Commercial and Common Sense: Federal Court Clarifies the Approach in Determining Whether a Contract Contravened the Law

In Maple Amalgamated Sdn Bhd and Anor v Bank Pertanian Malaysia Berhad Civil Appeal No. 02(f)-54-09/2020(A) (“Maple Amalgamated”), the Federal Court affirmed the legality of a Bai Bithaman Ajil (“BBA”) agreement. The Apex Court reasoned that the BBA agreement did not contravene Section 214A of the National Land Code’s (“NLC”) prohibition on unauthorised transfer of Estate Land without approval from the Estate Land Board. The BBA agreement did not lead to an actual transfer of proprietorship but merely served as a means to facilitate the BBA financing mechanism.

In Maple Amalgamated, an appeal was lodged against the legality of a BBA agreement for allegedly contravening Section 214A of the NLC. The provision and its relevant sub-sections are reproduced below:

(1) Notwithstanding anything contained in this Act, no estate land is capable of being transferred, conveyed or disposed of in any manner whatsoever unless approval of such transfer, conveyance or disposal has first been obtained from the Estate Land Board (hereinafter referred to as “the Board”) established under subsection (3)

…

(10A) (a) Any person who transfers, conveys or disposes of or attempts to transfer, convey or dispose of in any manner whatsoever, any estate land in contravention of subsection (1), commits an offence and shall, on conviction, be liable to imprisonment for a term of not more than five years or to a fine not less than one hundred thousand ringgit and not more than one million ringgit, or to both.

BRIEF FACTS

The case centred on a BBA agreement that involved two Agreements executed simultaneously between the 1^st Appellant (“Maple Amalgamated”) and the Respondent (“Bank Pertanian”). First, the Asset Purchase Agreement dated 24 June 2008 where the Respondent purchased the Estate Land from Maple Amalgamated priced at RM48,000,000.00. Second, the Asset Sale Agreement similarly dated where Maple Amalgamated repurchased the Estate Land priced at RM81,088,810.32. This payment would be completed on an instalment basis with the 2^nd Appellant acting as guarantor.

Maple Amalgamated defaulted on the Asset Sale Agreement which led to termination by the Bank Pertanian. Thus began a series of suits initiated by Bank Pertanian seeking the monies owed. The present appeal arises from the fourth suit filed by Maple Amalgamated for a declaration that the BBA agreement is null and void for illegality for breach of Section 214A of the NLC.

At the High Court, Maple Amalgamated’s suit was dismissed. The High Court found that the BBA agreement involving Estate Land as security does not contravene Section 214A and was therefore not void for illegality. Moreover, the BBA agreement did not fall within the prohibition of ‘transfer, convey or dispose of’ in Section 214A. This was affirmed by the Court of Appeal which held that BBA transactions are well established and judicially endorsed in Malaysia. The impugned BBA transaction did not create any effective conveyance or disposal of the Estate Land.

Hence, the present appeal to the Federal Court on one question of law, that is “whether an unconditional agreement for the sale and purchase of an estate land by way of asset purchase agreement and asset sale agreement (‘Asset Sale & Purchase Agreements’) pursuant to Bai Bithaman Ajil financing is in breach of section 214A of the National Land Code 1965 when no prior approval is obtained from the Estate Land Board before entering into the said Asset Sale & Purchase Agreements?”

In answering the above, the Federal Court broke down the question into 4 issues:

1. Does section 214A of the NLC apply to the BBA agreement?

2. If section 214A applies, is the BBA agreement void for illegality?

3. If the BBA agreement is void for illegality, are Maple Amalgamated precluded from raising this issue by reason of the res judicata principle?

4. If the BBA agreement is void, what is to be the appropriate remedy? 

SECTION 214A’S APPLICABILITY TO THE BBA AGREEMENT

Firstly, the Apex Court clarified the ratio decidendi of its prior ruling in Gula Perak Bhd v Datuk Lim Sue Beng & other appeals [2019] 1 CLJ 153 (‘Gula Perak’). The legislative intent behind the framework of Section 214A of the NLC was to control and prevent the fragmentation of Estate Land resulting from unregulated transfer, conveyance, or disposal thereof. Hence, for a contractual transaction to be void for illegality under Section 214A, it must be an unapproved transfer, conveyance, or disposal of Estate Land in any manner whatsoever that results in fragmentation of said land. The mere existence of an Estate Land-related agreement that appears to infringe Section 214A is not sufficient to render it void for illegality.

Furthermore, the Federal Court cited the interpretive rule of noscitur a sociis and opined that the words ‘transfer, convey or dispose of’ in Section 214 of the NLC merely serve to affirm the legislative intent to prevent fragmentation of Estate Land in any possible way. They do not, however, bar a transaction such as the BBA agreement from being executed. Thus, in the present case, the Federal Court ruled that Section 214A is inapplicable to the BBA agreement as there was no actual transfer of Estate Land ownership for the Asset Purchase Agreement.

The Federal Court also referred to Dato' Haji Nik Mahmud Bin Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ 393 where a BBA transaction involving a similar purchase and repurchase mechanism for Malay Reserve Land was upheld as valid. The crucial factor to consider is whether the parties in the BBA transaction intended to transfer proprietorship of the land. In Maple Amalgamated, the absence of this intention was evident by the lack of any follow-up measures or steps taken by Maple Amalgamated or Bank Pertanian to transfer the land.

Instead, Bank Pertanian’s ‘purchase’ of the Estate Land was a mere conduit to carry out the BBA agreement. At the same date of the ‘purchase’, the Estate Land was ‘repurchased’ by Maple Amalgamated on the same date. Thus, the parties never intended to actually transfer proprietorship over the Estate Land from Maple Amalgamated. Bank Pertanian also did not, either under law or equity, come to own the Estate Land in the process of the BBA agreement.

A COMMON SENSE APPROACH TO ILLEGALITY

With Section 214A of the NLC inapplicable to the BBA agreement, the question of illegality became redundant. Notwithstanding this, the Federal Court clarified the preferred judicial approach to illegality in contract law under Section 24’s paragraphs (a) and (b) of the Contracts Act 1950 and upheld the dictum in St John’s Shipping Corporation v Joseph Rank Ltd [1956] 3 All ER 683 which advocated a cautious judicial approach – i.e. that the courts should be slow to strike down contracts for illegality.

The Federal Court also went on to clarify that recent developments in this area of law (including recent cases such as the Federal Court decision of PJD Regency Sdn Bhd v Tribunal Tuntutan Pembeli Rumah & Anor and Other Appeals [2021] 2 CLJ 441) suggests that in determining whether an agreement contravenes the law in the first place, due regard must be given to the object or purpose of the law concerned. Where two possible interpretations based on the law and facts exist, the interpretation which favours commercial sense, namely between one which avoids the finding of illegality, ought to be preferred. This approach, as can be seen in St John’s Shippping (supra) is based on the thought process that reasonable commercial people would have organised their affairs on the assumption that what they were doing was not illegal.

Thus, in Maple Amalgamated, the Federal Court applied the commercial soundness approach and held that the BBA agreement was a valid financial commercial transaction which was permitted by law. The 2 possible interpretations in applying Section 214A of the NLC would have been:

1. The BBA agreement was void for illegality as the Estate Land had been ‘disposed of’; or  

2. The BBA agreement was not void for illegality as its true nature contained no actual ‘transfer, conveyance or disposal’ of the Estate Land based on the nature of the BBA agreement itself and the intention of the parties when the BBA agreement was concluded.

Given that the second interpretation avoids the possibility of contravening the law under Section 214A of the NLC, the Federal Court preferred this approach in line with the ‘commercial sense’ approach.