INTRODUCTION
Assignment is an effective instrument of security and is widely used by financial service providers as a form of security towards facilities provided to their customers.
There are two types of assignments. Legal assignment and Equitable assignment. A legal assignment must comply with Section 4(3) of the Civil Law Act 1956 wherein there are 3 requirements that shall be complied with. These 3 requirements are (a) the assignment must be in writing, (b) the assignment must be absolute and (c) there must be a written notice of the assignment to the obligor (the debtor). However, it has to be noted that the existence of the provision on legal assignments or statutory assignments does not negate the existence of equitable assignment.
In this article, we will deal with the issue on competing security or interest in a legal and equitable assignment in accordance with the rule propounded in Dearle v Hall (1828) 38 E.R. 475 (“Dearle v Hall”).
RULE IN DEARLE V HALL
The case of Dearle v Hall introduced a pivotal rule in the law of Equitable Assignments, fundamentally altering the way priority is determined between competing assignees of a same debt. The rule established that the first assignee that has given notice to the debtor or trustee holds priority towards the debt, regardless of the order in which the assignments were made, provided the first assignee had acted in good faith.
On the facts of the case, one Zachariah Brown had assigned an annuity to William Dearle and subsequently later on to Joseph Hall, who was unaware of the prior assignment given to William Dearle. Hall conducted inquiries but was not informed of any existing claims. The central issue was whether the first assignee (Dearle) or the second assignee (Hall) had priority.
The Court there held that priority between assignees of the same debt is not determined by the order of the assignments but by the date notice is given to the debtor or trustee. As Hall had given notice of his assignment first, he had priority, even though his assignment was made after Dearle’s. The Court’s ruling introduced a rule that the first assignee to notify the debtor or trustee takes precedence, provided they act in good faith. This is now known as the “Priority Rule”.
This rule is an exception to the general principle that equitable interests are prioritized based on the order they were created.[1] The determining factor is the date on which the debtor receives the notice and not when it was sent.[2] If however two assignees give notice on the same day, the earlier assignment shall takes precedence, and the law does not recognize fractions of a day for this purpose.[3]
The Priority Rule from Dearle v Hall originally applied to equitable assignments of equitable interests. However, it also extends to equitable assignments of legal choses in action, including debts.[4] Even if competing assignees has statutory assignment, the one who first gives notice to the debtor takes priority.[5] This rule applies despite the general principle that equitable interests are subordinate to any legal interests taken at a later time in good faith. Certain circumstances, such as contractual obligations or the nature of the charge, may prevent an assignee from giving notice, but the rule remains: priority is determined by who notifies the debtor first.[6]
The Priority Rule applies equally to equitable and statutory assignments: the first to notify the debtor has the right to collect and discharge the debt. The rationale behind this rule is to prevent fraud from multiple assignments and encourage timely notice. As intangible assets like debts cannot be physically possessed, providing notice is the legal equivalent.[7]
The rule is also considered logical and commercially sensible. If priorities were determined differently, debtors would need to investigate the existence of prior assignments every time they received notice, complicating the process.[8] Therefore, prompt notice ensures clarity in determining priority between competing assignees and protects the debtor from fraudulent claims.
Application of Dearle v Hall in Malaysia
In Public Finance Bhd v Scotch Leasing Sdn Bhd (in receivership) [1996] 2 MLJ 369 (“Public Finance Bhd“), the Federal Court referred to the Priority Rule from Dearle v Hall, which relates to the priority of assignments based on notice to the debtor. However, the court clarified that the rules of priority established in Dearle v Hall, which is primarily applied to land and equitable interests in land, should not be automatically applied to personal property (like book debts or movable property) without significant modifications.
The Federal Court distinguished the case of Dearle v Hall by emphasizing that the nemo dat rule (no one can give what they do not own) applied to personal property (subject to any modification under the common law or statute i.e. Sales of Goods Act 1957), and the principle of priority of notice was less relevant in the context of book debts. While the court acknowledged the Dearle v Hall principle, it did not form the basis of the decision, making any reference to Dearle v Hall more of an obiter dictum (a statement not essential to the decision, though binding) rather than the ratio decidendi.
Therefore, based on Public Finance Bhd, when dealing with the assignment of book debt, the principle of nemo dat is applicable in which the issues of competing claims or security over the debt is a non-issue as the subsequent assignment is not effective as the true owner of the debt has been assigned previously.
However, in Southern Pipe Industry (M) Sdn Bhd & Anor v Telekom Malaysia Bhd [2018] MLJU 1261 (“Southern Pipe“), the High Court dealt with an issue involving an equitable assignment of payment of contract proceeds. The central issue in this case is whether an effective notice has been given to Telekom for the payment to be assigned to Southern Pipe. In its judgment, the Court clarified that firstly an equitable assignment does not depend on notice to be effective. However, if no notice is given, as assignee is bound by any payments which the obligor may make to the assignor. In citing the rule in Dearle v Hall, the Court cited that a notice to the obligor will afford priority to an assignee over the earlier assignee who failed to give notice.
Therefore, it is clear a notice in an equitable assignment is crucial in matters of ensuring priority in conflicting security and assignment.
CONCLUSION
The Dearle v Hall rule establishes that priority between competing assignees is determined by the first to give notice to the debtor, regardless of when the assignment was made, provided the assignee acted in good faith. This principle prevents fraud and ensures clarity in competing claims over the same debt.
In Malaysia, while the rule has been referenced, its application is more nuanced. In Public Finance Bhd, the Court distinguished between personal property and land, favoring the nemo dat principle for book debts. However, in Southern Pipe, the Court reaffirmed that notice is essential in establishing priority among competing assignees, reinforcing the importance of timely notification in ensuring legal precedence.
If you have any questions or queries, please contact our Dispute Resolution Partner, Mr. Brandon Cheah (brandon@nzchambers.com), or our Dispute Resolution Senior Associate, Mr. Azrul Haziq Khirullah (azrul@nzchambers.com) or our Dispute Resolution Associate, Ms. Aireen Natasha Ab Wahab (aireen@nzchambers.com).
Authors:
- Brandon Cheah
- Azrul Haziq Khirullah
- Aireen Natasha
References:
[1] Mills S. & Ruddy N. (2020). Salinger on Factoring. Sweet Maxwell (page 173).
[2] Ibid, page 173.
[3] Ibid, page 173.
[4] Ibid, page 173
[5] Ibid, page 173.
[6] Ibid, page 174.
[7] Ibid, page 174.
[8] Ibid, page 174.