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www.ipsofactoJ.com/archive/index.htm [1997] Part 4 Case 15 [HCM] |
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Judgment
R.K. Nathan JC
The plaintiff owned 98,000 shares in a company called Magnacasa Holdings Sdn Bhd (‘MHSB’) which amounted to 5% of the equity.
Prior to the incorporation of MHSB, there was in existence a company known as Magnacasa Sdn Bhd (‘MSB’). The business of MSB was in the sale to the public of time-shares for use of holiday resorts in Malaysia. Under the scheme, the subscribing member would pay a membership fee of RM2,000 and thereafter pay a nominal fee for each time he used the particular resort.
A company called Traz Sdn Bhd (‘TSB’) in which the second defendant was a 50% shareholder owned 51% and one Ng Kok Seng (‘NKS’) 44% of MSB. The balance of 5% equity of MSB was held by the plaintiff. In August/September 1990, MSB underwent a corporate restructure in which MHSB was created as an investment holding company to contain the activities of MSB and such other subsidiaries as may be formed in the future. A share swap took place between MSB and MHSB in which each MSB share was swapped for ten MHSB shares. Thus TSB became a 51% shareholder of MHSB which in turn held the entire equity of MSB.
After TSB became the majority shareholder of MHSB, the third defendant was appointed to the board as a nominee of the second defendant. The second defendant although not on the board, nevertheless created an executive committee comprising of two, of which he was one, to oversee the board of directors. The second defendant then moved in and acquired an office in MHSB and brought in his own personnel. He also took charge of the development and planning. The second defendant then restructured MHSB. On 6 March 1991, the plaintiff entered into an agreement with the first defendant to sell his 5% shares in MHSB for a total purchase price of RM480,000. Upon execution of the said agreement, the second defendant paid RM100,000 and it was a term of the agreement that the balance sum of RM380,000 was to be paid to the plaintiff by five monthly instalments of RM76,000 each. The second and third defendants jointly guaranteed the payment of the balance price of RM380,000 under the agreement. Upon receipt of the initial payment of RM100,000, the plaintiff executed blank transfers and delivered the same with the share certificates and with his letter of resignation from the board of directors, to the second defendant. Five post-dated cheques were given to the plaintiff and the first two instalments of RM76,000 each were cleared. On 28 May 1991, the cheque for the third instalment was dishonoured with the remarks ‘payment stopped’. The plaintiff’s case is that when he confronted the second defendant, the latter asked for more time and paid RM10,000 and further smaller amounts amounting to RM16,000 leaving a total balance of RM212,000. On 12 August 1991, the plaintiff received a letter from the first defendant stating that it had stopped payment of the last two cheques. It is this letter that forms the substance of the issue. The letter is therefore reproduced:
Dear Mr. Tan, Re: Sales & Purchase Agreement We are writing to inform you that we have stopped payment on the two cheques No 832512 and 832513 for $76,000 each as our board had decided that since the legality of Magnacasa Sdn Bhd is now in question in the courts, it will not be possible for us to proceed with the sale until at least this question has been resolved in the courts. Since the only business of Magnacasa was the holiday scheme operated by its subsidiary, it was this business which we were interested in acquiring. We hope you will understand our concern and the fact that the whole transaction has changed in nature and the consideration may even have failed completely for the agreement. Yours faithfully EMPEREE SDN BHD Sgd Authorized Signatory |
MHSB was involved in the time-sharing concept. There were numerous other subsidiaries owning valuable properties and it was the case of the plaintiff that the value of MHSB was because of its property base.
The defence of the first defendant was that it had entered into the agreement on account of the plaintiff’s misrepresentation, inter alia, that MHSB, the holding company, owned shares in a subsidiary company MSB which was doing a lucrative business of selling membership to the public for time-sharing holidays in MSB’s holiday resorts. The first defendant submitted that it was held out by the plaintiff to the first defendant that to take over MSB’s business and to control MSB, the first defendant was required to take over MHSB by purchase of the said shares. It was the case of the first defendant that the plaintiff further had held out that the main asset of MHSB was their shares in MSB and the returns to the first defendant and that their investment would be assured from the lucrative business of MSB.
In August 1991, the plaintiff, the third defendant, NKS and MSB were charged in the Sessions Court in Kuala Lumpur in relation to the sale of the time-share to the public under s 363(3) of the Companies Act 1965 (‘the Act’) punishable under s 363(5) of the same Act. On 9 March 1992, MSB and NKS were convicted by the sessions court and fined RM12,000 each in default four months imprisonment. The plaintiff and the third defendant were released by the same court upon the charges being withdrawn against them.
I agree with the first and second defendants’ submissions that notwithstanding the manner in which the defence has been pleaded, there is principally a single issue to be determined in this matter and that is:
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Whether the agreement dated 6 March 1991 is void and unenforceable having as its object or part of its object an unlawful purpose contrary to the provisions of ss 24 and 25 of the Contracts Act 1950. |
If the answer is in the affirmative, then the secondary issue is:
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Whether the first defendant is entitled to restitution or compensation in respect of the monies paid under the agreement, pursuant to s 66 of the Contracts Act 1950. |
CASE FOR THE FIRST AND SECOND DEFENDANT
The defendants contended that illegality need not be specifically pleaded but that once brought to the attention of the court, the issue of illegality needs investigation. They relied on the judgment of the then Supreme Court in Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281 at p 288 wherein S.C. Peh SCJ said:
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When the contract is not ex facie illegal, then on the question of pleadings, there is only one situation where illegality need not be pleaded when the court can still take judicial notice of illegality and refuse to enforce it. The situation is when facts which have not been pleaded emerge in evidence in the course of the trial showing clearly the illegality, e.g. the illegal purpose of the contract, or its illegal consideration, with the presence of all relevant circumstances, see e.g. Palaniappa Chettiar v Arunasalam Chettiar [1959] MLJ 143, Leong Poh Chin v Chin Thin Sin [1959] MLJ 246 and North Western Salt Co Ltd v Electrolytic Alkali Ltd [1914] AC 461 just to mention a few. The existence of such a situation in the instant appeal is warranted by the facts that emerged in evidence, including affidavit evidence. |
A similar finding in more liberal terms was made by the Court of Appeal in Mustafa Osman v Lee Chua [1996] 2 MLJ 141 in the judgment of Gopal Sri Ram JCA at p 146 wherein his Lordship said:
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We accept as beyond argument that illegality need not be specifically pleaded, and that once the illegality is brought to the attention of the court before whom the action is being tried, the court, upon being satisfied that the transaction is indeed illegal, is obliged to act upon it. See, Natha Singh v Syed Abdul Rahman [1962] MLJ 265; Nasib Singh v Ramasamy [1969] 1 MLJ 211. |
The defendants argued that this court should not limit itself to a determination based on an ex facie legal contract when faced with evidence that the ulterior or collateral purpose of the contract was unlawful. It was pointed out to me that in Lim Kar Bee, the Supreme Court was faced with an allegation that an agreement for the sale and purchase of land and a trust deed subsequently made thereunder, whilst on its face legal, was really a device to avoid payment of estate duty in regard to the land. The court held that as the primary purpose of the scheme (which included the sale and the trust deed) was to avoid paying estate duty, the scheme was illegal and thus came within s 24 of the Contracts Act 1950. As such, the sale agreement and subsequent trust were held unenforceable.
Turning to the facts of this case, these defendants submitted that the purpose of the agreement was for the acquisition of the only business of MHSB, namely the carrying on of an unlawful sale of time-shares. Through DW1, it became apparent that MHSB had no bank accounts of its own and that the income generated exclusively by MSB was from sale of the time-shares to the public. In this respect, it was pointed out to me that PW1 and DW1 both confirmed that between RM30,000,000 to RM60,000,000 was collected by MSB from the sale of the shares. It was also in evidence that properties had been purchased with some of these funds but that none of these properties could be shown to have been purchased by any company properly described as a subsidiary of either MHSB or MSB. The whereabouts of these properties are uncertain. What however is clear is that these properties were never injected into MSB or any subsidiaries of these companies.
It was further submitted on behalf of the first and second defendants that the allegation of the plaintiff that the second defendant took RM500,000 to purchase lands in Langkawi was clearly unsubstantiated since no claims either civil or criminal had been preferred against the second defendant in respect of this sum. PW2 also confirmed that apart from the time-sharing business there was no other business that MSB was involved in. DW2 also affirmed that after the conviction, MSB only serviced the members until the monies ran out.
On the next issue, that is, that the business of MSB was unlawful, these defendants relied on Anderson Ltd v Daniel [1924] 1 KB 138 wherein Bankes LJ, quoting with approval the decision of Wrenbury LJ, held as follows at p 143:
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.... Upon that point I should like to refer to what Lord Wrenbury, then Buckley J, said in one of the moneylender cases: Victorian Daylesford Syndicate v Dott [1905] 2 Ch 624 at p 629: ‘The next question is whether the Act is so expressed that the contract is prohibited so as to be rendered illegal. There is no question that a contract which is prohibited, whether expressly or by implication, by a statute is illegal and cannot be enforced. I have to see whether the contract is in this case prohibited expressly or by implication. For this purpose, statutes may be grouped under two heads, those in which a penalty is imposed against doing an act for the purpose only of the protection of the revenue, and those in which a penalty is imposed upon an act not merely for revenue purposes, but also for the protection of the public. That distinction will be found commented on in numerous cases, including those which have been cited of Copie v Rowlands (1836) 3 M &W 149 and Fergusson v Norman (1838) 5 Bing NC 76. Parke B in the former case says the question to determine is whether the Act is “meant merely to secure a revenue to the city, and for the purpose to render the person acting as a broker liable to a penalty if he does not pay it? or whether one of its objects be the protection of the public, and the prevention of improper persons acting as brokers?” If I arrive at the conclusion that one of the objects is the protection of the public, then the act is impliedly prohibited by the statute and is illegal.’ In my opinion that language applies directly to this case. Here the penalty is imposed wholly for the protection of the public, and the purchaser is entitled to take the objection that as the vendors have failed to give the required invoice, the contract of sale is illegal and they cannot sue for the price. [emphasis added] |
It was the submission of these defendants that an examination of s 363(3) of the Act shows both that the act of selling shares to the public is prohibited and that it is clearly enacted for the protection of the public. It was urged upon me that by its very terms, s 363(3) aims at protecting the public against persons offering shares for purchase other than those protected by sub-s (4).
With regard to the counterclaim, the first and second defendants submit that unless the parties were in pari delicto when they entered into the agreement, the defendant is entitled to succeed on its counterclaim. I was referred to Menaka v Lum Kum Chum [1977] 1 MLJ 91 where the Privy Council held at p 94:
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.... Neither party was aware of the illegality at the time of making the loan transaction and the documents were prepared and executed on both sides in complete good faith. The contract was ‘discovered’ to be void only after these proceedings had been started. Section 66 of the Contracts Ordinance therefore applies and both parties before this Board accepted that it does. Section 66 provides as follows:
Mohd Azmi J gave effect to s 66 by finding that the advantage which the borrower had received under the contract was the sum of RM20,000 and that he should restore that sum to the appellant. But as he had made two payments of interest amounting together to RM600 the learned judge found that RM600 was an advantage received by the lender and that it should be deducted from the RM20,000 leaving a balance of RM19,400 to be paid by the respondent who now represents the borrower. Leaving aside for the moment the question of whether any interest should also be payable, their Lordship agree with both courts below that the principal sum of RM19,400 should be paid by the respondent to the appellant. In that way effect will be given to s 66 under which each party is bound to restore any advantage which he has received to the person from whom he received it – see Govindram Seksaria v Radbone (1947) LR 74 Ind App 295 at p 303 where Lord Morton of Henryton said:
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It was urged upon me to hold that the unlawfulness of the agreement was discovered subsequent to its execution, that is on or around 29 May 1991 and that the agreement was effectively terminated in August 1991. It was also pointed out to me that the charge on which the company was convicted related back to February 1989, which was a time before which the first and second defendants had any direct or indirect involvement in MSB or MHSB. In the circumstances, I was asked to hold that the first defendant was entitled to restitution of the monies paid under the agreement totalling RM268,000.
CASE FOR THE THIRD DEFENDANT
The plaintiff’s claim against the third defendant is based upon a letter of guarantee dated 6 March 1991, executed by the third defendant. However, he said in evidence that he executed the said guarantee under various circumstances. He was at all material times a nominee for the second defendant in the board of directors of MHSB and MSB. He was then also the second defendant’s nominee shareholder of 1,025,999 shares in TSB which were subsequently transferred to a person or persons not known to the third defendant as he had executed blank transfer forms for those shares and which were retained by the second defendant. He confirmed that TSB was the vehicle that was used by the second defendant to buy into MHSB, and that he was emplaced on the Board of Directors of MHSB and MSB by the second defendant, and that he did not personally have any shareholding in MHSB and MSB, and that the plaintiff accepted the third defendant as a guarantor knowing that he was at all material times the nominee for the second defendant.
Whilst described as the executive chairman of the ‘Magnacasa Group of Companies’, the third defendant said that he was in fact acting not very independently by reason of his position as a nominee of the second defendant. It was pointed out to me that the plaintiff had indeed admitted to this during cross-examination by the third defendant. The third defendant submitted that the plaintiff clearly knew that he was a nominee for the second defendant and also that the second defendant had agreed to fully indemnify the third defendant should the plaintiff call upon and claim on the said letter of guarantee. By reason of such collateral knowledge and understanding, it was urged upon me to hold that the plaintiff is now estopped from making this claim against the third defendant. Notwithstanding the fact that he had not pleaded estoppel specifically, the third defendant however relied on Boustead Trading (1985) Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1995] 3 MLJ 331 wherein the Court of Appeal held that so long as material facts giving rise to a plea of estoppel are raised, there was no need to actually use the term ‘estopped’ in the pleadings.
Further and alternatively, the third defendant submitted that from the testimony of the plaintiff and the second defendant, it was evident that there were modifications and variations to the original sale and purchase scheme. Since the plaintiff did not lead evidence as to whether the third defendant was aware of or had consented to such changes – which related to the completion date of the transaction coupled with the payment of the balance purchase price – the third defendant relied on s 86 of the Contracts Act 1950 which provided as follows:
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Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. |
It was thus submitted that the third defendant was discharged of his obligation and liability under the letter of guarantee by operation of law.
FINDINGS OF THE COURT
(Was there misrepresentation by the plaintiff)
The evidence clearly showed that the first and second defendants knew or ought to have known of the state of the company at the time they entered into the agreement. The second defendant was the deputy in finance, in an executive committee (‘the Exco’) in MHSB and together with one Amir Senawi, through their company TSB, owned 51% of the equity of MHSB. PW1 in his examination-in-chief testified that the second defendant owned TSB with one Amir Senawi and prior to TSB becoming a shareholder of MHSB the company was known as MSB. After TSB became the shareholder, the board of directors of MHSB was changed. PW1 also testified that the third defendant was appointed to the Board of MHSB as a nominee of the second defendant. The third defendant confirmed this in his evidence. PW1 also testified that the second defendant although not on the board of directors, had created the Exco and held the position of deputy in finance which evidence stands unrebutted and from the common agreed bundle of documents, his presence in the board meetings in his capacity as Exco member is patently clear. I find as a fact that the second defendant knew about the position of the company. I am fortified in making this finding of fact when I consider the evidence of PW2 who testified that upon restructuring the company, the second defendant brought in his own people, namely Joe Sabastian, Lisa Huang and Tengku Ardy. This was not denied by the second defendant. In the circumstances, the allegations of misrepresentation made by the first and second defendants must fail.
TIME SHARING SCHEME AND ILLEGALITY
The second and third defendants, in raising the issue of illegality in respect of MSB, the subsidiary of MHSB, which was charged under s 363(3) to be read together with s 363(9) of the Act for illegally selling time-sharing holidays scheme, contend that there is a failure of consideration in the agreement.
THE ARRANGEMENT OF THE COMPANIES ACT 1965
For ease of reference, the Companies Act is arranged as Pt I to Pt XII. Each part, which has its main heading, is then further sub-divided into Divisions bearing sub-headings. Each Division then consists of sections relevant to its own sub-heading. Time-sharing scheme therefore falls under Pt IV (Shares, Debentures and Charges). It then comes under Div 5 whose sub-heading is: Interests Other Than Shares, Debenture, Etc and the relevant section is s 84, which is the interpretation section and which defines time-sharing scheme as:
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.... a scheme, undertaking or enterprise –
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It is also relevant to reproduce s 363(3) and (9) of the Act:
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363. |
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Clearly therefore as the law stood then, the time-sharing scheme which came under Pt IV Div 5 was a prohibited enterprise.
However, nowhere in the relevant section, i.e. s 363, or anywhere in the Act, is there a stipulation that a company which is charged under that section should cease operations. It would be ludicrous to argue that every time a company does something prohibited by the law, it should cease operations. It is my judgment that notwithstanding the fact that the company had done something prohibited by law, the fundamental root of the contract, i.e. the transfer of shares in the company, is not affected, as the company did not cease to exist and the contract is still enforceable. As long as the company was not required by law to cease operations, there is no failure of consideration. In my view, as long as there is no failure of consideration, the mere fact that the first and second defendants formed the opinion that the company was no longer viable, is not a defence. So long as consideration is adequate, this court will not enquire into the sufficiency of it. It is not for this court to denounce a contract, happily entered into by the parties, and to say it is unfair. Any agreement executed or made in the ordinary course of business between two parties must be presumed as intended to be legally binding. If the essential elements of a bargain are present, the court will not balance the one side against the other. The parties are presumed to be capable of appreciating their own interests and of reaching their own equilibrium. At this juncture, it is imperative that I look at sub-s (7) of s 363 of the Act which reads:
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363. |
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Where any person is convicted of having made an offer in contravention of this section, the court before which he is convicted may order that any contract made as a result of the offer shall be void and may give such consequential directions as it thinks proper for the repayment of any money or the retransfer of any shares; and an appeal against the order and any consequential directions shall lie to the court. |
From the documentary evidence adduced through the common agreed bundle of documents and from the oral evidence of the witnesses, it is apparent that the defendants in this case never availed themselves of this subsection. Surely the defendants who had clear knowledge of the prosecution ought to have made representations under the subsection to the court that found the defendants guilty under s 363(3) of the Act. Since no representations were made to the sessions court, the said court on its own volition did not make any order under this subsection.
It is my finding that the first and second defendants by their failure to exercise their rights pursuant to this subsection had by their default, acquiesced to the rights of the plaintiff in this case. When a party has a legal means of enforcing his right at the earliest instance but refused to do so either through ignorance or indolence, this court will not lend its benign hand to the same defendant for crying foul on a later date when he awakes from his slumber.
It is my finding that although MSB was charged for selling time-sharing memberships without the prospectus, illegally, the defendants herein cannot assume that this should render the present agreement unenforceable. The sale and purchase agreement for the sale of the shares between the plaintiff and the first defendant is not illegal and there has been no suggestion that that agreement is illegal. The contract for selling the time-sharing membership is a separate matter and is severable even if it is illegal. In St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267, the Merchant Shipping Act 1932 forbade the loading of a ship to such an extent that the loadline becomes submerged. A penalty is imposed for breach of the statute. The master of the plaintiff’s ship, which had been chartered to an English firm for the carriage of grain from a port in Alabama to England, put into a port in the course of the voyage and took on bunkers, the effect of which was to submerge the loadline contrary to the Act. The master was prosecuted in England for the offence and was fined £1,200. The defendants, to whom the ownership of part of the goods had passed, withheld part of the freight due, contending that the plaintiffs could not enforce a contract which they had performed in an illegal manner. Devlin J rejected this contention and held that the illegal loading was merely an incident in the corpus of performance that did not affect the core of the contract. Again in the case of Shaw v Groom [1970] 2 CB 504, a landlord sued his tenant for arrears of rent amounting to £103 due in respect of a weekly tenancy. The tenant contended that the action must fail, since the rent book issued to him by the plaintiff did not contain all the information required by the Landlord and Tenant Act 1962. Such a default was punishable by a fine not exceeding £50. The Court of Appeal dismissed this contention. The contract was not to be stigmatized as illegal in its performance. The intention of the legislature was that non-compliance with the statutory requirement should render the landlord liable to a fine, not that it should deny him access to the court. Unless this limited construction was placed upon the Act, the result might well be that the landlord would forfeit a sum far in excess of the maximum fine.
I therefore find that the legislature did not, because of s 363(3) of the Act, intend to preclude the company from proceeding with the operation of the company. The offence committed by the company is, I find, a strict liability offence, and in the circumstances, the contract is, in my view, not automatically rendered illegal as performed merely because some statutory requirement has been violated in the course of its completion.
The submission of the first and second defendants that s 363(3) is enacted for the protection of the public needs a second look.
Section 363(4) of the Act reads as follows:
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363. |
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Section 84 has since been amended by the Companies (Amendment) (No 2) Act 1992 (‘Act A836’) with regard to the interpretation of the word ‘interest’. Since Act A836, interest is defined thus:
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(it) means any right to participate or interest, whether enforceable or not and whether actual prospective or contingent –
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In the light of these far reaching amendments, it is obvious that Parliament has had second thoughts about out-lawing time-sharing schemes. Whilst it is not my lot in the present proceedings to find if the word ‘interest’ as defined in s 84 of the Act read together with s 363(4) of the Act would now legalize time-sharing concepts, suffice it to say that the arguments of the first and second defendants that the time-sharing concept is against public policy can no longer prevail.
The third defendant’s arguments can be summarized as follows:
The plaintiff’s knowledge of the third defendant’s position as a nominee raised an estoppel against the plaintiff from making the claim against the third defendant.
The plaintiff knew that the second defendant had agreed to indemnify the third defendant should the plaintiff make a claim on the guarantee.
The modifications and variations to the original sale and purchase scheme without the knowledge and consent of the third defendant raised the defence of s 86 of the Contracts Act 1956.
It is my finding that none of these arguments were pleaded, let alone proved in evidence. In any case, the conduct of the third defendant in all matter and in his dealings with the plaintiff, ought to preclude his reliance on estoppel. He signed the guarantee not as a nominee but in his individual personal capacity. The guarantee is plain and simple and ought to be given its simplistic interpretation. If there is indeed any indemnity provided by the second defendant, the third defendant can no doubt claim such indemnity against the second defendant.
In the circumstances, I had no hesitation in allowing the plaintiff’s claim against all three defendants with interest at 8% pa from 9 December 1991 to date of realization and costs. I also dismissed the first and second defendant’s counterclaim with costs.
Cases
Anderson Ltd v Daniel [1924] 1 KB 138
Boustead Trading (1985) Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1995] 3 MLJ 331
Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281
Menaka v Lum Kum Chum [1977] 1 MLJ 91
Mustafa Osman v Lee Chua [1996] 2 MLJ 141
Shaw v Groom [1970] 2 CB 504
St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267
Legislations
Companies Act 1965: s. 84, s.363
Companies (Amendment) (No 2) Act 1992
Contracts Act 1950: s. 24, s. 25, s. 66, s. 86
Representations
Dennis Xavier and Norhaslinda Salleh (Xavier Rafie & Norhaslinda) for the plaintiff.
David Morais, Azlan Sulaiman and P.S. Khoo (P.S. Khoo & Associates) for the first and second defendant.
B.B. Teh (Heng & Mogan) for the third defendant.
Notes:-
This decision is also reported at [1998] 5 MLJ 273.
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