A pledge of shares without a formal agreement is void due to illegality, particularly relating to public policy concerns regarding share allotments.

James Foong FCJ:

Introduction

[1] The background facts of this case are not disputed. They are as follows: The plaintiff is a private limited company owned by the Chan family. They held shares in a public-listed company known as Palmco Holdings Bhd (Palmco) which is listed in the Kuala Lumpur Stock Exchange. The 1st defendant, his wife and the 2nd defendant (which is a private limited company controlled by the 1st defendant) whom we shall collectively refer to as the 1st defendant and his group, also held shares in Palmco. There is another Malay gentleman by the name of Dato Yusof Latif (Latif). Like the 1st defendant, Latif, his family and the company he controlled (collectively referred to as Latif and his group) also owned shares in Palmco. Together, these three groups were the majority shareholders of Palmco and by virtue of Datuk Chan Woot Khoon, Chan Koi Koon and Chan Fook Khoon, nominees of the plaintiff, 1st defendant and Latif, as elected directors of Palmco effectively controlled the operation of Palmco.

[2] The relationship between the Chan family, 1st defendant and Latif was good until a dispute erupted. It all began when Palmco announced a special rights issue for Bumiputras in 1984 at RM1 per share. The total special rights issue amounted to 9,640,000 shares. These shares were originally offered to Bumiputra institutions but due to the persuasive powers of the 1st defendant and Latif, the Ministry of International Trade & Industries (MITI) reversed its decision and offered them to the 1st defendant and his group and Latif and his group instead. But 1st defendant and his group and Latif and his group did not have sufficient means to take up this special rights issue. To facilitate them, the plaintiff in this instant case pledged its own fully paid-up shares in Palmco to various banks for facilities extended to the 1st defendant and his group and Latif and his group. In this instant case, the plaintiff pledged a total of 865,000 of its Palmco shares to several banks for facilities to the defendants.

[3] The defendants had used the loan facilities granted to them by the various banks to subscribe for the special rights issue allocated to them.

[4] There was no written agreement regarding the loan of these shares and neither was there any board resolution of the plaintiff approving this exercise. The only documentary evidence for this transaction were the memorandums of deposit executed by the plaintiff in favour of the banks granting the loans.

[5] The defendants serviced the loan from 1984 (the date of drawdown) till 1989 when they stopped due to the economic downturn. As a result of this, the banks recalled the loans and upon default sold the plaintiff's Palmco shares pledged to them. The plaintiff is now seeking the return of these shares or its value thereof.

[6] According to the plaintiff, their Palmco shares were pledged "on the express and/or implied understanding that the said shares are to be returned to the plaintiff by the defendants on demand". In addition, the plaintiff asserts that "It is also an express and/or implied condition that the defendants will not breach the terms and conditions of their loan agreements with their respective bankers so as not to jeopardise the plaintiff's shares deposited with the banks". Since the defendants failed and/or neglected to return the said shares after due notice and having breached the terms and conditions of the loan agreements with the banks thereby jeopardising the said shares, the plaintiff sought:-

a. An order tha