Federal Court, Malaysia

Lee Hun Hoe Ag LP, Ali Ag CJ (Malaya), Raja Azlan Shah FJ

19 May 1977

KEYWORDS

Bill of Lading – Pledge by buyer to bank – Third party creditor obtaining freezing injunction over assets of the buyer, namely the goods in transit – Bank’s rights for immediate possession

FACTS AND DECISION

In this case, the bank was holding the bill of lading issued to its order. A third party secured a judgment against the buyer and obtained an injunction to freeze the assets of the buyer, namely the cargo under the bill still in transit at that time, to satisfy the judgment debt. The bank applied for leave (Permission) to intervene into the injunction proceedings with a view to an order to enable the bank to present the bill and collect the cargo.

The High Court refused to allow the bank to present the bill and receive the cargo (unless the bank furnishes a bank guarantee for a certain amount). It directed the bank to file interpleader proceedings, with the bank as the plaintiff (Claimant) and the third party as the defendant. The bank did not furnish the bank guarantee and appealed to the Federal Court. In the meantime, goods were sold by sheriff and proceeds deposited into the court.

The Federal Court upheld the decision, whilst by that time the goods were already sold by the sheriff and hence that part of the order was spent.

OBSERVATION

This decision will not be commercially welcomed, as it dilutes the function of the bill of lading as conferring right to possession, ability to pledge it in return for financing in international trade and trade certainty related to bills of lading. When ordering interpleader proceedings, the court did not sufficiently consider the bank’s own interest in the goods as the financier, as opposed to any interest of the third party and the buyer, as well as the bank’s immediate right to the goods. The court also did not sufficiently consider that the goods were pledged to the bank and the interest of any judgment creditor over the assets of the buyer was subject to the bank’s interest in these goods as a pledgee and equitable chargee for value. It is dubious whether this decision represents the right law.

In some way, there was not much choice of utility to the Federal Court, since the essential part of the High Court order as to entitlement of the bank to immediate possession of the goods were already spent and the proceeds of sale was safe in the court. That may be the reason the Federal Court was inclined to maintain the interim order made by the High Court even if it was wrongly made. The option of applying for summary judgement was always open the the bank once the interpleader proceedings have commenced.

The decision of the Privy Council in Official Assignee of Madras v Mercantile Bank of India Ltd is to be preferred to this, in which the buyer had pledged the document of title, namely railway receipts, to the bank and became insolvent while the goods were in transit. The Privy Council held that the bank was the pledgee and equitable chargee of the goods, the insolvency administrator merely stood in the shoes of the borrowers, he was not entitled to the goods or their proceeds, the goods or their proceeds having been pledged were not divisible among the creditors.

Overview by ARUN KASI