Hashim Yeop Sani CJ (Malaya):

By a letter dated 29 October 1980 (A.R. Vol. 2, p. 232) the appellants ("the bank") acceded to the request of a company, Syarikat Johor Tenggara Sdn. Bhd., for a fixed loan of RM1,250,000 to facilitate the purchase (by Ow Chor Seng and Chee Eng Hoon, the directors) of the shares of Hotel Rasa Sayang Sdn. Bhd. ("the hotel"). This fixed loan was to be secured by:

(a) a first legal charge on Malay Grant 1969 on Lot 1327 situated in the township of Johor Bahru of which the hotel was the registered proprietor;

(b) a debenture stamped up to RM1,250,000 on all the hotel's assets;

(c) joint and several guarantees for RM1,250,000 from the directors of Syarikat Johor Tenggara Sdn. Bhd.; and

(d) a personal guarantee from Chee Eng Hock for the same amount of RM1,250,000.

An agreement for this purpose was entered into on 19 November 1980 by the parties concerned. The hotel executed the securities and the bank disbursed the loan.

On 28 September 1982 the bank granted an overdraft facility and a further loan of RM2,500,000 to the hotel secured by a first legal charge for an amount up to RM4,000,000 over the hotel's land and a further first legal supplementary charge of the same sum on land comprised in Grant No. 753 for Lot No. 218 situated also in the township of Johor Bahru owned by Upaya Ladang Koko Sdn. Bhd., a subsidiary company of the hotel. As further security for the term loan the hotel was to issue a debenture in favour of the bank over its property and undertaking and also to obtain joint and several guarantees secured from all the directors.

One of the "terms and conditions" stipulated in the bank's letter of 28 September 1982 was:

1. The term loan of RM1,250,000 extended to Syarikat Johor Tenggara Sdn. Bhd. is to be liquidated upon release of the term loan granted under Hotel Rasa Sayang. (AR Vol. 2, p. 236).

The first legal charge was registered under Presentation No. 20275/82 Vol. 1098 Folio 60 on 6 October 1982 where it was stated that the hotel charged its land to the bank to secure the repayment on demand of banking facilities up to the limit of RM4,000,000 which limit includes overdraft facilities to an amount not exceeding RM1,500,000 and a fixed loan to an amount not exceeding RM2,500,000 both with interests.

The first legal supplemental charge was registered under Presentation No. 20276/82 Vol. 1098 Folio 61 on 6 October 1982 where Upaya Ladang Koko Sdn. Bhd., the subsidiary of the hotel, charged its land to the bank to secure the repayment on demand of banking facilities advanced to the hotel as aforesaid.

Proceedings in the High Court against the hotel commenced with civil suit no. 23-1086 of 1989 which was the main action by the bank against the hotel to recover the sum of RM3,785,000.39 and interests thereon. Civil suit no. 23-1085 of 1986 was against Ow Chor Seng, Choo Yoon Kian, Lim Chea Ngee and Chee Eng Hoon to recover the same said sum of RM3,785,000.39 based on a document of guarantee dated 2 October 1982.

The bank also took several actions to realise the securities provided by the hotel in the following proceedings:

(a) By originating summons no. 31-213-1986 against the hotel and Upaya Ladang Koko Sdn. Bhd. to enforce the charges.

(b) By writ of summons no. 23-1086-86 to enforce the debenture.

(c) By writ of summons no. 23-1085-86 against the guarantors.

On 8 December 1987 the trial Judge granted an order to consolidate the cases. After the consolidation order all the cases went for trial on 22 December 1987.

At the commencement of the trial on 22 December 1987 the issue of the alleged illegality of both the 1980 and 1982 loans granted by the bank was agreed upon to be tried as a preliminary question of law.

After hearing submissions and considering the affidavits and documents produced the trial Judge held that:

(a) The documents evidencing the loans showed that the purpose of the loan RM1,250,000 extended to Syarikat Johor Tenggara on 29 October 1980 was to finance the