A security given in contravention of Section 133 of the Companies Act 1965 remains enforceable, maintaining legal consistency and certainty.

Gopal Sri Ram JCA:

An understanding of the background of this case is essential in order to properly appreciate the issues that have arisen for decision in this appeal. Fortunately, I am spared the task of dealing with the factual matrix at any great length as it has been detailed in the judgment of the learned trial judge. A summary of the relevant facts therefore suffices.

The respondent (whom I shall refer throughout this judgment as "the plaintiff") is a private company limited by shares. It carries on the business of housing development. It owns several pieces of land ("the subject property"). It wanted to develop the subject property into a housing estate. It was in need of capital to fund the development. It wanted to raise monies against the security of the subject property. However, the subject property was already charged to a finance company to which the plaintiff owed almost RM2 million.

The appellant (whom I shall refer to as "the defendant") is a co-operative society whose business and affairs are regulated by its own by-laws and the provisions of the Co-operative Societies Act 1948 ("the Act"). In June 1985, the plaintiff applied to the for a loan of RM5 million. But the plaintiff was not a member of the defendant. And s. 30 of the Act authorises loans only to members of a co-operative society. The plaintiff's application for a loan was therefore not approved by the defendant. The plaintiff wanted to get around this difficulty. On 29 June 1985, it resolved, inter alia, to create a first legal charge over the subject property in the defendant's favour for the purpose of securing a loan of RM5 million to one Lim Chin Hin ("Lim"). Lim was, at all material times, a director of the plaintiff.

Then, on 19 August 1985, Lim applied to become a member of the defendant. His application was approved. Lim then applied for and obtained a loan of RM5 million from the defendant. A part of the loan amount was utilised to discharge the charge in favour of the finance company and to redeem the issue documents of title to the subject property. The plaintiff then executed a third party charge in the defendant's favour to secure the loan.

On 2 December 1991, the plaintiff took out an originating summons claiming a declaration that the charge in the defendant's favour was void and unenforceable. It relied on s. 133 of the Companies Act 1965 ("the Act"). That section reads as follows:

133(1) A company (other than an exempt private company) shall not make a loan to a director of the company or of a company which by virtue of section 6 is deemed to be related to that company, or enter into any guarantee or provide any security in connection with a loan made to such a director by any other person but nothing in this section shall apply:

(a) subject to subsection (2), to anything done to provide such a director with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company;

(b) to anything done to provide such a director who is engaged in the full-time employment of the company or its holding company, as the case may be, with funds to meet expenditure incurred or to be incurred

by him in purchasing or otherwise acquiring a home; or

(c) to any loan made to such a director who is engaged in the fulltime employment of the company or its holding company, as the case may be, where the company has at a general meeting approved of a scheme for the making of loans to employees of the company and the loan is in accordance with that scheme.

(4) Where a company contravenes this section any director who authorises the making of any loan, the entering into of any guarantee or the providing of any security contrary to this section shall be guilty of an offence against this Act.

Penalty: Ten thousand ringgit.