High Court of Malaya holds subsequent side-deal does not defeat bank-assignee’s rights and interests in property

25 February 2021

Tan Sri Dato’ Sri Ramasamy a/l Muthusamy v Alliance Bank Malaysia Bhd & Anor [2020] 12 MLJ 500

In Tan Sri Dato’ Sri Ramasamy a/l Muthusamy v Alliance Bank Malaysia Bhd & Anor, a property development company (“IRDK”) had by a sale and purchase agreement agreed to sell a five-storey property (“Property”) to a buyer (“Uthama”). Uthama obtained a loan from Alliance Bank Malaysia Bhd (“Defendant”) to part-finance the purchase and in consideration for the loan, executed a deed of assignment absolutely assigning the Property to the Defendant. The deed, inter alia, precluded Uthama from dealing with the Property in any manner without the Defendant’s prior consent and also provided that if Uthama defaulted in repaying the loan, the Defendant had the right and power to sell and assign the Property as the absolute unencumbered owner by way of public auction or private treaty. In return for receiving the loan sum from the Defendant, IRDK undertook to forward the duly executed memorandum of transfer and title for the Property to the Defendant.

Unbeknown to the Defendant, IRDK and Uthama subsequently entered into a side-deal which involved the granting of an interest-free loan from IRDK to Uthama’s company and in return, the execution of an irrevocable power of attorney (“PA”) by Uthama giving IRDK the absolute right to sell the Property if the loan was not repaid within six months. When Uthama defaulted under its loan agreement with the Defendant, the Property was put up for sale by way of public auction where the second defendant (“D2”) successfully bid for the Property. D2 filed proceedings in court to remove a private caveat entered by a director of IRDK (“Plaintiff”) on the Property and to compel IRDK to honour its undertaking to the Defendant to execute and forward the memorandum of transfer and the strata title to the Property. In response, the Plaintiff filed the instant originating summons (“OS”).

The issues before the High Court were:

  • Whether a developer can validly enter into a subsequent side-deal with a purchaser who had absolutely assigned all the purchaser’s rights to and interest in the property in favour of the end-financing bank who thereby disbursed the loan money to the developer as payment of the balance purchaser price and through such subsequent side-deal, restrict or prohibit the bank-assignee from selling the property by auction in the event of the purchaser-borrower’s default in the loan repayment; and
  • Whether a director of the developer can, by relying on the said side-deal and in the absence of any power of attorney by the developer to appoint him as its attorney, in the director’s own name sue the bank-assignee to stop the bank-assignee from selling the property by auction.

The High Court held as follows:

  • As the PA executed by Uthama was in favour of IRDK, the Plaintiff as the director of IRDK had no locus standi to file and maintain the OS in his personal capacity.
  • IRDK upon receiving the full purchase price for the Property, merely held the Property as a bare trustee for Uthama or his assignee or successor-in-title, as the case may be. Since Uthama had, for valid consideration, absolutely assigned the property to the Defendant, Uthama himself was also a constructive trustee holding the Property on trust for the Defendant and had no right to sell or deal with the Property. Any subsequent attempt by IRDK and Uthama to create any proprietary right to or interest in the Property without the prior consent of the Defendant would not defeat the rights and interest of the Defendant under the absolute assignment.
  • Both the auction under the loan agreement and deed of assignment and the proclamation of sale were valid in law. The Plaintiff had not proven on balance of probabilities that either he or IRDK had suffered any real loss as a result of the Defendant’s auction sale.