013 was signed, Dato’ Zulkifli did not inform the 2nd Defendant of the appointment of the R&M. The 2nd Defendant only knew about the R&M after reading the newspaper advertisements regarding the R&M’s Proposed Sale. The 2nd Defendant disagreed with the Plaintiffs’ learned counsel that the purpose of the Agreement dated 12.7.2013 was to transfer the Ship from the Ship Builder to the 1st Defendant so as to ensure that the Bank would not have access to the Ship;

 

(k) MITI informed the 2nd Defendant that the Ship could be used locally. It is to be noted that the Defendants have not called any officer of MITI to give evidence in this case;

 

(l) the 2nd Defendant sent an email dated 22.7.2013 to MITI (2nd Defendant’s Email dated 22.7.2013) stating, among others, the 1st Defendant was confident that MITI would grant an export permit to sell the Ship to “Demtek Ltd, Turkey’ as the buyer and seller of the Ship are not “companies or countries listed under STA”;

 

(m) the 1st Defendant had entered into a “Memorandum of Understanding” dated 1.8.2013 with Prosper Energy (MOU With Prosper Energy) whereby Prosper Energy would lease the Ship

 

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for use in Sabah and/or Sarawak waters. The 3rd Defendant has also agreed to lease the Ship because MITI’s approval for the export of the Ship, may take some time and there is always a possibility that the purchaser of the Ship may face financial difficulties and may not be able to complete the sale. During the 2nd Defendant’s meeting with MITI, MITI’s officers had informed the 2nd Defendant that the 1st Defendant was free to lease the Ship. By leasing the Ship, the 1st Defendant would be able to pay the 3rd Defendant, the “cost of the Ship within 4.2 years or at the most, 8.5 years;

 

(n) the 1st and 2nd Defendants are concerned about the condition of the Ship, especially when the Ship has not been properly maintained. From the beginning, on or around November 2013, the 1st and 2nd Defendants wanted to employ their own security guards and to have their own technicians maintain the Ship but the R&M did not agree. The 2nd Defendant agreed that he had told the R&M not to sell the Ship. The was because the 1st Defendant wanted to lease the Ship to Prosper Energy so that the 2nd Defendant could make more money; and

 

(o) despite the 2nd Bill of Sale and the registration of the Ship in the 1st Defendant’s name, the 1st Defendant did not take possession of the Ship from the Ship Builder. The 2nd Defendant explained that the 1st Defendant did not do so because the Ship Builder had not conducted a “test run” of the Ship despite the fact that the Ship Builder had been paid in full by the 3rd Defendant.

 

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F. Effect of 6 Debentures

 

66. As Forms 40 (Certificates of Registration of Charge) for all the 6 Debentures have been issued by SSM, s 111(2) CA provides that Forms 40 for the 6 Debentures “shall be conclusive evidence” that the requirements of as to registration of the 6 Debentures, have been complied with. I rely on the following decisions:

 

(a) in K. Balasubramaniam, Liquidator for Kosmopolitan Credit & Leasing Sdn Bhd (In liquidation) v MBF Finance Bhd & Anor

 

[2005] 2 MLJ 201, at 214, Siti Norma Yaakob FCJ (as Her Ladyship then was) gave the following judgment in the Federal Court –

 

“The charges have been duly registered under s 108 [CA], and the fact of registration is very significant as it renders the debenture valid and effective and it binds the appellant

 

[company which created the debenture].”

 

(emphasis added);

 

(b) Balasubramaniam was followed by Azizah Nawawi JC (as Her Ladyship then was) in the High Court case of Code Brilliant Sdn Bhd & Ors v Heng Ji Keng & Ors [2014] 6 CLJ 502, at 508;

 

(c) Abdul Malik Ishak J’s (as His Lordship then was) decision in the High Court case of Malaysian International Merchant Bankers

 

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Bhd v Highland Chocolate and Confectionary Sdn Bhd & Anor (No 2) [1998] 4 CLJ Supp 32, at 70 [MIMB (No 2)]; and

 

(d) in Re Lin Securities (Pte) Ltd, Peter Chi Man Kwong & Ors v Asia Commercial Bank & Ors [1988] 2 MLJ 137, at 150, Chao Hick Tin JC (as His Lordship then was) in the Singapore High Court gave effect to s 134(2) of the Companies Act of Singapore which is similar (not identical) to our s 111(2) CA.

 

67. In this case, the Defendants have not disputed the validity of the 6 Debentures.

 

F1. Significance of 1st Debenture

 

68. The effect of the 1st Debenture is most significant in this case as this security document has been created first in time on 24.1.2008, before the Borcos Contract (27.3.2008) and the Shipbuilding Contract (6.3.2010). The 2nd Debenture has been executed on 11.6.2010, after the Shipbuilding Contract. Hence, the 2nd to 6th Debentures are not as important as the 1st Debenture.

 

F2. Meaning of “debenture”, “fixed charge” and “floating charge”

 

69. Section 4(1) CA defines a “debenture” to include “debenture stock, bonds, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not.

 

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“Debenture” is defined more extensively in s 2(1) of the Capital Markets and Services Act 2007 (CMSA) as follows:

 

—debenture” includes debenture stock, bonds, notes and any other evidence of indebtedness of a corporation for borrowed monies, whether or not constituting a charge on the assets of the corporation, but shall not be construed as applying to any of the following:

 

(a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray the consideration payable under, a contract for sale or supply of goods, property or services or any contract of hire in the ordinary course of business

 

(b) a cheque, banker’s draft or any other bill of exchange or a letter of credit;

 

(c) a banknote, guarantee or an insurance policy;

 

(d) a statement, passbook or other document showing any balance in a current, deposit or savings account;

 

(e) any agreement for a loan where the lender and borrower are signatories to the agreement and where the lending of money is in the ordinary course of business of the lender, and any promissory note issued under the terms of such an agreement; or

 

(f) any instrument or product or class of instruments or products as

 

the Minister may, on the recommendation of the Commission, prescribed by order published in the Gazette;”.

 

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70. James Foong J (as His Lordship then was) decided as follows in the High Court case of Bensa Sdn Bhd (In liquidation) v Malayan Banking Bhd & Anor [1993] 1 MLJ 119, at 124-125 –

 

—The next question to be asked is whether LKC6 is a ‘debenture’ falling within the category as provided for under s 108(3)(a) [CA].

 

As early as the 19th century, the English judges have found difficulty in defining this term ‘debenture’. As observed by Lindley J in British India etc Co v IRC, ‘… what the correct meaning of “debenture” is I do not know. I do not find anywhere any precise definition of it. We know that there are various kinds of instruments commonly called debentures.’

 

Again, in Levy v Abercorris Co, Chitty J expressed a similar view: ‘I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art.1

 

However, the same judge, Chitty J in the case of Edmonds v Blaina Co did describe ‘debenture’ as follows:

 

The term itself imports a debt – an acknowledgment of a debt – and speaking of the numerous and various forms of instruments which have been called debentures without anyone being able to say the term is incorrectly used. I find that generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security.

 

To my mind, this 19th century definition of Chitty J above, where at first he cannot give any precise legal definition, ought to be given a

 

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more liberal outlook to meet the modern day needs where the sphere of business has increased substantially due to modern technology and communication. In the present day, a wide range of forms and instruments are introduced to meet the ever changing needs of modern day commerce and for this, the term ‘debenture’ should also include besides ‘debt’, any obligation, covenant, undertaking or guarantee to pay or any acknowledgment thereof.

 

In fact, s 4 of our Act defines ‘debentures’…

 

In this respect, I find that LKC6 is a debenture. It contains the elements of an obligation, covenant, undertaking or guarantee to pay. It is a security granted by the company to the insurance company and as such is properly registered as a charge under para (a) of s 108(3) [CA]”.

 

71. The term “charge” is defined in s 4(1) CA –

 

—charge” includes a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise”.

 

72. In National Provincial Bank of England v Charnley [1923] All ER Rep Ext 820, at 834, Atkin LJ (as His Lordship then was) described a charge created by a company as follows:

 

“ The first question that arises is, whether or not this document does create a mortgage or a charge, and to determine that, I think it is necessary to form an idea of what is meant by a “charge”. It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value it appears that both parties evince an intention that property existing or future shall be made available

 

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as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a “charge,” even though the present legal right which is contemplated can only be enforced at the expiration of some time to expire in the future, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, and only gets a right to have the security made available by an order of the court. If those conditions exist, I think there is a “charge”. lf, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence to seize in the future, then there may be no charge, in the sense in which I think it would be used in respect of this matter ”

 

(emphasis added).

 

73. Romer LJ in Re Yorkshire Woolcombers Association Ltd, Houldsworth v Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284, at 294-295, gave the following judgment in the English Court of Appeal regarding a floating charge:

 

“Under s. 14 of the Companies Act of 1900, for a charge to be a —floating charge on the undertaking or property of the company” within the meaning of the words used in that section, it cannot, I think, be properly contended that it is essential that the charge must be on the whole undertaking, or on the whole property, of the company. The term “floating” is one that until recently was a mere popular term. It certainly had no distinct legal meaning. It

 

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is not a legal term. It has recently been used in more than one statute; but when the Courts have to consider whether the charge is a floating one within the meaning of the term as used in the Acts of Parliament, and in particular within the meaning of the Companies Act, 1900, one must, I think, deal with the question of substance to be answered according to the circumstance of each particular case. I certainly do not intend to attempt to give an exact definition of the term “floating charge,” nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with .”

 

(emphasis added).

 

The English Court of Appeal’s judgment in Re Yorkshire Woolcombers Association Ltd, has been affirmed by the House of Lords (which is reported as Illingworth v Houldsworth & Anor [1904] AC 355). In Illingworth, at p. 358, Lord MacNaghten contrasted a fixed charge with a floating charge as follows:

 

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“I should have thought there was not much difficulty in defining what a floating charge is in contrast to what is called a specific charge. A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp .”

 

(emphasis added).

 

F3. Case law on interpretation of debentures

 

74. I derive assistance from the following 2 Singapore cases on how to construe a debenture:

 

(a) Chao Hick Tin JC (as His Lordship then was) decided as follows in Re Lin Securities Pte Ltd, at p. 140, 141, 142, 143 and 144 –

 

“No particular form of words is necessary for the purpose of creating a charge. Any written instrument showing the intention of the parties that a security should be thereby created would suffice although it contains no general words of a charge: see Fisher & Lightwood on Law of Mortgages (9th Ed.) at p. 13.

 

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The next question for determination, which is the key question, is whether the charge created is a fixed charge or a floating charge.

 

Generally, a charge on all the property, both present and future, will create a floating charge. So will a charge upon all the property now belonging or hereafter acquired by the company (see Palmer on Company Law Vol. I 23rd Ed. paragraph 44-06). A charge over stock in trade and bock debts is normally a floating charge. But there is no magic in any particular set of words. A floating charge may be created without resort to such classical words and expressions as “present or future property” or “undertaking”. …

 

It is clear that whether an instrument creates a fixed or a floating charge does not necessarily depend on the label given to it or a particular set of words used by the parties.

 

In construing the LOH [Letter of Hypothecation], I am mindful of the fact that the court is not entitled to rely upon anything which any party subsequently did or said. …

 

Counsel for the liquidators has quite rightly conceded to the submission made by Mr. Lloyd [learned Queen’s Counsel for the 6th and 16th defendants] that subsequent conduct of the parties should not be relied upon to construe the LOH. But, as the authorities indicated, surrounding circumstances would be relevant and could be taken into account. …

 

Accordingly subjective evidence of the intention of the parties is not admissible, but the court can properly have regard to what has been called the matrix of fact, i.e. the

 

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extrinsic circumstances surrounding the transaction including the conduct of the parties at the time the contract was entered into. …

 

It seems to me that one should not determine the effect of the LOH wholly within the four corners of the document. It must be viewed in the context of the surrounding circumstances of the transaction. First was of course the business of the company itself, the stockbroking business. I think this court is quite entitled to take judicial notice of what this line of business involved and how such business was transacted, i.e. the buying and selling of shares on behalf of clients. ”

 

(emphasis added); and

 

(b) in Re EG Tan & Co Pte Ltd, Wong Tui San & Ors v Chase Manhattan Bank NA [1991] 3 MLJ 301, at 305, Lai Kew Chai J held as follows in the Singapore High Court –

 

“ The first question is simply but most importantly in this case one of construction of the share memorandum as to the intention of the parties in relation to the respondents’ security in the shares deposited and to be deposited on and as from 26 August 1982. This task has to be undertaken by first and foremost ascertaining the ordinary meaning of the words used in the share memorandum against the ‘factual matrix’ or background of the transactions and eschewing in the process of construction matters dehors the share memorandum such as the subjective wishes or intent of either party before the agreement was signed or their subsequent conduct: see Re Lin Securities Pte Ltd [1988] 2 MLJ 137 at pp 137 and 143E-144G ”

 

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(emphasis added).

 

75. I am of the view that despite –

 

(a) the definitions of “debenture” in s 4(1) CA and s 2(1) CMSA;

 

(b) the meaning of “charge” given in s 4(1) CA; and

 

(c) previous cases which have explained the meaning of a “debenture”, “charge”, “fixed charge” and “floating charge”

 

– the meaning and effect of a “charge”, “fixed charge” and “floating charge” as provided in a particular “debenture”, is a question of construction of the debenture in question. Based on Re Lin Securities Pte Ltd and Re EG Tan & Co Pte Ltd, the interpretation of a debenture –

 

(i) depends on the ordinary meaning of the actual words used in the debenture. The label given by the parties may not be conclusive; and

 

(ii) the factual matrix at the time of the creation of the debenture, namely the extrinsic surrounding circumstances regarding the execution of the debenture, may be considered in construing the

 

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debenture. The factual matrix concerning the creation of the debenture includes –

 

(iia) the conduct of parties at the time of the creation of the debenture; and

 

(iib) the nature and scope of business conducted by the parties at the time of the execution of the debenture.

 

The construction of the debenture cannot take into account the following matters –

 

(1) the parties’ subjective intention; and

 

(2) the statement and conduct of the parties after the execution of the debenture.

 

Sections 91 and 92 EA will apply in this case to bar any extrinsic evidence, be it oral or documentary, from contradicting, varying, adding to or subtracting from the terms of the 1st Debenture – please see the Federal Court’s judgment in in Tindok Besar Estate Sdn Bhd v Tinjar Co [1979] 2 MLJ 229, at 227-228. The Defendants have not contended that any one of the provisos (a) to (f) to s 92 EA applies in this case so as to justify the admission of extrinsic evidence to contradict, vary, add to or subtract from the terms of the 1st Debenture. In any event, the interpretation of a term of a contract, including the 1st Debenture, is a question of law to be decided by the court and not by

 

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witnesses through their oral or documentary evidence – the Court of Appeal’s judgment in NVJ Menon v The Great Eastern Life Assurance Company Ltd [2004] 3 CLJ 96, at 103-104.

 

76. It is to be noted that previous cases which have construed debentures and which have decided on the existence or non-existence of fixed charges or floating charges as well as their effect, are not binding precedents. This is because each case is decided based on the particular wording of the debenture in question and the possibly unique factual matrix concerning the creation of the debenture.

 

F4. Did 1st Debenture create a charge over assets of Ship Builder in favour of Bank?

 

77. The relevant provisions of the 1st Debenture are as follows:

 

1.2 Further definitions [Clause 1.2 of 1st Debenture]

 

In this Debenture each of the following expressions has, except where the context otherwise requires, the meaning shown opposite it:-

 

Charged Property the property, assets and rights for the

 

time being comprised in or subject to the charges contained in clause 3.1 of this Debenture;

 

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Encumbrance any mortgage, pledge, lien, charge

 

(whether fixed or floating), assignment, hypothecation, deposit, sale with right of retention or other security interest of any kind (including without prejudice any title retention, assignment or transfer by way of security, sale and lease-back and/or sale and repurchase on credit terms) or any other arrangement having substantially the same economic and legal effect as any of the foregoing;

 

Secured Amounts the Indebtedness as defined in the

 

Fourth Agreement [Fourth

 

Supplemental Financing Facilities Agreement dated 24.1.2008;

 

3. CHARGES

 

3.1 Fixed and Floating Charges

 

For better securing the payment of the Secured Amounts and discharge of the obligations of the [Ship Builder] under the Facility Documents the [Ship Builder] as beneficial owner hereby charges to [Bank] and so that the charge hereby created shall be a continuing security:-

 

(a) by way of a first fixed charge:-

 

(i) all the freehold or leasehold property of the [Ship Builder] both present and future including all buildings al [sic] fixtures (including trade fixtures) from time to time on any such property all liens charges option agreements rights and interest over

 

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the land both present and future and all plant, machinery, motor vehicles, computers and other equipment of the [Ship Builder] both present and future and the full benefit of all warranties and maintenance contracts for any of the same but excluding stock in trade of the [Ship Builder] [Clause 3.1(a)(i) of 1st Debenture];

 

(b) by way of a first floating charge, the undertaking of the [Ship Builder] and all its other movable and

 

immovable property, other assets, all book debts and proceeds of book debts and other debts [sic] revenues claims and rights whatsoever and wheresoever, both present and future (including bank deposits and credit balances and all things in action due and owing or which may become due or owing to or purchased or otherwise acquired by the [Ship Builder] [Clause 3.1(b) of 1st Debenture].

 

6. CONTINUING SECURITY

 

Notwithstanding clause 22.9, the charges contained in this Debenture are made for securing the Secured Amounts; and the charges, covenants an [sic] provisions contained in this Debenture shall remain in force as continuing security to [Bank] notwithstanding any settlement of account or any other act, event or matter whatsoever, except only the execution under a written agreement by [Bank] of an absolute and unconditional release or the execution by [Bank] of a receipt for all (and not part only) of the Secured Amounts [Clause 6 of 1st Debenture].’’

 

(emphasis added).

 

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78. It is clear that based on the ordinary meaning of the words in the 1st Debenture [especially Clauses 3.1(a), (b) and 6 read with the definitions of “Charged Property’ and “Secured Amounts” in Clause 1.2], as a security for the Ship Builder’s repayment of the Credit Facilities, the Ship Builder has created a charge in the Bank’s favour –

 

(a) over all the assets of the Ship Builder at the time of the execution of the 1st Debenture; and

 

(b) in respect of assets which may be acquired by the Ship Builder in the future. Accordingly, even though the Ship was only completed after the execution of the 1st Debenture, the Ship fell within the ambit of the charge created by the 1st Debenture.

 

I find there is nothing in the factual matrix concerning the creation of the 1st Debenture which is inconsistent with the above literal construction of the 1st Debenture that the Ship has been charged by the Ship Builder to the Bank under the 1st Debenture. The Defendants do not dispute in this case that the 1st Debenture has created a charge over the Ship in the Bank’s favour. The question that arises is whether the Ship is subject to a fixed charge or a floating charge under the 1st Debenture.

 

F5. Did 1st Debenture create fixed charge or floating charge over Ship?

 

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79. If this court decides that the Ship is subject to a fixed charge under the 1st Debenture, the Priority Issue must be resolved in favour of the Bank. This is clear from the following cases:

 

(a) in the Court of Appeal case of Tan See King & Anor v Anata Knitting Industry (M) Sdn Bhd [2013] 2 MLJ 284, at 287, 288 and 289, Anantham Kasinather JCA gave the following judgment –

 

“[4] In our judgment, the short answer to the first issue is that the subject matter of the fixed charge in the debenture such as the motor vehicles in this case cannot be validly sold by the appellants. The rationale for this proposition is that upon the creation of the debenture in favour of the chargee bank, the motor vehicles of the respondent which formed the subject matter of the second fixed charge are encumbered with the interest of the chargee bank and consequently, the respondent had no interest or title that could be passed by it to the appellants.

 

[6] Since the respondent was incapable of dealing with the motor vehicles, it follows that the answer to the first issue is that the appellants did not derive good title to the motor vehicles following the purported purchase of the same from the respondent.

 

[7] With respect, once it is accepted that the respondent had no title to pass, the question of the appellants being bona fide purchasers for value does not arise particularly since the respondents had registered the

 

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debentures with the Companies Commission. On the particular facts of this case, we are satisfied that this registration of the earlier debentures with the Companies Commission sufficed to serve as sufficient notice of the existence of the fixed charge in favour of the respondent.

 

Properties forming the subject matter of a floating charge can be sold in the ordinary course of business. However, this is not the case with properties forming the subject matter of a fixed charge, as is the case here. The distinction between a fixed charge and a floating charge have already been highlighted in para 5 of this judgment by reference to the pronouncements of Lord Macnagthen in Illingworth v Houldsworth.

 

[10] From the pronouncements of Lord Macnagthen and Earl of Halsbury LC it is evident that a company is only permitted to deal with property forming the subject matter of a floating charge pending crystallisation of the floating charge into a fixed charge in the ordinary course of business. In the case of the assets of the company forming the subject matter of a fixed charge, the company is not entitled to deal with the same at all ”

 

(emphasis added).

 

I will discuss later in this judgment the effect of the registration of the 1st Debenture with the SSM; and

 

(b) in MIMB (No 2), at p. 47, Abdul Malik Ishak J (as His Lordship then was) decided as follows –

 

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—As I said, the 1st defendant issued the debenture as a security for the credit facility of RM1 million advanced by the plaintiff and it clearly falls within the ambit of s. 4 [CA]. Be that as it may, the plaintiff’s fourth charge is in the nature of a fixed charge and that being the case it attaches immediately to all the assets of the 1st defendant in existence at the date of the creation of the charge. … It is said that a specific or fixed charge attaches to a particular piece of property, like a leech, which is identified when the charge is created, and the identity of the property does not change, although it may be extended, during the subsistence of the charge. Examples of them are abound. To name one of them would be the striking example of the legal and equitable mortgages of land owned by a company when the mortgage is created. In my judgment, it is not necessary that the property should exist when the charge is created or that the company should then own the property. Suffice that the property or the class of assets to which it belongs is sufficiently defined in the instrument creating the charge so that there can be no doubt that the property is caught by the charge (Tailby v. Official Receiver [1888] 13 App Cas 523 at 533, per Lord Watson; and Re Yorkshire Woolcombers’ Association Ltd [1903] 2 Ch 284 at 294 per Vaughan Williams LJ). In the instant case, the property and assets are sufficiently defined in the debenture to enable the plaintiff to act accordingly. In my judgment, the plaintiff’s charge attached immediately upon the property and the assets at the date of the creation of the charge and that would be on 23 October 1993. The reason is simple. The plaintiff’s charge is a fixed charge and therefore no crystallisation is

 

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necessary. In my judgment, the debenture would bite on the property and the assets the minute it was created .”

 

(emphasis added).

 

80. The Plaintiffs’ learned lead counsel, Ms. SM Yoong, has contended that the Ship falls within the meaning of “motor vehicles” in Clause 3.1(a)(i) of 1st Debenture and as such, the Ship is subject to a first fixed charge pursuant to the 1st Debenture. Reliance is placed by the Plaintiffs on “Black’s Law Dictionary”, 8th Edition, at p. 1589, which defines a “vehicle” as follows:

 

“ 1. Something used as an instrument of conveyance.

 

2. Any conveyance used in transporting passengers or things by land, water, or air.”

 

81. Mr. Mohan Das Nair, learned lead counsel for the Defendants, has submitted that the Ship does not fall within the meaning of “motor vehicles” in Clause 3.1(a)(i) of 1st Debenture. According to the Defendants, the Ship “would be caught’ under the floating charge of the 1st Debenture. Since the Ship was subject to a floating charge of the 1st Debenture, the Ship Builder was entitled to deal with the Ship until the crystallisation of the floating charge in the 1st Debenture.

 

82. In respect of Tan See King, I am of the following respectful view:

 

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(a) as explained above, the meaning and effect of each debenture must depend on the particular terms of the debenture and the factual matrix concerning the creation of the debenture; and

 

(b) the Court of Appeal has held that the motor vehicles in Tan See King formed a fixed charge in favour of the charge bank. The relevant clauses of the debentures have not been produced in the judgment in Tan See King. Accordingly, the debentures construed in Tan See King may be differently worded from the provisions in the 1st Debenture.

 

83. I am of the opinion that the Ship –

 

(a) does not come within the meaning of “motor vehicles” in Clause 3.1(a)(i) of 1st Debenture so as to constitute the Ship a first fixed charge in the Bank’s favour; and

 

(b) falls within the ambit of a first floating charge in Clause 3.1(b) of 1st Debenture.

 

The above decision is premised on the following reasons:

 

(i) the ordinary meaning of “motor vehicles” in Clause 3.1(a)(i) of 1st Debenture, in my view, refers to motorised land vehicles and does not include the Ship. At this juncture, I must express my reluctance to refer to legal dictionaries to construe the natural meaning of commercial documents, including a debenture. The

 

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intention of parties in a business document should first be ascertained by referring to the ordinary meaning of the terms in the document. For this purpose, reputable and “established’ language dictionaries may be resorted to. Parties are, of course, at liberty to provide specific or technical definitions in the interpretation clause of a contract. In this case, there is no extended meaning of “motor vehicles” in the interpretation provision of the 1st Debenture, namely clause 1.2, to include the Ship. I must make clear that I am not ruling out any reference to a legal dictionary in the construction of a contractual provision. There may be instances where it is appropriate to refer to legal dictionaries to interpret a particular contractual provision. In this case, I am not inclined to refer to “Black’s Law Dictionary’ to provide the natural meaning of “motor vehicles” in Clause 3.1(a)(i) of 1st Debenture;

 

(ii) the Ship can easily fall within the meaning of any one or more of the following phrases in Clause 3.1(b) of 1st Debenture so as to subject the Ship to a first floating charge in the Bank’s favour –

 

(1) “the undertaking” of the Ship Builder;

 

(2) “all … immovable property” of the Ship Builder; and/or

 

(3) “other assets” of the Ship Builder

 

– “whatsoever and wheresoever, both present and future”.

 

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The Ship can also come within the phrase “otherwise acquired’ by the Ship Builder in Clause 3.1(b) of 1st Debenture;

 

(iii) all the 3 characteristics of a floating charge as described by Romer LJ in Re Yorkshire Woolcombers Association Ltd, are

 

satisfied in respect of the Ship, namely –

 

(1) the Ship is in a class of assets of the Ship Builder, both present and future, which has been charged to the Bank;

 

(2) the class of the Ship Builder’s assets which includes the Ship, is “one which, in the ordinary course of the business of the [Ship Builder], would be changing from time to time”; and

 

(3) until crystallization of the floating charge, the Ship Builder was free to carry on its business in respect of the Ship in the ordinary way;

 

(iv) the entire wording and context of Clause 3.1(a) of 1st Debenture does not show that a specific charge will fasten immediately on the Ship so as to make the Ship a fixed charge as explained by Lord MacNaghten in Illingworth. This is understandable as the construction of the Ship will take some time and the Ship may not be an “ascertained and definite property or property capable of being ascertained and definite” so as to form a first fixed charge under Clause 3.1(a) of 1st Debenture;

 

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(v) the Ship falls within the meaning of a floating charge given by Lord MacNaghten in Illingworth as the Ship is subject to a floating charge which “is ambulatory and shifting in its nature, hovering over and … floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp” ; and

 

(vi) as decided in Re Lin Securities Pte Ltd, the court may consider the nature of the Ship Builder’s business, namely to build and to sell ships. If the objective and manifest intention of the Ship Builder and the Bank was to include the Ship as a fixed charge under the 1st Debenture, both parties would and could have easily provided as such in Clause 3.1(a) of 1st Debenture. This was however not done in this case. This supports the construction that both the Ship Builder and the Bank have manifestly intended for the Ship to be subject only to a floating charge and not a fixed charge.

 

84. In the event I am wrong and if the Ship is indeed part of the first fixed charge under Clause 3.1(a)(i) of 1st Debenture, the Priority Issue is decided in favour of the Bank as against the 1st as well as 3rd Defendants. This judgment will proceed on my above finding that the Ship falls within the first floating charge in Clause 3.1(b) of 1st Debenture.

 

G. Has first floating charge under 1st Debenture crystallized?

 

85. The following provisions in the 1st Debenture are relevant:

 

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4. FIXED SECURITY

 

4.2 Crystallisation

 

[Bank] may, at any time, by notice in writing served on the [Ship Builder], convert the floating charge contained in this [1st Debenture] into a first fixed charge over all the property, assets and rights from time to time and at any time subject to the floating charge or over so much of the same as is specified in the notice [Clause 4.2 of 1st Debenture].

 

4.3 Automatic Crystallisation Provision

 

If the [Ship Builder] charges pledges or otherwise encumbers in favour of any third party, whether by way of a fixed or floating security any of the Charged Property or attempts to do so without the prior written consent of [Bank] or if any person attempts to levy any distress execution sequestration or other attempts or other process against any of the Charged Property or if any floating charge whether created before or after the date hereof, shall crystallise over any of the Charged Property the floating charges hereunder shall automatically without notice operate as fixed charges instantly when such event occurs [Clause 4.3 of 1st Debenture].

 

5. RESTRICTION AGAINST OTHER CHARGES

 

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The [Ship Builder] hereby declares and undertakes that there is no Encumbrance upon any of the Charged Property secured by this Debenture having priority to or ranking pari passu with this Debenture and:-

 

(a) the [Ship Builder] shall not during the subsistence of this Debenture without the consent in writing of [Bank] execute any form of Encumbrance in respect of any the Charged Property [Clause 5(a) of 1st Debenture];

 

8. COVENANTS BY [SHIP BUILDER] 8.1 Covenants

 

The [Ship Builder] covenants with [Bank] as follows:-

 

(a) not to create or permit to exist upon or affect any of the Charged Property any Encumbrance which ranks, or may come to rank in priority to or to pari passu with the floating charge contained in clause 3.1(b) or, except with the prior written consent of [Bank], any Encumbrance which rank after the charges contained in this Debenture [Clause 8.1(a) of 1st Debenture];

 

(b) not to transfer, assign, charge, sell, lend or otherwise dispose of any of the Charged Property … without the prior written consent of [Bank] [Clause 8.1(b) of 1st Debenturef

 

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(emphasis added).

 

86. Messrs Skrine’s Letter dated 20.3.2013 stated that the floating charge had crystallized “with immediate effect’ (Crystallization Notice). The Crystallization Notice has been sent pursuant to Clause 4.2 of 1st Debenture. The Defendants rely on the Crystallization Notice to submit that the floating charge under the 1st Debenture has only crystallized on 20.3.2013. Hence, according to the Defendants, all agreements entered by the Ship Builder with the 3rd Defendant and various parties before 20.3.2013, are valid.

 

87. The Plaintiffs now contend that the floating charge has automatically crystallised much earlier on 6.3.2010 under Clause 4.3 of 1st Debenture when the Ship Builder “encumbers” the Ship by entering into the Shipbuilding Contract without the prior written consent from the Bank. This court will now decide the following 2 questions:

 

(a) whether an “automatic crystallization clause” such as Clause 4.3 of 1st Debenture is valid and enforceable; and

 

(b) if Clause 4.3 of 1st Debenture was valid and enforceable, was there an automatic crystallization of the first floating charge under the 1st Debenture when the Shipbuilding Contract was executed by the Ship Builder on 6.3.2010 without the Bank’s prior written consent?

 

G1. Validity of automatic crystallization clause in 1st Debenture

 

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88. The following Malaysian High Court cases have not only upheld the validity of an automatic crystallization clause but have also enforced such a clause:

 

(a) in MIMB (No 2), at p. 47-48, Abdul Malik Ishak J (as His Lordship then was) decided as follows –

 

“Be that as it may, art. 5.7(b) of the debenture consolidates the position of the plaintiff even further. That article states as follows:

 

5.7(b) Notwithstanding anything herein contained, if the Company charges pledges or otherwise encumbers (whether by way of fixed or floating security) any of the charged assets described in Section 5.1 hereof or attempts so to do without the prior written consent of the Bank or if any distress, attachment or legal process is levied, enforced or issued against any of the lands or assets of the Company or if any of the events specified in section 9.1 hereof occurs, the floating charge hereby created over the assets the subject thereof shall automatically without notice operate as a fixed charge immediately upon the occurrence of such an event.

 

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and it means what it says. It is an automatic crystallisation clause as it provides in clear terms that if the 1st defendant attempts to sell any of the lands or assets of the company it shall crystallise immediately and forthwith. In my judgment, the automatic crystallisation occurred the very minute the agreement dated 8 September 1995 was entered into between the 1st defendant and the 2nd defendant and, consequently, there was no need for a notice to be issued to the 1st defendant .”

 

(emphasis added);

 

(b) Alauddin J (as His Lordship then was) held as follows in Silverstone Marketing Sdn Bhd lwn Hock Ban Hin Trading Sdn Bhd & Yang Lain (The Pacific Bank Bhd sebagai pihak menuntut) [1998] 2 MLJ 696, at 701-702 (in our National Language) –

 

“Persoalan sekarang ialah adakah ‘automatic

 

crystallization’ tersebut sah di sisi undang-undang? Jawapannya adalah jelas. Sekali lagi, saya membuat petikan dari buku Legal Problems of Credit and Security di mana penulis menyatakan demikian di ms 69:

 

Under an automatic crystallization clause, no action on the part of the debenture holder is needed to crystallize the charge; crystallization occurs automatically on the occurrence of a specified event. The use of automatic crystallization clauses became fashionable in the 1970s, during

 

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which period there was a tendency to expand the range of crystallizing events. Winding up and receivership were also invariably specified, though as mentioned earlier this was not strictly necessary, for it is a term implied by law that these events cause a charge to crystallize. Other events sometimes specified as crystallizing events were the grant of security to another creditor; the levy of distress or execution against the debtor’s assets ….

 

(Penekanan ditambah.)

 

Dari petikan di atas, nampaknya debentur yang bersifat ‘automatic crystallization’ menjadi semakin popular dan mula mendapat perhatian mahkamah pada tahun-tahun tujuh puluhan.

 

Dalam kes Re Brightlife Ltd [1987] 1 Ch 200, Hoffmann H di ms 215E menyatakan demikian:

 

… I would therefore respectfully prefer the decision of the New Zealand Supreme Court Re Manurewa Transport Ltd [1971] NZLR 909 (dirujuk), recognizing the validity of a provision for automatic crystallization …. For present purposes, however, it is not necessary to decide any questions about automatic crystallization. The notices under cll 3(B) and 13 constitute intervention by the debenture-holder and there is in my judgment no conceptual reason why they should not crystallize the floating charge if the terms of the charge upon their true construction have this effect.

 

Apa yang berlaku dalam kes Re Brightlife Ltd ialah pihak pemiutang cuba berhujah bahawa kejadian sesuatu ‘crystallization’ adalah ditetapkan oleh undang-undang dan bukan berdasarkan perjanjian pihak-pihak berkenaan dan ‘crystallization’ hanya boleh berlaku dalam tiga situasi sahaja, iaitu penggulungan syarikat, perlantikan seorang penerima (receiver) atau pemberhentian sesuatu urusan perniagaan.

 

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Akan tetapi penghujahan tersebut ditolak oleh Hoffmann H di mana beliau menyatakan (di ms 214, 215):

 

I do not think it is open to the courts to restrict the contractual freedom of parties to a floating charge on such grounds … These arguments for and against the floating charge are matters for Parliament rather than the courts ….

 

Justeru itu, mahkamah berpendapat bahawa ‘crystallization’ bergantung kepada sesuatu kontrak atau perjanjian antara pihak-pihak berkenaan yang mempunyai kebebasan untuk menentukan sesuatu kejadian di mana gadaian terapung akan menjadi tetap (crystallized).

 

WJ Gough dalam bukunya Company Charges (Edisi Kedua) di ms 235 di bawah perenggan, ‘Effective express crystallization clauses’ menyatakan:

 

Express crystallization clauses developed as a relatively recent feature of the floating charge. Clauses which have been held effective by the courts have been designed mainly to counter the subsequent intrusion of adverse third party rights in situations where, as a result of previous case decisions, the floating charge remained vulnerable to loss of priority.

 

Di halaman yang sama, penulis juga memberi beberapa contoh kes-kes di mana mahkamah berpendapat bahawa ‘automatic crystallization’ adalah sah dari segi undang-undang. Antara kes-kes tersebut ialah:

 

(1) Stein v Saywell (1969) 121 CLR 529;

 

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(2) Re Manurewa Transport Ltd [1971] NZLR 909;

 

(3) North Western Shipping & Towage Co Pty Ltd v Commonwealth Bank of Australia (1993) 118 ALR 453;

 

(4) DFC Financial Services Ltd v Coffey [1991] 2 NZLR 513 (dirujuk); dan

 

(5) Re Rex Developments Pty Ltd (in liquidation) (1994) 13 ACSR 485.

 

Tidak syak lagi berdasarkan kepada kes-kes tersebut di atas bahawa mahkamah di zaman mutakhir ini lebih bersedia dan cenderung untuk menerima terma-terma yang memperuntukkan ‘automatic crystallization’ ”

 

(emphasis added); and

 

(c) in an unreported case of CIMB Bank Bhd v ZAQ Construction

 

Sdn Bhd [2013] 1 LNS 230, at paragraph 24, Nallini Pathmanathan J (as Her Ladyship then was) gave the following judgment –

 

“24. Such an automatic crystallisation provision therefore operates independently of any written notice seeking to crystallise the floating charge. In the instant case the fact that the written notice preceded the writ of seizure and sale renders the provision less relevant. But it does mean that the secured creditor, envisaging execution by third party creditors provided expressly for automatic crystallisation such that even if a party sought to levy execution, the charge would crystallise into a fixed charge thereby according the secured creditor

 

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priority over the asset at the point in time when distress was levied .”

 

89. Courts in New Zealand, Australia and England (in chronological order) have recognised the validity and efficacy of an automatic crystallization clause. As early as 1971, in Re Manurewa Transport Ltd [1971] NZLR 909, Speight J in the New Zealand Supreme Court upheld the validity of an automatic crystallisation clause in a debenture. I should point out that after Re Manurewa Transport Ltd, Berger J in the Supreme Court of British Columbia in R v Consolidated Churchill Copper Corp Ltd (1979) 90 DLR (3d) 357 had rejected the application of an automatic crystallization clause. I refer to the following decisions from New Zealand, Canada, Australia and England (in chronological order) regarding the validity of an automatic crystallisation clause:

 

(a) Speight J decided as follows in Re Manurewa Transport Ltd, at p. 913 and 916-917 –

 

“13. The moneys hereby secured shall immediately attach and payable and the charge hereby created shall immediately attach and become affixed: …

 

(i) If the company mortgages charges or encumbers or attempts to mortgage charge or encumber any of its property or assets contrary to the provisions hereof without the prior written consent of the lender.

 

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After all, a floating charge is not a word of art, it is a description for a type of security contained in a document which may provide a variety of circumstances whereupon crystallization takes place. In this case, to mortgage or attempt to mortgage an asset is one of them .”

 

(emphasis added).

 

At the time of the decision of Re Manurewa Transport Ltd, the New Zealand Supreme Court was a court of first instance. Presently, the New Zealand Supreme Court is the apex court in that country;

 

(b) in Consolidated Churchill Copper Corp Ltd, at paragraphs 21 and 22, Berger J decided as follows –

 

“21. But there has been no judgment rendered on the question in Canada. The matter is one of first impression. So policy considerations should be placed on the scales. These considerations weigh heavily against the adoption of the notion of self-generating crystallization. … The requirements for filing by a receiver under the Companies Act would be rendered a dead letter. The company would not know where it stood; neither would the company’s creditors. How is anyone to know the true state of affairs between the debenture-holder and the company unless there is an unequivocal act of intervention? … The debenture-holder would have all the advantages of allowing the company to continue in business and all of the advantages of intervening at one and the same time, to the prejudice of all other creditors.

 

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22. It is my view that neither in the older cases, nor in the recent cases, nor in the exigencies of policy, is there any justification for the adoption of a concept of selfgenerating crystallization. …

 

23……Condition No. 6 of the debenture says:

 

—If the security hereby constituted shall become enforceable the Banks (Brameda) may by instrument in writing … appoint any person … to be a receiver … of the property and assets hereby charged …”

 

24. I hold that the floating charge never crystallized.”

 

(emphasis added).

 

Berger J had refused to recognise the legality of automatic crystallization clauses based purely on public policy considerations. The Supreme Court of British Columbia is a court of first instance. The learned authors of “Chan & Koh on Malaysian Company Law – Principles & Practice”, 2nd Edition (2006), at p. 386, have correctly pointed out that the relevant “Condition No. 6” of the debenture in Consolidated Churchill Copper Corp Ltd, required the debenture holder (in that case, the assignee of the debenture) to send a written instrument to crystallize the floating charge. There was therefore no clear provision in the debenture in Consolidated Churchill Copper Corp Ltd to provide for an automatic crystallization of the floating charge;

 

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(c) in Horsburgh & Anor v Deputy Commissioner of Taxation

 

(1984) 54 ALR 397, at 413-414, McGarvie J who partially dissented in a three-member Supreme Court of Victoria, recognised the application of an automatic crystallisation clause in a debenture. Anderson and Murray JJ in the majority in Horsburgh, did not decide on the application of the automatic crystallisation clause as their Lordships thought that such a matter was not necessary for the decision in that case. It is to be noted that the highest court in Australia is the High Court of Australia and not the Supreme Court of the states;

 

(d) Hoffmann J (as His Lordship then was) in the English High Court case of Re Brightlife Ltd [1986] 3 All ER 673, at 680-681, preferred Re Manurewa Transport Ltd over Consolidated Churchill Copper Corp Ltd;

 

(e) DFC Financial Services Ltd v Coffey [1991] 2 NZLR 513, at 518, Lord Goff delivered the opinion of the Privy Council on an appeal from New Zealand, which gave effect to an automatic crystallisation clause in a debenture;

 

(f) in Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liquidation) (1992) 7 ACSR 365, at 371-373 and 378, the Court of Appeal of New South Wales followed Re Manurewa Transport Ltd regarding the application of an automatic crystallisation clause in a debenture;

 

(g) the judgment of Morrit J (as His Lordship then was) in the English High Court case of Griffiths & Anor v Yorkshire Bank plc & Ors

 

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[1994] 1 WLR 1427, at 1433, recognised the effect of an automatic crystallisation clause in a debenture; and

 

(h) in Covacich v Riordan [1994] 2 NZLR 502, at 504-507, Fisher J in the New Zealand High Court, upheld the legality of an automatic crystallisation clause in a debenture. I will refer to Covacich subsequently in this judgment in respect of the effect of the registration of a debenture with SSM on third parties dealing with the company in question.

 

90. With respect, I am not inclined to follow Consolidated Churchill Copper Corp Ltd. I am of the respectful view that automatic crystallization clauses in debentures are both lawful and necessary for the following reasons:

 

(a) since automatic crystallization clauses are not governed by CA and any other Malaysian statute, parties have complete freedom to agree to such clauses. Gopal Sri Ram FCJ decided as follows in the Federal Court case of Berjaya Times Squares Sdn Bhd (formerly known as Berjaya Ditan Sdn Bhd) v M Concept Sdn Bhd [2010] 1 MLJ 597, at 606 –

 

“Before addressing these issues there is an important observation that needs to be made. It is this. The agreement in the present case is one that is not regulated by statute. In short, it is not a contract governed by the housing development legislation. The appellant and respondent were therefore at complete liberty, in accordance with the doctrine of freedom of contract to agree on any terms they thought fit. ’’

 

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(emphasis added);

 

(b) according to s 24(e) of the Contracts Act 1950 (CA 1950), the consideration or object of a contract is unlawful if the court considers such a contract as opposed to public policy. In Theresa Chong v Kin Khoon & Co [1976] 2 MLJ 253, at 255-256, Gill CJ (Malaya) in the Federal Court adopted a narrow construction of s 24(e) CA 1950 as follows –

 

“It was contended for the appellant that when the plaintiffs entered into an agreement with the defendant to engage her as a remisier, without her being registered with the Stock Exchange, they were entering into an agreement which was void as being contrary to public policy.

 

The arguments put forward by counsel for the respondent in contesting the appeal may be summarised as follows.

 

The defendant did not plead that the contract was void as being opposed to public policy. For the court to take cognizance of illegality the transaction must be illegal on the face of it. Not being registered as a remisier is not contrary to public policy because the bye-laws of the Stock Exchange are the bye-laws of a private body which have no force of law. They are binding on the plaintiffs but not on the defendant. If the plaintiffs were dealing with an unregistered remisier they were committing a breach of bye-law 97 of the Stock Exchange Rules which provides for a penalty. But their dealing with such a remisier did not make the contract illegal as being opposed to public policy.

 

I do not think there is any merit in the argument that illegality was not pleaded because a court is bound to take cognizance of it if it is of the opinion that the contract is void on the ground of being contrary to public policy. But I entirely agree with the rest of the arguments put forward by

 

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counsel for the respondent. It seems clear that the present contract does not fit into any of the traditional pigeon holes. It was on the basis of those arguments that the learned trial judge found that the contract between the plaintiffs and the defendant was not illegal. In my judgment the learned judge was quite right in taking that view.”

 

(emphasis added).

 

Theresa Chong has been affirmed by Shankar JCA in the Court of Appeal case of YK Fung Securities Sdn Bhd v James Capel (Far East) Ltd [1997] 2 MLJ 621, at 667, 669 and 671, as follows

 

—Theresa Chong v Kin Khoon & Co [1976] 2 MLJ 253 had another aspect to it which formed the ratio decidendi of that case. There it was held by the Federal Court that a violation of the rules of the KLSE had occurred. Nevertheless, the Federal Court held that the contract was valid and not illegal.

 

It was strenuously submitted that we should not follow this decision because it was too narrow and that the categories of contracts which are contrary to public policy are not closed. The defendant’s counsel referred us to the articles ‘Public Policy under the Contracts Act 1950’ [1981] JMCL 1 by Prof Visu Sinnadurai (as he then was), especially his comments at pp 14-20 and the Indian authorities therein referred to.

 

The defence’s attempt to invoke public policy was devoid of any merit.”

 

(emphasis added).

 

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In view of the narrow construction of s 24(e) CA 1950 by 2 appellate decisions in Theresa Chong and YK Fung Securities Sdn Bhd (which are binding on me as a matter of stare decisis), I do not think an automatic crystallization clause in a debenture may be invalidated solely on the ground of being contrary to public policy as decided in Consolidated Churchill Copper Corp Ltd;

 

(c) I am of the view that it is not contrary to public policy for financial institutions to insist on, among others, automatic crystallization clauses in debentures, before financial institutions agree to grant credit facilities to borrower companies. My opinion is based on the following reasons –

 

(i) financial institutions have the prerogative not to grant any credit facilities. If credit facilities are given, financial institutions have a right to propose terms and conditions to secure repayment of the credit facilities as the financial institutions deem fit. I am of the further view that it is prudent banking practice for secured lenders to insert automatic crystallization clauses in debentures because the secured lenders have no effective means to know what actually transpires between debtor companies and third parties;

 

(ii) companies have a right to refuse to the insertion of automatic crystallization clauses in debentures. However, if borrower companies freely consent to automatic crystallization clauses in their debentures and have thereby received the full benefit of the credit facilities, these companies cannot now renegade on such clauses, especially when the debentures have already been registered with SSM; and

 

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(iii) in respect of third parties dealing with the debtor companies who may be later prejudiced by the application of automatic crystallization clauses, this judgment will subsequently discuss the wide implication of registration of debentures with SSM whereby third parties are considered by case law to have “notice” of automatic crystallization clauses and are therefore bound by such clauses. Third parties deal with debtor companies, like all unsecured creditors, at the third parties’ own risk; and

 

(d) the validity and enforceability of automatic crystallization clauses in Malaysia is consistent with the judicial approach in New Zealand, Australia and England. I do not see any reason why Malaysian case law on automatic crystallization clauses should differ from the case law position of New Zealand, Australia and England. In United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd [1993] 1 MLJ 182, at 193, the Supreme Court held as follows in a judgment given by Anuar J (as His Lordship then was) –

 

“In our judgment, it is important generally speaking, and more so in matters of commercial law, that there should be uniformity in the common law of the Commonwealth

 

It is important, as far as possible, to ensure that our law on debt securitization is consistent with the corresponding law in other Common Law countries. This is especially so when debt securitization is now borderless in the sense that Malaysian companies do borrow money from financial institutions in other jurisdictions.

 

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G2. Has Clause 4.3 of 1st Debenture been automatically triggered in this case?

 

91. By way of Clauses 5(a) and 8.1(a) of 1st Debenture, the Ship Builder has undertaken and covenanted respectively not to create any “encumbrance” (defined in Clause 1.2 of 1st Debenture) on the Ship Builder’s “Charged Property’ (defined in Clause 1.2 of 1st Debenture to include the Ship). In Clause 8.1(b) of 1st Debenture, the Ship Builder has covenanted not to “sell’ or “otherwise dispose of the Ship without the Bank’s prior written consent.

 

92. In respect of the Borcos Contract dated 27.3.2008 –

 

(a) by way of the Bank’s Letter dated 27.2.2009, the Bank has agreed to the Ship Builder’s assignment of the sale proceeds of the Borcos Contract to the Bank; and

 

(b) the Ship Builder has agreed by way of the Ship Builder’s Letter dated 2.3.2009 that all proceeds of the sale of the Ship to Borcos, be paid to the Bank.

 

93. The Bank’s Letter dated 27.2.2009 and the Ship Builder’s Letter dated 2.3.2009, showed that the Ship Builder has obtained the Bank’s written consent for the Ship Builder’s sale of the Ship to Borcos. There is therefore no reason why the Ship Builder could not have complied with Clauses 5(a), 8.1(a) and (b) of 1st Debenture and apply for the Bank’s

 

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prior written consent for the Shipbuilding Contract and all other subsequent agreements and dealings with the Defendants in respect of the Ship in this case.

 

94. Clause 4.3 of 1st Debenture is couched in mandatory terms as is clear from the use of the imperative term “shall’, not once but twice. Clause 4.3 of 1st Debenture applies even to an “attempt to “encumber” the Ship without the Bank’s prior written consent. In MIMB (No 2), at p. 48, the High Court decided that an attempt to sell the charged asset in question would cause the floating charge to “crystallize immediately and forthwith”.

 

95. I am of the view that the Shipbuilding Contract amounts to an “encumbrance” on the Ship within the meaning of Clause 1.2 of 1st Debenture. The Shipbuilding Contract falls within the meaning of the phrase “any other arrangement having substantially the same economic and legal effect as “any mortgage, pledge, lien, charge (whether fixed or floating), assignment, hypothecation, deposit, sale with right of retention or other security interest of any kind (including without prejudice any title retention, assignment or transfer by way of security, sale and lease-back and/or sale and repurchase on credit terms)” in the definition of “encumbrance” in Clause 1.2 of 1st Debenture. This is because under clause 2.1 of the Shipbuilding Contract, the 3rd Defendant is obliged to pay to the Ship Builder only and this by-passed the Bank completely. Accordingly, Clause 4.3 of 1st Debenture immediately applies on 6.3.2010 when the Ship Builder

 

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concluded the Shipbuilding Contract without the Bank’s prior written consent.

 

96. Even if I have erred in construing that the Shipbuilding Contract constitutes an “encumbrance” in Clause 1.2 of 1st Debenture, the Ship Builder’s execution of the Shipbuilding Contract without the Bank’s prior written consent, amounts to a clear “attempt to encumber the Ship which automatically invokes the application of Clause 4.3 of 1st Debenture.

 

97. SD2’s evidence is clear that the Ship Builder has not obtained the Bank’s prior written consent to enter into the Shipbuilding Contract. In fact, the Bank has not been informed by the Ship Builder of the Shipbuilding Contract. Hence, the automatic crystallization of the first floating charge under Clause 4.3 of 1st Debenture on 6.3.2010.

 

H. Effect of automatic crystallization of first floating charge in this case

 

98. Upon the automatic crystallization of the first floating charge under Clause 4.3 of 1st Debenture on 6.3.2010, the Ship became subject to a fixed charge in favour of the Bank. The Bank will thus have priority over the Ship vis-à-vis the 3rd Defendant and any other party, including the 1st Defendant. I rely on the following cases:

 

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(a) in Director of Customs, Federal Territory v Ler Cheng Chye (Liquidator of Castwell Sdn Bhd, in liquidation) [1995] 2 MLJ 600, at 612, the Federal Court in a judgment given by Wan Yahya FCJ held as follows –

 

“On crystallization, the floating charge which had until then remained suspended, becomes fixed and attaches itself to the charged assets of the company. Simultaneously, the charge holders’ interest becomes a proprietary interest capable of defeating the competing interests of unsecured creditors

 

(emphasis added);

 

(b) Ler Cheng Chye has been affirmed by the Federal Court in Balasubramaniam. The Federal Court in Balasubramaniam, at

 

p. 216, 219, 220 and 223, decided as follows –

 

“11. … As such, we are only concerned with the

 

movable assets of KCL [debtor company] and under these circumstances and on the authority of Mahadevan & Anor v Manilal & Sons (M) Sdn Bhd [1984] 1 MLJ 266 the fixed charge created by the debenture is an equitable one.

 

29 Re High Crest also held that the only way that an

 

insolvent company or its liquidators could recover its property was by way of a redemption action against the debenture holder but even that

 

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too would be dependent upon the company satisfying all the obligations under the debenture.

 

31

 

32

 

To conclude ss 233(1) and 277(5) [CA] have no application where assets form part of an equitable charge as the second respondent [receiver and manager] have a legal right to possess them pursuant to the terms of the debenture.

 

On appointment, a receiver and manager becomes an agent of the company and that agency ceases upon the winding-up of the company. Nevertheless, he still retains his possessory right to the charged assets and his status is best described by Edgar Joseph Jr FCJ in the case of Kimlin Housing Development Sdn Bhd (Appointed Receiver and Manager) (in liq) v Bank Bumiputra (M) Bhd & Ors [1997] 2 MLJ 805 (‘ Kimlin’) to be as follows:

 

To put it another way, winding up after a receiver and manager is appointed terminates his purely personal powers but not his in rem powers.

 

The distinction between a receiver’s and manager’s in rem powers and his personal powers is this: the former flow from the security created by the debenture and relate to the assets of the company whereas the latter relate to everything else. So, for example, in Sowman v David Samuel Trusts Ltd [1978] 1 All ER 616, a receiver appointed

 

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over assets which included a mortgage debt could validly exercise the power of sale in the name of the company despite its liquidation. This power, being coupled with an interest, was irrevocable both at common law and by statute and accordingly, a power given to the receiver for the purpose of securing a benefit to the debenture holders was irrevocable as a power given to the debenture holders themselves. It was further held that the sale did not contravene s 227 of the Companies Act 1948 (equivalent to the Malaysian s 223) since although made in the name of the company, it was a sale of property which did not belong to the company but formed part of the debenture holder’s security.

 

44. Added to this is the decision of this court in the case of Director of Customs, Federal Territory v Ler Cheng Chye (Liquidator of Castwell Sdn Bhd, in liq) [1995] 2 MLJ 600 confirming the secured creditor’s status that he stands outside the liquidation and that he must be paid first in preference over other unsecured creditors .”

 

(emphasis added).

 

It is to be noted that in Mahadevan & Anor v Manila! & Sons (M)

 

Sdn Bhd [1984] 1 MLJ 266, at 270-271, the Federal Court in a judgment given by Salleh Abas CJ (Malaya) (as His Lordship then was) recognised an equitable charge over land despite the fact that the charge was not registered under the National Land Code (NLC); and

 

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(c) in Tan See King, the Court of Appeal has decided that a company has no lawful title or interest in an asset subject to a fixed charge to pass to any third party purchaser. Consequently, the question of a bona fide purchaser for valuable consideration obtaining title or interest to an asset of a company which is subject to a fixed charge, does not arise.

 

99. I must pause here to remind myself that crystallization of a floating charge does not create a new charge. I cite the following judgment of the Singapore Court of Appeal in Dresdner Bank Aktiengesellschaft & Ors v Ho Mun-Tuke Don & Anor [1993] 1 SLR 114, delivered by LP Thean J (as His Lordship then was):

 

“Secondly, crystallization is merely a process in the enforcement of a floating charge and does not retrospectively change the nature of the security. Upon crystallization, the floating charge fastens on the assets subject to the charge, and thenceforth the company is not at liberty to deal with the assets, whether in the course of business or otherwise. It is true that at that stage the charge has become a fixed charge, but the resulting fixed charge arose from the original floating charge and is in effect the same security affecting the same assets. There is no ‘new’ charge created on those assets.”

 

(emphasis added).

 

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100. In view of the automatic crystallisation of the first floating charge under Clause 4.3 of 1st Debenture on 6.3.2010, Clause 4.2 of 1st Debenture could not apply as there was no floating charge to be converted by the Crystallization Notice on 20.3.2013. Clause 4.3 of 1st Debenture has expressly provided for automatic crystallisation of the first floating charge “without notice”. In other words, both the Ship Builder and Bank have manifestly intended for Clause 4.3 of 1st Debenture to apply independently of Clause 4.2 of 1st Debenture. Accordingly, the Crystallization Notice is not effective at all. It is to be noted that the Bank could not be faulted for sending the Crystallization Notice as the Bank was deceived and kept in the dark by the Ship Builder in respect of the Shipbuilding Contract and all subsequent agreements entered by the Ship Builder in respect of the Ship.

 

101. Despite the Priority Issue being resolved in favour of the Bank by virtue of the application of Clause 4.3 of 1st Debenture which automatically rendered the Ship as part of the fixed charge under the 1st Debenture (as explained above), I will discuss the following issues stated below in the event that I have erred in applying the automatic crystallization clause in this case.

 

I. Whether provisions of MSO confer priority on 1st and 3rd Defendants?

 

102. In this case, the Defendants rely on the original copies of –

 

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(a) the Certificate of Malaysian Registry issued by the Registrar of Malaysian Ships at Port Klang on 30.8.2012 which showed that the Ship Builder is the registered owner of the Ship; and

 

(b) 2nd Bill of Sale dated 27.3.2013 wherein the Ship Builder had transferred the Ship to the 1st Defendant.

 

The Defendants had submitted that the Bank did not conduct a search of the Register Book which would have revealed that by way of the 2nd Bill of Sale, the Ship Builder had transferred the Ship to the 1st Defendant. The Defendants further contend that the Bank has failed to register its mortgage in the Register Book over the Ship under the MSO. If the Bank had registered its mortgage in the Register Book over the Ship, the 3rd Defendant would have known of the Bank’s security interest in the Ship and presumably, the 3rd Defendant would not have entered into the Shipbuilding Contract.

 

103. The following provisions in the MSO are pertinent:

 

“s 12. Obligation to register Malaysian ships

 

(1) Every Malaysian ship unless so exempted shall be registered under this Ordinance.

 

(2) If a ship required by this Ordinance to be registered is not so registered, she shall not be recognized as a Malaysian ship.

 

(3) A ship required by this Ordinance to be registered may be detained until the master of the ship, if so required, produces the certificate and of registry of the ship.

 

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s 13.

 

Exemption from registry

 

The following ships are exempted from registration under

 

this Part –

 

(a) any ship not exceeding 15 tons nett used for navigation on the rivers and coastal waters of Malaysia;

 

(b) any vessel licensed under section 475 of this Ordinance; and

 

(c) any local fishing vessel not exceeding five hundred tons gross where such vessel is licensed under any written law relating to fisheries.

 

s 15. Register book

 

Every registrar shall keep a book (hereinafter called

 

“the Register Book”) and entries in that book shall be

 

made in accordance with the following provisions –

 

(a) the property in a ship shall be divided into sixty-four shares;

 

(b) subject to (d) not more than sixty-four individuals shall be entitled to be registered at any one time as owners of a ship, but this rule shall not affect the beneficial interest of any number of persons of any company represented by or claiming under or through any registered owner or joint owner;

 

(c) a person shall not be entitled to be registered as the owner of a fractional part of a share in a ship but any number of persons not exceeding five may be registered as joint owners of a ship or any share therein;

 

(d) joint owners shall be considered as constituting one person only as regards the person entitled to be registered, and shall not be entitled to dispose in

 

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severalty of any interest in a ship or in any share

 

therein;

 

(e) a corporation may be registered as owner by its corporate name.

 

s 16. Application for the registration of Malaysian ship

 

(1) An application for the registry of a ship shall be made

 

(a) in the case of natural persons, by the person applying to be registered as owner, or by some one or more persons so applying if more than one, or by his or their agent; and

 

(b) in the case of corporations, by their agent, and the authority of the agent shall be testified by writing under the common seal of that corporation.

 

(2) The application shall be made in the prescribed form

 

and shall be supported by a statutory declaration

 

containing the following particulars:

 

(a) the name of the ship and its existing tonnages (if known);

 

(b) a statement of the date when and the place where the ship was built, or if the date and place of building are not known, a statement that the declarant does not know the date and place of the building of the ship;

 

(c) a statement as to the owner of the ship and the citizenship of such owner, and if the ship is owned by more than one person, the number of shares each is entitled to;

 

(d) a statement of the name of the master of the ship and his citizenship;

 

(e) a statement that no other person (other than those declared) is entitled as owner to any legal

 

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or beneficial interest in the ship or any share

 

thereof;

 

(f) except where the operator and the owner of the ship are the same person, the name and citizenship of the operator of the ship;

 

(g) a declaration that the particulars stated in the form are true to the best of his knowledge and belief; and

 

(h) such other particulars as may be prescribed.

 

(3) The registrar may demand proof of ownership to his

 

satisfaction before proceeding with the registry of a ship.

 

s 22. Certificate of registry

 

(1) The certificate of registry shall be in such form as may be prescribed by the Minister.

 

(2) The certificate of registry shall state –

 

(a) the name of the owner of the ship, his occupation and address, and if there are more owners than one, the proportions in which they are interested in the ship;

 

(b) the name of the master and the particulars of his certificate of competency;

 

(c) the date and place where the ship was built;

 

(d) the particulars given in the certificate of measurement; and

 

(e) such other particulars as may be prescribed.

 

(2A) Every registered owner of a registered Malaysian ship

 

shall as soon as possible and in any case not later than fourteen days inform the registrar in writing of any changes affecting the particulars required to be stated in the certificate of registry under subsection (2).

 

ill

 

(2B) Any person who contravenes subsection (2A) shall be guilty of an offence and shall on conviction be liable to a fine not exceeding five thousand ringgit.

 

(3) The Minister may by regulation prescribe the form of

 

endorsements that may be made on the certificate of registry to record the changes in the particulars specified in subsection (2) without issuing a new certificate.

 

s 34. Transfer of ship or share

 

(1) A registered Malaysian ship or a share therein when disposed of to a person or corporation qualified to own a Malaysian ship shall be transferred by a bill of sale.

 

(2) The bill of sale shall be in the prescribed form and shall contain such description of the ship as in the certificate of registry or some other description sufficient to identify the ship to the satisfaction of the registrar and shall be executed by the transferor or his agent and the transferee or his agent and attested by two witnesses.

 

s 36. Registry of transfer

 

Every bill of sale for the transfer of a registered ship or of a share therein when duly executed shall be produced to the registrar of the port of registry with the declaration of transfer; the registrar shall thereupon enter in the register book in the order of the production the name of the transferee as the owner of the ship or share and shall endorse on the bill of sale the fact that entry has been made.

 

s 39. Transfer of ship or sale by order of Court

 

Where the Court, whether under the preceding section of this Ordinance or otherwise, orders the sale of the property in the ship or any share therein, the order shall contain a declaration vesting in the person named by the Court the right to transfer the property in the ship or share; and that person shall thereupon be entitled to transfer the property in the ship or share in the manner and to the extent as if he were the

 

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registered owner; and the registrar of the ship’s port of registry shall comply with the order of the Court.

 

s 40. Power of Court to prohibit dealings

 

The High Court may on the application of any interested person make an order prohibiting, any dealing with the ship or any share therein or on any terms and conditions it thinks just.

 

s 41. Mortgages of ship or share

 

(1) A registered ship or a share therein may be made in security for a loan or other valuable consideration, and the instrument creating such security shall be in the form, as may be prescribed by the Minister.

 

(2) On production of the instrument to the registrar of the ship’s port of registry he shall record such instrument in the register book; and when there are more mortgages than one, record them in the order in which they are produced to him and by memorandum notifying each mortgagor of the mortgage recorded by him.

 

s 55. No notice of trust be registered

 

No notice of any trust shall be entered in the register

 

book; the registered owner or a shareholder of a Malaysian ship shall have power to dispose of the ship or share therein and to issue valid receipts, unless he has no notice of the trust.”

 

(emphasis added).

 

104. Firstly, I am of the opinion that the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale are not conclusive evidence and may be challenged in court. This view is premised on the following reasons:

 

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(a) unless a Malaysian ship is exempted from registration under s 13(a) to (c) MSO, the Malaysian ship is obliged to be registered under s 12(1) MSO. Failure to register a Malaysian ship when it is obligatory to do so under s 12(1) MSO, means that the ship “shall not be recognised as a Malaysian ship” [s 12(2) MSO] and the ship may be detained under s 12(3) MSO. Accordingly, the MSO does not provide, either expressly or by necessary implication, that failure to register a Malaysian ship under MSO will invalidate and/or render unenforceable –

 

(i) the equitable or beneficial ownership of the ship; and

 

(ii) the equitable charge over the ship.

 

It is to be noted that s 55 MSO expressly provides that notice of any trust shall not be entered in the Register Book;

 

(b) MSO has no provision equivalent to –

 

(i) s 111(2) CA which deems that Forms 40 for the 6 Debentures shall be conclusive evidence; and

 

(ii) s 89 NLC (which provides for the conclusiveness of the register document of title to land) and s 340(1) NLC (concerning the indefeasibility of registered title and interest in land).

 

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Section 15 MSO provides for the contents of the Register Book while s 22 MSO concerns the form of the Certificate of Malaysian Registry. Section 34 MSO provides for the form of a bill of sale and s 36 MSO requires a bill of sale to be entered in the Register Book. There is no provision in MSO which provides for the conclusiveness and/or indefeasibility of the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale;

 

(c) s 39 MSO confers very wide power on the court to order the sale of any ship and the “registrar of the ship’s port of registry shall comply” with the court order. The wide ambit of the court’s power is fortified by s 40 MSO which empowers the court to prohibit any dealing with the ship “on any terms and conditions as it thinks just’. Under ss 39 and 40 MSO, if the court resolves the Priority Issue in the Bank’s favour, the court may –

 

(i) cancel the Certificate of Malaysian Registry, the 1st and 2nd Bills of Sale;

 

(ii) direct the Registrar of Malaysian Ships to rectify the Register Book in respect of the Ship and to give full effect to the court’s decision on the Priority Issue; and

 

(iii) restrain the Defendants from dealing with the Ship; and

 

(d) s 16(3) MSO provides that the Registrar of Malaysian Ships “may” demand proof of ownership of ship before registering the ship. If the Registrar of Malaysian Ships does not demand proof of ownership of ship, registration of the ship is purely an

 

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administrative act of the Registrar of Malaysian Ships. If the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale are conclusive and indefeasible, this may cause injustice as the Registrar of Malaysian Ships may not have considered the question of equitable and beneficial ownership of the ship in question. In this case, there is no evidence that SD5 has requested the Ship Builder to furnish proof of ownership of the Ship. It is thus clear that SD5 has issued the Certificate of Malaysian Registry without any inquiry regarding the ownership of the Ship.

 

105. I am of the view that the Bank is not obliged to register a mortgage over the Ship under s 41(1) MSO for the following reasons:

 

(a) s 41(1) MSO provides for registration of “mortgages” and not “charges”. It is trite law that there is a fundamental distinction between mortgages and charges as explained by Peh Swee Chin J (as His Lordship then was) in the High Court case of Bank Bumiputra Malaysia Bhd v Doric Development Sdn Bhd & Ors [1988] 1 MLJ 462, at 463, as follows –

 

“It is not necessary to delve into all the differences between a charge and a mortgage beyond mentioning one or two of such differences. In an English mortgage at common law, the mortgaged property was transferred to the name of the mortgagee on the creation of the mortgage with a proviso for redemption. Under the said proviso, the mortgagee agreed to re-transfer the mortgaged property by a certain date beyond which it was stated to be irredeemable. Equity stepped in and provided the equity of redemption, by which

 

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the right to redeem was extended beyond the said date and would be lost only on foreclosure or sale ”

 

(emphasis added).

 

Unlike a mortgage, when a company creates a charge over its assets by way of a debenture, the company does not transfer legal ownership of its assets to the secured creditor. Section 41 MSO, in my view, only applies to mortgages of ships when the ship owners have transferred legal ownership of the ships to secured creditors as security for repayment of credit facilities granted by those creditors;

 

(b) s 41(1) MSO is not a mandatory provision which requires compulsory registration of mortgages. The use of the permissive “word’ in s 41(1) MSO indicates that s 41(1) MSO is a purely directory provision without any sanction for a party’s failure to register a mortgage. In the High Court case of Sing Hoe Motor Co v Public Prosecutor [1968] 2 MLJ 54, at 55, Raja Azlan Shah J (as his Royal Highness then was) held that the word “may” in the then s 92(4) of the Road Traffic Ordinance 1958 did not provide for mandatory forfeiture of the vehicle but instead provided the court with a discretion to forfeit or otherwise the vehicle. The construction that s 41(1) MSO is not an imperative provision, is fortified by a comparison between s 41(1) MSO with s 108(1) CA which provides that a charge “shall’ “be void against

 

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the liquidator and any creditor of the company” if the charge is not registered with SSM; and

 

(c) as explained above, a charge over land may not be registered under NLC and yet our Federal Court in Mahadevan and Balasubramaniam, has recognised the legality and enforceability of equitable charges over land. Accordingly, even if s 41(1) MSO is construed to be a mandatory provision requiring registration of charges, the Bank’s failure to register the 6 Debentures with the Registrar of Malaysian Ships, does not deny or invalidate the existence and enforceability of the equitable charges over the Ship in the Bank’s favour, especially when Forms 40 for the 6 Debentures have been issued and are conclusive evidence under s 111(2) CA.

 

106. In any event, I do not attach much, if any, weight to the Certificate of Malaysian Registry, 1st and 2nd Bills of Sale. This is due to the following reasons:

 

(a) in the 1st Bill of Sale on 26.5.2010, the Ship Builder stated that the Ship Builder had been fully paid by the 3rd Defendant and in consideration of such a payment, the Ship Builder transferred all its shares in the Ship to the 3rd Defendant. If the 1st Bill of Sale were correct, the 3rd Defendant should have been registered with the Registrar of Malaysian Ships as the owner of the Ship. However, the subsequent Certificate of Malaysian Registry dated 30.8.2012 stated that the Ship Builder was the owner of the Ship!

 

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Accordingly, if the 1st Bill of Sale were correct, then the contents of the Certificate of Malaysian Registry could not be true. Section 16(1)(c), (e) and (g) MSO provide that an application for the registry of a ship “shall’ be in the prescribed form and ‘‘shall’ be supported by a statutory declaration (SD) which contained, among others –

 

(i) a statement as to the owner of the ship;

 

(ii) a statement that “no other person (other than those declared) is entitled as owner to any legal or beneficial interest in the ship”; and

 

(iii) a declaration that the particulars stated in the prescribed form are “true to the best of his knowledge and belief’.

 

Accordingly, I have grave doubts regarding the truth of the SD supporting the Ship Builder’s prescribed form for the issue of the Certificate of Malaysian Registry. At this juncture, I refer to ss 199 and 200 of the Penal Code (PC) as follows –

 

“s 199. False statement made in any declaration which is

 

by law receivable as evidence

 

Whoever, in any declaration made or subscribed by him, which declaration any Court, or any public servant or other person, is bound or authorized by

 

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law to receive as evidence of any fact, makes any statement which is false, and which he either knows or believes to be false or does not believe to be true, touching any point material to the object for which the declaration is made or used, shall be punished in the same manner as if he gave false evidence.

 

s 200. Using as true any such declaration known to be false

 

Whoever corruptly uses or attempts to use as true any such declaration knowing the same to be false in any material point, shall be punished in the same manner as if he gave false evidence .”

 

(emphasis added);

 

(b) the 2nd Bill of Sale on 27.3.2013 stated that in consideration of US$8,500,000 paid by the 1st Defendant to the Ship Builder, the Ship Builder transferred all its shares in the Ship to the 1st Defendant. Once again, if the contents of the 1st Bill of Sale (the Ship Builder had been fully paid by the 3rd Defendant) were true, the 2nd Bill of Sale could not be correct. More importantly, the evidence of SD1, SD2, SD3, SD4 and 2nd Defendant, showed that the 1st Defendant did not pay anything to the Ship Builder for the Ship. There is also no documentary evidence to support the payment of US$8,500,000 paid by the 1st Defendant to the Ship

 

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Builder for the Ship. Hence, the truth of the contents of the 2nd Bill of Sale is seriously doubted; and

 

(c) if the contents of the 2nd Bill of Sale are true, namely the 1st Defendant is now the owner of the Ship, then the contents of the Certificate of Malaysian Registry (certifying that the Ship Builder is the owner of the Ship), cannot be correct. Section 22(2A) MSO mandatorily requires a registered ship owner to inform in writing the Registrar of Malaysian Ships “as soon as possible and in any case not later than [14] days” of any change to be stated in the Certificate of Malaysian Registry. There is no evidence that the Ship Builder, as the registered owner of the Ship according to the Certificate of Malaysian Registry, has fulfilled s 22(2A) MSO regarding the transfer of ownership of the Ship from the Ship Builder to the 1st Defendant as stated in the 2nd Bill of Sale. Any contravention of s 22(2A) MSO is an offence which is punishable under s 22(2B) MSO with a fine up to RM5,000.

 

107. In view of the above reasons, I am of the following opinion:

 

(a) under the MSO, the contents of –

 

(i) the Register Book;

 

(ii) the Certificate of Malaysian Registry; and

 

(iii) the 1st and 2nd Bills of Sale

 

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– do not confer any priority on the 1st and 3rd Defendants in respect of the Ship. As such, the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale do not affect the Priority Issue in this case; and

 

(b) the Bank’s failure to register the 6 Debentures with the Registrar of Malaysian Ships, does not postpone the Bank’s priority to the Ship by virtue of the automatic crystallization of the first floating charge under Clause 4.3 of 1st Debenture. I will discuss later in this judgment that the Defendants have not acted in good faith in this case and/or are considered by case law to have “notice” of the Debentures registered in SSM regarding the Bank’s charge in the Ship.

 

J. Was there an undue preference for 1st and 3rd Defendants in this case?

 

108. The relevant part of s 293 CA reads as follows:

 

“s 293. Undue preference.

 

(1) Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy under the law of bankruptcy be void or voidable shall, in the event of the company being wound up, be void or voidable in like manner.

 

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(2) For the purposes of this section the date which corresponds with the date of presentation of the bankruptcy petition in the case of an individual shall be –

 

(a) in the case of a winding up by the Court –

 

(i) the date of the presentation of the petition;

 

(emphasis added).

 

109. Section 293(1) CA applies the “undue preference” provision in s 53 BA. The relevant part of s 53 BA is reproduced below:

 

“s 53(1). Every conveyance or transfer of property or charge thereon made, every payment made, every obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts, as they become due, from his own money in favour of any creditor or any person in trust for any creditor shall be deemed to have given such creditor a preference over other creditors if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within six months after the date of making, taking, paying or suffering the same and every such act shall be deemed fraudulent and void as against the Director General of Insolvency.

 

(2) This section shall not affect the rights of any person

 

making title in good faith and for valuable consideration through or under a creditor of the bankrupt.”

 

(emphasis added).

 

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110. In Lian Keow Sdn Bhd (In liquidation) & Anor v Overseas Credit Finance (M) Sdn Bhd & Ors [1988] 2 MLJ 449, at 452, 453, 455, Seah SCJ delivered the following judgment of the Supreme Court:

 

—In my opinion, section 53 [BA] is imported into a winding up proceeding of a company by section 293(1) [CA] …

 

In short, the rules of bankruptcy as to fraudulent preference are applied to the winding up of the company by the court by section 293(1) [CA].

 

I think it appropriate at this stage to refer to what Bacon V.C. said about this subject. Speaking of section 164 of the English Companies Act 1862 which is the forerunner of section 320 of the English Companies Act 1948 (ours is section 293 [CA]) in the case of Willmott v London Celluloid Co (1886) 31 Ch D 425 Bacon V.C. said (at p. 434):

 

“The 164th section, however, relates only to a case similar in all respects to that which would arise in bankruptcy, and the very words of the 164th section put this beyond the possibility of doubt. This Act of Parliament, dealing as it does with an insolvent company, that is, a bankrupt company, and making provision for the benefit of the creditors, of the shareholders, and of all other persons interested, declares by the 164th section that a fraudulent preference shall be set aside and held to be void for the benefit of the creditors – that is, the creditors in the winding up. No other persons have any right to raise the question of fraudulent preference…”

 

Earlier on, Bacon V.C. observed that:

 

“In bankruptcy, and only in bankruptcy as far as I know, the doctrine of fraudulent preference found a place in the jurisprudence of this country. A winding up is, in point of

 

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fact, a bankruptcy, and the doctrine is also applicable to a winding up.”…

 

In short, section 53(1) renders void as against the Official Assignee a transfer of property, by a person who is unable to pay his debts as they become due from his own money, in favour of a creditor as this transfer shall be deemed as giving that creditor a fraudulent preference over the other creditors if that person is adjudged a bankrupt within six months after the making of the transfers. …

 

As regards the phrase “every transfer of property made by any person” used in section 53(1), I think these words “any person” ought to be given a liberal interpretation. In my opinion, the transfer of the property may be signed by the bankrupt as well as by his trustee or agent on his behalf provided always that the beneficial interest in the property is vested in the bankrupt at the material time. Otherwise, the bankrupt could easily defeat the just claims of the Official Assignee by registering his property in the name of a third party. …

 

In Re Chong Khian (Bankrupt) Kuching High Court No K45 of 1978 I held that the date of making of the fraudulent preference in favour of a creditor over other creditors under section 53(1) [BA] means the date of the registration of the said transfer at the Land Registry office. It is correct to point out that I was construing a provision of the Sarawak Land Code in that case. However, since the Sarawak Land Code and the [NLC] are substantially based on the Torrens system of Australia, I would adopt the same construction in construing the [NLC] in Peninsular Malaysia. Applying this rule of interpretation, it followed that all the three transfers of the first, second and third portions of the estate to the first respondent were made in November 1978. In other words, transfer of landed property was made when registered under the [NLC] and not when it was executed by the parties. …

 

In my opinion, the expression “within six months after the date of making (the transfers)” in section 53(1) is capable of being construed to mean: (a) before the expiration of six months after

 

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the date of making the transfers or (b) during the period of six months after the date of making the transfers.

 

I would prefer construction (a) which would have the effect of preventing any mischief which a bankrupt might be thinking of doing between the period of the presentation of the bankruptcy petition and the making of the adjudication order by the court.

 

I agree with the contention of learned counsel for the second appellant that the words “in favour of any creditor” means “in favour of any person claiming to be a creditor”.”

 

(emphasis added).

 

111. In Sime Diamond Leasing (M) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd (In liquidation) [1998] 4 MLJ 569, at 579, Edgar Joseph Jr FCJ gave the following judgment of the Federal Court:

 

—To take the matter further, it is clear law that the Court has no power to make an order setting aside payments and transfers made in the run-up to bankruptcy in favour of a particular creditor which were designed to prefer him over other creditors unless the following five conditions are satisfied:

 

(1) that the transaction in question took place within six months prior to the commencement of winding up;

 

(2) that it satisfies the description of one of the types of transaction mentioned in s 53(1) [BA];

 

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(3) that it took place at a time when the company was insolvent;

 

(4) that the person in whose favour the transaction was effected stood in the relation of creditor to the Company;

 

and

 

(5) the effect of the transaction was to confer on that person a preference, priority or advantage over other creditors in the winding up.

 

The object of the rules of bankruptcy as to fraudulent preferences is to prevent a creditor from obtaining for himself an unfair advantage at the expense of other creditors by concluding a transaction with the company during what has been called the twilight period which precedes winding up.’

 

(emphasis added).

 

112. Menzies J in the High Court of Australia held as follows in Commercial Banking Co of Sydney Ltd v George Hudsons Pty Ltd (in liquidation) [1973] 2 ALR 1, at 5 –

 

“It is a deeply rooted principle of company law that, when liquidation has commenced, one creditor should not be assisted by the Court to improve its position vis-a-vis other creditors.”

 

(emphasis added).

 

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113. The WU Petition has been filed on 14.3.2013 and the Ship Builder’s Winding Up was ordered on 14.5.2013. Based on Lian Keow Sdn Bhd (In liquidation) and Sime Diamond Leasing (M) Sdn Bhd, the time period for the application of s 293(1) and (2)(a)(i) CA read with s 53(1) BA (Undue Preference Rule) would commence on 14.9.2012 (6 months before the presentation of the WU Petition). As described in Sime Diamond Leasing (M) Sdn Bhd, the twilight period which preceded the Ship Builder’s winding up, would begin on 14.9.2012.

 

114. I am satisfied that the first condition as laid down in Sime Diamond Leasing (M) Sdn Bhd has been satisfied in this case. The following agreements and transactions have taken place after the commencement of the twilight period on 14.9.2012:

 

(a) the 11th and 12th Variations of Shipbuilding Contract have been entered on 10.10.2012 and 28.1.2013 respectively;

 

(b) the SSPSL Agreement dated 17.9.2012;

 

(c) the Settlement Agreement dated 29.10.2012;

 

(d) the Agreement dated 5.11.2012;

 

(e) the 2nd Bill of Sale dated 27.3.2013; and

 

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(f) the Agreement dated 12.7.2013

 

(Impugned Agreements).

 

115. The Impugned Agreements satisfy the second condition stated in Sime Diamond Leasing (M) Sdn Bhd as the Impugned Agreements concern “transfer of property’ in the Ship and/or constitute “obligation incurred” by the Ship Builder in respect of the Ship within the meaning of s 53(1) BA.

 

116. The third condition laid down in Sime Diamond Leasing (M) Sdn Bhd, required the Impugned Agreements to be executed at a time when the Ship Builder was insolvent. This third condition was clearly fulfilled as the Ship Builder could not even pay its third party contractors as early as the first agreement with a third party contractor on 13.4.2012 (Bundle B, p. 277-278).

 

117. The Impugned Agreements favour the 1st and 3rd Defendants. Even if this court assumes the Impugned Agreements to be bona fide with full payment of valuable consideration and without notice of the Bank’s charge over the Ship, the 1st and 3rd Defendants are considered as unsecured creditors of the Ship Builder. Hence, the fourth condition as explained in Sime Diamond Leasing (M) Sdn Bhd has been satisfied in this case.

 

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118. I find that the fifth condition as stated in Sime Diamond Leasing (M) Sdn Bhd has been fulfilled in this case because if the Impugned Agreements are not set aside under s 293(1) CA, the Impugned Agreements will confer on the 1st and 3rd Defendants an undue preference in respect of the Ship vis-à-vis all the other unsecured creditors of the Ship Builder.

 

119. Based on the above reasons, all the 5 conditions laid down in Sime Diamond Leasing (M) Sdn Bhd have been satisfied in respect of the Impugned Agreements. As such, all the Impugned Agreements are void under s 293(1) CA for breaching the Undue Preference Rule.

 

K. Disposition of Ship Builder’s property contrary to s 223 CA

 

120. Sections 219 and 223 CA read as follows:

 

“s 219. Commencement of winding up by the Court

 

(1) Where before the presentation of the petition a resolution

 

has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and, unless the Court on proof of fraud or mistake thinks fit otherwise to direct, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.

 

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(2) In any other case the winding up shall be deemed to

 

have commenced at the time of the presentation of the petition for the winding up.

 

s 223. Avoidance of dispositions of property, etc.

 

Any disposition of the property of the company

 

including things in action and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court shall unless the Court otherwise orders be void”

 

(emphasis added).

 

K1. Does s 223 CA apply in this case?

 

121. Upon the Ship Builder’s Winding Up, s 219(2) CA deems that the Ship Builder’s Winding Up shall commence on 14.3.2013, the date of the presentation of the WU Petition – please see Siti Norma Yaakob JCA’s (as Her Ladyship then was) judgment in the Court of Appeal case of Kredin Sdn Bhd v Development & Commercial Bank Bhd [1995] 3 MLJ 304, at 307.

 

122. After 14.3.2013, the Ship Builder had disposed of its property, namely the Ship, by way of the following:

 

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(a) the 2nd Bill of Sale dated 27.3.2013 whereby the Ship Builder transferred shares owned by the Ship Builder in the Ship to the 1st Defendant; and

 

(b) the Agreement dated 12.7.2013 which provided that, among others, the 3rd Defendant had paid the Sale Price for the Ship and the 2nd Bill of Sale had been executed and registered in the Register Book

 

(Ship Builder’s Disposition).

 

123. In Sime Diamond Leasing (M) Sdn Bhd, at p. 579, the Federal Court held as follows:

 

“In other words, in considering the question whether there has been a disposition within the terms of s 223 [CA], the relevant date is not the date of the set-off but the date of the transaction”

 

(emphasis added).

 

124. It is clear that the Ship Builder’s Disposition is caught by s 223 CA. Accordingly, the Ship Builder’s Disposition is rendered void under s 223 CA unless the court validates the Ship Builder’s Disposition under s 223 CA itself.

 

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K2. Should Ship Builder’s Disposition be validated by court under s 223 CA?

 

125. Zakaria Yatim J (as His Lordship then was) decided as follows in the High Court case of Kimoyama Elektrik (M) Sdn Bhd v Metrobilt Construction Sdn Bhd [1990] 3 MLJ 309, at 311 –

 

—From the authorities cited above (with the exception of Re Miles [1948] 1 Ch 188), it can be concluded that under s 223 of the Companies Act, the disposition of the property of the company after a winding-up petition has been presented is void unless the court makes a validating order. The purpose of the section is to protect the interests of creditors when a petition for winding up is presented. The court, however has the discretion whether or not to make a validating order. The court cannot exercise its discretion to make a validating order if the result of the order is to make one or more creditors being paid in full. In Re Gray’s Inn [1980] 1 All ER 814, Buckley LJ in his judgment at p 718 said:

 

Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claim, it is, in my opinion, clear that the court should not validate any transaction or series of transactions which might result in one or more preliquidation creditors being paid in full at the expense of the other creditors…”

 

(emphasis added).

 

126. In deciding whether the Ship Builder’s Disposition should be validated by this court under s 223 CA, I refer to a recent Federal Court’s judgment given by Zulkefli Makinudin CJ (Malaya) in Wong Wee

 

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Kheong & Anor v Daya Bersama Sdn Bhd [2013] 3 MLJ 313. In Wong Wee Kheong –

 

(a) the respondent company was wound up on 24.8.2000;

 

(b) from 9.10.2003 until 29.1.2004, the appellants purchased 2 pieces of land from the respondent company;

 

(c) the appellants had done the necessary land searches which did not reveal any encumbrance on the 2 pieces of land. The company search by the appellants also did not show that the respondent company had been wound up;

 

(d) the appellants had paid the full purchase price to the respondent company and had no notice of the respondent company’s winding up;

 

(e) despite the respondent company’s winding up and the appointment of the respondent company’s liquidator, the transfer instruments of 2 pieces of land had been purportedly executed by directors of the respondent company. The 2 transfer instruments had been registered under the NLC in favour of the appellants; and

 

(f) the respondent company’s liquidator filed suits to recover the 2 pieces of land on the ground that since the 2 transfers were executed and registered after the respondent company’s winding up, the 2 transfers should be nullified by s 223 CA.

 

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127. The Federal Court decided as follow in Wong Wee Kheong, at p. 323, 324-325 and 326:

 

“[12] … It is true that ordinarily since the respondent

 

company had been wound up on 24 August 2000, a disposition of the company’s property after the commencement of the winding up, which was on 31 May 2000 (filing of the petition) would be void. However based on the peculiar set of facts of the case, it is our considered view that the proviso in s 223 [CA] is still operative in relation to the transactions which took place and the court has the power and jurisdiction to declare the transactions as valid.

 

[13] It is to be noted that s 223 [CA] makes no mention as to time. It is our view validation can be made by the court at any time. We are in agreement with the submission of learned counsel for the appellants that to insist that the purchasers must have applied for a validation after the company was wound up, there must be knowledge. Here the purchasers had no knowledge at all of the winding up order at the material time. It is also noted that the Act does not prescribe as to how the discretion under s 223 [CA] is to be exercised. However there are case laws that have distilled the principles involved in validating transactions after the commencement of winding up, and even after a winding order has been granted based on two broad considerations:

 

(a) if the transaction(s) are beneficial to the general body of creditors; or

 

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(b) if it was just and fair to allow the transaction(s) with particular regard to the good and honest intention of the persons concerned.

 

[14] The general rule in s 223 [CA] is that it does not shut out bona fide transactions. In Lian Keow Sdn Bhd (in liquidation) & Anor v Overseas Credit Finance (M) Sdn Bhd & Ors [1988] 2 MLJ 449, Seah, SCJ made reference to a passage by Vaisey J in Re Steane’s (Bournemouth) Ltd which states:

 

that each case must be dealt with on its own facts and particular circumstances (special regard being had to the question of the good faith and honest intention of the persons concerned), and that the court is free to act according to the judge’s opinion of what would be just and fair in each case.

 

The discretion is an unfettered one.

 

18. There is absolutely no allegation of fraud or collusion

 

or even dishonesty against the purchasers. For all intent and purposes the first appellant, the second appellant and Kenneth Too Heng Khuen were bona fide purchasers for value without notice of any purported act by any other party to defraud the company. As far as the purchasers were concerned, they were dealing with the proper directors of the respondent company at the material time and have made full payment to the company.

 

23. … All of the four appeals are allowed with costs here and

 

at the Court of Appeal and at the High Court (in respect of Appeal No 02(f)-67-10 of 2011) in favour of the appellants. The costs are to be paid by the liquidator of Daya Bersama Sdn Bhd. We would also make the necessary order that the sale and purchase agreement dated 30 October 2003 between Wong Wee Kheong

 

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and Ho Mei Ling and Daya Bersama Sdn Bhd be validated under s 223 [CA] and that the sale and purchase agreement dated 30 October 2003 between Kenneth Too Heng Khuen and Daya Bersama Sdn Bhd be validated under s 223 [CA].”

 

(emphasis added).

 

128. Before applying the 2 considerations laid down in Wong Wee Kheong in respect of validation of a disposition of property by a wound up company under s 223 CA, I need to clarify that the facts in Wong Wee Kheong are peculiar to that case as acknowledged by the Federal Court (at p. 323). The material facts in this case are to be distinguished from Wong Wee Kheong as follows:

 

(a) Wong Wee Kheong does not concern a debenture registered with SSM;

 

(b) there is no application of an automatic crystallization clause in Wong Wee Kheong which confers priority on the secured creditor. In fact, Wong Wee Kheong did not involve a secured creditor;

 

(c) the company search conducted in Wong Wee Kheong did not reveal that the respondent company had been wound up. A company search of the Ship Builder by the Defendants will easily show the 6 Debentures and in particular Form 34;

 

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(d) the appellants had done the necessary land and company searches in Wong Wee Kheong. In this case, the Defendants did do any SSM search of the Ship Builder;

 

(e) in Wong Wee Kheong, the appellants were found to be bona fide purchasers who had paid the full purchase price for the 2 pieces of land. I will explain subsequently in this judgment that the 3rd Defendant is not able to discharge the legal burden to prove that the 3rd Defendant is a bona fide purchaser of the Ship for valuable consideration without notice of the Bank’s security interest in the Ship by way of the 1st Debenture; and

 

(f) the appellants had already been registered as proprietors of 2 pieces of land and could rely on the indefeasibility of their registered titles under s 340(1) NLC. As explained above, the 1st and 3rd Defendants cannot rely on the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale under the MSO to defeat the Bank’s secured interest in the form of a fixed charge over the Ship under the 1st Debenture (after automatic crystallization of the first floating charge).

 

129. Applying the first consideration laid down in Wong Wee Kheong, the Ship Builder’s Disposition will only benefit the 1st and 3rd Defendants. The Ship Builder’s Disposition does not benefit the general body of the creditors of the Ship Builder. As such, this court will not validate the Ship Builder’s Disposition based on the first consideration in Wong Wee Kheong (whether the disposition of property by the wound up company is beneficial to the general body of the wound up company’s creditors).

 

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130. According to the second consideration in Wong Wee Kheong, a disposition of property by a wound up company may be validated if it is just and fair to do so with particular regard to the good and honest intention of the parties in question. I am satisfied that the court should not validate the Ship Builder’s Disposition based on the second consideration in Wong Wee Kheong. This decision is premised on the following grounds:

 

(a) if the Ship Builder’s Disposition is validated under s 223 CA, it is neither just nor fair to the Bank because –

 

(i) the Bank is a secured creditor of the Ship Builder and has registered 6 Debentures with SSM before the Ship Builder’s Disposition; and

 

(ii) the automatic crystallization clause in the 1st Debenture has already been triggered on 6.3.2010, before the Ship Builder’s Disposition;

 

(b) for reasons expressed later in this judgment, this court finds that the 3rd Defendant is not a bona fide purchaser of the Ship for valuable consideration without “notice” of the Bank’s charge over the Ship by way of the 1st Debenture;

 

(c) there were 2 Newspaper Advertisements on 25.3.2013 regarding the WU Petition, 2 days before the execution of the 2nd Bill of Sale

 

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on 27.3.2013. The Defendants should have notice of the 2 Newspaper Advertisements and the 2nd Bill of Sale should not have been executed;

 

(d) on 3.4.2013, the R&M has been appointed by the Bank. As decided by the Federal Court in Balasubramaniam, at p. 220, upon the appointment of the R&M, the R&M would take custody of all the assets subject to the charges as stated in the 6 Debentures, including the Ship. Consequently, from the appointment of the R&M on 3.4.2013, the Ship Builder’s BOD had no power to deal with the Ship, let alone to dispose of it. Accordingly, Dato’ Zulkifli had no authority to sign the Agreement dated 12.7.2013 regarding the Ship on behalf of the Ship Builder. Any disposal of the Ship by Dato’ Zulkifli or any person, after the appointment of the R&M and without the R&M’s consent, amounts to an exercise of dominion over the Ship which is inconsistent with the rights and powers of the R&M over the Ship and such an act constitutes a tort of conversion against the R&M – please see the English Court of Appeal’s judgment by Slesser LJ in Oakley v Lyster [1931] 1 KB 148, at 156; and

 

(e) there was a Gazette Notification of the WU Petition on 11.4.2013. Section 81 EA provides that the court “shall presume the genuineness” of a gazette notification. The effect of a gazette notification is provided in s 18(2) of the Interpretation Acts 1948 and 1967 (IA) which reads as follows –

 

—18(2) Publication in the official Gazette of Malaysia shall constitute sufficient notice of any matter required to be published in the Gazette by or

 

under any federal law or required to be published in the Sabah Government Gazette or the Sarawak

 

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Government Gazette by or under any enactment of those States which has been declared to be a federal law/’

 

(emphasis added).

 

By virtue of the operation of s 18(2) IA, the Defendants shall be deemed to have “sufficient notice” of the Gazette Notification of the WU Petition on 11.4.2013 and should not have entered into the Agreement dated 12.7.2013.

 

L. Does STA apply in this case?

 

L1. Relevant provisions of STA

 

131. The following provisions in STA are pertinent to this case:

 

“s 2. Interpretation

 

“brokering” means the activity of a person who, either on his own behalf or acting as an agent on behalf of another person –

 

(a) negotiates, arranges for or facilitates the purchasing, financing, conveying, sale or supply of items; or

 

(b) buys, sells or supplies such items;

 

“export” means—

 

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(a) to take or cause to be taken out of Malaysia any items by land, sea or air, or to place any items in a conveyance for the purpose of such items being taken out of Malaysia by land, sea or air; or

 

(b) to transmit technology by any means to a destination outside Malaysia, and includes any oral or visual transmission of technology by a communications device where the technology is contained in a document the relevant part of which is read out, described or otherwise displayed over the communications device in such a way as to achieve a similar result;

 

—restricted activity” means –

 

(a) any activity that supports the development, production, handling, usage, maintenance, storage, inventory or proliferation of any weapon of mass destruction and its delivery systems; or

 

(b) participation in transactions with persons engaged in such activities;

 

“strategic items” means any items prescribed as strategic items under section 7;

 

—unlisted items” means items that may be used in a restricted activity but are not prescribed as strategic items under section 7;

 

“weapons of mass destruction” means any weapon designed to kill, harm or infect people, animals or plants through the effect of nuclear explosion or dispersion or the toxic properties of a chemical weapon or the infectious or toxic properties of a biological weapon, and includes a delivery system designed, adapted or intended for the deployment of such weapons.

 

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s 3. Prevailing law

 

(1) The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other written law, including the related laws, relating to the prevention of the proliferation of weapons of mass destruction and their delivery systems.

 

(2) In the event of any conflict or inconsistency between the provisions of this Act and those of any other written laws, including the related laws, the provisions of this Act shall prevail and the conflicting or inconsistent provisions of the other written laws shall, to the extent of the conflict or inconsistency, be deemed to be superseded.

 

s 4. Extra-territorial application

 

(1) This Act shall, in relation to any person, whatever his nationality or citizenship, have effect outside as well as within Malaysia, and where an offence under this Act is committed by any person in any place outside Malaysia, he may be dealt with in respect of such offence as if the offence was committed at any place within Malaysia.

 

s 7. Strategic items

 

(1) The Minister may, by order published in the Gazette, prescribe any items as strategic items for the purposes of this Act.

 

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(2) If any question arises as to whether any item is or is not included in a class of items appearing in an order made under subsection (1), such question shall be decided by the Controller.

 

s 8. Restricted and prohibited end-users

 

(1) The Minister may designate an end-user to be a restricted end-user for which a special permit is required under this Act.

 

(2) The Minister may designate an end-user to be a prohibited end-user to which all export, transhipment or transit of strategic items or unlisted items under this Act are prohibited.

 

(3) A list of the restricted end-users and prohibited end-users shall be published by order in the Gazette, and the Minister may amend the list from time to time.

 

s 9. Export, transhipment and transit of strategic items and unlisted items

 

(1) No person shall export, tranship or bring in transit strategic items unless he obtains a permit issued under this Act.

 

(2) No person shall export, tranship or bring in transit strategic items or unlisted items to a restricted end-user specified in subsection 8(1) unless he obtains a special permit issued under this Act.

 

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(3) No person shall export, tranship or bring in transit strategic items or unlisted items to a prohibited end-user specified in subsection 8(2).

 

(4) A person who contravenes subsection (1) commits an offence and shall, on conviction –

 

(a) in relation to strategic items which are arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such strategic items without a permit or with knowledge that the export, transhipment or bringing in transit of such strategic items without a permit is unlawful –

 

(A) where death is the result of the act, be punished with death or imprisonment for natural life, and in the case of a body corporate, be punished with a minimum fine of thirty million ringgit; or

 

(B) in any other case, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such strategic items without a permit or without knowledge that the export, transhipment or bringing in transit of such

 

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strategic items without a permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit; and

 

(b) in relation to strategic items other than arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such strategic items without a permit or with knowledge that the export, transhipment or bringing in transit of such strategic items without a permit is unlawful, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such strategic items without a permit or without knowledge that the export, transhipment or bringing in transit of such strategic items without a permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit;

 

(5) A person who contravenes subsection (2) commits an offence and shall, on conviction –

 

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(a) in relation to strategic items or unlisted items which are

 

arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such items without a special permit or with knowledge that the export, transhipment or bringing in transit of such items without a special permit is unlawful –

 

(A) where death is the result of the act, be punished with death or imprisonment for natural life, and in the case of a body corporate, be punished with a minimum fine of thirty million ringgit; or

 

(B) in any other case, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such items without a special permit or without knowledge that the export, transhipment or bringing in transit of such items without a special permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit; and

 

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(b) in relation to strategic items and unlisted items other than

 

arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such items without a special permit or with knowledge that the export, transhipment or bringing in transit of such items without a permit is unlawful, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such items without a special permit or without knowledge that the export, transhipment or bringing in transit of such items without a special permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit;

 

(6) A person who contravenes subsection (3) commits an offence and shall, on conviction –

 

(a) in relation to strategic items or unlisted items which are arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such items or with knowledge that the export, transhipment or bringing in transit of such items without a permit is unlawful –

 

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(A) where death is the result of the act, be punished with death or imprisonment for natural life, and in the case of a body corporate, be punished with a minimum fine of thirty million ringgit; or

 

(B) in any other case, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such items or without knowledge that the export, transhipment or bringing in transit of such items without a permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit; and

 

(b) in relation to strategic items and unlisted items other than arms or related material –

 

(i) where the act is done with the intent to unlawfully export, tranship or bring in transit such items or with knowledge that the export, transhipment or bringing in transit of such items is unlawful, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

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(ii) where the act is done without the intent to unlawfully export, tranship or bring in transit such items or without knowledge that the export, transhipment or bringing in transit of such strategic items without a permit is unlawful, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit;

 

s 11. Brokering of strategic items

 

(1) No person shall carry out an act of brokering of any strategic items unless he is registered under section 19, and where required under the related laws, holds a valid permit for the brokering of such strategic items from the relevant Authority under the related laws where –

 

(a) he has been notified by the relevant Authority or an authorized officer that such strategic items may be intended or are likely to be used, wholly or in part, for or in connection with a restricted activity;

 

(b) he knows that such strategic items are intended to be used, wholly or in part, for or in connection with a restricted activity; or

 

(c) he has reasonable grounds to suspect that such strategic items are intended or are likely to be used, wholly or in part, for or in connection with a restricted activity.

 

(2) A person who contravenes subsection (1) commits an offence and shall, on conviction –

 

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(a) in relation to strategic items which are arms or related

 

material –

 

(i) where death is the result of the act, be punished with death or imprisonment for natural life, and in the case of a body corporate, be punished with a minimum fine of thirty million ringgit; or

 

(ii) in any other case, be punished with imprisonment for a term of not less than ten years or with a fine of not less than ten million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of twenty million ringgit; or

 

(b) in relation to strategic items other than arms or related material, be punished with imprisonment for a term of not less than five years or with a fine of not less than five million ringgit or with both, and in the case of a body corporate, be punished with a minimum fine of ten million ringgit.

 

(3) In any proceedings for an offence in respect of any strategic items referred to in paragraph (1)(c), it shall be a defence for the accused to prove that he has made all reasonable inquiries as to the use or proposed use of the items and is satisfied from such inquiries that the items will not be used for or in connection with a restricted activity.”

 

(emphasis added).

 

L2. STA does not apply in this case

 

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132. The Plaintiffs contend that ss 8 and 9 STA read with paragraph 3 of the Strategic Trade (Restricted End-Users and Prohibited End-Users) Order 2010 (ST Order 2010) and Part 3 of the First Schedule to the ST Order 2010, prohibited the export of the Ship to Iran.

 

133. The Plaintiffs rely on, among others, MITI’s Letter dated 13.12.2012 which has been signed by the Controller. MITI’s Letter dated 13.12.2012 gave an export permit to the Ship Builder to export the Ship to LNGVL subject to the conditions and requirements of STR, a subsidiary legislation made under the STA. MITI has taken the stand that STA applies to the Ship (MITI’s Stand).

 

134. The Plaintiffs further submitted that there was oral and documentary evidence from the Ship Builder and Defendants which “conceded” that STA required the Ship Builder to obtain an export permit from MITI before the Ship could be exported to Iran (Concession). The Concession can be evidenced from, among others, the following:

 

(a) Dato’ Zulkifli’s Email dated 29.8.2012;

 

(b) the SSPSL Agreement;

 

(c) the Settlement Agreement;

 

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(d) the Agreement dated 5.11.2012 which cancelled the SSPSL Agreement due to MITI’s objection and provided for 2 options, namely the 3rd Defendant could transfer the Ship to –

 

(i) LNGVL or LSB; or

 

(ii) a “trustee company’ represented by the 2nd Defendant;

 

(e) SD3 testified that SD3 was informed by SD2 that the Ship could not be delivered to Iran because MITI had refused to issue an export license for the Ship Builder to do so;

 

(f) SD4 gave evidence that SD2 informed SD4 that the Ship could be transferred to a “Malaysian trustee” of the 3rd Defendant and MITI’s approval was not required for such a transfer;

 

(g) the 2nd Defendant stated that he agreed to help the 3rd Defendant when MITI refused to issue an export license for the Ship Builder to send the Ship to Iran in or around August 2011. Consequently, the 2nd Defendant incorporated the 1st Defendant so that the 3rd Defendant could transfer the Ship to the 1st Defendant; and

 

(h) the 2nd Defendant’s Email dated 22.7.2013 which stated, among others, that the 1st Defendant was confident MITI would grant an export permit for the Ship to be sold to “Demtek Ltd, Turkey’ as the buyer and seller of the Ship were not “companies or countries listed under STA’.

 

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135. The Plaintiffs also contended that there were efforts by the Ship Builder and all the Defendants to circumvent the operation of the STA and ST Order 2010 (Circumvention Efforts). The Circumvention Efforts are evidenced by, among others –

 

(a) the execution of the SSPSL Agreement for the Ship to be sold and delivered to SSPSL and not to the 3rd Defendant in Iran;

 

(b) the Settlement Agreement which provided –

 

(i) for the Ship Builder to help the 3rd Defendant to find a purchaser of the Ship and for the purchase price to be “wire transferred” to the 3rd Defendant’s bank account outside Iran (Clause 4E of Settlement Agreement); and

 

(ii) that the terms of the Settlement Agreement would not be disclosed to court (Clause 7 of Settlement Agreement); and

 

(c) the Agreement dated 5.11.2012 which provided 2 options for the Ship Builder and all the Defendants to circumvent the application of the STA.

 

136. The Defendants have submitted that STA does not apply in this case for the following reasons:

 

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(a) the definition of “strategic item” in s 2 STA read with s 7(1) STA does not include the Ship;

 

(b) the 3rd Defendant is not a “restricted end-user’ or “prohibited enduser’ under s 8 STA read with paragraph 4 of the ST Order 2010;

 

(c) the PM attended the launching of SK3 and expressed his appreciation for the 3rd Defendant’s engagement of the Ship Builder to build the Ship and SK3; and

 

(d) SK3 has been delivered to the 3rd Defendant in Iran despite the fact that STA has already come into effect.

 

137. Firstly, the question of whether a written law applies or not in a particular case, is a question of interpretation of the written law. The construction of a written law does not depend on –

 

(a) the position taken by the relevant Ministry, Department, Agency or body of the Government. Statements and conduct by the PM, Ministers and public servants, do not constitute law. This case does not concern statements and conduct by the PM, Ministers and public servants which may create legitimate expectations or estoppel in the sphere of public law. Accordingly, MITI’s Stand is not pertinent to the construction of STA and ST Order 2010;

 

(b) the Concession does not affect the construction of STA and ST Order 2010. Even if learned counsel has wrongly conceded in

 

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respect of a legal position, the court is not bound by such an erroneous admission of law. Suffices for me to rely on the Court of Appeal’s judgment given by Abdul Malek Ahmad JCA (as His Lordship then was) in Ahmad Tajudin bin Hj Ishak v Suruhanjaya Pelabuhan Pulau Pinang [1997] 1 MLJ 241, at 251, as follows –

 

—As the submissions continued, however, we discovered that the parties had actually proceeded in the trial court upon an erroneous admission of the law which did not bind us.

 

In the court below, counsel for both sides stood on common ground upon the issue of discrimination. They agreed that it was within the right of the respondent as an employer to discriminate among his employees. They also agreed that, in the absence of an Act of Parliament on that behalf, unfair discrimination whether on the basis of sex or other criteria was not actionable. The trial judge held the same view. Indeed, he said so in no uncertain terms in his judgment.

 

Counsel and the judge were quite wrong, of course. They all overlooked the far-reaching provisions of arts 5(1) and 8(1) of the Federal Constitution (‘the Constitution1). The combined effect of these two articles is to strike down any arbitrary or harsh and unfair action which adversely affects the quality of life. See Tan Tek Seng v Suruhanjaya Perkhidmatan Pendidikan & Anor [1996] 1 MLJ 261 and Hong Leong Equipment Sdn Bhd v Liew Fook Chuan and another appeal [1996] 1 MLJ 481. It follows that where a person’s livelihood or reputation is adversely affected by a decision, then the decision-maker must act fairly and reasonably.

 

Before us, counsel for the appellants said that he realized the error into which he had fallen in the court below. He wished to retract the admission of law he had made before

 

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the judge. Cik Zarina Hussain, who appeared for the respondent, was absolutely fair in her approach to this change of stance by the appellant. She conceded that it was open to the appellants to take the point.

 

Now, it is well-settled that counsel is not bound by an erroneous admission of law that he makes. Neither is the court. If counsel makes an erroneous admission of law, he may withdraw it at any time; even on appeal. If a judge acts upon an erroneous admission of law, this court is not bound by his views. We may look at the matter afresh ”

 

(emphasis added); and

 

(c) the Circumvention Efforts is not relevant to the interpretation of STA and ST Order 2010. Conduct of parties, including the PM, does not affect the construction of statutes. Hence, the fact that SK3 has been delivered to the 3rd Defendant in Iran, is immaterial to the interpretation of STA and ST Order 2010.

 

138. I am not able to find any Malaysian case which has construed STA and ST Order 2010. I am of the view that STA and ST Order 2010 do not apply in this case. My opinion is premised on the following reasons:

 

(a) STA regulates “strategic items” and “unlisted items”. Sections 9(1) to (6) and 11(1) STA concern offences in respect of “strategic items”. Offences regarding “unlisted items” are provided in s 9(2) to (6) STA;

 

(b) “strategic items” is defined in s 2 STA to mean “any items prescribed as strategic items” under s 7 STA. Section 7(1) STA

 

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provides that the “Minister’ (defined in s 2 STA to mean the Minister charged with the responsibility for international trade and industry) “may, by order published in the Gazette, prescribe any items as strategic items for the purposes” of STA [Section 7(1) Order]. Section 7(2) STA provides that if there is any question on whether an item is or is not included in a Section 7(1) Order, such a question shall be decided by the Controller. It is therefore clear that before any item is a “strategic item” for the purposes of STA, there must be a Section 7(1) Order.

 

There is no Section 7(1) Order to prescribe that a ship is a “strategic item”. The ST Order 2010 does not prescribe a ship as a “strategic item”. In fact, the ST Order 2010 is made under s 8 STA and is not a Section 7(1) Order. Accordingly, the prohibitions of “strategic items” as provided in ss 9(1) to (6) and 11(1) STA do not apply to the Ship;

 

(c) “unlisted items” is defined in s 2 STA as items that may be used in a “restricted activity” but are not prescribed as “strategic items” under s 7 STA. Section 2 STA further defines a “restricted activity” as “any activity that supports the development, production, handling, usage, maintenance, storage, inventory or proliferation of any weapon of mass destruction and its delivery systems”.

 

—Weapons of mass destruction”, according to s 2 STA, means —any weapon designed to kill, harm or infect people, animals or plants through the effect of nuclear explosion or dispersion or the toxic properties of a chemical weapon or the infectious or toxic properties of a biological weapon, and includes a delivery system designed, adapted or intended for the deployment of such weapons”. It is clear that the Ship is not an “unlisted item” in s 2

 

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STA which will be used in a “restricted activity” regarding “weapons of mass destruction”;

 

(d) ss 9(4) to (6) and 11(2) STA provides for very severe punishment, including death, imprisonment for natural life and minimum fine of RM30 million for certain offences [s 9(4)(a)(i)(A) STA]. It is trite law that if there are two or more interpretations of a penal statutory provision, namely if there is an ambiguity in the construction of a penal law, the court should construe that provision strictly in favour of life and liberty – please see, eg the Privy Council’s decision on appeal against a judgment of the Federal Court from Singapore in Liew Sai Wah v Public Prosecutor [1968] 2 MLJ 1, at 2. Accordingly, if there is any ambiguity in –

 

(i) the definitions of “strategic items” and “unlisted items” in s 2 STA; and

 

(ii) ss 7(1), 9(1) to (6), 11(1) and (2) STA

 

– such an ambiguity should be resolved in favour of life and liberty. The above interpretation is consistent with a strict construction of penal statutes such as STA; and

 

(e) in addition to the very severe sanctions imposed by STA, s 3(2) STA provides that STA shall prevail over any other inconsistent written law. Section 4(1) STA further provides that all offences under the STA are extra-territorial in nature, namely any offence under STA may be committed outside the territorial jurisdiction of

 

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Malaysian courts and yet Malaysian courts have extra-territorial jurisdiction to try and punish for these extra-territorial offences. According to s 4(1) STA, Malaysian courts may try extra-territorial offences under the STA committed solely by persons who are not Malaysian citizens. If I accept a wide construction of STA as advanced by the Plaintiffs, this may cause injustice.

 

M. Admissibility and evaluation of evidence

 

M1. Part C Documents

 

139. During pre-trial case management of this case, the Plaintiffs have classified many documents adduced by the Defendants as “Part C Documents” under Order 34 rule 2(2)(e)(ii) RC (documents where the authenticity and contents are disputed) (Part C Documents). In KTL Sdn Bhd & Anor v Leong Oow Lai & 2 Other Cases [2014] AMEJ 1458, at paragraph 34, I decided as follows:

 

“34. If a document is classified as a Part C Document, the party adducing that document bears the evidential burden to satisfy the court on a balance of probabilities the following 2 conditions of admissibility of that document (2 Conditions of Admissibility):

 

(a) in accordance with the rule against documentary hearsay, the maker of the Part C Document has to be called as a witness — the Federal Court’s judgment in Capital Insurance Bhd v Cheong Heng Loong Goldsmiths (KL) Sdn Bhd [2005] 4 CLJ 1, at 20, 21-25 and 28. If the maker of a Part C Document cannot be called as a witness, the party adducing that document has to satisfy the court regarding the application of any one of the exceptions to the hearsay rule such as ss 32(1)(a) to (h) [s 32(1)(i) and

 

(j) EA only apply to criminal proceedings according to s

 

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32(2) EA], 33 to 37, 73A(1), (2) and/or 90A(1) EA [s 90C EA provides that s 90A EA shall prevail over, among others, any other provision of EA relating to the proof of evidence]; AND

 

(b) —primary evidence” of the Part C Document as understood in s 62 EA must be adduced in court as required by s 64 EA – the Supreme Court’s decision in KPM Khidmat Sdn Bhd v Tey Kim Suie [1994] 2 MLJ 627, at 631. It is to be noted that Explanation 3 of s 62 EA provides that a document produced by a computer (in compliance with s 90A EA) is primary evidence. If —primary evidence” of a Part C Document is not available, s 64 EA provides that —secondary evidence” [within the meaning of s 63(a) to (e) EA] of the Part C Document can only be admitted as evidence if there is proof of the application of any one of the paragraphs in s 65(1)(a) to (g) EA.”

 

140. The Defendants did not –

 

(a) call the maker or author of Part C Documents;

 

(b) rely on any one of the exceptions to the documentary hearsay rule as provided in ss 32(1)(a) to (h), 33 to 37, 73A(1), (2) and/or 90A(1) EA to admit Part C Documents;

 

(c) adduce the primary evidence (as defined in s 62 EA) of Part C Documents as required by s 64 EA; and

 

(d) rely on s 64 read with any one of the paragraphs in s 65(1)(a) to

 

(g) EA, to admit secondary evidence of Part C Documents in lieu of primary evidence.

 

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141. In view of the above reasons, I am constrained to hold that all the Part C Documents are not admissible as evidence.

 

M2. Weight to be attached to oral hearsay evidence

 

142. SP2 testified that SP2 heard from Puan Nurul, the Bank’s accounts manager, that as at September 2009, 75% of the Ship had been built. According to SP2, as “part and parcel of the requirement’ of the Bank, Puan Nurul would do “regular site visits” to check the Ship Builder’s construction of all its ships. I am not able to give any weight to such evidence by SP2 (as informed by Puan Nurul) because of the following reasons:

 

(a) Puan Nurul has not been called by the Plaintiffs to testify in this case;

 

(b) the Defendants have been deprived of their right to cross-examine Puan Nurul so as to ascertain the truth of what Puan Nurul has informed SP2; and

 

(c) there is no evidence which has been adduced by the Plaintiffs as to why Puan Nurul, the Bank’s own accounts manager, cannot be called to give evidence in this suit.

 

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I rely on my earlier judgment in Tenaga Nasional Berhad v Api-Api Aquaculture Sdn Bhd [2015] 3 AMR 811, at 830-831 (Api-Api Aquaculture Sdn Bhd), as follows:

 

—[25] Despite the fact that the Chinese gentleman and Encik Yusof had not been called as witnesses, SPI’s conversations with them did not constitute oral hearsay evidence and such conversations were admissible to show that such conversations had indeed taken place. This is in accordance with the Privy Council’s decision on appeal from the Federation of Malaya in Subramaniam v PP [1956] 1 MLJ 220 at 222, delivered by LMD De Silva as follows:

 

Evidence of a statement made to a witness by a person who is not himself called as a witness may or may not be hearsay. It is hearsay and inadmissible when the object of the evidence is to establish the truth of what is contained in the statement. It is not hearsay and is admissible when it is proposed to establish by the evidence, not the truth of the statement, but the fact that it was made. The fact that the statement was made, quite apart from its truth, is frequently relevant in considering the mental state and conduct thereafter of the witness or of some other person in whose presence the statement was made. In the case before Their Lordships statements could have been made to the appellant by the terrorists, which, whether true or not, if they had been believed by the appellant, might reasonably have induced in him an apprehension of instant death if he failed to conform to their wishes.

 

(Emphasis added)

 

[26] SP1’s conversations with the Chinese gentleman and Encik Yusof are relevant as direct oral evidence regarding matters which have been seen, heard and perceived by SP1 under s 60(1)(a), (b) and (c) of the EA.

 

[27] Despite admitting as evidence SP1’s conversations with the Chinese gentleman at the premises and Encik Yusof, I attach no weight to such evidence because the gentleman and Encik Yusof have not been called as witnesses and

 

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more importantly, the defendant has no opportunity to cross-examine them so as to ascertain the truth of such conversations. Furthermore, Encik Yusof is an employee of the plaintiff and no evidence has been adduced by the plaintiff on why Encik Yusof cannot be called to testify in this suit.’

 

(emphasis added).

 

143. The 2nd Defendant has testified that he has been informed by MITI that the Ship can be used locally. For the same reasons as explained above, I attach no weight to such evidence because the Defendants have not called the relevant MITI officer to testify regarding such a matter. The Defendants have also not adduced any evidence to explain why the relevant MITI officer cannot be called to testify on this matter.

 

144. SD2 had testified that SD2 was “advised’ by Dato’ Zulkifli that the 3rd Defendant had paid the full Sale Price to the Ship Builder. Due to the above-mentioned reasons, I do not attach any weight to such oral hearsay evidence as Dato’ Zulkifli has not been called by the Defendants to give evidence in this case. I will discuss later in this judgment on whether an adverse inference should be drawn against the Defendants under s 114(g) EA for the Defendants’ failure to call Dato’ Zulkifli to testify in this matter.

 

M3. SD2’s veracity

 

145. SD2 is an important witness in this case for the following reasons:

 

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(a) at the material time, SD2 was the MD for the Ship Builder; and

 

(b) most of the agreements and documents adduced in this case, from the 6 Debentures until the 2nd Bill of Sale, have been signed by SD2 on behalf of the Ship Builder. Even after the appointment of the R&M, SD2’s Email dated 25.10.2013 was sent to the R&M wherein SD offered limited assistance to show the Ship to potential purchasers.

 

146. I have considered SD2’s oral evidence together with all the other evidence adduced in this case, both oral and documentary. I make a finding of fact that SD2 lacks credibility. This finding is premised on the following reasons:

 

(a) SD2 has read the 6 Debentures before signing the 6 Debentures on behalf of the Ship Builder. By way of the Ship Builder’s Letter dated 2.3.2009 to Borcos, the Ship Builder irrevocably authorised Borcos to pay directly to the Bank for the Ship. Accordingly, SD2 had actual knowledge of the Bank’s floating charge over the Ship before the execution of the Shipbuilding Contract on 6.3.2010. Before the Ship Builder entered into the Shipbuilding Contract with the 3rd Defendant, SD2 as the Ship Builder’s MD should have caused the Ship Builder to obtain the Bank’s written consent for the Shipbuilding Contract;

 

(b) SD2 admitted that SD2 did not inform the Bank of the Shipbuilding Contract. SD2 could not give a reason for such a failure. It is my finding of fact that from the Shipbuilding Contract on 6.3.2010

 

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onwards, SD2 had continuously concealed from the Bank, the Shipbuilding Contract and a host of agreements and dealings regarding the Ship. Such a concealment is supported by the fact that none of the agreements between the Ship Builder and the 3rd Defendant have been stamped until after –

 

(i) the filing of the Plaintiffs’ Suit; and

 

(ii) the issue of lack of stamping of the said contracts, has been raised by the Plaintiffs’ solicitors;

 

(c) after the appointment of the R&M on 3.4.2013, SD2 had concealed the Shipbuilding Contract and subsequent agreements and dealings regarding the Ship from the R&M –

 

(i) by not replying to R&M’s Letters dated 31.10.2013 and 12.11.2013;

 

(ii) in the Meeting on 29.10.2013 with the R&M, SD2 together with Dato’ Zulkifli did not inform the R&M that the Ship had been transferred by the Ship Builder, first to the 3rd Defendant and then to the 1st Defendant; and

 

(iii) SD2’s Email dated 25.10.2013 to the R&M offered limited assistance to show the Ship to potential purchasers. SD2 could and should have informed the R&M in SD2’s Email dated 25.10.2013 regarding the Shipbuilding Contract and subsequent agreements and dealings concerning the Ship.

 

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Even at this belated stage, SD2 continued to conceal from the R&M the Shipbuilding Contract and subsequent agreements and dealings concerning the Ship;

 

(d) after the Ship Builder had received the Crystallization Notice in Messrs Skrine’s Letter dated 20.3.2013, SD2 should not have signed the 2nd Bill of Sale on 27.3.2013;

 

(e) SD3, SD4 and 2nd Defendant gave evidence that SD2 did not inform them of the Debentures and the filing of the WU Petition against the Ship Builder. SD2 himself admitted that SD2 did not inform the 3rd Defendant regarding the WU Petition. SD2 had thus concealed material facts from SD3, SD4 and 2nd Defendant;

 

(f) Clause 7 of Settlement Agreement (signed by SD2 on behalf of the Ship Builder) expressly stated that the contents of the Settlement Agreement would not be disclosed to court. SD2 testified that SD2 did not know why the contents of the Settlement Agreement could not be disclosed to court. Any honest person, more so the MD of a company, should disclose all facts to a court of law so as to assist the court in making a just decision. By agreeing to Clause 7 of Settlement Agreement, albeit on behalf of the Ship Builder, SD2 is willing to participate in an agreement to conceal the truth from the court;

 

(g) in the Meeting on 29.10.2013 with the R&M, SD2 together with Dato’ Zulkifli informed the R&M that the 3rd Defendant had not paid the full purchase price for the Ship. SD2 however testified in this case that the 3rd Defendant had not only paid the full purchase price for the Ship to the Ship Builder but the 3rd Defendant had

 

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even made the Alleged Overpayment to the Ship Builder. Such a material contradiction clearly shows a lack of credibility on SD2’s part;

 

(h) during cross-examination, SD2 testified that as the Ship Builder’s MD, SD2 would sign documents on behalf of the Ship Builder as requested by the 3rd Defendant and Dato’ Zulkifli. During SD2’s reexamination, SD2 said he would not sign any agreement requested by the 3rd Defendant which he knew to be untrue, false or inaccurate. It is trite law that SD2 as a director of the Ship Builder, owes fiduciary duties to the Ship Builder under Malaysian case law and statutory obligations under s 132(1) and (1A) CA to –

 

(i) exercise SD2’s powers as a director of the Ship Builder at all times for a proper purpose and in good faith in the best interest of the Ship Builder; and

 

(ii) exercise reasonable care, skill and diligence as a director of the Ship Builder.

 

I do not see how SD2 can discharge his fiduciary and statutory duties as the Ship Builder’s MD by merely signing documents on behalf of the Ship Builder as requested by the 3rd Defendant and Dato’ Zulkifli. SD2 can only discharge his fiduciary and statutory duties as the Ship Builder’s MD by making a personal assessment of whether SD2 should sign any document on behalf of the Ship Builder. Any breach of s 132(1) and (1A) CA does not only entail civil liability [civil remedies for breach of a director’s duties are preserved under s 132(5) CA] but also attracts penal sanction up to a maximum of 5 years imprisonment and/or fine of RM30,000 under s 132(3) CA;

 

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(i) during re-examination, SD2 testified that SD2 would not sign any agreement for the Ship Builder which SD2 knew to be untrue, false or inaccurate. The Declaration of Warranty, signed by SD2 on behalf of the Ship Builder on 26.5.2010, stated that the construction of the Ship had been completed on that date. SD2 admitted that the Ship had not been built on 26.5.2010 but yet, SD2 signed the Declaration of Warranty!;

 

(j) SD2 did not disclose to MITI that the “true” purchaser of the Ship from the Ship Builder was the 3rd Defendant. Besides SD2’s concealment of this material fact from MITI, SD2 had willingly and actively participated in giving a false impression to MITI that the Ship had been first sold to SSPSL and then to LNGVL. Furthermore, SD2 informed SD3 that the Ship could be sold to any buyer so long as the Ship was not delivered to Iran. SD4 testified that SD2 informed SD4 that if the Ship were transferred to a “Malaysian trustee”, MITI’s approval would not be required. According to the 2nd Defendant’s evidence, SD2 proposed that the “best option” was for the Ship to be transferred to the 1st Defendant. Although this court finds that the STA does not apply in this case, SD2’s active participation in the Circumvention Efforts, clearly shows SD2’s lack of probity in SD2’s dealings with a Government Ministry. SD2 had no qualms in deceiving MITI;

 

(k) SD2 testified that the agreements signed between the Ship Builder and the 3rd Defendant had been prepared by the 3rd Defendant and not by the Ship Builder. SD4 however gave evidence that the drafts of all the agreements between the Ship Builder and the 3rd Defendant, had been prepared by the Ship Builder; and

 

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(l) SD2 is one of the Guarantors against whom the Bank has obtained Summary Judgment. Accordingly, SD2 has the motive under s 8(1) EA to give false evidence against the Bank as SD2 has an “axe to grind” with the Bank.

 

N. Whether Priority Issue can be resolved by way of application of equitable doctrines?

 

147. As explained in the above Parts G2 and H, once there was an automatic crystallization of the first floating charge of the 1st Debenture on 6.3.2010, the Ship was subject to a fixed charge in the Bank’s favour. The 3rd Defendant as a purchaser of the Ship, at the most, is only an unsecured creditor of the Ship Builder. As from 6.3.2010, the Bank has priority to the Ship over the 3rd Defendant and all other unsecured creditors of the Ship Builder, including the 1st Defendant -please see, eg the Court of Appeal’s judgment in Tan See King.

 

148. I am of the view that the Priority Issue in this case has been resolved by way of an automatic crystallization of the first floating charge of the 1st Debenture. The Priority Issue cannot now be decided based on the following equitable doctrines:

 

(a) the doctrine that a purchaser of a property may acquire a lawful title to the property if –

 

(i) the purchaser is bona fide;

 

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(ii) the purchaser has paid the full purchase price for the property before any other equitable claim to the property arises; and

 

(iii) the purchaser has no “notice” of an earlier equitable claim to the property

 

(Bona Fide Purchaser Exception);

 

(b) the doctrine of bare trust. As explained later in this judgment, the equitable doctrine of bare trust can only apply if the purchaser of property in question, has completed the sale by having done all that are required of the purchaser under the sale and purchase agreement, including full payment of the purchase price, before the crystallization of the floating charge; and

 

(c) the question of competing equities which will be resolved by way of who has the earlier equity (in point of time) and the earlier equity has not been postponed by any negligence or default on the part of the holder of the earlier equity which has prejudiced the holder of a subsequent equity. The question of competing equities can only apply when there is a claim by holders of a “similar’ kind of equity, namely when there is a dispute by –

 

(i) more than one purchasers or unsecured creditors over the same asset; and

 

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(ii) more than one secured creditors claiming priority to the same property.

 

149. If the above equitable doctrines can apply to decide the question of priority between a secured creditor and an unsecured one (such as a purchaser of an asset from a debtor company), this will –

 

(a) defeat the efficacy of automatic crystallization clauses in debentures; and

 

(b) affect adversely, if not rendered redundant, the security interest of secured creditors as embodied in the debentures.

 

As explained later in this judgment, third parties are considered by case law to have “notice” of automatic crystallization clauses in debentures which have been registered with SSM and third parties are therefore bound in law by such clauses.

 

O. Can 3rd Defendant rely on Bona Fide Purchaser Exception in this case?

 

150. Despite my aforesaid decision in respect of the Priority Issue, I will now discuss whether the 3rd Defendant can claim lawful title to the Ship vis-à-vis the Bank, by relying on the Bona Fide Purchaser Exception.

 

O1. 3rd Defendant has legal burden to prove Bona Fide Purchaser Exception

 

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151. Section 106 EA provides as follows:

 

“ When any fact is especially within the knowledge of any person, the burden of proving that fact is upon him.’

 

152. I am of the opinion that the 3rd Defendant bears the legal burden under s 106 EA to prove the Bona Fide Purchaser Exception on a balance of probabilities. This decision is based on the following reasons:

 

(a) only the 3rd Defendant can adduce evidence regarding its bona fides; and

 

(b) I refer to the following Federal Court cases which have held that a third party purchaser of land or interest in land has the legal burden to prove that he or she is a bona fide purchaser of the land or interest in land for valuable consideration without notice of any fraud or circumstances which may vitiate his or her title or interest

 

(i) Tan Ying Hong v Tan Sian San [2010] 2 MLJ 1, at 8; and

 

(ii) Ong Chat Pang & Anor v Valliappa Chettiar [1971] 1 MLJ 224, at 227.

 

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O2. 3rd Defendant had failed to prove full payment of Sale Price before automatic crystallization of first floating charge in 1st Debenture

 

153. As to when the 3rd Defendant should pay in full the Sale Price for the Ship, I refer to the Federal Court’s judgment given by Edgar Joseph Jr FCJ in Borneo Housing Mortgage Bhd v Time Engineering Bhd [1996] 2 MLJ 12. The material facts in Borneo Housing Mortgage Bhd are as follows:

 

(a) by way of a sale and purchase agreement dated 2.11.1982, the developer company sold to the respondent company a piece of land upon which the developer company would construct an industrial building;

 

(b) on 28.5.1983, the developer created a charge over its land in favour of the appellant company (a finance company) under the Sabah Land Ordinance (SLO) in consideration for a bridging loan granted by the appellant company to the developer company. This charge was registered on 21.6.1983 under the SLO;

 

(c) the respondent company only paid the full purchase price to the developer company on 23.5.1986;

 

(d) the developer company defaulted on the bridging loan and the appellant company applied for an order for sale of the charged land under the SLO;

 

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(e) the respondent company applied to the High Court for, among others, a declaration that the developer was a bare trustee of the land for the benefit of the respondent company; and

 

(f) the High Court allowed the respondent company’s suit but this was reversed by the Federal Court.

 

The Federal Court decided as follows in Borneo Housing Mortgage Bhd, at p. 29 and 31 –

 

“In our view, the contractual events which result in the vendor becoming a bare trustee of the land, the subject matter of the agreement of sale and purchase, for the purchaser, is on completion, that is to say, upon receipt by the vendor of the full purchase price, timeously paid and when the vendor has given the purchaser a duly executed, valid and registrable transfer of the land in due form in favour of the purchaser, for it is then that the vendor divests himself of his interest in the land.

 

It follows that in the present case, the judge in the court below had erred in law when he held, as he did in fact hold, that the finance company chargee’s charge had been created after the developer had become a bare trustee of the purchaser under the agreement and that consequently, the finance company chargee had to take the charge subject to the equitable interest or beneficial interest in the disputed property of the purchaser under the agreement. This holding is flatly contradicted by the undisputed evidence and the applicable law as we understand it, which showed that at the time when the finance company’s charge was created, that is to say, on 28 May 1983, and registered on 21 June 1983, the chargor was not yet a trustee of the purchaser under the agreement. Consequently, any suggestion that the charge thus created was null and void was devoid of any legal basis .”

 

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(emphasis added).

 

154. Based on Borneo Housing Mortgage Bhd, the 3rd Defendant must prove that the 3rd Defendant has paid the full Sale Price for the Ship to the Ship Builder before the automatic crystallization of the first floating charge in the 1st Debenture on 6.3.2010.

 

155. I am not satisfied that the 3rd Defendant has discharged the legal burden to prove on a balance of probabilities that the 3rd Defendant has paid the full Sale Price to the Ship Builder before the automatic crystallization of the first floating charge in the 1st Debenture on 6.3.2010. This decision is premised on the following reasons:

 

(a) there is no evidence of payment of the full Sale Price by the 3rd Defendant to the Ship Builder before 6.3.2010. To the contrary, the Plaintiffs have adduced bank statements of the Ship Builder’s accounts with the Bank (2nd Plaintiff) and CIMB (Ship Builder’s Bank Statements) which do not show that the Ship Builder has indeed received the full Sale Price from the 3rd Defendant;

 

(b) Clause 2.2 of Shipbuilding Contract provides that the Sale Price shall be paid by the 3rd Defendant by LC established within 4 weeks from the date of signing of the Shipbuilding Contract. Clause 3.1 of Shipbuilding Contract states that the Ship Builder undertakes to complete construction of the Ship and SK3 and

 

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deliver both ships to the 3rd Defendant within “ninety (120) days” from the date the LC is received by the Ship Builder. It is clear from clauses 2.2 and 3.1 of the Shipbuilding Contract that on 6.3.2010, the 3rd Defendant has not paid any part of the Sale Price, let alone the full purchase price, to the Ship Builder;

 

(c) Clause 3(E) of 3rd Variation of Shipbuilding Contract on 22.12.2010 has expressly provided that in the event the LC is revoked, the balance of the “cost of the Ship would be paid after the delivery of the Ship. This is therefore clear documentary evidence in Clause 3(E) of 3rd Variation of Shipbuilding Contract that as late as 22.12.2010, the 3rd Defendant has not paid the full purchase price for the Ship to the Ship Builder. Since the Ship has yet to be delivered to the 3rd Defendant, based on Clause 3(E) of 3rd Variation of Shipbuilding Contract, the 3rd Defendant is not obliged to pay the balance of the Sale Price to the Ship Builder;

 

(d) SD2 testified that SD2 was only aware of the 3rd Defendant’s part payment of the Sale Price by way of LC. SD2 did not know as a fact whether the 3rd Defendant had paid the full Sale Price. SD2 was only “advised’ by Dato’ Zulkifli that the 3rd Defendant had paid the full Sale Price. As decided above, this court cannot give any weight to SD2’s evidence based on what SD2 has heard from Dato’ Zulkifli; and

 

(e) the Defendants submitted that, among others, the 1st Bill of Sale and the SSPSL Agreement, had expressly stated that the Sale

 

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Price had been paid by the 3rd Defendant to the Ship Builder and the Ship Builder had acknowledged receipt of the Sale Price. I am not able to accept these agreements which have explicitly stated that the Ship Builder has acknowledged receipt of the full purchase price from the 3rd Defendant. My reasons are as follows

 

(i) the earliest document to state that the 3rd Defendant has paid the full Sale Price is the 1st Bill of Sale on 26.5.2010, which is still after automatic crystallization of the first floating charge in the 1st Debenture on 6.3.2010; and

 

(ii) proviso (a) to s 92 EA allows extrinsic evidence to be admitted to contradict a contractual provision regarding the consideration required for the contract. Proviso (a) to s 92 EA reads as follows –

 

“Provided that – (a) any fact may be proved which would invalidate any document or which would entitle any person to any decree or order relating thereto, such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, the fact that it is wrongly dated, want or failure of consideration, or mistake in fact or law

 

(emphasis added).

 

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The following Federal Court cases have applied proviso (a) to s 92 EA to allow extrinsic evidence to be adduced to prove lack of valuable consideration for the agreements in question despite the express provisions in those agreements that valuable consideration have already been furnished –

 

(1) Lim Ah Moy v Lee Cheng & Ors [1970] 2 MLJ 99, at 101; and

 

(2) Ganam d/o Rajamany v Somoo s/o Sinnah [1984] 2 MLJ 290, at 293.

 

Based on proviso (a) to s 92 EA, the R&M and the Bank can adduce extrinsic evidence in the form of the Ship Builder’s Bank Statements to show that the Ship Builder has not received any payment of the Sale Price from the 3rd Defendant. It is to be noted that the Defendants have not adduced any evidence to rebut the Ship Builder’s Bank Statements or to show why this court should not accept the truth of the contents of the Ship Builder’s Bank Statements. SD2’s evidence did not provide any reason for me not to give any weight to the contents of the Ship Builder’s Bank Statements.

 

O3. When a third party is considered by case law to have “knowledge” or “notice” of a company’s earlier charge over company’s assets in favour of company’s secured creditor?

 

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156. Firstly, if a third party has actual “knowledge” or 11 notice” of a company’s earlier debenture, the third party is clearly bound by such a debenture in any subsequent dealing or contract between the third party and the company.

 

157. The difficulty is when the third party has no actual “knowledge” or “notice” of a company’s prior debenture but in certain circumstances, the third party is considered by case law to have “knowledge” or “notice” of a company’s debenture. I have intentionally avoided using the phrase “constructive knowledge” or “constructive notice”. This is because I find such phrases to be imprecise and their indiscriminate use, may give rise to confusion.

 

158. For a description of the different kinds of “knowledge” or 11 notice”, I refer to a case on constructive trust, Baden & Ors v Societe Generate et al [1992] 4 All ER 161. In Baden, at p. 235-236, Peter Gibson J (as His Lordship then was) held as follows in the English High Court:

 

“250. What types of knowledge are relevant for the

 

purposes of constructive trusteeship? Mr Price [plaintiffs’ learned counsel] submits that knowledge can comprise any one of five different mental states which he described as follows: (i) actual knowledge;

 

(ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge

 

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of circumstances which would put an honest and reasonable man on inquiry. More accurately, apart from actual knowledge they are formulations of the circumstances which may lead the court to impute knowledge of the facts to the alleged constructive trustee even though he lacked actual knowledge of those facts. Thus the court will treat a person as having constructive knowledge of the facts if he wilfully shuts his eyes to the relevant facts which would be obvious if he opened his eyes, such constructive knowledge being usually termed (though by a metaphor of historical inaccuracy) ‘Nelsonian knowledge’. Similarly the court may treat a person as having constructive knowledge of the facts (type (iv) knowledge) if he has actual knowledge of circumstances which would indicate the facts to an honest and reasonable man.

 

251. Formulations (iii) and (v) are taken by Mr Price from authority (see Belmont [1979] 1 All ER 118 at 130, [1979] Ch 250 at 267, per Buckley LJ and Selangor [1968] 2 All ER 1073 at 1104, [1968] 1 WLR 1555 at 1590 per Ungoed-Thomas J respectively). Mr Price submits that the court will treat a person as having constructive knowledge of the facts (type (iii) knowledge) if he wilfully and recklessly fails to make such inquiries as an honest and reasonable man would have made. He says that this is so even if the plaintiff cannot show that such inquiries would have given him actual knowledge of the facts. Similarly Mr Price submits that the court may treat a person as having constructive

 

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knowledge of the facts (type (v) knowledge) if he (without wilfulness or recklessness) fails to make such inquiries as an honest and reasonable man would have made. Again he says that this type of knowledge does not depend on the plaintiff showing that such inquiries would have given him actual knowledge of the facts. Mr Price however accepts that these formulations require modification to this extent, that if the alleged constructive trustee can show that on a balance of probabilities inquiries would have produced answers acceptable to the honest and reasonable man even if such answers be incorrect constructive knowledge is not to be imputed. Mr Leckie [defendant’s learned counsel] submits that the correct formulation of these two types of knowledge includes a requirement that it must be shown that the inquires if made would have given actual knowledge of the facts. This formulation comprehends Mr Price’s modification but goes beyond it in not permitting constructive knowledge to be imputed to a stranger to a trust in a case where there is no probability shown of the inquiry producing actual knowledge. Mr Leckie’s formula is substantially in accord with what Edmund Davies LJ said in Carl-Zeiss [1969] 2 All ER 367 at 384, [1969] 2 Ch 276 at 304 where he recognised as a possible exception to the requirement of actual knowledge the case ‘where the agent is under a duty to inquire into the validity of the third party’s claim and where, although inquiry would have established that it was well-founded, none is instituted’.”

 

(emphasis added).

 

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159. According to Baden, when a person has or claims to have, no actual knowledge or notice of a particular matter, case law may consider him or her to have the following 4 kinds of “knowledge” or “notice”:

 

(a) “wilfully shutting one’s eyes to the obvious” (Wilful Blindness). Wilful Blindness is also known as “Nelsonian knowledge”, “Wilful Ignorance” and “Contrived Ignorance”;

 

(b) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would have made (Recklessness);

 

(c) knowledge of circumstances which would indicate the facts to an honest and reasonable person (Knowledge of Circumstances); and

 

(d) knowledge of circumstances which would put an honest and reasonable person on inquiry (Duty to Inquire).

 

As explained in Baden, there may be variations of “Knowledge of Circumstances” and “Duty to Inquire”.

 

160. The question which I have to decide now is – if a third party dealing with a company has no actual knowledge of the company’s earlier debenture registered with SSM, what kind of “knowledge” or “notice” of the debenture by the third party will case law consider the third party to be bound by the debenture? It is to be noted that this case concerns

 

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only a charge which has been registered with SSM. This judgment does not deal with “knowledge” or “notice” for other branch of law.

 

O4. Effect of registration of Form 34 with SSM

 

161. Forms 34 for the 6 Debentures have been lodged by the Ship Builder with SSM. I will only reproduce the relevant part of Form 34 for the 1st Debenture as follows:

 

“FORM 34

 

COMPANIES ACT 1965 [Section 108(1) and 110(1)]

 

STATEMENT OF PARTICULARS TO BE LODGED WITH CHARGE

 

[SHIP BUILDER]

 

To the Registrar of Companies,

 

1. The charge is created by: [Ship Builder]

 

2. The charge was created on: 24 day of January, 2008

 

3. The charge Is Fixed and Floating.

 

4. The description of the instrument creating or evidencing the charge is:

 

1. Fourth Supplemental Financing Facilities Agreement

 

2. Memorandum of Deposit

 

3. Letter of Set Off

 

4. Debenture

 

5. Assignment of Contract Proceeds

 

6. Power of Attorney over Contract Proceeds

 

7. Charge

 

8. Security documents as stipulated by the Bank

 

5. The liability (whether present or prospective) secured by the charge

 

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is: Ringgit Malaysia Seven Hundred Million (RM700,000,000.00) only together with interest and all other amounts payable by the [Ship Builder] and/or the Guarantors to the Bank under each of the Facility Documents, whether in connection with principal, interest, commissions, fees, costs, expenses or otherwise, as the case may be.

 

6. The liability secured is for the benefit of: [Ship Builder] having its registered office address at…

 

7. The creation of subsequent charges is restricted or prohibited.

 

8. A short description of the property affected is:

 

By way of fixed and floating charge over all or any or part of the Charged Property now or hereafter existing and more particularly described in the Debenture.

 

9. The name and address of the person entitled to the Charge is:

 

[Bank] …

 

10. Some salient covenants or terms and conditions in the instrument of Charge:

 

(a) Dealing with Security

 

The Company will not transfer, sell, lease or otherwise dispose of any property or assets subject to the Debenture (other than the property referred to in sub-clause (b) of the Debenture) otherwise than by way of sale on arm’s length terms in the ordinary course of the [Ship Builder’s] day-to-day trading .

 

(b) Continuing Security

 

The securities herein created are expressly intended to be and shall be a continuing security for payment, repayment, satisfaction, performance and discharge of the indebtedness by the [Ship Builder] and shall not be satisfied by any intermediate payment, repayment, satisfaction, performance and discharge of any part of those indebtedness (or by any settlement of accounts between any person and the Bank) and shall remain in full force and effect until those Indebtedness have been paid, repaid, performed, satisfied and discharged in full.

 

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11. The instrument of Charge or a copy thereof is kept at the registered office of the [Ship Builder] and is open to the inspection of any creditor or member of the company without fee or of any other person on the payment of a fee of RM2.00.

 

Dated this 28 day of January 2008″

 

(emphasis added)

 

162. The Defendants have relied on the Supreme Court’s judgment given by Edgar Joseph Jr SCJ in United Malayan Banking Corporation Bhd v Aluminex (M) Sdn Bhd & Anor [1993] 3 MLJ 587 (UMBC’s Case). Based on UMBC’s Case, the Defendants have submitted as follows:

 

(a) even if the Defendants have conducted a search of SSM’s records of the Ship Builder, the Defendants will only know that there are fixed and floating charges over the Ship Builder’s assets in the Bank’s favour and the Defendants are not able to know the specific terms of the Debentures; and

 

(b) the Defendants’ notice of the Debentures does not mean that the Defendants have notice of the actual terms of the Debentures.

 

163. In UMBC’s Case –

 

(a) the first respondent company, Aluminex Sdn. Bhd. (Aluminex) had registered 2 debentures with the Registrar of Companies

 

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(ROC) [SSM has not been established at that time] in favour of United Asian Bank Bhd. (UAB) in consideration of UAB’s overdraft facilities granted to Aluminex. UAB’s debentures contained a clause that Aluminex could not create another charge over its assets in favour of another party without UAB’s written consent (Restrictive Clause);

 

(b) for the purpose of Aluminex’s business, Aluminex had to purchase glass from Ming Sing Glass Sdn. Bhd. (Supplier). The Supplier applied for credit facilities from the appellant bank (UMBC) to finance the purchase of glass for Aluminex’s business. As part of the security for UMBC’s loan to the Supplier, Aluminex executed an absolute assignment of contract proceeds (payable by Aluminex’s client to Aluminex) (Contract Proceeds) in UMBC’s favour. This assignment had been registered with ROC as a charge in UMBC’s favour;

 

(c) an amount of Contract Proceeds had been paid to UMBC pursuant to the assignment;

 

(d) Aluminex defaulted in respect of the overdraft facilities and UAB appointed a receiver and manager over Aluminex;

 

(e) the issue before the Supreme Court was whether UAB or UMBC was entitled to the Contract Proceeds; and

 

(f) the Supreme Court allowed UMBC’s appeal and held that UMBC had priority to the Contract Proceeds because –

 

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(i) based on the documents in question, UMBC had a “purchase money security interest in the Supplier’s purchase of glass;

 

(ii) Aluminex’s assignment to UMBC was executed before the crystallization of UAB’s floating charges over Aluminex’s assets; and

 

(iii) the Supreme Court held at p. 607 that UMBC’s notice of the UAB’s prior debentures registered with the ROC, did not mean that UMBC had notice of the Restrictive Clause –

 

—It is also true, as counsel for UAB has stressed, that when UMBC took the assignment and registered it as a charge with the Registry of Companies, Kuala Lumpur, pursuant to s 108(3)(d) [CA], it was aware of the existence of the prior registered debenture and supplemental debenture held by UAB, but a wealth of English authority indicates that, contrary to ordinary conveyancing practice, notice of a debenture creating a floating charge does not constitute notice of the terms thereof, including restrictive clauses forbidding the creation of later charges ranking in priority to or pari passu with the charge containing the clause. (See English and Scottish Mercantile Investment Co v Brunton; Re Castell & Brown Ltd; Re Valletort Sanitary Steam Laundry Co Ltd; Wilson v Kelland and G & T Earle Ltd v Hemsworth RdC)

 

We are mindful of the fact that, when these cases were decided, restrictive clauses of the kind we have referred to were rarely encountered, whereas nowadays, they are regularly encountered. However, in Malaysia, the procedure in force, at the material time, for registration of a debenture, did not require a record to be made of the particulars of a restrictive clause of the sort we have referred to. (Compare the Singapore Company Regulations 1987, which makes provision

 

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for noting the restrictions or prohibitions on the company in connection with the charge.) Here, one was merely required to register certain particulars of a debenture or charge and one could do no more. More particularly, at the material time, the particulars required to be entered under the Malaysian Act (see Companies Regulations 1966 Sch 2, Form 34, prior to its amendment by PU(A)16 which came into force only on 1 February 1986) were these:

 

(a) the name of the company giving the charge;

 

(b) the date of the creation of the charge;

 

(c) description of the instrument creating or evidencing the charge;

 

(d) the amount secured by the charge;

 

(e) short description of the property affected; and

 

(f) names and addresses of the persons entitled to the charge.

 

We are, therefore, of the view that the English authorities cited above on this point should be followed and we accordingly do so.

 

We have also considered the question whether UMBC had actual notice of the restrictive clause in the debenture and the supplemental debenture on Aluminex’s power to create later prior-ranking charges save with the written consent of UAB and are satisfied that, upon the evidence disclosed by the record provided, there is no such evidence. We need hardly add that the onus of proof as regards this point is upon UAB .”

 

(emphasis added).

 

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164. I am of the view that UMBC’s Case may be easily distinguished from

 

this case as follows:

 

(a) there were competing claims to the Contract Proceeds by 2 secured creditors of Aluminex. In this case, the 3rd Defendant is not a secured creditor of the Ship Builder;

 

(b) UMBC’s Case did not concern an automatic crystallization clause which had been triggered when the Ship Builder entered into the Shipbuilding Contract without obtaining the Bank’s prior written consent. In UMBC’s Case, Aluminex had assigned the Contract Proceeds to UMBC before the crystallization of UAB’s floating charges over Aluminex’s assets (when UAB appointed a receiver and manager over Aluminex). In fact, the Contract Proceeds had already been paid to UMBC before the crystallization of UAB’s floating charges over Aluminex’s assets; and

 

(c) one of the issues which arose in UMBC’s Case was whether UMBC had prior knowledge of the Restrictive Clause. At the time of the registration of UAB’s charges in the ROC, the then Form 34 did not provide for paragraph 7 (whether the creation of subsequent charges is restricted or prohibited). Hence, UMBC had no notice of the Restrictive Clause. It is clear that UMBC’s Case is decided based on the then Form 34. As explained above, the Form 34 of the 1st Debenture in this case, has much more information which is available to any person, including the Defendants, who care to do a SSM search on the Ship Builder.

 

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165. It is to be noted that after UMBC’s Case, the following Malaysian cases have decided that registration of a charge with SSM gives notice to the world at large regarding the security interest of the debenture holder:

 

(a) in KL Engineering Sdn Bhd & Anor v Arab Malaysian Finance

 

Bhd [1994] 2 MLJ 201, at 207, 208 and 209, Mohamed Dzaiddin SCJ (as His Lordship then was) delivered the following judgment of the Supreme Court –

 

“In dealing with the first ground of appeal, the question is whether the common law doctrine of constructive notice extends to Form 49. In company law, constructive notice means that anyone dealing with a registered company is deemed to have notice of the contents of its public documents. According to Gower’s Principles of Modern Company Law (5th Ed, 1992) at p 170, ‘Precisely what that included was never wholly clear but it certainly included the memorandum and articles of association. ’

 

However, the next important question is whether Form 49 comes within the category of public documents upon which persons dealing with the company is deemed to have notice of its contents.

 

The conclusion that follows from the above opinion, with which we respectfully agree, is that the common law doctrine of constructive notice should apply to Form 49. To

 

reiterate, Form 49 is a public document which contains particulars of directors who are the mind and will of a company, as well as managers and secretaries who are responsible for

 

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the day-to-day running of the company. It is a document which affects the powers of the company and its agents. Certainly, its purpose must be more than just to provide information about the company’s directors, managers and secretaries. Therefore, persons dealing with the company should check with the Registrar of Companies who its directors, managers and secretaries are at any given time.

 

We hasten to add that as Form 49 (D14) is a public document to which the common law doctrine of constructive notice applies, the respondent, having been put upon inquiry of its content, but failed to check, must be presumed to have known that at the material time, James Kow Yuen Wah was not a director of the first appellant and was, therefore, not authorized to sign P7 on the company’s behalf.’’

 

(emphasis added);

 

(b) the Court of Appeal decided as follows in Tan See King, at p. 288

 

“On the particular facts of this case, we are satisfied that this registration of the earlier debentures with the Companies Commission sufficed to serve as sufficient notice of the existence of the fixed charge in favour of the respondent”

 

(emphasis added);

 

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(c) in MIMB (No 2), at p. 46, Abdul Malik Ishak J (as His Lordship then was) held as follows –

 

“As I said the debenture dated 23 October 1993 was duly registered with the registrar of companies. There was no reason as to why the 2nd defendant should not have notice about the charge under the Companies Act 1965 in favour of the plaintiff.

 

There was no evidence emanating from the 2nd defendant to show that they had made a search with the registrar of companies. On perusal of encl. 17, para. 3(c) thereof, it can safely be inferred that at all material times the 2nd defendant knew that the holder of the prior registered charge was Bank Bumiputra Malaysia Berhad [“BBMB”].

 

Now, if the 2nd defendant knew that BBMB was the prior registered charge holders, then the 2nd defendant should also have notice of the fourth charge to the plaintiff. It is reasonable to assume that the 2nd defendant had made a search with the registrar of companies in order to be privy to the information that there was a charge to BBMB. As a corollary thereto and by way of an argument, the search with the registrar of companies would also reveal the existence of the fourth charge to the plaintiff.

 

(emphasis added); and

 

(d) Nallini Pathmanathan J (as Her Ladyship then was) held as follows in CIMB Bank Bhd, at paragraph 44 –

 

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“44. … The effect of registration under section 108 of the Companies Act 1965 is to notify the world at large of the existence of the Plaintiff’s security in the assets of Asia Petroleum.”

 

(emphasis added).

 

166. Section 11(2)(a) CA allows any person, including the Defendants, on payment of prescribed fee, to inspect any document lodged with SSM. Under s 11(2)(c) CA, any person may request for a copy or extract of any document which he or she is entitled to inspect under s 11(2)(a) CA, to be given and certified by the ROC. Accordingly, the Defendants could have easily conducted a SSM search of the Ship Builder and consequently, could have obtained a copy of Form 34 of the 6 Debentures.

 

O5. Effect of s 115 CA

 

167. Section 115 CA reads as follows:

 

“s 115. Company to keep copies of charging instruments and

 

register of charges

 

(1) Every company shall cause the instrument creating

 

any charge requiring registration under this Division or a copy thereof to be kept at the registered office of the company but in the case of a series of debentures the keeping of a copy of one debenture of the series shall be sufficient for the purposes of this subsection.

 

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(2)

 

(3)

 

(3A)

 

(4)

 

Every company shall keep at the registered office of the company a register of charges and enter therein all charges specifically affecting property of the company and all floating charges on the undertaking or any property of the company, giving in each case a short description of the property charged, the amount of the charge and (except in the case of securities to bearer) the names of the persons entitled thereto.

 

The instruments or copies thereof and the register of charges kept in pursuance of this section shall be open to the inspection of any creditor or member of the company without fee and the register of charges shall also be open to the inspection of any other person on payment of such fee not exceeding two ringgit for each inspection as is fixed by the company.

 

Any person shall, on application to a company and on payment of a fee not exceeding one ringgit for every page or part thereof, be furnished with a copy of any instrument of charge or debenture kept by the company in pursuance of this section within three days of his making the application.

 

If default is made in complying with this section the company and every officer of the company who is in default shall be guilty of an offence against this Act.

 

Penalty: Two thousand ringgit. Default penalty .”

 

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(emphasis added)

 

168. It is to be noted that s 115(3A) CA has been inserted by the Companies (Amendment) (No. 2) Act 1992 (Act A836).

 

169. By virtue of s 115 CA, any person, including the Defendants –

 

(a) can inspect the “instrument creating the charge” and the “register of charges” kept in the Ship Builder’s registered office by paying a fee not exceeding RM2 for each inspection; and

 

(b) shall, on application to the Ship Builder and on payment of a fee not exceeding RM1 for every page, be entitled to be furnished with a copy of any instrument of charge and debenture kept in the Ship Builder’s registered office within 3 days of the application.

 

If the Ship Builder fails to comply with any request to inspect and to be furnished with copies of the instrument of charge and debenture, the Ship Builder and its officer “shall be guilty of an offence” under s 115(4) CA.

 

170. In this case, the Defendants did not attempt to inspect the 6 Debentures in the Ship Builder’s registered office pursuant to s 115(3) CA. Nor was there any application by the Defendants under s 115(3A) CA for the Ship Builder to furnish copies of the 6 Debentures to the Defendants.

 

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171. I wish to emphasise that any person proposing to enter into a business dealing with a company, should –

 

(a) conduct a SSM search of the company to ascertain whether any Form 34 has been filed by the company; and

 

(b) request to inspect and to be furnished with copies of the instrument of charge and debenture of the company, if any, as provided in s 115(3) and (3A) CA.

 

Failure to do all of the above may be detrimental to the person dealing with the company as case law may consider the person to have “notice” of any charge created by the company. In Covacich, at p. 506, Fisher J stated as follows:

 

“The immediate answer is the perhaps theoretical one that prospective creditors do have constructive notice of the hazards of automatic crystallisation. By inspecting a copy of the debenture at the Companies Office they can ascertain that a fixed charge over all the assets of the company will crystallise upon the occurrence of the events there stated. If in that knowledge they then choose to deal with the company without ensuring that none of those events has occurred, they do so at their peril ”

 

(emphasis added).

 

O6. 3rd Defendant’s “Wilful Blindness” and/or “Recklessness” in this case

 

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172. I am satisfied that the 3rd Defendant has wilfully shut its eyes to the obvious in this case. The 3rd Defendant’s Wilful Blindness is proven by the fact that before the 3rd Defendant’s execution of the Shipbuilding Contract on 6.3.2010, the 3rd Defendant did not –

 

(a) conduct a SSM search of the Ship Builder under s 11(2)(a) CA which would have easily revealed Form 34 of the 1st Debenture;

 

(b) inspect the “instrument creating the charge” and the “register of charges” kept in the Ship Builder’s registered office pursuant to s 115(3) CA; and

 

(c) apply under s 115(3A) CA for a copy of the instrument of charge and debenture kept in the Ship Builder’s registered office.

 

173. In addition or as an alternative to the 3rd Defendant’s Wilful Blindness,

 

I find that the 3rd Defendant has been guilty of Recklessness. SD3 admitted during cross-examination that the 3rd Defendant’s purchase of the Ship at the Sale Price of US$8.2 million, was a “valuable transaction” and yet recklessly, the 3rd Defendant did not appoint a competent Malaysian lawyer to advise the 3rd Defendant and to safeguard the 3rd Defendant’s interest before the 3rd Defendant entered into the Shipbuilding Contract.

 

174. I do not think I should apply “Knowledge of Circumstances” and “Duty to Inquire” in this case. I acknowledge that there may be circumstances

 

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which case law may consider a party to have “Knowledge of Circumstances” or “Duty to Inquire” but this is not the case here.

 

175. In view of the 3rd Defendant’s Wilful Blindness and/or Recklessness as explained above, the 3rd Defendant cannot rely on the Bona Fide Purchaser Exception in this case.

 

O7. Did 3rd Defendant act in good faith in this case?

 

176. This court finds that the 3rd Defendant is not able to discharge the legal burden to prove on a balance of probabilities that 3rd Defendant is a bona fide purchaser of the Ship. This finding is premised on the following reasons:

 

(a) the 3rd Defendant willingly and actively took part in the Circumvention Efforts which involved deception of MITI. Such a conduct by the 3rd Defendant is relevant under s 8(2) EA and negatives the 3rd Defendant’s bona fides. If STA applies to the Ship in this case (in Part L, this court finds that STA has no application here), the 3rd Defendant’s conduct would have constituted a criminal offence;

 

(b) the 3rd Defendant agreed in Clause 7 of Settlement Agreement, not to disclose the terms of the Settlement Agreement to court;

 

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(c) the 3rd Defendant was a party to the Impugned Agreements which constituted an undue preference under s 293(1) CA read with s 53(1) BA (please see the above Part J); and

 

(d) the 3rd Defendant executed the Agreement dated 12.7.2013 which had been nullified by s 223 CA (please see the above Part K).

 

P. 1st Defendant cannot rely on 2nd Bill of Sale

 

177. As explained in the above Part K, the 2nd Bill of Sale in the 1st Defendant’s favour is invalidated by s 223 CA. Furthermore, the 1st Defendant is a “trustee company” for the 3rd Defendant. If the 3rd Defendant cannot have priority to the Ship vis-à-vis the Bank, a fortiori the 1st Defendant cannot acquire lawful title to the Ship.

 

Q. Whether an adverse inference should be drawn against Defendants in this case?

 

178. In civil cases, generally, a defendant has no legal onus to prove his or her defence. Nonetheless, the court has a discretion to draw an adverse inference against a defendant for his or her failure to call a relevant witness to support the defence. This is clear from the following cases:

 

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(a) the Supreme Court’s judgment given by Hashim Yeop Sani CJ (Malaya) in Guthrie Sdn Bhd v Trans-Malaysian Leasing Corp

 

Bhd [1991] 1 MLJ 33, at 34-35;

 

(b) Haidar JCA’s (as His Lordship then was) judgment in the Court of Appeal case of Chan Yoke Lain v Pacific & Orient Insurance

 

Co Sdn Bhd [1999] 1 MLJ 303, at 308-309; and

 

(c) Gopal Sri Ram’s (as His Lordship then was) judgment in the Court of Appeal in Subry bin Hamid v Husaini bin Tan Sri Ikhwan

 

[2006] 5 AMR 644, at 652-653.

 

179. Dato’ Zulkifli is an important witness for the 3rd Defendant (not for the Plaintiffs) in respect of the following matters:

 

(a) SD2 testified that Dato’ Zulkifli informed SD2 that the 3rd Defendant had paid the full purchase price for the Ship;

 

(b) there was evidence, such as Dato’ Zulkifli’s Email dated 1.2.2011, that Dato’ Zulkifli had personally received cash payments from the 3rd Defendant. These cash payments were not reflected in the Ship Builder’s Bank Statements. Paragraph 30(v) of the Defence and Counterclaim pleaded that “At the request of [Dato’ Zulkifli], the 3rd Defendant acted in good faith, paid cash to [the Ship Builder] vide [Dato’ Zulkifli]”;

 

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(c) Dato’ Zulkifli signed the following agreements and documents involving the Defendants –

 

(i) the MOU;

 

(ii) the Settlement Agreement;

 

(iii) the 2nd Bill of Sale; and

 

(iv) the Agreement dated 12.7.2013; and

 

(d) according to SD3, SD4 and 2nd Defendant, Dato’ Zulkifli did not inform SD3, SD4 and the 2nd Defendant regarding the Debentures and the WU Petition.

 

180. I exercise my discretion under s 114(g) EA to draw an adverse inference against the Defendants for their failure to call Dato’ Zulkifli to testify in this case. This decision is based on the following reasons:

 

(a) as explained in the above Part O1, the 3rd Defendant has the legal onus to prove the application of the Bona Fide Purchaser Exception. Accordingly, the 3rd Defendant should have called Dato’ Zulkifli as a witness in this case so as to enable the 3rd Defendant to discharge this legal burden;

 

(b) it is clear from the aforesaid paragraph 179 that Dato’ Zulkifli is a material witness for the Defendants in this case; and

 

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(c) the Defendants have not adduced any evidence to explain why the Defendants cannot subpoena Dato’ Zulkifli in the same manner as the Defendants have subpoenaed SD2. In fact, the Defendants have not even applied for a subpoena for Dato’ Zulkifli to testify in this case! There is also no evidence that Dato’ Zulkifli has refused to be interviewed by the Defendants’ solicitors or have demonstrated his hostility towards the Defendants.

 

In view of the aforesaid reasons, this court is constrained to hold that there is suppression of Dato’ Zulkifli’s evidence by the Defendants as explained by the Supreme Court’s judgment given by Mohd. Azmi SCJ in Munusamy v Public Prosecutor [1987] 1 MLJ 492, at 493-494.

 

R. Should court order SP of Shipbuilding Contract?

 

181. Even if the 3rd Defendant is able to discharge the legal burden to prove on a balance of probabilities that the 3rd Defendant is a bona fide purchaser of the Ship for valuable consideration without Wilful Blindness and/or Recklessness, the 3rd Defendant still has the onus to persuade this court to exercise its discretion under s 21 SRA to order SP of the Shipbuilding Contract (SP Order).

 

182. The relevant part of section 21 SRA provides as follows:

 

“s 21(1). The jurisdiction to decree specific performance is discretionary, and the court is not bound to grant any

 

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such relief merely because it is lawful to do so; but the discretion of the court is not arbitrary but sound and reasonable, guided by judicial principles and capable of correction by a court of appeal.

 

(2) The following are cases in which the court may

 

properly exercise a discretion not to decree specific performance:

 

(a) where the circumstances under which the contract is made are such as to give the plaintiff an unfair advantage over the defendant, though there may be no fraud or misrepresentation on the plaintiff’s part; . . .”

 

(emphasis added).

 

183. In Saad Marwi v Chan Hwan Hua & Anor [2001] 3 CLJ 98, at 104

 

and 112, Gopal Sri Ram JCA (as His Lordship then was) delivered the following judgment in the Court of Appeal regarding s 21(2)(a) SRA:

 

“What comes across fairly clearly from the Indian cases is that in order for [s 21(2)(a) SRA] to bite, there must be some objective unfairness in the bargain struck between the parties; some oppression or victimisation to be garnered from the circumstances existing at the time the agreement is made.”

 

(emphasis added).

 

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184. I am not inclined to exercise my discretion under s 21(1) SRA to grant SP Order. In fact, there are grounds for this court to refuse to make the SP Order under s 21(2)(a) SRA. If the SP Order is granted, there will be “objective unfairness”, “oppression” and/or “victimisation” of the Bank as explained in Saad Marwi. This decision is supported by the following reasons:

 

(a) the Ship Builder’s Debt To The Bank amounted to RM732,481,943.08 as at 31.5.2013;

 

(b) the Bank in this case is a secured creditor which has registered 6 Debentures with SSM;

 

(c) the automatic crystallization clause in the 1st Debenture has been triggered by the execution of the Shipbuilding Contract. To grant the SP Order for the Shipbuilding Contract is to nullify the effect of the automatic crystallization clause and this in turn, will defeat the security interest of the Bank in the assets of the Ship Builder;

 

(d) the 3rd Defendant has been involved in the Impugned Agreements and the Ship Builder’s Disposition which have been nullified by ss 293(1) and 233 CA respectively;

 

(e) as elaborated above, the 3rd Defendant has failed to prove on a balance of probabilities that the 3rd Defendant has paid the full Sale Price to the Ship Builder;

 

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(f) the 3rd Defendant is guilty of Wilful Blindness and/or Recklessness whereby case law considers the 3rd Defendant to have “notice” or “knowledge” of the Bank’s earlier charge over the assets of the Ship Builder;

 

(g) for reasons given above, the 3rd Defendant is not a bona fide purchaser of the Ship in this case;

 

(h) there is suppression of Dato’ Zulkifli’s evidence in this case by the Defendants; and

 

(i) after the presentation of the WU Petition, Gazette Notification (concerning the WU Petition), 2 Newspaper Advertisements (regarding the WU Petition), Messrs Skrine’s Letter dated 20.3.2013 and the appointment of the R&M (on 3.4.2013), the Ship Builder and the 1st and 3rd Defendants entered into the Agreement dated 12.7.2013. It is my finding of fact that the Agreement dated 12.7.2013 is a sham with the sole intention to deprive the Bank of its security in the Ship.

 

In The Enfield; Barbury (Panama) SA & Anor v Crossoceanic Navigational Services Pte Ltd [1982] 2 MLJ 106, at 108, the Singapore Court of Appeal in a judgment given by Lai Kew Chai J, held that a purported sale of a ship in that case was a device and a sham to defraud lawful claimants so that the ship as a security was put out of the reach of those claimants.

 

S. Summary of court’s decision

 

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185. A summary of the court’s decision is as follows:

 

(a) the Ship did not form part of the first fixed charge under Clause 3.1(a)(i) of 1st Debenture but fell within the scope of a first floating charge under Clause 3.1(b) of 1st Debenture;

 

(b) the automatic crystallization clause in Clause 4.3 of 1st Debenture was valid and had been triggered when the Ship Builder entered into the Shipbuilding Contract on 6.3.2010 without the Bank’s prior written consent. Upon the automatic crystallization of the first floating charge under the 1st Debenture on 6.3.2010, the Ship became subject to a fixed charge in favour of the Bank;

 

(c) once the Ship is subject to a fixed charge in the Bank’s favour, the 3rd Defendant and any other party, including the 1st Defendant, could not lawfully obtain any title or interest in the Ship without paying the Ship Builder’s secured debt due to the Bank;

 

(d) the Bank’s priority to the Ship is not postponed by –

 

(i) the Register Book, Certificate of Malaysian Registry, 1st and 2nd Bills of Sale; and

 

(ii) the Bank’s failure to register the 6 Debentures with the Registrar of Malaysian Ships;

 

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(e) the Impugned Agreements (as defined above) shall be void under s 293(1) CA read with s 53(1) BA for contravening the Undue Preference Rule;

 

(f) the Ship Builder’s Disposition (as described above) shall be void under s 223 CA and this court cannot validate the Ship Builder’s Disposition pursuant to s 223 CA;

 

(g) STA does not apply to the Ship in this case;

 

(h) equitable doctrines do not apply in this case to resolve the Priority Issue when there has been an automatic crystallization of the first floating charge under the 1st Debenture on 6.3.2010; and

 

(i) assuming that the equitable doctrine of bona fide purchaser for valuable consideration without notice of the Bank’s charge applies in this case –

 

(i) the 3rd Defendant has failed to discharge the legal burden to prove on a balance of probabilities that the 3rd Defendant is a bona fide purchaser of the Ship for valuable consideration without notice of the Bank’s charge;

 

(ii) the 1st Defendant cannot rely on 2nd Bill of Sale which is invalidated by s 223 CA;

 

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(iii) an adverse inference under s 114(g) EA should be made against the Defendants for failing to call Dato’ Zulkifli to testify in this case; and

 

(iv) on the facts in this case, the court should not exercise its discretion to order SP of the Shipbuilding Contract under s 21 SRA.

 

T. Court’s orders

 

186. Based on the above reasons, the following orders are made:

 

(a) the Plaintiffs’ Suit is allowed with costs;

 

(b) the Defendants’ non-monetary counterclaim is dismissed with costs;

 

(c) the 2nd Bill of Sale is declared null and void and ineffective in transferring any right, interest and share in the Ship to the 1st Defendant;

 

(d) the registration and transfer of the Ship from the Ship Builder to the 1st Defendant be cancelled and be declared as null and void;

 

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(e) the Ship shall be re-transferred and re-registered in the name of the Ship Builder within 14 days from the date of the oral judgment on 30.3.2015;

 

(f) the Defendants shall within 14 days from the date of the oral judgment on 30.3.2015, deliver to the R&M the original copy of the Certificate of Malaysian Registry and the 2nd Bill of Sale together with all other original certificates and documents in relation thereto; and

 

(g) the Registrar of Malaysian Ships be directed to do that is necessary to give effect to this judgment.

 

WONG KIAN KHEONG

 

Judicial Commissioner High Court (Commercial Division) Kuala Lumpur

 

DATE: 23 JUNE 2015

 

Plaintiffs’ Counsel: Ms. SM Yoong, Mr. KK Chan, Ms. SS Tan & Mr. Chung Winnou

 

(Messrs Shook Lin & Bok)

 

Defendants’ Counsel: Mr. Mohan Das Nair, Puan Rahayu binti Abd Ghani, Ms. Ang Lay Ling &

 

Cik Rafiqah binti Abdul Razak (Messrs Rahayu Partnership)

 

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