Federal Court imposes meaningless “remedial” constructive trust.
The recent decision of the Federal Court in RHB Bank Berhad v Travelsight (M) Sdn Bhd & 3 Ors & Another Appeal (Civil Appeal No. 02(f)-36-07/2013 (W), 20 November 2014.) appears to be yet another instance of the recent worrying trend in which the apex court has struggled to deal with fundamental concepts of equity and trusts law.
The facts of Travelsight were as follows. Travelsight (M) Sdn Bhd (“Travelsight”) entered into a sale and purchase agreement with Atlas Corporation Sdn Bhd (“Atlas”) in 1996 for the purchase of a piece of property for a consideration of RM816,696.00 (“SPA”). Travelsight paid RM216,696.00 towards the purchase price, with the balance financed by Development and Commercial Bank Berhad (“DCCB”), later known as RHB Bank Berhad (“RHB”), pursuant to a loan facility granted by RHB to Travelsight. By a deed of assignment, Travelsight assigned its rights, interest and title in the property to DCCB as security.
In 2001, Travelsight and DCCB commenced an action against Atlas seeking rescission of the SPA on the ground of misrepresentation by Atlas. In November 2002, the High Court allowed the claim and ordered a rescission of the SPA and a refund of all monies paid and the application of the refund together with judgment interest towards redemption of the property (“the 2002 High Court Order”).
Atlas did not comply with the terms of the 2002 High Court Order. Atlas was wound up in 2004 by a third party creditor. The liquidators of Atlas refused to comply with the 2002 High Court Order, and took the position that Travelsight was merely an unsecured creditor, and that the liquidators were entitled to deal with the property as an unencumbered asset. In the meanwhile, Travelsight continued to make repayments to DCCB and later to RHB, and Travelsight ultimately repaid the loan facility in full in 2011.
In subsequent proceedings in the High Court between Travelsight and RHB with Atlas and its liquidators as interveners, the issues which ultimately came before the Federal Court were (i) following the rescission of the SPA, who had the beneficial title to the property, and (ii) whether Travelsight had a proprietary right to the refund of the purchase price which made it a “secured” creditor in Atlas’ liquidation.
On appeal to the Federal Court, the Federal Court interpreted the 2002 High Court Order to mean that as a condition to rescission of the SPA there must be restitutio in integrum, in other words restitution and counter-restitution by Travelsight and Atlas. Atlas or its liquidators were obliged to make restitution of the purchase price to Travelsight before it could obtain counter-restitution of the property. The Federal Court observed:–
… without restitution of the purchase price, the property would remain with Travelsight as purchaser and RHB as assignee. Given that the property remained with Travelsight as purchaser and RHB as assignee, but which property was lost only because of sale by the liquidators, it could not be contended, as did Atlas/liquidators, that Travelsight was an unsecured creditor.
The Federal Court then went on to observe:–
Rather, upon rescission of the purchase, it should be asked as to whether Travelsight had a proprietary right to the refund, as counter-restitution of the property was tied to the refund, and also as to whether Atlas/liquidators could assert ownership of the property without refund of the purchase price …
The Federal Court concluded that Travelsight had a proprietary right to the refund of the purchase price paid to Atlas. However, the basis of the proprietary right was not made entirely clear by the Federal Court. Curiously, although the Federal Court correctly observed that “upon rescission, beneficial title to property revests with the transferor”, the Federal Court appears to have regarded that the legal position with regards to beneficial title to money was somehow different, observing that “English case law is not as clear-cut.”
The Federal Court then appears to have imposed a constructive trust “in the remedial sense” over the property in favour of Travelsight. The Federal Court observed:-
… with rescission, the property would revert to Atlas, that is, by way of mutual restitution. That is the same as to say that without mutual restitution, the property would not revert to Atlas. Atlas had to refund the purchase price to take back the property. We are mindful that “a constructive trust [in the remedial sense] arises whenever the circumstances are such that it would be unconscionable of the owner of the legal title to assert his own beneficial interest and deny the beneficial interest of another. It arises from circumstances which are, ex hypothesi, known to the legal owner, for if they were not his conscience would not be affected” (“Restitution and Constructive Trusts” 1988 Law Quarterly Review Vol 114 page 399, per Millett L.J. at 400) …
It could be reasonably assumed that the circumstances that would have been known to Atlas and liquidators were: (i) the full purchase price had been paid, (ii) the property belonged to Travelsight as purchaser and RHB as assignee, (iii) the order dated 15.11.2002 validated rescission and ordered a refund of the purchase price, and, (iv) the purchase price had not been refunded. Given those latter circumstances that would have been known to them, it could be further assumed that Atlas and liquidators should have known that the property was not that of Atlas to deal and dispose as its own. Fairly said, the circumstances that would have been known to Atlas and liquidators were such that it would be unconscionable of Atlas and liquidators to treat the property as its unencumbered asset and deny the beneficial interest of Travelsight and RHB. The circumstances were such that gave rise to a constructive trust, in the remedial sense, which equity imposed on Atlas and liquidators, to deal not with the property as its beneficial property.
However, later in its judgment, the Federal Court went on to observe:-
However, in view of the order dated 15.11.2002 which had supplanted the provisions of the loan agreement that pertained to the property and its redemption, there should not have been that order by the courts below to RHB to reassign the property to Travelsight. Both Travelsight and RHB had agreed to rescission. When they applied for the order dated 15.11.2002, they explicitly agreed to relinquish their respective title and interest in the property in exchange for a refund of the purchase price. Upon the grant of the order dated 15.11.2002, the property was effectively relinquished by both Travelsight and RHB. Hence, as against RHB, when both had agreed to a refund in lieu of property, Travelsight could not later ask for a reassignment of the property that it, together with RHB, had willingly relinquished.
It comes to this. Travelsight had a proprietary right to the refund. But the refund was not paid. By right, the property remained with Travelsight as purchaser and RHB as assignee. But that the property had been sold. To pronounce that the property remained with Travelsight and RHB would only be idle …
From an examination of the Federal Court’s judgment, it appears that instead of relying on the “revesting” theory, the Federal Court held that Travelsight had a proprietary right to the refund on the following grounds:
(i) First, as Atlas failed to refund the purchase price to Travelsight, a “remedial” constructive trust arose in respect of the property in favour of Travelsight; and
(ii) Secondly, as Atlas failed to refund the purchase price to Travelsight, a resulting trust arose in respect of the property in favour of Travelsight.
The Federal Court appears to have held that Travelsight’s proprietary right to the refund was justified because notwithstanding the constructive trust and resulting trust over the property, Atlas and its liquidators had acted unconscionably in proceeding to sell the property despite failing to refund the purchase price to Travelsight.
The decision of the Federal Court in Travelsight is very controversial. There are fundamental problems with the analysis based on trusts.
- First, the authorities referred to by the Federal Court in its judgment do not in any way support its controversial view that the “remedial constructive trust is part of English law”. It remains the case that English law only recognizes institutional constructive trusts and not remedial constructive trusts.
- Secondly, despite repeatedly describing the constructive trust imposed in Travelsight as being “in the remedial sense”, the reasoning of the Federal Court appears instead to have been entirely consistent with the imposition of an institutional constructive trust.If it is correct that upon rescission of the SPA Travelsight nevertheless retained a beneficial interest in the property until Atlas had refunded the purchase price to Travelsight, this could only have been on the basis that on the execution of the contract and payment of the full purchase price, Atlas became a constructive trustee for Travelsight. (See e.g. M & J Frozen Food Sdn Bhd v Siland Sdn Bhd [1994] 1 MLJ 294, SC.) And there can be no doubt that such a constructive trust is institutional and not remedial in nature.
A remedial constructive trust is an order of the court granting, by way of remedy, a proprietary right to someone who, beforehand, had no proprietary right. (See e.g. Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812 at 830 – 831.) If Travelsight had a proprietary right (i.e. a beneficial interest) in the property prior to rescission, there was no basis whatsoever for recognizing and imposing a remedial constructive trust. In such circumstances, the Federal Court’s description of the constructive trust as being “in the remedial sense” simply makes no sense.
- Thirdly, the imposition of the “remedial” constructive trust by the Federal Court does not appear to even justify its conclusion that Travelsight had a proprietary right to refund. In this regard, the Federal Court’s reasoning on the “remedial” constructive trust appears at best to have been obiter dicta and at worst wholly circular.Upon rescission of the sale and purchase agreement, the beneficial title to the property revested in Atlas. However, the Federal Court held that the circumstances were such that (i) it would be unconscionable of Atlas and liquidators to treat the property as its unencumbered asset and deny the beneficial interest of Travelsight, and (ii) this gave rise to a constructive trust, in the remedial sense, which equity imposed on Atlas and liquidators, to deal not with the property as its beneficial property. Yet the Federal Court went on to hold that Travelsight had “relinquished” its title and interest in the property in exchange for a refund of the purchase price when the High Court ordered rescission in 2002, and that it would be “idle” to pronounce that the property remained with Travelsight. In the ultimate analysis, the imposition of the remedial constructive trust on the facts of the case appears to have been a wholly meaningless exercise.
- It is submitted that Travelsight’s proprietary right to refund of the purchase price could be justified simply on the basis that, upon the rescission of the SPA between Travelsight and Atlas, the beneficial title to the purchase price revested retrospectively in Travelsight. Accordingly, Travelsight’s claim against Atlas for the refund of the purchase price would have therefore been a proprietary claim, and this was sufficient to give Travelsight priority over the unsecured creditors in Atlas’ liquidation. There was simply no need to resort to the doctrine of constructive trusts or resulting trusts, let alone recognise a remedial constructive trust under Malaysian law, in order to arrive at a just result on the facts of the Travelsight case.
The Federal Court’s reasoning in Travelsight in relation to the doctrine of “remedial” constructive trusts appears to have been wholly obiter and unnecessary to its decision. As such, it should be treated with great caution. The imposition of a “remedial” constructive trust so as to create proprietary rights where none existed before has severe legal and financial consequences, especially in the commercial world. When one recalls the well-known maxim that “equity does not act in vain”, it can be better appreciated that the purported imposition of the “remedial” constructive trust” by the Federal Court was in reality a case of much ado about nothing.