The Federal Court in Bank Kerjasama Rakyat Malaysia Berhad v GM Healthcare Sdn Bhd & 5 Ors recently re-affirmed the principle in Mae Perkayuan on the issue whether a breach of a facility agreement by a bank exonerates the principal borrower and guarantors’ liabilities for monies due and outstanding under the loan to the bank.
The Bank granted a financing facility totalling RM64,130,000 to the 1st Respondent, GM Healthcare Sdn Bhd (“GMH”) for the purpose of a hospital construction project, which was guaranteed by the 3rd to 6th Respondents. The project was awarded by Jabatan Kerja Raya (“JKR”) to Sunshine Fleet (“SF”), the Main Contractor. SF in turn appointed GMH as its sub-contractor for the said construction.
As additional security, the Bank obtained a third party assignment of the contract proceeds from SF to pay the contract proceeds into a project account with the Bank. The Bank would then deduct an amount agreed to by GMH towards repayment of the financing facility and release the surplus/balance proceeds to GMH.
Disputes arose between GMH and SF as to the entitlement of the surplus/balance proceeds for interim certificates no. 24 onwards. As the Bank was not privy to the disputes, the Bank notified parties that it would not be involved in any dispute involving
GMH and SF but stated that it would disburse monies directly to GMH’s sub-contractors for interim certificates no. 24 to 28 and hold the surplus until the dispute was resolved or a court order obtained.
SF then commenced proceedings and sought a Mareva injuction against GMH and the Bank, restraining them from dealing with any of the surplus amounts from the contract proceeds. The Bank took the position that it had no choice but to withhold
payments, including those to third party sub-contractors, vendors and suppliers. GMH disputed and maintained that by failing to make those payments, the Bank had breached the financing facilities.
SF took the position that GMH had caused the project to stall and sought to terminate the sub-contract on the grounds that the Bank was no longer financing the project. SF also brought a claim against the Bank, claiming that the Bank failed to pay the surplus amounts to SF but instead paid the same to GMH.
GMH on the other hand, counterclaimed against the Bank for breach of its financing facilities by failing to release the surplus funds to its third party sub-contractors, vendors and suppliers.
By way of a recovery action, the Bank counterclaimed against GMH and the Guarantors for the outstanding balance under the financing facility granted to GMH.
The Guarantors also brought a counterclaim against the Bank, inter-alia alleging that the Bank had breached an agreement between SF and the Bank relating to the treatment of the contract proceeds.
At the High Court, the trial judge allowed GMH’s and the Guarantors’ respective counterclaims and dismissed the Bank’s counterclaim. The trial judge found that:
(a) the Bank had breached the financing facility agreement as it ought to have released the monies to the third party sub-contractors, vendors and suppliers notwithstanding the Mareva application; and
(b) the said breach of the financing facility agreement exonerated the primary debtor, i.e. GMH and the guarantors from repaying any part of the remaining outstanding debt due and owing to the Bank.
The Bank’s appeal to the Court of Appeal was dismissed.
Subsequently, the Bank sought leave to appeal from the Federal Court. The Federal Court granted leave for 6 questions of law to be determined.
In relation to the 1st question, i.e.
whether the breach of a facility agreement exonerates the principal borrower and thereby guarantors from recovery of monies disbursed to the borrower by way of a loan and remaining due and outstanding to the Bank?
the Federal Court held that the decisions of the High Court and Court of Appeal are flawed as:
(a) The effect of the High Court and Court of Appeal’s decision on the banking and financing industry would be that loans would become irrecoverable simply by reason of an allegation of a breach made by the borrower;
(b) There is no proposition of law that underlies such a legal conclusion;
(c) There is no clause in the financing facility agreement that allows for such a proposition to be made;
(d) There is no such proposition in law in the Contracts Act 1950;
(e) The correct approach is as set out by the Supreme Court in BBMB Kuala Terengganu v Mae Perkayuan Sdn Bhd & Anor [1993] 2 CLJ 495 wherein the Supreme Court held that the bank’s claim for recovery of loan was entirely a separate matter from the borrower’s claim for damages against the bank and that there is no ground in law for exempting the borrower from liability to repay the loan.
The Federal Court’s decision reaffirms the trite legal principle that a breach of the financing facility agreement by the bank results in a claim in damages accruing to the borrower, which is separate and distinct from the borrower’s obligation to repay monies owed to the bank.
As such, a borrower is not exonerated from its liabilities to repay the loan in the event of a breach by the bank.
