Malaysia-Companies-Financial Assistance

In the Court of Appeal case of Fujasa Property Sdn Bhd & Anor v Idaman Unggul Bhd & Anor [2015] 5 MLJ 810, it was held that:-

"[18] A plain reading of s 67 of the CA 1965 indicates that the words 'financial assistance' is widely construed. This may be inferred by the provision that the giving of financial assistance may be 'whether directly or indirectly'; and the means by which it may be given such as a loan, guarantee or provision of security 'or otherwise'.

[19] There are two components to the meaning of financial assistance within the scope of s 67 of the CA 1965. In the first instance, there must be some financial assistance given by the company. Secondly, the financial assistance should be given 'for the purpose of or in connection with' the purchase of the company's shares.

[20] In determining whether or not there was any financial assistance in the sense prohibited under s 67, the courts have adopted a practical approach in the construction of the meaning of financial assistance in the light of the commercial realities of the transaction.
[21] In Charterhouse Investment Trust Ltd and others v Tempest Diesels Ltd [1986] BCLC 1 Hoffmann J said at p 11:

The words (giving financial assistance) have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.

[22] In Wallersteiner v Moir; Moir v Wallersteiner and others [1974] 3 All ER 217; [1974] 1 WLR 991 (CA) at p 1014, Lord Denning described how financial assistance may have been given in the following words:

You look to the company's money and see what had become of it. You look to the company's shares and see into whose hands they have got. You will then see if the company's money has been used to finance the purchase.

[23] As there are multifarious ways in which such financial assistance may be provided, it would be instructive to review some cases by way of illustration.

[24] In Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor [1990] 1 MLJ 356, a company bought shares in the hotel using a loan from a bank on the security of the hotel's land. The Supreme Court held that there was financial assistance which was prohibited under s 67 of the CA 1965.

[25] In Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors [1990] 1 MLJ 485; [1990] 1 MSCLC 90, at p 402, shareholders in a company owing land transferred their shares to a developer. It was agreed that the developer would build houses on the land and transfer some of the houses to the shareholders. The developer financed the development by charging the company's land to a finance company. As the developer failed to deliver on its promise, the shareholders sued and obtained judgment under the contract. The developer appealed and argued that the transaction was in breach of s 67(1). The Supreme Court held that the arrangement to fund the building and transfer of the houses amounted to financial assistance within the meaning of s 67(1).

[26] In Utama Wardley Bhd & Anor v Lenggang Laut Development Sdn Bhd & Ors [1991] 3 MLJ 490; [1991] 3 CLJ 2233, the company gave a negative pledge to a bank which was financing a purchaser to acquire its shares in the company. Pursuant to the pledge, the company deposited the title deeds to its land with the bank. The court held that there was no financial assistance as the negative pledge and the deposit of the title deeds by the company was not by way of security; it being merely an assurance by the company that it would not encumber its assets without prior consent of the bank.

[27] In Yap Sing Hock Holdings Bhd & Ors v Chuah Teong Hooi & Ors [1989] 2 MLJ 503, the purchaser created a debenture over its existing and future assets in favour of a bank to obtain finance to acquire shares in three other companies. As the debenture would also include the future assets of the purchaser in the three companies whose shares were being acquired, it was contended that this amounted to financial assistance. However, the court held that this did not constitute financial assistance as it was not the companies that created the debenture but the purchaser.

[28] In Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors [1999] 5 MLJ 421, the plaintiff, and the first and second defendants entered into a lease-back agreement. Under the agreement, the second defendant would transfer, among others, all his shares in the plaintiff to the first defendant and settle in full all outstanding loans and liabilities of the plaintiff, in consideration that the plaintiff would transfer its assets as enumerated in a schedule, a lease of land and the tenancy of its office to the second defendant. The second defendant would, thereafter, lease-back the assets, and assign and transfer the tenancy back to the plaintiff. The first defendant having gained control of the plaintiff, entered into a sublease agreement with the third defendant. Under the sublease agreement, the third defendant would pay the plaintiff monthly rental and electricity and water charges in consideration to the plaintiff for subletting a portion of its business premises. The plaintiff's claims, as against the first defendant, as director and trustee of the company, an account of all monies received under the sublease agreement and payment of all sums received and found due after the taking of the account, and as against the second defendant, as constructive trustee, similar account and payment of all sums found due from the second defendant to the plaintiff. Alternatively, the plaintiff's claim against the first, second and third defendants for damages for conspiracy to injure. In addition, the plaintiff contended that the agreement was in contravention with s 67. The second defendant, however argued that the agreement fell within the exception in s 67(2)(c) which permits for the giving of financial assistance by a company to its employees to purchase fully-paid shares in the company.

[29] In that case the court found that the first defendant had breached his duties as a director under s 132 of the CA 1965 and as a fiduciary of the plaintiff because he had taken the monies paid by the third defendant for the subrentals and the electricity charges and that he did not account at all to the plaintiff. Under the agreement, the first defendant had received shares in the plaintiff by transferring the company's assets to the second defendant. This is a clear case of fraud on the company by its director. There was a depletion of monies due to the company when monies were paid out to the second defendant and a depletion of the company's assets when the assets were transferred to the second defendant, and thereafter, by them being leased back to the company for which payments were made. The court found that it was a cleverly planned subterfuge to deplete the assets of the company; there was no financial assistance to the employees of the company to buy into the shares of the company.

[30] In Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors [1990] 1 MLJ 485 (SC), a company, Chen Hua Development (M) Sdn Bhd was the registered owner of a piece of land known as Taman Hilltop. The vendors of the shares in Chen Hua Development entered into a joint venture agreement with Kidurong Land Sdn Bhd, a housing developer, whereby the vendors transferred their shares to Kidurong for RM3.8m; the consideration to be paid in kind by the transfer of certain specified units of houses to be constructed on Taman Hilltop. Kidurong had agreed to develop Taman Hilltop. The issue for determination before the Supreme Court was whether the joint venture agreement to develop Taman Hilltop had infringed s 67(1) in that the transfer of the shares in Chen Hua to Kidurong was financed by Chen Hua by charging the Taman Hilltop land; the land which is Chen Hua's asset. The Supreme Court held that the provisions of s 67 is very wide [#65533] the financial assistance can be direct or indirect. Kidurong had used all the money it obtained from the charge of Chen Hua's land for the projects, ie to build the houses and that the payments of the shares was to be by the transfer of part of the project. The Supreme Court found that the funding of the project which in effect is the funding of the houses to be transferred is any direct or indirect financial assistance and as such is a breach of s 67.

[31] In Belmont Finance Corporation v Williams Furniture Ltd and others (No 2) [1980] 1 All ER 393 (CA), the Court of Appeal held that there was financial assistance where a company purchased property from a person at an inflated price with the sole purpose of enabling that person to purchase the company's shares. Buckley LJ, speaking for the Court of Appeal said at p 403:

It was an exceptional and artificial transaction and not in any sense an ordinary commercial transaction entered for its own sake in the commercial interests of Belmont. It was part of a comparatively complex scheme for enabling Mr. Grosscurth and his associates to acquire Belmont at no cash cost to themselves, the purchase being found not from their own funds or by the realisation of any asset of theirs (for Maximum continued to be part of their group of companies) but out of Belmont's own resources.


[32] Both criminal and civil consequences flow from a breach of the prohibition.

[33] Briefly, criminal consequences fall on the officers of the company in default; the company is not liable as the law recognises it as the victim of the breach. Under s 67(3) each officer who is in default is liable to a fine of up to RM100,000 or five years imprisonment or both.

[34] Civil consequences are governed by sub-s (6) of s 67. Subsection (6) was amended by the Companies (Amendment) (No 2) Act 1992 came into effect on 10 September 1992. According to the unamended version, it was provided that 'the company' was not prevented from recovering the amount of any loan made in breach of s 67.

[35] Subsection (6) of s 67 was amended by the insertion of the words 'or any person' after the words 'the company'. The amended sub-s (6) is as follows:

Nothing in this section shall operate to prevent the company [or any person] from recovering the amount of any loan made in connection of this section or any amount for which it becomes liable, either on account of any financial assistance given, or under any guarantee entered into or in respect of any security provided, in contravention of this section.

[36] In Hotel Rasa Sayang, the Supreme Court held that a transaction made in breach of the financial assistance prohibition would be null and void under s 24 of the Contracts Act 1950. The Supreme Court held that the words 'the company' referred to the company itself which had provided the financial assistance and the meaning of the words did not include a third party [#65533] the lender in that case. The Supreme Court in Kidurong, also arrived at the same conclusion that an agreement which contravenes s 67 is void and unenforceable under s 24 of the Contracts Act 1950.

[37] Subsequently, sub-s (6) also came to be considered in Lori (M) Bhd (Interim Receiver) v Arab-Malaysian Finance Bhd [1999] 3 MLJ 81; [1999] 3 AMR 3161 (FC) where the Federal Court departed from the Supreme Court's approach in Hotel Rasa Sayang. It is pertinent to observe that even though Lori, was decided after the amendment of sub-s (6) of s 67 of the CA 1965, the Federal Court did not apply the amended sub-s (6) because the impugned financial assistance occurred prior to the date the amendment took effect.

[38] In Lori, the High Court had granted an order for the sale of land which was charged by way of security by Lori (M) Bhd ('Lori') in favour of Arab-Malaysian Finance Bhd ('AMFB') for a loan pursuant to the National Land Code. Lori was originally owned by Majlis Amanah Rakyat ('MARA'). MARA had appointed Technivest Sdn Bhd to manage Lori. Later MARA offered to sell its shares in Lori to Technivest. Technivest applied to AMFB for a term loan of RM4.3m. Technivest informed AMFB that the purpose of the loan was to pay MARA for the settlement of Lori's liabilities with MARA and its subsidiaries. AMFB required a charge over the land owned by Lori as part of the security for the loan facility. However, this offer was revoked as the proceeds of the loan provided by AMFB would be used by Technivest to purchase the shares owned by MARA in Lori; as such it would fall foul of the financial assistance prohibition under s 67. Subsequently, Lori applied to AMFB for a fresh loan facility. By that time the shares in Lori had already been transferred to Technivest. AMFB required a charge of the land owned by Lori as security for the loan facility. The charge and loan facility agreement were executed on 11 October 1990. Eventually Lori defaulted in the repayment of the loan and AMFB applied to the High Court to enforce the charge. At the High Court, Lori, through its interim receiver, contended that the charge was unenforceable as it contravened the financial assistance prohibition under s 67 of the CA 1965. Lori's argument was rejected and the High Court granted an order for sale in favour of AMFB. Lori appealed to the Federal Court arguing that the High Court erred in holding that the loan facility arrangements did not contravene the financial assistance prohibition. The Federal Court dismissed the appeal.

[39] The Federal Court in Lori, took the position that Hotel Rasa Sayang, was decided per incuriam because the Supreme Court failed to actually construe the words 'for which it becomes liable' in sub-s (6) and placed undue stress on the provisions of s 24 of the Contracts Act 1950 and held that because the bank had knowledge of the illegality and the nature of the transaction at the material time, the bank's claim failed. The Federal Court took the view that sub-s (6) creates an important exception to s 24 of the Contracts Act 1950 by allowing recovery under an illegal contract, thereby excluding the operation of s 24. Subsection (6) was enacted for the protection of the company's funds and the interests of shareholders as well as creditors and the general public. The Supreme Court in Hotel Rasa Sayang, had been unduly swayed by certain English cases as the relevant legislation on which they were decided did not have an equivalent sub-s (6) saving provision. Another difference was that the prohibition under the relevant English legislation imposed criminal liability not only on officers of the company but also the company itself, whereas under s 67, criminal liability is only imposed on officers of the company. The Federal Court also held that sub-s (6) of s 67 appears to be a statutory recognition of the rule in Victor Battery Company, Limited v Curry's Limited And Others [1946] Ch 242 where it was decided that an illegal security given by a company to finance the purchase of its own shares contrary to s 45(1) of the Companies Act 1929 (UK) (being the equivalent to our s 67(1) of the CA 1965) was not avoided. The Federal Court noted, however, that the Companies Act 1929 (UK) did not have a provision equivalent to our sub-s (6) of s 67; and added that even if Victor Battery was wrongly decided, it matters not for the principle enunciated therein had been statutorily recognised in sub-s (6) of s 67."

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