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  • Writer's pictureGavin Jayapal

When illegality will not vitiate a contract (Part 2)


Image Credit: Martin Fredy, available at https://www.bigstockphoto.com/image-108416966/stock-photo-cup-of-coffee-and-money-valid-banknotes-on-a-wooden-table


In Part 1 of this series, I considered a scenario where the Courts would strike-down a bargain for illegality.


It ought to be noted though, that illegality will not always vitiate an agreement.


2 Federal Court cases make this point emphatically, with one coming very recently (December 2020).


LIPUTAN SIMFONI (2019)


Factual matrix


Liputan Simfoni v Pembangunan Orkid [2019] 4 MLJ 141 involved a fraudulent land transaction. Pembangunan Orkid Desa Sdn Bhd (Co. No.:31550-U) was the owner of Lot 2788.


An impostor-company, masquerading as “Pembangunan Orkid Desa Sdn Bhd” (but with a different company number, 9048-D), applied to the Land Office for a replacement title.


A replacement title was issued to the impostor. It then sold Lot 2788 on to a company called Chai Sit Trading Sdn Bhd (“Chai Sit”), who subsequently sold it to Liputan Simfoni Sdn Bhd (“LS”).


The Plaintiff (the actual Pembangunan Orkid Desa) discovered the fraud. It filed suit against all the impostor-company, Chai Sit and LS. The Plaintiff sought, in essence, a restoration of Lot 2788.


The HC allowed the Plaintiff’s claim and the COA affirmed the same. The FC agreed, but made a slightly different legal finding.


Illegality


As pertains illegality, a question was posed as to whether the second S&P (i.e., the one as-between Chai Sit and LS) was void due to the fact that it (S&P) sought to avoid real property gains tax and stamp duty.

[46] The next issue is the illegality point. Learned counsel for the first defendant submitted that the first defendant accepts the concurrent findings of fact by the High Court and the Court of Appeal that the second SPA had the effect of evading the payment of the real property gain tax and the stamp duty. However, the first defendant submitted that both the courts erred with the finding that the second SPA was void.

Determination of the FC


The FC held that the second S&P was not void. The FC cautioned that there must be a sufficient nexus to link the illegal act and the contract. In the absence of such a nexus, the Courts would seek to uphold a bargain, rather than strike it down:

[117] Having carefully considered the authorities cited by the parties, we are inclined to agree with the contention of learned counsel for the first defendant that the second SPA is not void. We agree with the view that the courts should be slow in striking down commercial contracts on the ground of illegality. The compliance with the Stamp Act 1949 and the Real Property Gains Tax 1976 are not the prerequisite for the second SPA to be enforceable. There is no prohibition under the two Acts to preclude the first defendant from acquiring rights to the subject land. The Stamp Act 1949 provides a penalty for breach of its provisions. Similarly, under the Real Property Gains Tax Act 1976 there are penalties for breach of its provision. In addition, it is provided that tax due and payable may be recovered by the government by civil proceeding as a debt to the government. The object of the two Acts is to raise revenue. There is therefore no sufficient nexus such as would satisfy the test laid down in Curragh Investment Ltd. The first defendant’s infringement of the two Acts therefore did not prevent it from suing on the contract which is legal.

TEH PAPER (2021)


Hot on the heels of Liputan Simfoni was the FC decision of Tan Keen Keong v Tan Eng Hong Paper [2021] 3 MLJ 914 (“TEH Paper”).


TEH Paper involved a winding-up petition. The matter went to full trial (NB: The High Court has determined that a Petition cannot be converted into a Writ action nor be set-down for trial, see Yew Shing Lin v KEB Oil & Gas [2021] MLJU 304. The HC proceedings in TEH Paper were determined prior to KEB Oil).


At trial, the HC made numerous purported findings of illegality. In allowing the appeals and setting-aside the winding-up order, the FC noted that these could not be substantiated.


In a customarily-excellent judgment, Mary Lim FCJ referenced and applied the principles gleaned from Liputan Simfoni. Her Ladyship noted that:

[57] We, too, agree that this trio of considerations — the purpose of the statute; whether any other policy may be undermined or disaffected and the need to exercise some measure of restraint, is necessary and should always be weighed before striking down commercial contracts or as in the case of these appeals, winding up of corporations on the ground of illegality even if there are criminal penalties involved in the contraventions. After all, we are in the area of public policy, a term which is not statutorily defined under the Companies Act 1965 or even the Contracts Act 1950. These tests are amply illustrated in Liputan Simfoni. Citing Lori (M) Bhd (Interim Receiver) v Arab-Malaysian Finance Bhd [1999] 3 MLJ 81; [1999] 2 CLJ 997; and Co-operative Central Bank Ltd (in receivership) v Feyen Development Sdn Bhd [1995] 3 MLJ 313; [1995] 4 CLJ 300, the Federal Court added that case law ‘seems to suggest that the courts should be slow to find illegality and strike down commercial transactions’. See also Tekun Nasional v Plenitude Drive (M) Sdn Bhd and other appeals [2018] 4 MLJ 567, applying Lori, Co-operative Central Bank Ltd (in receivership) v Feyen Development Sdn Bhd and the High Court of Australia’s decision in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410.


[71] This approach of examining the object or purpose of the relevant legislation before invalidating an agreement or arrangement is not new. As seen from Liputan Simfoni; it was already applied in Kin Nam and even earlier in Beca (M) Sdn Bhd. Beca is yet another authority of how the intent of legislation needs to be carefully examined before ruling on the issue of illegality.


[86] On the facts in these appeals, none of the companies were formed with illicit purpose or intent of circumventing any law, be it the Companies Act 1965, Income Tax Act 1967 or the Penal Code. Furthermore, it was not the suggestion of the petitioner or the families that he fronted, and it would be highly improper to attempt to change his stance midstream to claim otherwise just because the learned judge had found the alleged contraventions to be matters of concern that His Lordship could not ignore.

On a separate point and dealing with the “just and equitable” principle of winding-up, Her Ladyship noted as follows:

[90] These are prescribed situations where it would be just and equitable to wind up such companies and the court should always be slow to import into the just and equitable ground the right to wind up a company for contraventions of other provisions of the Companies Act 1965 unless such contraventions can be co-related with any of the other grounds in s 218(1).


[92] The just and equitable jurisdiction must be exercised carefully and judiciously, with special regard for the irreversible and drastic nature of a winding up as a court-ordered remedy (see Perennial (Capitol) Pte Ltd and another v Capitol Investment Holdings Pte Ltd and other appeals [2018] 1 SLR 763). Not only are there more moderate remedies available, the purported wrongs under the Income Tax Act 1967 have been addressed and dealt with by the relevant authorities; and where they have not, to be dealt with by those charged with the necessary jurisdiction; or as far as the petitioner is concerned, for him, as a minority shareholder in both TEH Holdings and TEH Paper, to file an action under s 181 of the Companies Act 1965 since the learned judge found that his real complaint was of oppression and that he actually wanted his shares bought out.


[93] Factually, there are also grave concerns on the existence of the illegalities. As gathered from the above portions of the grounds of judgment, the contravention and/or illegality pertain to the ‘family fund and under counter-activities’; how monies from the family companies are ‘siphoned off’ for these purposes and, for some of the directors to pay and/or evade tax. However, when the allegations are examined, it readily becomes apparent that there is much uncertainty, vagueness and a paucity of evidence vital to establish the very existence of the particular contravention, wrong or illegality.

Premised upon the above, the FC allowed the appeals and set-aside the winding-up orders.


Conclusion


From Liputan Simfoni and TEH Paper, it is apparent that illegality will not always serve to strike-down a bargain. There must be a sufficient nexus between the illegality complained-of and the agreement.


One cannot seek to void a contract merely based on every ancillary illegality that may crop-up. As per Megarry J in Curragh Investments v Cook [1974] 3 All ER 658, “…I do not think that it could seriously be contended that every contract made by an English company, whether for the sale of land or otherwise, is illegal, if when it is made, the company is liable to prosecution and fine for failing to comply with some provision of the Act of 1948, for example, for not filing its annual returns in due time. Such a doctrine, for which I can see no justification, would result in chaos.


What then, one may ask, of the proceeds of illegality? If a contract is deemed void for illegality, what ought to happen to the proceeds of the bargain that was struck? Ought they revert to the original owner, or remain vested in the new owner?


Part 3 of this series will consider this point, with a recent High Court decision.


GAVIN JAYAPAL

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