In Maple Amalgamated Sdn Bhd v Bank Pertanian Malaysia Bhd,(1) the single specified issue before the Federal Court was whether an Islamic banking facility known as a "Bai Bithaman Ajil" (BBA) transaction was invalid for being in violation of section 214A of the National Land Code (NLC). In dealing with that specific question regarding a BBA transaction, the Court also made broader pronouncements on the applicable legal principles when it is asked to invalidate a commercial transaction. Such pronouncements have much wider implications in the commercial world.
The BBA transaction in this case comprised the typical asset purchase agreement and asset sale agreement, the charge and the guarantee and indemnity agreement of an estate land(2) ("the BBA agreement") between a borrower, a guarantor and a bank. The borrower and the guarantor defaulted on the BBA agreement. Disputes arose between the parties and they engaged in a number of legal proceedings. This appeal originated from the fourth suit brought by the borrower and guarantor ("the appellants") filed in the high court for, among other things, a declaration that the BBA agreement was null and void by reason of illegality for breaching section 214A of the NLC.
The appellants were unsuccessful before both the high court and Court of Appeal: the high court dismissed their application and the Court of Appeal dismissed their appeal.
The Federal Court granted leave to the appellants to appeal on the following sole question of law:
Whether an unconditional agreement for the sale and purchase of an estate land by way of asset purchase agreement and asset sale agreement ('Asset Sale & Purchase Agreements') pursuant to Bai Bithaman Ajil financing is in breach of section 214A of the National Land Code 1965 when no prior approval is obtained from the Estate Land Board before entering into the said Asset Sale & Purchase Agreements?
In response, the Federal Court formulated four sub-issues that needed to be addressed:
- Did section 214A of the NLC apply to the BBA agreement?
- If yes, was the BBA agreement void for illegality?
- If yes, were the appellants caught by the res judicata principle?
- If the BBA agreement was void, what was the appropriate remedy?
Ultimately, the Federal Court appears to have addressed only the first and second sub-issues.
Was the BBA agreement caught by section 214A of the NLC?
The Court started by affirming that its decision in Gula Perak v Datuk Lim Sue Beng(3) remained good law. In that case, the Court had held that a sale and purchase agreement of an estate land conditioned upon the Estate Land Board's approval was valid. The conditional agreement in Gula Perak can be contrasted with the unconditional agreement in this appeal. The Court clarified that the ratio decidendi in Gula Perak was that the purpose of section 214A of the NLC is to prevent fragmentation of an estate land. The Court then went on to make a number of significant pronouncements on statutory interpretation.
First, in determining the legislative intent of a particular statute, the Court held that "Hansard" (ie, speeches made in Parliament) are "merely the starting point on interpretation and not the end-goal". Hansard is used when a court is required to ascertain the meaning of the words used in statutes. The court remains obliged to construe statutes based on the language employed by applying the settled canons of construction. The court is not bound by what parliamentarians say if it departs from the actual language of the statute.
Second, the Court held that the entire section 214A of the NLC (including all of its subsections) must be construed in the natural and ordinary meaning in light of its object and purpose, and as a whole, having regard to all of its subsections, which are interdependent on each other.
Third, the maxim of noscitur a sociis (the associated words rule) was employed to interpret the words "transfer, convey or dispose of" in section 214A of the NLC. The Court held that such analogous words, when used in such a context, should operate to confine the meaning of the more general word to the more restricted one. This is similar to the ejusdem generis (of the same kind) rule. The Court noted that "convey" and "dispose of" had been inserted by way of an amendment in 1972 to tighten the prohibition of transfer of land in all ways thinkable without the Estate Land Board's prior approval. It further held that if Parliament had intended to prohibit transactions in the nature of the present appeal, it should have stated so clearly.
Therefore, in relation to the first issue, the Court concluded that the BBA agreement was not caught by section 214A of the NLC, as there had not been an actual transfer of ownership of the land. No memorandum of transfer had been executed and the borrower had remained the registered proprietor at all material times. The arrangement under the BBA agreement had merely been a means to finance an Islamic facility.
Was the BBA agreement illegal under contract law?
The Court went on to consider whether the BBA agreement was illegal under contract law. The Court held that it should be hesitant to invalidate contracts when dealing with statutes regulating commercial transactions. An agreement that is in breach of a statutory provision is not automatically void for illegality, unless there is a clear intention of the statute or law.
In view of the object and purpose of the law, if there are two possible interpretations, the one that avoids a finding of illegality is to be preferred. The Court held that the public and reasonable commercial people would organise their affairs on the assumption that what they are doing is not prohibited by law. Therefore, the Court preferred the interpretation that did not result in the finding of contravening section 214A of the NLC in this appeal.
The Court further held that the words "transfer, convey and dispose of", being analogous words, should have their meaning confined to the legislative intention to prevent actual or attempted outright transfers and fragmentation of estate land.
Therefore, in relation to the second issue, the Court held that the BBA agreement was not void for illegality.
As reflected in this decision, the Court is in favour of affirming as opposed to invalidating commercial agreements. It discourages defaulting parties from running arguments of illegality, which are more often than not an afterthought to avoid contractual obligations. Unless there is a clear contravention of the law and no alternative interpretation, the Court would prefer not to strike down a contract on grounds of illegality.
For further information on this topic please contact Tan Min Lee or Lee Xin Div at Gan Partnership by telephone (+603 7931 7060) or email ([email protected] or [email protected]). The Gan Partnership website can be accessed at www.ganlaw.my
(1) Maple Amalgamated Sdn Bhd v Bank Pertanian Malaysia Bhd  1 LNS 976 (Federal Court).
(2) Pursuant to section 214A(11) of the NLC, an "estate land" means any agricultural land under one or more than one title where the area or aggregate area is not less than 40 hectares and the alienated lands constituting such area are contiguous.
(3) Gula Perak Bhd v Datuk Lim Sue Beng  1 CLJ 153 (Federal Court).