In Maple Amalgamated Sdn Bhd v Bank Pertanian Malaysia Bhd(1), the sole issue before the Federal Court of Malaysia was whether an Islamic banking facility known as a Bai Bithaman Ajil (“BBA”) transaction is invalid for violating Section 214A of the National Land Code (“NLC”). In addressing this specific issue concerning the BBA, the Federal Court also made broader pronouncements on the applicable legal principles when the Court is asked to invalidate a commercial transaction — pronouncements with much wider implications for the commercial world.
Facts
The BBA transaction in this case comprised the typical Asset Purchase Agreement and Asset Sale Agreement, Charge, and Guarantee & Indemnity Agreement relating to an estate land(2) (collectively referred to as the “BBA Agreement”) between a borrower, guarantor, and bank. The borrower and guarantor defaulted under the BBA Agreement. Disputes subsequently arose between the parties, resulting in several legal proceedings. This appeal originated from the fourth suit brought by the borrower and guarantor (“Appellants”) in the High Court seeking, among others, a declaration that the BBA Agreement is null and void for illegality on the basis that it breached Section 214A of the NLC.
The Appellants were unsuccessful before both the High Court and the Court of Appeal.
Issues
The Federal Court granted leave to the Appellants to appeal on this sole question of law:
“Whether an unconditional agreement for the sale and purchase of an estate land by way of an 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 responding to the above question, the Federal Court formulated four sub-issues which might need to be addressed:
(1) Does Section 214A of the NLC apply to the BBA Agreement?
(2) If yes, is the BBA Agreement void for illegality?
(3) If yes, are the Appellants caught by the res judicata principle?
(4) If the BBA Agreement is void, what is the appropriate remedy?
Ultimately, the Federal Court addressed only the first and second sub-issues.
Is the BBA Agreement Caught by Section 214A of the NLC?
The Federal Court began by affirming that its decision in Gula Perak v Datuk Lim Sue Beng(3) remains good law. In that case, the Federal Court held that a sale and purchase agreement of an estate land that was conditional upon the Estate Land Board’s approval was valid. The conditional agreement in Gula Perak can be contrasted with the unconditional agreement in the present appeal.
The Federal Court clarified that the ratio decidendi in Gula Perak was that the purpose of Section 214A of the NLC is to prevent the fragmentation of estate land. It then went on to make several significant pronouncements on statutory interpretation.
First, the determination of legislative intent in a particular statute — through Hansard or parliamentary speeches — is “merely the starting point of interpretation and not the end goal.” Hansard is relevant when the Court needs to ascertain the meaning of words used in statutes. However, the Court remains obligated to construe statutes based on the language employed, applying the settled canons of construction. The Court is not bound by what Parliamentarians say if it departs from the actual wording of the statute.
Second, the entire Section 214A of the NLC (including all its subsections) must be construed according to its natural and ordinary meaning in light of its object and purpose, and as a whole — having regard to the interdependence of its subsections.
Third, the maxim noscitur a sociis (the associated words rule) was employed to interpret the words “transfer, convey or dispose of” in Section 214A of the NLC. Such analogous words, when used in context, should operate to confine the meaning of the more general word to the more restricted one. This is similar to the ejusdem generis rule.
The Federal Court noted that the words “convey” and “dispose of” were inserted by way of an amendment in 1972 to tighten the prohibition on the transfer of land in all conceivable forms without the Board’s prior approval. If Parliament had intended to prohibit transactions of the nature present in this appeal, it would have stated so clearly.
Accordingly, in relation to the first issue, the Federal Court concluded that the BBA Agreements are not caught by Section 214A of the NLC, as there had been no actual transfer of ownership of the land. No memorandum of transfer was executed, and the borrower remained the registered proprietor at all material times. The arrangement under the BBA Agreement was merely a means to finance an Islamic facility.
Is the BBA Agreement Illegal Under Contract Law?
The Federal Court next considered whether the BBA Agreement is illegal under contract law. The Court held that it should be slow to invalidate contracts when dealing with statutes that regulate commercial transactions. An agreement that breaches a statutory provision is not automatically void for illegality unless the statute or law clearly so intends.
In light of the object and purpose of the law, if two interpretations are possible, the one that avoids a finding of illegality should be preferred. The Federal Court observed that reasonable and prudent commercial parties would organise their affairs on the assumption that what they are doing is lawful. Accordingly, the Court preferred the interpretation that does not result in a contravention of Section 214A of the NLC in this appeal.
The Federal Court further held that the words “transfer, convey and dispose of”, being analogous, should be confined to the legislative intention of preventing actual or attempted outright transfers and fragmentation of estate land. Therefore, on the second issue, the Federal Court held that the BBA Agreement is not void for illegality.
Commentary
As reflected in this decision, the Federal Court favours affirming, rather than invalidating, commercial agreements. It discourages defaulting parties from raising arguments of illegality — often an afterthought to evade contractual obligations. Unless there is a clear contravention of law and no alternative interpretation available, the Court would prefer not to strike down a contract on grounds of illegality, especially when the parties have willingly executed the contract with full awareness of their respective obligations.
For any enquiries, please contact the authors:
Tan Min Lee
Partner
Gan Partnership
E: minlee@ganlaw.my
Lee Xin Div
Senior Associate
Gan Partnership
E: xindiv@ganlaw.my
(1) Maple Amalgamated Sdn Bhd v Bank Pertanian Malaysia Bhd [2021] 1 LNS 976 (Federal Court)
(2) Pursuant to Section 214A(11) of the NLC, “estate land” means any agricultural land under one or more titles, the area or aggregate area of which is not less than 40 hectares, and the alienated lands constituting such area are contiguous.
(3) Gula Perak Bhd v Datuk Lim Sue Beng [2019] 1 CLJ 153 (Federal Court).
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at the date of publication on 13 September 2021.
