Judgment

Edgar Joseph Jr FCJ

1. This application is a sequel to our judgment in Co-operative Central Bank Ltd (In receivership) v Feyen Development Sdn Bhd [1995] 3 MLJ 313 (‘Feyen’) – which held that charge transactions under the National Land Code 1965 (‘the Code’) which breached s 133(1) of the Companies Act 1965 (‘the Act’) did not give rise to civil consequences – and the subsequent judgment of the Court of Appeal in Harta Empat Sdn Bhd v Koperasi Rakyat Bhd [1997] 1 MLJ 381 (‘Harta Empat’), which held to the contrary on the ground that that part of our judgment was mere obiter.

2. With respect, it is difficult to see how the criticism that this application by Feyen Development Sdn Bhd although couched in terms of a prayer for ‘clarification and rectification’ of our judgment in Feyen, is really a facade for inviting us to revisit Feyen and to reverse it having regard to Harta Empat, can be rebutted. Our reasons for this will appear later.

3. In Harta Empat, the Court of Appeal, whilst on the one hand appeared to be paying lip service to our judgment in Feyen, when it said (at p 384, per N.H. Chan JCA):

   The question whether s 133(1) of the Companies Act 1965 .... operates to invalidate a security provided by a company for a loan made to a director of the company by another person in contravention of the subsection or whether it merely prohibits the giving of such security on pain of incurring criminal liability is no longer justiciable, at least in this country, since the decision of the Federal Court in Co-operative Central Bank Ltd (In receivership) v Feyen Development Sdn Bhd [1995] 3 MLJ 313.

   then embarked on an attempt to debunk our judgment in Feyen in the following remarkable passages (at the same page): 

   The subsection [sub-s 133(1)] by itself does not invalidate the forbidden transactions, so that the company may incur civil liability for entering into them; see Feyen. However, before the company can be made liable, the transaction itself must be a valid and enforceable one. In the instant case, we are concerned with a charge under the National Land Code 1965 (‘the Code’) so that the question that arises is whether the provisions of the Code operate to invalidate the charge. Feyen did not refer to the provisions of the National Land Code when it considered the question of the validity of the two charge transactions in the case, nor did it discuss them. Therefore, any opinion expressed by Feyen on the validity of a charge must necessarily be obiter. [emphasis added]

4. The provisions of the Code which the Court of Appeal assumed that the Federal Court in Feyen had overlooked were ss 241(3)(a) and 301(c). Commenting on these provisions, the Court of Appeal said, inter alia, this (at p 386):

   Put shortly, a charge is subject to ‘any prohibition .... imposed by .... any.... written law for the time being in force’ (s 241(3)(a). The charge takes effect upon registration (s 243). Registration of the charge is obtained by presenting it to the registrar (s 292(1)(c)) but only if the charge is fit for registration (s 301), and the charge is fit for registration if para (c) of s 301 is satisfied, that is to say, ‘that the dealing which it effects is not contrary to any prohibition .... imposed by .... any .... written law for the time being in force (s 301(c)).

5. In conclusion, the Court of Appeal said this (at p 388):

   The upshot is this. Under the Code, the immovable property in the instant case could be charged but the charge was subject to any prohibition imposed by written law. Section 133(1) of the Act forbade the appellant company from providing the security for the loan made to its director by the respondent. The prohibition in s 133(1) had rendered the charge unfit for registration under s 301(c) of the Code. The charge is therefore invalid.

6. We are mindful of the fact that Harta Empat is the subject of a pending application for leave to appeal to the Federal Court, but counsel for Feyen, Mr. Hira Singh – who was also counsel for the successful chargor in Harta Empat – had expressly relied on the judgment of the Court of Appeal in Harta Empat as authority for the proposition that charge transactions under the Code which breached s 133(1) of the Act did give rise to civil consequences and, not to put too fine a point on it, his application now before us prays ‘for clarification and if necessary, rectification’ of our judgment in Feyen. [emphasis added] In these circumstances, whilst we are not at liberty to overrule Harta Empat, we are certainly at liberty to say whether having regard to the reasoning in Harta Empat, we are persuaded to depart from what we had said in Feyen. To put it another way, we are at liberty to say whether the decision in Harta Empat can stand with our decision in Feyen.

7. In the first place, we should like to deal with a point of wide ranging importance and this concerns the principle of stare decisis, which is a cornerstone of our system of jurisprudence.

8. In Harta Empat, the Court of Appeal in effect held that Feyen was not binding on it because it had overlooked certain provisions of the Code, to wit, ss 241(3) and 301(c). It was on the basis of this that the Court of Appeal relegated Feyen to mere obiter dicta. It is elementary that where, for example, a statute or a rule having statutory effect which would have affected the decision was not brought to the attention of the earlier court, the decision will have been given per incuriam (see the third exception, per Lord Green MR. in Young v Bristol Aeroplane Co Ltd [1944] 1 KB 718). On the other hand, obiter dictum is a mere chance remark by the court and is used in contradistinction to ratio decidendi – the rule of law for which a case is authority. Clearly, the Court of Appeal meant to say that our decision in Feyen was given per incuriam.

9. The question therefore arises: is it open to an intermediate court of appeal, such as the Court of Appeal in this country, to disregard a judgment of a final court of appeal such as the Federal Court on the ground that it was given per incuriam?

10. Our task in answering this question has been made considerably easier by the assistance derived from the remarks of Lord Hailsham in Cassell & Co Ltd v Broome [1972] AC 1027, which indicated the reaction of the House of Lords to the Court of Appeal’s refusal to follow a previous decision of the House on the ground that it had been given per incuriam.

11. Touching on the repercussions of the Court of Appeal advising judges of first instance to ignore decisions of the House of Lords, Lord Hailsham said this (at p 1054B–D):

    I am driven to the conclusion that when the Court of Appeal described the decision in Rookes v Barnard as decided ‘per incuriam’ or ‘unworkable’, they really only meant that they did not agree with it. But, in my view, even if this were not so, it is not open to the Court of Appeal to give gratuitous advice to judges of first instance to ignore decisions of the House of Lords in this way and, if it were open to the Court of Appeal to do so, it would be highly undesirable. The course taken would have put judges of first instance in an embarrassing position, as driving them to take sides in an unedifying dispute between the Court of Appeal or three members of it (for there is no guarantee that other Lord Justices would have followed them and no particular reason why they should) and the House of Lords. But, much worse than this, litigants would not have known where they stood. None could have reached finality short of the House of Lords and in the meantime, the task of their professional advisers of advising them either as to their rights, or as to the probable cost of obtaining or defending them, would have been, quite literally, impossible. Whatever the merits, chaos would have reigned until the dispute was settled, and, in legal matters, some degree of certainty is at least as valuable a part of justice as perfection.

    And in a famous passage (at p 1054D–E), Lord Hailsham concluded this part of the case by saying:

    The fact is, and I hope that it will never be necessary to say so again, that in the hierarchical system of courts which exists in this country, it is necessary for each lower tier, including the Court of Appeal, to accept loyally the decisions of the higher tiers. Where decisions manifestly conflict, the decision in Young v Bristol Aeroplane Co Ltd [1944] 1 KB 718 offers guidance to each tier in matters affecting its own decisions. It does not entitle it to question considered decisions in the upper tiers with the same freedom.

12. In our view, every word of what Lord Hailsham said regarding the status of judgments and relevance of precedent in the House of Lords, the circumstances, the duty of the Court of Appeal to accept loyally the decisions of the House of Lords and the chaotic consequences which would follow should the Court of Appeal fail in this duty apply with full force, mutatis mutandis, to this country and we adopt what his Lordship said. Clearly, the Court of Appeal in Harta Empat flew in the face of the principles enunciated by Lord Hailsham and we can only express the hope that it will not be necessary for the Federal Court hereafter to have to remind the Court of Appeal of those principles.

13. We now move on to consider whether the decision of this court in Feyen was given per incuriam.

14. During the argument before us in Feyen, counsel for the chargor had relied on s 241(3)(a) of the Code. Counsel for the chargee’s response to this was that if s 133(5) of the Act preserved the validity of the charges concerned, then s 241(3) of the Code – and we would add, by the same token, s 301(c) of the Code – would have no application. We considered that counsel for the chargee was plainly correct in this contention and that was why we had held that no ‘cause to the contrary’ within the meaning of s 256(3) of the Code had been shown.

15. By way of amplification, we would add that notwithstanding the breach of sub-s (1) of s 133 of the Act, having regard to the effect of the all-important sub-s (5) of s 133 as explained by us in Feyen, sub-s (1) of s 133 is neither a prohibition nor a limitation within the meaning of sub-s (3)(a) of s 241 or s 301(c) of the Code respectively. In the words of Gibbs CJ in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410:

    .... it is possible for a statute in terms to prohibit a contract and yet to provide expressly or impliedly, that the contract will be valid and enforceable.

16. This proposition is strikingly illustrated by the decision of the Judicial Committee of the Privy Council in Batu Pahat Bank Ltd v The Official Assignee [1933] MLJ 237, which is precisely in point.

17. In Batu Pahat Bank’s case, the Judicial Committee of the Privy Council was concerned with the question whether a breach of s 111(3) of the Companies Ordinance, which provided that no banking company shall lend any part of its funds on the security of its own shares, operated to invalidate the security or whether it merely prohibited the making of a loan on security under pain of incurring the specified penalties and liabilities.

18. In answering this question in favour of the appellant bank, their Lordships recognized that the crucial point turned upon the true construction of the section and went on to say this (at pp 238–239):

    Their Lordships can do no other than say that sub-s (4) means what it says, and that it deals with any loan made in contravention of the section, including, therefore, a loan by a banking company of part of its funds upon the security of its shares. If that event happens, sub-s (4) specifies the consequences, and they include a personal liability on directors and managers for ‘the payment of any portion of the amount lent which remains unpaid after deducting the amount realized on the securities’. This is a recognition by the subsection of two things, viz: (1) the continuance of the security on which the loan was made; and (2) the discharge of the debt pro tanto by the proceeds of its realization. In the face of this, it seems to their Lordships impossible to say that s 111(3) operates to invalidate a lien which would, apart from that subsection, be an effective lien.

19. It follows that both sub-s (3)(a) of s 241 and s 301(c) of the Code were utterly irrelevant to the issues which arose for decision in Feyen, and for that reason, were not even mentioned therein. It also follows that our judgment in Feyen on the point at issue was not given per incuriam. On the contrary, it was the judgment of the Court of Appeal in Harta Empat which was given per incuriam, for it entirely overlooked the provisions of sub-s (5) of s 133 of the Act which would have been fatal to its reasoning.

20. That, however, does not conclude our comments on Harta Empat. With respect, anyone reading the judgment of the Court of Appeal in Harta Empat should not be blamed if he is left with the distinct impression that it was an indirect attempt at resurrecting the decision in Che Wan Development Sdn Bhd v Co-operative Central Bank Bhd [1992] 2 MLJ 365 – a decision which had been expressly overruled in Feyen. For the avoidance of doubt, we have to point out that Che Wan, which had been interred by Feyen, remains interred – in other words, remains overruled.

21. For the various reasons stated, having carefully studied the judgment of the Court of Appeal in Harta Empat, we are not persuaded to depart from anything we had said in Feyen and so, even assuming for one moment that we have the power to rectify, there is nothing for us to rectify. In short, whilst we are not at liberty to overrule Harta Empat since it is the subject of a pending application for leave to appeal to the Federal Court, we are at liberty to say – and we do say – that in our view, the decision in Harta Empat, cannot stand with our decision in Feyen.

22. In the second place, we should like to deal with the contention of counsel for Feyen that the Federal Court in Feyen was mistaken when it treated the effect of a breach of s 133(1) of the Act on the validity of the charges under the Code as the sole question for decision when it was merely a preliminary question of law. It was argued that having held against the chargor on this point, the Federal Court should have remitted the proceedings to the High Court with a direction to hear and determine any other grounds the chargor might wish to advance for the purpose of establishing the existence of ‘cause to the contrary’ within the meaning of s 256(3) of the Code.

23. Having regard to the course which the proceedings took from first to last beginning in the High Court and ending on appeal before us – a clear outline of which appears in the affidavit of Mr. Selvathesan Jagasothy affirmed on 20 March 1997 – it was plain as a pikestaff that the question whether a breach of s 133(1) of the Act operates to invalidate the charges and loan transactions was not a preliminary point at all for it dealt with the whole subject matter of the action without the need for viva voce evidence.

24. To make this point clear, it will suffice if we quote with approval the following passages in that affidavit:

    As regards the defendant’s contention that Feyen only decided on a preliminary issue, I am advised by my solicitors and verily believe as follows: The appeal herein involved two originating summonses, namely, Originating Summons No 31–266–1986 and Originating Summons No 31–351–1988 filed by the plaintiff and a writ action, namely Civil Suit No 22–18–1991 filed by the defendant. The said originating summonses and the said writ action were consolidated and heard together as one action. None of the issues it is now raising were either pleaded or raised.  Prior to the hearing before the learned judge of the High Court, counsel for the defendant and the former counsel for the plaintiff entered into a statement of agreed facts and issues. Paragraph 11 states as follows: The sole preliminary issue before the High Court is to determine the effect of the breach of s 133 of the Companies Act 1965 and consequently the validity of the charges created and to make the necessary consequential orders. It is clear from this paragraph that the parties agreed that the validity of the charges depended solely on the determination of the effect of the breach of s 133.  Counsel for the defendant at paras 2 and 4 of his written submission (at p 72 of the appeal record) states as follows: (a) The chargor defendant has to show cause to the contrary under s 256(3) of the National Land Code 1965; the cause being that the charges created are invalid and void ab initio having been prohibited by statute: s 133 of the Companies Act 1965 that prohibits such a transaction. (b) In all these three consolidated actions – two charge actions and one suit – the parties are the same and the parties have produced agreed facts and issues dated 24 June 1993 and filed in court. Therefore, it is not necessary to take viva voce evidence. Further the learned judge of the High Court in his judgment also stated as follows:  In the three consolidated actions, the parties are the same and these parties have submitted the agreed facts and issues dated 24 June 1993 and filed in the court. Hence in this case there is no need to take oral evidence. The question of the validity of the charges was never dealt with by this court or for that matter by the parties as a preliminary issue. At no time during the appeal did the defendant refer to this question as being a preliminary issue and at no time did the defendant raise any objections to the remittance of the case to the High Court with a direction to grant the orders for sale, though the defendant had several opportunities to do so: (a) After delivering the judgment of the court on 28 September 1995, this court asked counsel present whether they had anything to say. Counsel for the defendant could have at that time informed the court, if he so believed, that s 133 was only a preliminary issue and that therefore the direction to the High Court to grant the orders for sale ought not to be made.  (b) On 5 December 1995, two copies of the draft orders were sent to the solicitors for the defendant for approval. The solicitors for the defendant did not at that time inform the solicitors for the plaintiff that they would be making an application to rectify the direction made by this court and that the finalization of the order ought to be stayed. The judgment in Feyen was delivered on 28 September 1995. The judgment in Harta Empat was delivered on 24 January 1997. The motion herein was filed on 13 February 1997. It has purportedly taken the defendant more than a year and three months to realize that the Federal Court’s decision was in respect of a preliminary issue only.  Prior to the hearing proper, the plaintiff had applied to set aside the statement of agreed facts and issues in order to raise matters outside of the same. The application was resisted by the defendant and the Federal Court had ruled in favour of the defendant holding that the parties are confined to the statement of agreed facts and issues. [emphasis added]

25. Furthermore, we would interpolate to remark, with respect, that the sequence of events traced in the affidavit aforesaid provides considerable justification for the criticism that the present application was inspired by the judgment of the Court of Appeal in Harta Empat and is clearly an attempt to invite us to re-visit Feyen and to reverse it in the light of Harta Empat.

26. We now move on to consider a further contention advanced by counsel for the chargor.

27. In the third place, it was contended that the Federal Court – having held against the chargor on the s 133(1) of the Act point – should have remitted the proceedings to the High Court at Seremban, with a direction to hear and determine any other grounds the chargor might wish to advance to show the existence of ‘cause to the contrary’ within the meaning of s 256(3) of the Code, and had it so directed, the chargor would have put forward the following further objections: 

    (a)	that the Federal Court in Feyen had no jurisdiction to direct the High Court to order the sale of the land held under EMR 655 Lot 1519, Mukim Ampangan, Town and District of Seremban, it being held under land office title; having regard to the provisions of s 260(2) of the Code which gives this jurisdiction to the land administrator. It was pointed out that it is only when there have been two unsuccessful attempts to sell land office land by public auction under the land administrator’s order that the land can be withdrawn from the sale and referred by the land administrator to the High Court, in which event, the High Court may substitute, for the order of the land administrator, an order for sale under s 256 of the Code (see s 265(2), (3)(a), (b) and (c) of the Code). It was said that in the present case, there had been neither an order for sale by the land administrator nor a reference by him to the High Court with the result that the Federal Court had no jurisdiction to make the remit to the High Court with the direction aforesaid;
    (b)	that the chargee had charged penalty interest; and
    (c)	that consequent to the decision of the High Court in favour of the chargor, the memorials relating to the charges concerned both in the issue documents of title and in the relevant register documents of title had been cancelled but after the chargee’s successful appeal from that decision to this court, the memorials had been restored, although there had been no order of this court authorizing the same.

28. As to ground (a), which raises a question of jurisdiction, all we need say is that it is perfectly baseless for it is flatly contradicted by a copy of the Order for Sale by the Land Administrator dated 24 June 1987 annexed to the affidavit of Mr. Selvathesan Jagasothy, an appointee of the chargee under reg 9(1) of the Essential (Protection of Depositors) Regulations 1986 by the Central Bank of Malaysia and the Reference by the Land Administrator to the High Court made pursuant to s 265(3)(b) of the Code, which appears at p 278 of the Record of Appeal. We note in passing that the jurisdiction point was not taken before the Judge in the court below and we have no doubt that had it been taken, it would have been given short shrift.

29. As to ground (b), which alleged that the chargee had charged penalty interest, the record of appeal provided showed that Mr. Selvathesan Jagasothy, the appointee of the chargee under reg 9(1)(b) of the Essential (Protection of Depositors) Regulations 1986, had gone on affidavit to deny this allegation, but even if the allegation were true, this would not amount to ‘cause to the contrary’ within the meaning of s 256(3) of the Code (see Low Lee Lian v Ban Hin Lee Bank Bhd [1997] 1 MLJ 77).

30. As to ground (c), which questions the validity of the restoration of the memorials relating to the charges concerned both on the issue documents of title and the relevant registers document of title, this submission is devoid of all substance. In allowing the appeal, this court had set aside the judgment of the High Court – that is to say, the whole of that judgment including the order directing cancellation of the memorials aforesaid. The parties were thus restored to the status quo ante, and there was thus clear authorization for the memorials concerned to be restored.

31. A final point is worth making. The High Court at Seremban will, without further ado – and in accordance with our directions appearing in the penultimate para of our judgment in Feyen (at p 330) – make the orders referred to therein. It goes without saying that the orders for sale of the charged lands to be made by the High Court shall provide for the sale to be by public auction, require the sale to be held on a date specified therein and specify the total amounts due to the chargee under the charges as at the date on which the orders for sale are made, in accordance with s 257(1)(a), (b) and (c) of the Code respectively.

32. It follows, therefore, that the sole question for decision before the High Court will be the total amounts due to the chargee under the charges as at the date on which the orders for sale are made and upon this question, the chargor Feyen shall have the opportunity of being heard.

33. In the result, for the reasons hereinbefore stated, we unanimously hold that this application is misconceived and must be, and is, dismissed with costs.

Judgment

Edgar Joseph Jr FCJ

(delivering the judgment of the court)

34. This appeal arises from proceedings by way of originating summonses in the High Court, Seremban, which raised the vexed question of whether there are any civil consequences which flow from a breach of s 133(1) of the Companies Act 1965 (‘the Act’), upon the validity of two loan and charge transactions registered under the National Land Code 1965 (‘the Code’).

35. To put matters in perspective, the provisions of the Act, which it would be convenient to reproduce are s 133(1), (4) and (5). The provisions read as follows:

    133.

    Loans to directors (1) A company (other than an exempt private company) shall not make a loan to a director of the company or of a company which by virtue of section 6 is deemed to be related to that company, or enter into any guarantee or provide any security in connection with a loan made to such a director by any other person but nothing in this section shall apply –  (a) subject to subsection (2), to anything done to provide such a director with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company;  (b) to anything done to provide such a director who is engaged in the full-time employment of the company or its holding company, as the case may be, with funds to meet expenditure incurred or to be incurred by him in purchasing or otherwise acquiring a home; or  (c) to any loan made to such a director who is engaged in the full-time employment of the company or its holding company, as the case may be, where the company has at a general meeting approved of a scheme for the making of loans to employees of the company and the loan is in accordance with that scheme.  (4) Where a company contravenes this section any director who authorizes the making of any loan, the entering into of any guarantee or the providing of any security contrary to this section shall be guilty of an offence against this Act.  Penalty: Ten thousand ringgit. (5) Nothing in this section shall operate to prevent the company from recovering the amount of any loan or amount for which it becomes liable under any guarantee entered into or in respect of any security given contrary to this section.

36. Touching on the background and effect of the Australian equivalent of the Malaysian s 133, being the Australian Companies Act 1981 s 234, Prof HAJ Ford in his book, Ford’s Principles of Corporations Laws (6th Ed), has this to say (at para 1525, pp 517–518):

    Companies legislation in s 232(2) [Malaysian s 132(1)] states the duty of good faith in very broad terms as a duty to act ‘honestly’. One aspect of that duty is to refrain from applying the company’s resources otherwise than for the benefit of the company as a whole. In companies legislation there are scattered measures on aspects of that duty. The various measures deal only with limited contexts (for example, s 232(5) dealing with improper use of company information) in which the duty exists. For such contexts the specific provisions emphasize the basic duty. That legislative emphasis is found in connection with a loan by a company to its director because such a transaction can readily waste a company’s resources. Section 234 regulates such loans but in addition to and not in derogation of other law. Presumably, that means that even if a loan is permitted by the legislation, the directors who sanction that loan must consider whether the transaction is for the benefit of the company and not prejudicial to the interests of its creditors. The legislation stems from a recommendation of the Cohen Committee in the United Kingdom who said that it was undesirable that a director should borrow from the company: if the director could offer good security, it would be no hardship to borrow elsewhere; if good security could not be offered, the director should not borrow from the company. In enacting a strict rule about loans to directors the legislature treats directors like trustees and forbids this form of self-dealing without any provision for the director to be absolved by showing that the particular loan was not prejudicial to the company. Section 234 forbids, subject to exceptions, a company making a loan to a director or certain other persons, bodies corporate or trusts related to a director. It also forbids the giving of a guarantee or the provision of security in connection with another lender’s loan to a director or related person or entity.

37. Bearing in mind the words of Prof Ford quoted above, we now embark upon a consideration of the vexed question of law, posed by the present appeal, to which we referred, at the outset.

38. For brevity and convenience, we shall refer to the appellant, the Co-operative Central Bank Ltd, which was the plaintiff in the court below, and the respondent, Feyen Development Sdn Bhd, which was the defendant in the court below, as ‘the chargee society’ and ‘the chargor company’, respectively, unless the context otherwise requires.

39. The essential facts, which led up to the litigation in which this appeal arises, may be taken in substance from the statement of agreed facts and issues, which was put in at the trial and may be stated thuswise:

    At all material times, the chargee society was registered as a co-operative society under the Co-operative Societies Act 1948, while the chargor company, was a privately incorporated company registered under the Act, although not a private exempt company as therein defined, and the person said to be the borrower was a certain Lim Kon Kwee (‘the borrower’), a member of the chargee society as well as a director of the chargor company.

40. According to the contemporary documents in the case, the chargee society had lent to the borrower a sum of RM3m on the security of two charges registered and created under the Code, bearing presentation Nos 8279–83 Vol. 435 Folio 27 and 1447/83 Vol. 73 Folio 66 (‘the charges’) by the chargor company, over its lands comprised in Grant No 16397 for Lot 12590, situated in Bandar Seremban, in the state of Negeri Sembilan and in EMR No 655, for Lot No 1519, situated in the mukim of Ampangan, in the state of Negeri Sembilan (‘the lands’), respectively, in favour of the chargee society. 

41. In the event, the chargor company having committed default under the charges, the chargee society commenced proceedings, namely, two separate charge actions to wit, Originating Summonses 266/86 and 351/88, praying, inter alia, for orders of sale, of the lands. On the other hand, the chargor company commenced separate proceedings, being civil suit 18/91, praying for declarations that the charges were illegal, void and unenforceable by reason of breach of s 133(1) of the Act.

42. Before the learned judge in the court below, the chargee society and the chargor company had, through their counsel, agreed that the sole question for decision in the proceedings hereinbefore mentioned was whether the effect of a breach of s 133(1) of the Act, had any, and if so, what civil consequences with regard to the validity of the charges aforesaid.

43. In the event, the learned judge answered this question in favour of the chargor company by holding that it was entitled to the declarations it had prayed for, that is to say, that the charges and the contract of loan for which the charges had been executed by way of security were illegal, void and unenforceable, and he accordingly made the necessary consequential orders for cancellation of the memorials in the register document of title and the issue documents of title, and return of the issue documents of title to the chargor company. It is from the whole of this decision that the chargee society has appealed to this court.

44. We note – in passing, only – and without placing undue stress on the point, that although nowhere in the statement of agreed facts and issues was any mention made as to the use, purpose or object of the loan, repayment of which was secured by the charges, there was clear evidence on this point, emanating from the affidavit of a certain Kwan Teck Yang, a co-director and co-subscriber of the borrower, to the memorandum of association of the chargor company, wherein by para 2, it was freely admitted:

    It is true the company was given a RM3m loan and as security for the said loan, property held under Grant No 16397 Lot No 12590 Bandar Seremban and property held under EMR No 655 Lot 1519 mukim of Ampangan, Seremban was charged to the plaintiff. The value of these properties was at RM10m.

45. It can therefore be reasonably inferred that at all material times Kwan Teck Yang was fully aware of the purpose, use or object of the loan. Indeed, it is he who, as director of the chargor company, had created the charges on behalf of the chargor company, and it is he who is now attempting to invalidate them on the ground that s 133(1) had been breached (see pp 200 and 263 of the appeal record).

46. Thus, although, on the face of the documents in the case, the borrower was said to be Lim Kon Kwee, it can also be reasonably inferred from the admission in the affidavit of Kwan Teck Yang (quoted above), that the loan of RM3m was ultimately received by the chargor company, and, as we have said, it is the chargor company which is now seeking to avoid the charges by seeking refuge in s 133 of the Act. Thus, there is no question here of the assets of the chargor company being depleted through misuse. Indeed, the position is quite the opposite; the chargor company is, in reality, seeking to avoid repayment of a loan it had obtained and, at the same time, to get back its lands free of the charges. But, this is a court of law and not a court of morals, so that if the chargor company is correct in its contention on the law, it is entitled to succeed.

47. For the avoidance of doubt, we hasten to add, that since it was agreed in the court below that the charge transactions had breached s 133(1) of the Act and, it was on this basis, that the learned judge had conducted and decided the case, we should do likewise.

48. It is obvious that s 133 of the Act does not in terms say that a guarantee entered into or any security given in contravention thereof is to be void, although this would result in the imposition of criminal liability on the official of the company concerned, and on the company itself, by virtue of the general penalty provisions contained in ss 369(1)(a) and 369(2) of the Act.

49. Nevertheless, the general rule is that a contract, the making of which is prohibited by statute expressly or by implication, and which stipulates for penalties for those entering into it, shall be void and unenforceable, unless the statute itself saves the contract or there are contrary intentions which can reasonably be read from the language of the statute itself. (See Holman v Johnson (1775) 98 ER 1120 at p 1121; Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ 356.) However, the general rule is subject to exceptions and, at the end of the day, it is a question of construction of the particular statute. This point was aptly put by Gibbs CJ in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 thuswise:

    It is often said that a contract expressly or impliedly prohibited by statute is void and unenforceable. That statement is true as a general rule, but for complete accuracy it needs qualification, because it is possible for a statute in terms to prohibit a contract and yet to provide, expressly or impliedly, that the contract will be valid and enforceable. However, cases are likely to be rare in which a statute prohibits a contract but nevertheless reveals an intention that it shall be valid and enforceable, and in most cases it is sufficient to say, as has been said in many cases of authority, that the test is whether the contract is prohibited by the statute. Where a statute imposes a penalty upon the making or performance of a contract, it is a question of construction whether the statute intends to prohibit the contract in this sense, that is, to render it void and unenforceable, or whether it intends only that the penalty for which it provides shall be inflicted if the contract is made or performed.  [emphasis supplied]

50. In Coramas Sdn Bhd v Rakyat First Merchant Bankers Bhd [1994] 1 MLJ 369 at p 378, a case where the validity of a contract entered into in breach of s 45(1) of the Banking and Financial Institutions Act 1989, was in question, we had occasion to quote with approval the above passage in the judgment of Gibbs CJ.

51. We have also read with much profit the judgment of McPherson J in JC Scott Constructions v Mermaid Waters Tavern Pty Ltd [1984] 2 Qd 413.

52. We note that Greig & Davis on the Law of Contract, at pp 1117ff, say that they see a trend in decisions whereby courts are now less ready to find a contract illegal or unenforceable simply by reason of a statutory provision. 

53. And, we also note that in Farrow Mortgage Services Pty Ltd (In Liquidation) v Edgar (1993) 114 ALR 1, the following principles of illegality were enunciated by the court (Lockhart, Gummow and Lee JJ) at pp 9 and 10:

    In his article ‘Restitutionary Recovery of Benefits Conferred under Contracts in Conflict with Statutory Policy – The New Golden Rule’(1987) 25 Osgood Hall LJ 787 at pp 788–789, Prof McCamus describes the ‘continued and remarkable growth of regulation in the modern era’ as having created an environment which is rather different from that in which the English courts formulated the approach of common law to illegality in contract; the commission of any offence then was perhaps more likely a signal of significantly anti-social conduct than it is today. The learned author also points out that when agreements have been entered into which create a conflict with the letter or the spirit of a regulatory legislative scheme, two problems emerge for resolution by the law of private obligations. The first concerns the validity of the agreement itself. The second concerns the secondary consequences for the parties, and third parties, if the agreement is indeed held to be unenforceable or void. Statute may render the agreement unenforceable without being void but, if void, it must, of necessity, be unenforceable: see Lejo Holdings Pty Ltd v Deutsche Bank (Asia) AG [1988] 2 Qd R 30 at p 41.  In Australia, the relevant principles, as settled, are largely to be found in the expositions in the judgments in Yango Patsoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410; 21 ALR 585. Counsel for both sides accepted that this was so. We have also been much assisted by the judgment of McPherson J in JC Scott Constructions v Mermaid Waters Tavern Pty Ltd [1984] 2 Qd R 413 cited by the respondents.

54. And, in Yango, Mason J (as he then was) said at p 429:

    There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished – see my judgment in Jackson v Harrison (1978) 138 CLR 438 at p 452. See also the suggestions that the principle cannot apply to all statutory offences (Beresford v Royal Insurance Co Ltd in the Court of Appeal [1937] 2 KB 197 at p 220, per Lord Wright; Marles v Philip Trant & Sons Ltd [1954] 1 QB 29 at p 37), per Denning LJ, and that it would be a curious thing if the offender is to be punished twice, civilly as well as criminally ( St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 at p 292), per Devlin J. The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime: Beresford’s Case [1938] AC 586 at pp 586, 599; Amicable Society v Bolland (Fauntleroy’s Case (1830) 4 Bligh (NS) 194 at p 211; 5 ER 70, at p 76). However, in the present case Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of non-compliance with s 8. In this case it is not for the court to hold that further consequences should flow, consequences which in financial terms could well far exceed the prescribed penalty and could even conceivably lead the plaintiff to insolvency with resultant loss to innocent lenders or investors.

55. It is with the above general principles in mind that we must now consider, in greater detail, the vexed question of law aforesaid. 

56. In Che Wan Development Sdn Bhd v Co-operative Central Bank Bhd [1990] 2 MLJ 365, a third party charge, created in favour of a lender as security for an illegal loan granted by the lender to a director of the chargor company, was held by N.H. Chan J (as he then was) to be void and unenforceable for breach of the prohibition imposed by s 133(1) of the Act. In so holding, his Lordship relied heavily on an array of English and Australian decisions.

57. In a well researched article entitled ‘Section 67 of the Companies Act: A Hornet’s Nest?’ by Miss Lai Ching Sum, reported in [1992] 2 MLJ xi, criticism has been levelled against N.H. Chan J for his ‘wholesale importation and adoption’, in Che Wan of Australian and English authorities, passages in Palmer’s Company Law and an Australian textbook, namely, Ford’s Company Law (2nd Ed).

58. Section 67 of the Act provides:

    67.

    Dealing by a company in its own shares, etc (1) Except as is otherwise expressly provided by this Act no company shall give, whether directly or indirectly and whether by means of a loan guarantee or the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company or in any way purchase deal in or lend money on its own shares.  (2) Nothing in subsection (1) shall prohibit – (a) where the lending of money is part of the ordinary business of a company, the lending of money by the company in the ordinary course of its business;  (b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of or subscription for fully-paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, or a subsidiary of the company including any director holding a salaried employment or office in the company or a subsidiary of the company; or  (c) the giving of financial assistance by a company to persons, other than directors, bona fide in the employment of the company or of a subsidiary of the company with a view to enabling those persons to purchase fully-paid shares in the company or its holding company to be held by themselves by way of beneficial ownership. (3) If there is any contravention of this section, the company is, notwithstanding section 369, not guilty of an offence but each officer who is in default shall be guilty of an offence against this Act.  Penalty: Imprisonment for five years or one hundred thousand ringgit. (4) Where a person is convicted of an offence under subsection (3) and the Court, by which he is convicted is satisfied that the company or another person has suffered loss or damage as a result of the contravention that constituted the offence, the Court may, in addition to imposing a penalty under that subsection, order the convicted person to pay compensation to the company or the person, as the case may be, of such amount as the Court specifies, and any such order may be enforced as if it were a judgment of the Court.  (5) The power of a Court under section 354 to relieve a person to whom that section applies, wholly or partly and on such terms as the Court thinks fit, from a liability referred to in that section, extends to relieving a person against whom an order may be made under subsection (4) of this section from the liability to have such an order made against him.  (6) Nothing in this section shall operate to prevent the company or any person from recovering the amount of any loan made in contravention of this section or any amount for which it becomes liable, either on account of any financial assistance given, or under any guarantee entered into or in respect of any security provided, in contravention of this section.

59. Miss Lai has gone on to make the following general observation – the soundness of which cannot be doubted:

    Without in any way doubting the wisdom and worth of foreign authorities as an aid for statutory interpretation if the relevant provisions are in pari materia with the Malaysian provisions, it is respectfully submitted that where the actual wording of a Malaysian statute differs from a foreign statute, albeit similar, greater scrutiny of the Malaysian statute is required notwithstanding the availability and assistance of foreign authorities to ensure an accurate and meaningful construction of the local statute.

    And, more particularly, directing attention to the differences between s 67 of the Act and the comparative legislation in England and Australia, she has added – persuasively, if we may say so:

    The writer respectfully submits that although the Malaysian s 67 is substantially similar in wording to the former English and Australian provisions, there are two material differences. Firstly, the prohibition under both the English and Australian provisions was so complete that the company itself was made a party to the offence, whereas under the Malaysian provision, only the officers of the company and not the company are guilty of the offence. Secondly, neither the Australian nor the English statutes have an equivalent provision to the Malaysian s 67(6). Section 67(6) reads: Nothing in this section shall operate to prevent the company from recovering the amount of any loan made in contravention of this section or any amount for which it becomes liable on account of any financial assistance given in contravention of this section. These differences are material because they suggest that a prohibited transaction may not be totally devoid of legal effect. Thus, English and Australian authorities which held that a prohibited transaction was void for being illegal must be carefully read in this perspective.

60. However, when it comes to s 133 of the Act, an examination of the comparative legislation in the Australian Companies Act 1961 s 125, 1981 s 230, the United Kingdom 1948 s 190, 1985 ss 330–334, reveals that there are provisions there equivalent to our s 133(5). Indeed, our sub-ss (4) and (5) (reproduced supra) are taken from the equivalent Australian section. 

61. It is certainly arguable – and persuasively so – that sub-s 5 of s 133 of the Act implies that notwithstanding that a guarantee or security given by a company may have contravened s 133(1), the company may incur civil liability under it, in which case it will have a right of recourse against the director/borrower. To quote Mr. Walter Woon in his book on Company Law, at p 179, when referring to the Singapore equivalent (s 162(5) of our s 133(5), he pertinently asks: ‘How can the company be liable under the guarantee or security unless they are valid and enforceable against it?’

62. In Littlewood v George Wimpey & Co [1953] 2 All ER 915 at p 921, Lord Denning LJ (as he then was) thought that ‘liable’ denotes that ‘.... a person is responsible at law’. Similarly, the Oxford Companion to Law, explaining the word ‘liability’ says: ‘A person is said to be under a liability when he is, or at least may be, legally obliged to do or suffer something.’

63. Referring to the comparative legislation in Australia, to wit, Australian Companies Act 1981 s 230 (previously s 125 of the 1961 Uniform Companies Enactments), the concept of which was imported from s 190 of the Companies Act 1948 of the United Kingdom (later repealed and replaced in far more extensive and stringent form by the Companies Act 1980 (UK) ss 49–52 and 63), Paterson Ednie & Ford in their work on Australian Company Law (3rd Ed) Vol 2 – Commentary Annotations – para 230/1 under the sub-heading ‘Introduction’ dated 2 September 1988, pertinently state – and we agree – that:

    In so far as this section enables the company to recover moneys in respect of a security, it is evidently designed with the decision in Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242; [1946] 1 All ER 519, in mind.

64. We would remark, in passing, that in Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242; [1946] 1 All ER 519, it was held that a mortgage of a company’s assets was valid and enforceable although it was given as security for a loan to the company which the lender knew would be used to assist someone to acquire shares in the company. This decision was followed by Cross J in Curtis’s Furnishing Stores Ltd (In liquidation) v Freedman [1966] 2 All ER 955; [1966] 1 WLR 1219 though it was doubted in Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073 at p 1153; [1968] 1 WLR 1555 at p 1646, and disapproved and not followed in Heald v O’Connor [1971] 2 All ER 1105; [1971] 1 WLR 497.

65. It goes without saying that if – and indeed, we so hold – that the principle in Victor Battery has been statutorily recognized in s 133(5) of the Act, then the fact that it has been held to be wrong or described as ‘heretical’ by Mr. LCB Gower in his book Principles of Modern Company Law (5th Ed) at p 237, would not matter, so far as our courts are concerned, for it would be their duty to give effect to the will of Parliament as expressed in the law.

66. We note that in Co-operative Central Bank Bhd v Syarikat Bukit Tinggi [1991] 1 CLJ 590, in considering the question whether an alleged breach of s 133(1) of the Act, had the civil consequences of rendering a charge transaction void and unforceable, the High Court, Penang, declined to follow Che Wan on the ground that it was decided per incuriam in that N.H. Chan J had overlooked:

    1. section 57 of the Co-operative Societies Act 1948 which says that the provisions of the laws for the time being in force relating to trade unions, associations, societies and companies, shall not apply to societies registered under the Co-operative Societies Act 1948, the plaintiff there being such; and also 

    2. the effect of s 133(5) of the Act, as explained by Mr. Walter Woon in his book on Company Law, quoted above.

67. With great respect, in our view, s 57 of the Co-operative Societies Act 1948, merely exempts a co-operative society registered under the Co-operative Societies Act 1948 from compliance with the requirements of the Act. In other words, s 57 does not prevent a company from relying on s 133 of the Act by way of defence, to proceedings brought against it by a co-operative society, for enforcement of a security given in connection with a loan made by the co-operative society to a director of such company or of a company which, by virtue of s 6 of the Act, is deemed to be related to such company, assuming, for the sake of argument, a breach of s 133(1) has the civil consequence of invalidating the transaction concerned.

68. However, we respectfully agree that the effect of s 133(5) of the Act is of direct relevance to the question whether a breach of s 133(1) of the Act has the civil consequences contended for by counsel for the chargor company. It would be more convenient if we revert to the case of Co-operative Central Bank, in the concluding stages of this judgment.

69. In the meanwhile, to return to Che Wan, a perusal of N.H. Chan J’s judgment shows that there was a reference in it to s 133(5) of the Act but he did not address the question whether s 133(5) of the Act is a statutory emanation of Victor Battery and, if it is, what are the consequences which flow therefrom. So far as relevant to this part of the case, this is what he said:

    It can be seen at once that ss 67(6) and 133(5) are similar in terms to s 230(7) of the Australian Companies Code 1981. What is said in Ford, Company Law (4th Ed, 1986) at p 405 (which I have referred to earlier in reference to s 230(7) of the Australian Companies Code 1981) should be equally applicable to s 133(5) of our Companies Act 1965. As pointed out in Ford, the subsection only applies to the company’s right to take action against an errant director without being met by the defence that the transaction is prohibited by statute and is illegal and therefore void. It does not affect any defence of illegality available to the company if it were sued on a transaction entered into in breach of it, thus making the transaction unenforceable against the company. The subsection does not apply if the company were to sue to recover what it had given as guarantee or security to the person who had made a loan to a director of the company so that it would not preclude the defence that because the transaction is tainted with illegality the courts should not assist the company.  In this judgment, I am only concerned with s 133 of the 1965 Act although any decision on this section concerning the validity of transactions prohibited by the section would be equally applicable to s 67 of the Act.  Section 133 prohibits a company from the making of loans to its directors as well as the entry into any guarantee or the provision of any security in connection with a loan to a director of the company by another person. And s 67 prohibits a company from giving financial assistance to its directors (or, where it is a subsidiary, to a director of its holding company) for the purchase of its shares.  Any agreement made in breach of any of the prohibitions in s 67 or s 133 of the Act is illegal, so as to expose the company’s officers to penalties. Although s 67 or s 133 do not expressly say that the prohibited transactions are void, this necessarily follows from the fact that the prohibited transactions are made illegal by the Act by subjecting the officers of the company to penalties: Heald v O’Connor [1971] 2 All ER 1105; Dressy Frocks v Bock (1951) 51 SR (NSW) 390 at p 393 decided under the Australian Uniform Companies Act 1961, s 67; see also Ford, Company Law (2nd Ed, 1978) at p 180. In Heald v O’Connor, Fisher J has held that the debenture in that case was prohibited by statute and for that reason was illegal and therefore void. It follows, therefore, that any transaction which has contravened any of the prohibitions in s 67 or s 133 of the Act is illegal and therefore void.  In any result, I find that the third party charge which was created by the plaintiff company in favour of the defendant co-operative society to secure an illegal loan made by the co-operative society to a director of the plaintiff company was illegal and therefore void and unenforceable by the co-operative society as it had contravened the prohibition in s 133 of the Companies Act 1965 on this type of transaction.  I therefore grant the declaration that was sought.  The plaintiff company has also sought an order for the cancellation of the registration of the charge on its lands and also for the return of all documents of title.

70. The only Australian case where Che Wan was considered was Corumo Holdings Ltd v C Itoh Ltd (1990) 3 ACSR 438, where Rogers CJ refused to follow it.

71. In Corumo, the court was concerned with a tripartite joint venture agreement and the validity of loans granted to a joint venture vehicle. Corumo and the guarantors of the loans contended that they had established breaches of s 230 of the Companies Code (NSW) 1981 and that in the result a syndicated credit facility agreement was void and unenforceable, subject to s 8(8), which provides that ‘relevant interest’ in a share ‘shall be disregarded’ if the ‘relevant interest’ is that of a trustee and the trustee is a bare trustee. It was further contended that an associated bank guarantee was void and unenforceable on the same ground.

72. At the end of the day, Rogers CJ did not find it necessary to rule on whether the impugned transactions had offended s 230 because, even assuming that they did, the breaches were ‘highly technical’ and so did not result in the loans transaction being rendered void or unenforceable.

73. In so holding, Rogers CJ applied a purposive interpretation to s 234 of the Australian companies legislation. He pointed out that the purpose of s 234 was to protect the company, its shareholders and creditors from having its assets misused for the benefit of directors and interests associated with directors. He recognized that whilst it would frustrate Parliament’s intention to restrict the scope of s 234, it would be equally unjust to invoke the section to commercial transactions free from the taint of misapplication of the companies’ resources, which the section was aimed at preventing.

74. In adverting to Che Wan, Rogers CJ observed that the result arrived at in that case would defeat Parliament’s purpose as explained above. He added:

    I would suggest that it hardly protects a company from having its assets misused to disable it from recovering its money by enforcing guarantees it had obtained.

75. He also made the pertinent observations at p 448, which we respectfully endorse, that ‘a commercial judge must be anxious about the impact that a decision may have on the proper functioning of the commercial community’.

76. The appeal (see (1991) 5 ACSR 720) based on s 230 was dismissed. On the basic issue of whether there had been a contravention of s 230(1)(a)(iiia) and (iv), the Supreme Court of New South Wales (Kirkby P, Samuels and Meagher JJA) held there had been no contravention of s 230 on the ground that a complete defence was available by reason of s 8(8) on the basis that ‘the relevant interest’ in the shares was held under a bare trust, which had to be disregarded for purposes of s 230.

77. Meagher JA was of the view that applying a purposive approach to s 230(1)(a), ‘a loan ought not to attract the prohibition if the director in question has a merely hypothetical, theoretical or notional control of the moneys’. On a further ground also he arrived at the conclusion that there had been no contravention of s 230. He did so, by applying a literal approach to s 8(8) hereinbefore mentioned, which provided a complete defence.

78. Nevertheless, Meagher JA did criticize parts of the reasoning of Rogers CJ on the ground that he ‘had applied the principles on which he relied too broadly’. This is how he put it (at pp 749–750):

    His Honour the trial judge, while arriving at the same conclusion as those which I have reached did so by a somewhat different route. He did not find it necessary to come to any conclusion as to whether or not there had been a breach of s 230. His Honour found that the appellants were endeavouring to take advantage of ‘highly technical breaches’ of the section the purpose of which was ‘to avoid corporate abuses of a kind which are totally absent here’. In these circumstances, his Honour held that even assuming the existence of the breaches alleged, no voidness or unenforceability would attach to the loans, because of his view of the scope of the doctrine of illegality currently espoused by the superior courts. One must sympathize with this approach. The alleged breaches were ‘technical’ in the extreme. Since the purpose of the section was the protection of the lending company, and its shareholders and creditors, it can hardly be conducive to the furtherance of that purpose to deprive the lending company of its apparent rights against the guarantors of its loans. Not even the forensic skills of counsel for the appellants extended to a submission that any of their clients had any merits on the s 230 issue. And, as I say, his Honour undoubtedly came to the right conclusion. But with the greatest respect to him, I think his Honour applied the principles on which he relied somewhat too broadly. There is no doubt that the general rule is that where a statute expressly prohibits a transaction and stipulates for penalties for those entering into it, such a transaction will be void and unenforceable. That principle is at least as old as Holman v Johnson (1775) 1 Cowp 341 at p 343; 98 ER 1120 at p 1121, and see King v Licensing Court Brisbane; ex p Daniel (1920) 28 CLR 23 at p 30. However, exceptionally in some cases, such a result may not ensue, bearing in mind the context and purpose of the statutory prohibition. Thus, for example, in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410; 21 ALR 585 the High Court of Australia held that a transaction entered into in violation of s 8 of the Banking Act 1959 (Cth) was neither void nor unenforceable. This latter conclusion will the more readily be drawn where to declare a contract void and unenforceable would harm one of the class of persons for whose benefit the statutory provision was made; Cunningham v Cannon ( [1983] 1 VR 641 at p 646 per King J). A recognition of the strength of those exceptional cases, however, in my view does not solve the present problem. It could hardly be contended that no contract, however blatantly in breach of s 230, was void or unenforceable. If, for example, there were a contract of loan between JC No 100 and Mr. Stapleton, or between SA and Mr. Inomata, could it seriously be denied that it was both void and unenforceable? And would not that defect remain even if, in all the circumstances, it would found to be on balance beneficial for the lender? One would have to find some doctrine which resulted in the conclusion that some contracts in breach of the section were void and others not; or, alternatively, that the section had the effect of avoiding the provisions of such a contract in so far as they imposed burdens on the lending company but not in so far as they conferred benefits. There is, in my view, no such doctrine of intermittent unilateral voidness known to our law. It therefore becomes necessary in a case such as the present to inquire whether or not a breach of the section, technical or otherwise, has been committed; and in my view such an inquiry eventually leads in this case to the conclusion that it has not.  The appeal by Corumo should therefore be dismissed with costs.

79. In our view, to admit the defence of illegality to a commercial transaction of the present sort, would defeat a purposive interpretation of sub-ss (1) and (5) of s 133 of the Act which is designed for the protection of the company, its shareholders and creditors from unlawful dissipation of its resources.

80. We would go further and say that to admit the defence of illegality to defeat the chargee society’s application to enforce the charges by way of an order for sale, would, in the words of Mason J (as he then was) in Yango Pastoral (at p 428), provide ‘a windfall gain’ to the chargor company and others in a similar position. In consequence, such a result would impose substantial hardship upon the chargee society for, in the words of Gibbs CJ in Yango Pastoral (at p 415, para 1):

    .... if a body corporate were unable to recover money that it has lent, it would be disabled from performing its own obligations, including those owed to its depositors. In those circumstances ‘the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute’ (Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB at p 390; Dalgety and New Zealand Loan Ltd v VC Imeson Pty Ltd (1963) 63 SR (NSW) 998 at p 1004).

81. This court will not be astute to lend its aid to enable the chargor company to take advantage of its own default or wrong by relying on its own breach to avoid the charge transactions and thereby escape its obligations thereunder, unless this is what the clear language of the statute is thought to require. (See for example, Kasumu v Baba-Egbe [1956] 3 All ER 266 at pp 271I–272A; [1956] 3 WLR 575 at pp 583–584.)

82. But, to apply s 133 to the present charge transactions so as to produce a result which would exempt the chargor company from the obligations incurred by it thereunder would be tantamount to applying it to commercial transactions which were free from the taint of corporate abuse which the section was designed to counter. However, we repeat, this is not a court of morals but a court of law and, if the counsel for the chargor company is correct in his contentions, he is entitled to succeed.

83. Fortunately, in our view, sub-s (5) of s 133 enables us to hold that a breach of sub-s (1) of s 133 does not have the result contended for by counsel for the chargor company, for the reasons hereinbefore mentioned. The case of Co-operative Central Bank Bhd v Syarikat Bukit Tinggi was, therefore, rightly decided by Mohamed Dzaiddin J (now a Federal Court judge) in favour of the chargee, on the ground of the effect of sub-s (5) of the Act. It follows, therefore, that the case of Che Wan was wrongly decided.

84. To summarize, our conclusion is that accepting that the charge transactions did breach s 133(1) of the Act, no civil consequences flowed therefrom, that is to say, no voidness or unenforceability attached to the loan or the charge transactions, regard being had to the context and purpose of s 133(1), and especially the principle underlying s 133(5), as explained above, which regrettably the learned judge failed to take into account or to give proper weight to, with the result that his judgment cannot stand.

85. This appeal therefore succeeds, the judgment of the court below is set aside, the charges must be enforced, no cause to the contrary having been shown within the meaning of s 256(3) of the Code. We accordingly restore and remit the originating summonses concerned to the High Court, Seremban, with a direction to grant the prayers therein, including the prayers for sale of the lands and to make such further or other consequential orders and directions as are required under s 257(1), (2) and (3) of the Code.

86. The chargor company must pay to the chargee society the costs of the proceedings both here and in the court below. The deposit paid into court by way of security for costs of the appeal will, or course, have to be refunded.

Cases

Batu Pahat Bank Ltd v The Official Assignee [1933] MLJ 237

Cassell & Co Ltd v Broome [1972] AC 1027

Che Wan Development Sdn Bhd v Co-operative Central Bank Bhd [1992] 2 MLJ 365

Che Wan Development Sdn Bhd v Co-operative Central Bank Bhd [1990] 2 MLJ 365

Co-operative Central Bank Ltd (In receivership) v Feyen Development Sdn Bhd [1995] 3 MLJ 313

Co-operative Central Bank Bhd v Syarikat Bukit Tinggi [1991] 1 CLJ 590

Harta Empat Sdn Bhd v Koperasi Rakyat Bhd [1997] 1 MLJ 381

Low Lee Lian v Ban Hin Lee Bank Bhd [1997] 1 MLJ 77

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410

Young v Bristol Aeroplane Co Ltd [1944] 1 KB 718

Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ 356

Coramas Sdn Bhd v Rakyat First Merchant Bankers Bhd [1994] 1 MLJ 369

Corumo Holdings Ltd v C Itoh Ltd [1990] 3 ACSR 438; [1990] 5 ACSR 720

Curtis’s Furnishing Stores Ltd (In liquidation) v Freedman [1966] 2 All ER 955; [1966] 1 WLR 1219

Farrow Mortgage Services Pty Ltd (In liquidation) v Edgar [1993] 114 ALR 1

Heald v O’Connor [1971] 2 All ER 1105; [1971] 1 WLR 497

Holman v Johnson (1775) 98 All ER 1120

JC Scott Constructions v Mermaid Waters Tavern Pty Ltd [1984] 2 Qd 413

Kasumu v Baba-Egbe [1956] 3 All ER 266; [1956] 3 WLR 575

Littlewood v George Wimpey & Co [1953] 2 All ER 915

Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073; [1968] 1 WLR 1555

Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242; [1946] All ER 519

Legislations

Companies Act 1965: s.133, s. 369

National Land Code 1965: s.241, s.256, s.257, s.301

Essential (Protection of Depositors) Regulations 1986: Reg.9

Banking and Financial Institutions Act 1989 s 45(1) 

Co-operative Societies Act 1948 s 57 

Companies Act 1948 [UK]: s.190

Companies Act 1985 [UK]: s.330, s.331, s.332, s.333, s.334 

Companies Act 1961 [Aust]: s.125

Companies Act 1981 [Aust]: s.230, s.234

Companies Code 1981 [NSW]: s.8, s.230

Uniform Companies Enactments 1961 [Aust]: s.125

Authors and other references

Prof HAJ Ford, Principles of Corporations Laws (6th Ed)

Greig & Davis, Law of Contract

Miss Lai Ching Sum, ‘Section 67 of the Companies Act: A Hornet’s Nest?’ [1992] 2 MLJ xi

Walter Woon, Company Law

Oxford Companion to Law

Paterson Ednie & Ford, Australian Company Law (3rd Ed) Vol 2 – Commentary Annotation

Representations

Hira Singh (Asbir Hira Singh & Co) for the applicant / appellant in earlier appeal.

Vijendran Ponniah (Murali Achan with him) (Vije & Co) for the respondent.

Notes:-

This decision is also reported at [1997] 2 MLJ 829 and at [1995] 3 MLJ 313.