JUDGMENT

Syed Ahmad Idid JC:

The plaintiff is a company incorporated in Malaysia and has its place of business at Wisma Tun Fuad Stephens, Lot No. 3, SDB Tower, Karamunsing, Kota Kinabalu, Sabah.

Money and Banking in Malaysia by Bank Negara Malaysia, 30th Anniversary Edn. 1959-1989 has this to say;

In 1977, the Sabah Development Bank Berhad was set up by the Sabah State Government to provide for medium and long term loans in Sabah to private and State enterprises. By the 1980's the Agricultural Bank of Malaysia followed by the Sabah Development Bank (plaintiff here) emerged as the leading medium and long term credit institutions while loans by the Sabah Development Bank Berhad were extended to finance a wide range of activities on the agricultural, manufacturing, utilities and the construction of real estate sectors.

The plaintiff claimed against the 1st defendant for the sum of M$188,618.09 being outstanding documentary import and revolving credit facility as at 31 January 1986 extended by the plaintiff to the 1st defendant at the 1st defendant's requests under two letters of offer dated 30 March 1985 and 3 April 1985 respectively together with interest thereon at the rate of 17.5% per annum.

By a continuing guarantee in writing dated the 2 April 1985 executed by the 2nd and 3rd defendant's in favour of the plaintiff, the 2nd and 3rd defendants guaranteed on demand to pay the plaintiff all sums up to the limit of M$500,000 in addition to such further sum for interest thereon and other charges, costs and expenses which should at any time be owing or remaining due and unpaid to the plaintiff from the 1st defendant.

The plaintiff also claimed against the 1st, 2nd and 3rd defendants statutory interest, costs and further or other relief.

At the hearing on 4 July 1991, Mr. Sugumar, on behalf of the three defendants, decided to argue only on one point, that is that the plaintiff, not being licensed as a bank under the 1973 Banking Act , had therefore transacted illegally. So the issue he raised was that the transactions, the subject matter of this action, were void pursuant to s.24 of the Contracts Act . What Mr. Sugumar meant was that "the agreement(s) was/were not enforceable by law" [s.2(f) of the Contracts Act 1950] . He submitted that the object of the agreement was forbidden by law-s.24(a) Contracts Act 1950 .

The plaintiff's contention was that the loan was properly and legally extended to the 1st defendant and so recoverable in law. The plaintiff operates as a development bank and since 26 July 1978 the plaintiff had been duly authorised to use the word "Bank" by the Minister under s.9 of the Banking Act 1973 . The activities of the plaintiff in respect of the loan transaction in this action are not "banking business" and do not therefore infringe s.3 of the Banking Act 1973 as they do not come within s.2 of that Act . Therefore the plaintiff does not require a banking licence under the Banking Act to extend the said loan to the 1st defendants.

What Is a Development Bank or Development Finance Institution?

According to the Bank Negara Malaysia's 30th Anniversary Edn. of Money and Banking in Malaysia (1959-1989), development finance institutions are specialised financial institutions. They are established to promote a higher level of investment in industries and agriculture... Their functions include the extension of financial assistance in the form of medium and long-term loans... and the provision of guarantees for loans... The role played by development finance institutions tends normally to complement those of other major financial institutions. They specialise in medium and long-term capital financing as well as supply a range of financial services not normally provided by the commercial banks and the finance companies... Development finance institutions emerged in Malaysia, as in most developing countries, to fill a gap in the supply of financial services that are not usually covered by the established financial institutions...