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2011 MarsdenLR 173
ZAKI TUN AZMI, ZULKEFLI MAKINUDIN, RAUS SHARIF
CHANG YUN TAI & ORS – Appellant
Versus
HSBC BANK (M) BHD & OTHER APPEALS – Respondent
Financing agreements are valid despite alleged illegalities in sale contracts, and banks have no duty to verify underlying agreements' legality.
Headnote:(A) Local Government Act 1976 - Power of Attorney Act 1949 - Companies Act 1965 - Contracts Act 1950 - Sale and purchase agreements for properties - Court dismissed appeal regarding financing agreements being declared void based on alleged illegality of the underlying sale agreements - Financing agreements valid despite the SPA's alleged contraventions as it was concluded separately. (Paras 28, 29)
(B) Contractual Obligation - Duty of financial institutions - No duty upon banks to ensure the legality of sale agreements; their role limited to lender and they can rely on borrowers' representations regarding legality. (Paras 14, 18, 22)
Facts of the case:
Appellants purchased apartments under a scheme which allegedly was the subject of fraud or contraventions of law, claiming the agreements were void. They sought to challenge the validity of financing agreements with banks regarding this purchase. (Paras 2, 5, 7)
Findings of Court:
Financing agreements remain valid despite alleged illegalities in sale agreements, with no evidence banks were complicit or aware of the said illegality - obligation of borrowers to ensure legality of the agreements is affirmed. (Paras 21, 28, 29)
Issues: Whether financing agreements are void due to alleged illegality in related sale agreements, and if banks have a duty to seek out potential legal infirmities in the agreements. (Paras 8, 9, 12)
Ratio Decidendi: The alleged illegality of the Sale and Purchase Agreement does not extend to nullify the financing agreements - banks are not liable to verify legality beyond their direct contractual relationship with borrowers. (Paras 21, 24, 28)
Result: Appeal dismissed with costs, RM75,000 awarded. (Para 29)
| Table of Content |
|---|
| 1. background of the case regarding the spa and financing agreements. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7) |
| 2. arguments concerning legality and enforcement of financing agreements. (Para 8 , 10 , 12 , 13 , 14 , 18 , 20) |
| 3. court's observations on the relationship between spa and financing agreement. (Para 9 , 11 , 15 , 16 , 19 , 21 , 22 , 23 , 24 , 25 , 27 , 28) |
| 4. duty of inquiry and representation in financing (Para 17) |
| 5. analysis of legality under the contracts act (Para 26) |
Zulkefli Makinudin FCJ:
Introduction
(1) These three appeals were heard together and it was agreed by all parties that the decision in Appeal No. 02(f)-15-2011 (W) will bind Appeal No. 02(f)-16-2011 (W) and Appeal No. 02(f)-17-2011 (W). The appellants in all these three appeals are the same parties. They are the purchasers of the medium-cost apartments ("the apartments") in a housing development project known as Bandar Universiti Teknologi Legenda in Mantin, Negeri Sembilan undertaken by the developer called Dataran Mantin Sdn Bhd ("the developer"). The respondent in Appeal No. 02(f)-15-2011 (W) is HSBC Bank (M) Berhad. The respondent in Appeal No. 02(f)-16-2011 (W) is Alliance Bank Berhad. The respondent in Appeal No. 02(f)-17-2011 (W) is Malayan Banking Berhad. For the purpose of arguments in these appeals, all the parties agreed that they would be referring to the appeal records of the appellants in Appeal No. 02(f)-15-2011 (W).
Background Facts
(2) The Appeal No. 02(f)-15-2011 (W) is an appeal by the appellants against the decision of the Court of Appeal in upholding the decision of the High Court to strike out the appellants action against the respondent under the Kuala Lumpur High Court Civil Suit No. 08-22-1498-2005 ("the D8 action") on the ground that there is no reasonable cause of action against the respondent pursuant to O. 18 r. 19(1)(a) of the Rules of the High Court 1980 ("RHC 1980").
(3) The appellants were the 178 plaintiffs who instituted the D8 action against the respondent and 21 others as defendants for various declarations in respect of sale and purchase agreement ("SPA") entered into between each of the appellant as purchaser and the developer for the purchase of the apartments.
(4) The appellants had also obtained end financing from various financial institutions including the respondents vide the respective loan cum assignment agreements ("the financing agreement") entered into between them and these financial institutions for the purchase of the apartments under the SPA.
(5) In the D8 action the appellants alleged against the developer, the two companies connected with the developer including their directors and the local authority, that is Majlis Perbandaran Nilai ("Majlis Perbandaran"), that they had conspired to defraud the appellants by way of a scheme aimed at inducing the appellants into purchasing the apartments from the developer under the SPA. They contended that the SPA was void ab initio for being contrary to law and/or public policy by reason of the fact that the Majlis Perbandaran is not empowered to execute the Power of Attorney ("PA") by reason of its character as a local authority under the provisions of the Local Government Act 1976 . In this case the SPA was entered into by the developer for and on behalf of Majlis Perbandaran, the owner of the subject land pursuant to the PA executed in favour of the developer by the Majlis Perbandaran. It was also alleged that the PA was not executed in compliance with the provisions of the Power of Attorney Act 1949 . The appellants further alleged that the SPA was an investment contract within the meaning of Companies Act 1965 when considered in the context of the Guaranteed Return Scheme Agreement ("GRSA") entered into by the appellants with the companies connected with the developer and such investment contract contravened the provisions of the .
(6) It is the appellants case as against the developer and its connected companies that the developer had rep
