Pembinaan Lagenda Unggul Sdn Bhd (Dalam Penggulungan Voluntari Pemiutang-Pemiutang) v Geohan Sdn Bhd & Another Appeal (W-02(IM)(NCC)-887-05/2016) (Court of Appeal)
For the Appellants: H Y Chong (Wilson Ho and Muhammad Iqram with him); Messrs. Azman Davidson & Co.
For the Respondents: Rohan Arasoo (Harold Tan Kok Leng with him); Messrs. Harold & Lam Partnership
The facts in both appeals are similar. Pembinaan Lagenda Unggul Sdn Bhd (the appellant in both appeals) has engaged the sub-contractors, namely Geohan Sdn Bhd and SK M&E Bersekutu Sdn Bhd (respondents in these appeals respectively) to carry out some works. The sub-contractors completed their works and a certificate of practical completion (CPC) has been issued by the architect. Both the sub-contracts provide a clause (which is under Clause 16.3) for deduction and release of the retention sum. Despite the lapse of defects liability period (DLP) and legal demands from the sub-contractors, the main contractor neglected or failed to release the retention sum. Thereafter, the sub-contractors received a notice of meeting of creditors.
- The Court of Appeal held that a trust cannot be implied in law in the absence of an express clause in the contract creating a trust and manifesting an intention of the parties to create a trust. It is not sufficient to infer a subsistence of a trust from the surrounding circumstances and the conduct of the parties.
- The Court held that the word ‘deduction’ does not give rise to the manifestation of the intention of the parties to create a trust in relation to the retention sum as the purpose of deduction the retention monies is to provide security to the employer for the performance of the contractor’s obligation. Also to note that in this case there is no correspondence or negotiation or agreement between the parties or the monies have been set aside to the effect that the retention monies would be treated as a trust fund.
- It is a matter of construction of contract. The Court held that if there is an express clause in the contract to the effect of a trust and it is undisputable that there is a contractual obligation on the part of the main contractor to set aside the retention sum. The clauses in the building contract only create a legal obligation on the part of the contractor to retain the monies and failure to do so would only amounts to a default on his part, i.e. a breach of a condition of the contract. The remedies would be for liquidated damages, i.e. the retention sum.
- The failure to release the retention sum only gives rise to a debt due by the main contractors to the sub-contractors. A debt is a chose in action, does not confer any beneficial right but only a right to recover such debt, i.e. a right in personam and not a right in rem which only a trust can confer such beneficial interest [para 116].
- There is no identifiable assets that were impressed with the trusts applicable to the retention sum and there is a lack of segregation of the retention sum and in such situation the 3 elements for a trust to exist were not fulfilled. Such failure would only amount to a breach of contractual obligation by main contractor to create a trust. The remedy lies in damages.
- The absence of a trust does not entitle the sub-contractors the priority in preference to other unsecured creditors. To hold otherwise would run awry of the pari passu principle which is the cornerstone of insolvency law. Monies in the general account more properly found to be general assets beneficially belong to the main contractors.
- The judge has erred in concluding that “he who first has the strongest right” as it has no application in the case of insolvency where pari passu principle is applied.
- Leave is not granted under section 263(2) of the Companies Act 1965 to sub-contractors to commence proceedings against the contractor as the sub-contractors’ claims for the retention sums are clear and do not warrant adjudication by way of CIPAA or arbitration as they are seeking a remedy which can be dealt in the course of winding up.