22 November, 2017
Eric wishes to buy a piece of land, but does not want his name to appear as the registered proprietor. He asks David to enter into the sale and purchase agreement in David’s name to purchase the land on Eric’s behalf and Eric pays for the land. To record this arrangement, David signs a trust deed recording Eric as the beneficial owner of the land, and an irrevocable power of attorney granting Eric the ultimate power to deal with the land absolutely.
Similar arrangements can be used for purchasing anything from land to shares in a company, for a variety of reasons ranging from a compulsive desire to remain anonymous, to other more questionable intentions.
However, are such arrangements recognised and enforceable in Malaysia? Are there situations where they are not?
The recent August 2017 Federal Court decision in Malayan Banking Berhad v Neway Development Sdn Bhd & Ors [Civil Appeal No 02(f) – 19 – 05/2013] sheds some light on those questions.
In the Neway case, a local Bank granted a term loan to Company A to part finance the purchase of native land in Sabah. However, the Sabah Land Ordinance (“SLO”) expressly prohibited a non-native from purchasing native land. Company A did not meet the requirement of a ‘native’ and hence, was prohibited by the SLO from buying native land.
To overcome this troublesome obstacle, Company A appointed one of its staff, who was a native individual as a nominee (“Nominee”), to hold the native land on trust for Company A as the beneficial owner. As part of this arrangement, the Nominee also executed a power of attorney giving Company A the absolute right to deal with the native land. The Bank was fully cognizant of the trust arrangement between Nominee and Company A. Company A subsequently assigned the term loan to Company B, with the consent of the Bank. However, Company B defaulted the term loan, which prompted the Bank to claim against Company B for all outstanding sums.
Initial Judgement
The High Court dismissed the Bank’s claim on the primary basis that the term loan was for an illegal purpose, as it was given for the purchase of native land in contravention of the SLO. The SLO expressly prohibited any “dealings” between a native and a non-native in respect of a native land, and the High Court ruled that the series of arrangements that arose from the initial sale and purchase agreement, to the trust deed and all other connected instruments, were tainted with illegality and void under Section 24 of the Contracts Act 1950 (“CA”).
The Court of Appeal upheld the decision by the High Court. The Bank appealed to the Federal Court.
Federal Court
The Bank contended that the trust deed between Nominee and Company A was not a transfer and while the trust deed was capable of creating an interest in the land, it was incapable of registration under the SLO. The Bank therefore argued that the trust was not a ‘dealing’ under the SLO.
In response, the Federal Court held that the contention of the Bank was “misconceived”, as it ignored the fact that the native land was purchased through the Nominee in a clear attempt to circumvent an express statutory prohibition contained in the SLO. The Federal Court took the view that any subsequent instrument and documentation that was linked to or arose out of the illegal purchase would also be “tainted with illegality”, including the term loan granted by the Bank.
Furthermore, the Federal Court concluded that the Bank was not a bona fide lender without knowledge of the illegality of the purchase, as the Bank was fully aware that of the purchase and trust arrangement in respect of the native land was entered into to circumvent the SLO. It was noted that the Bank came to the courts with ‘unclean hands’, such deception was contrary to public policy and therefore being illegal and invalid.
Ultimately, the Federal Court decided to ‘let the loss lie where it falls’, and disallowed the Bank’s claim for the repayment of the term loan.
Trust Arrangements for Shares?
Another common situation which involves the use of a trust deed and power of attorney would be where a nominee is appointed to hold shares of a company on behalf of another.
The Federal Court in the case of Hasmah Bte Abdul Rahman v Kenny Chua Kien Lam [2006] 5 MLJ 236, deals with this scenario. In this case, the respondent “sold” shares in a company to the nominee appellant (without any payment by the nominee). The respondent subsequently made a statutory declaration to the Kuala Lumpur Stock Exchange and Securities Commission, giving the impression that the 30% bumiputra equity participation in Malaysian incorporated companies have been complied with.
The respondent subsequently demanded the return of, among others, the shares “sold” to the appellant. The Federal Court opined that the sale of shares to the appellant was ‘a transaction entered into for an unlawful purpose to achieve an unlawful end’, and that by filing the statutory declaration, a deception was practiced on the regulatory bodies.
Accordingly, the court regarded the trust arrangement between the respondent and the appellant Nominee to be tainted with illegality. Consequently, the court allowed the shares to ‘lie where they fall’, in the hands of the appellant Nominee.
Key Take-Aways
An agreement or instrument used for the purpose of circumventing a legal requirement may not be enforced by the court on the ground of illegality;
Even subsequent or incidental agreements that arise from such “illegal” agreements may also be declared void and unenforceable;
When an agreement is declared illegal, the courts will likely allow “the loss to lie where it falls”, especially where the party incurring the loss willingly and knowingly participated in the illegal transaction.
The application of these principles go beyond dealings or trust arrangements involving not only land but company shares as well.
In a vacuum, trust and nominee structures are legal and enforceable. However, if the trust and nominees structures are set up for the purpose of circumventing legal requirements, the courts are not obliged to lend any assistance to the party who comes with unclean hands.
For further information, please contact:
Donovan Cheah, Partner, Donovan & Ho
donovan@dnh.com.my
