Related or not related?

Identifying a related party transaction (RPT) is similar to playing detective and spotting the difference. If you’ve ever watched Suits (or the ongoing case of 1MDB), these transactions go from bank accounts to bank accounts, countries to countries and ending up settling in an offshore bank account. Tracing the chain of transactions is challenging at its simplest and are complicated to weave through the webs of thousands of transactions.

RPT is not always damaging to the companies as they might mutually benefit. For example, the principal company might award a contract to its subsidiary because of financial reasons and to save cost. However, RPT’s bad reputation and connotation stem from the fact that it is the most common way Directors and Trustees syphon out money from the company for personal benefit and money laundering.

  1. What is Related Party Transaction

As a basic and simple definition, a related-party transaction refers to any transaction involving the acquisition or disposal of interests in securities/assets by a company or any of its subsidiaries from or to a related party. The interest need not be financial or monetary interest. The Companies Act 2016 loosely defines “related” between corporation as:

Read that 3 times and see if you understand. Especially subsection (c ).

Interpretation:

  1. A and B are deemed related because A is the holding company of B (assuming full control). Nothing difficult.
  2. A and B are deemed related because A is the subsidiary of B. Nothing difficult.
  3. C and B are deemed related because C is the subsidiary of the holding company A of another corporation B.

(C ) is obviously the most contentious one because the question is then how far can you stretch this concept? Is C’s subsidiary’s subsidiary’s subsidiary deemed related to B? This would be the moot point of most RPT.

2. Who are related parties?

In addition to the above, transactions between the corporation and individuals/ other corporations which the directors of the company or substantial shareholder are connected to are considered a Related Party Transaction. Companies Act 2016 defines the how a person can be connected:

However, under section 221(3), a director shall NOT be deemed to be interested in any contract or proposed contract by reason only (a)relates to any loan to the company that the director has guaranteed or party to the loan; or (b) for the benefit of a corporation by virtue of section 7 is deemed to be related to the company that he is the director of that corporation.

As mentioned earlier, RPT are dangerous and are scrutinized because directors may enter into certain transactions at a grossly overvalued or undervalued price in which the director gets a personal benefit to the companies’ detriment. For example, Director A sells a piece of land to Individual B at 40% the market price who then sells it to Individual C at market price and splits the profit with Director A. This transaction, however, will be caught under the following provision:

This means that the transaction would be void unless shareholder approval is obtained at a general meeting or company approval at a Board meeting.

3. When and how is approval needed and obtained?

By default, RPT of any value requires a shareholders’ approval. At the general meeting,

  • An interested director in a RPT, must inform the Board of Directors of the Company the details of the nature and extent of his interest, including all matters in relation to the proposed transaction that he is aware or should reasonably be aware of, which is not in the best interest of the Company.
  • The director with interest, direct or indirect must abstain from deliberation and voting on the relevant resolution in respect of the RPT at the Board meeting. In a general meeting to obtain shareholders’ approval, a director or major shareholder, with any interest, direct or indirect, or person connected to them must not vote on the resolution approving the transaction.
  • Votes are to be taken on poll.

A similar provision to section 228 is encapsulated under section 223 Companies Act 2016. This deals with substantial transactions rather than RPT but I’m including this if RPT also happens to be a substantial value transaction which has additional requirements.

What approval procedures to follow would depend on the type of company involved in the transaction.

  1. Where a company’s shares are listed on the stock exchange

Under Chapter 10.08 of the Listing Requirements, “where any one of the percentage ratios of a related party transaction is 0.25% or more, a listed issuer must announce the related party transaction to the (Bursa Malaysia) as soon as possible after terms of the transaction have been agreed”. The valuation for the percentage ratio is calculated from the value of the assets compared to the net assets of the corporation so for example, the value of a piece of land a company intends to sell to the net asset of the corporation.

However, exceptions apply where the value is less than RM0.5mil or that it is a Recurrent Transaction.

If the percentage ratio is more than 5%, the corporation must announce the transaction to Bursa Malaysia + send a circular to shareholders + obtain approval at a general meeting + appoint an independent advisor before the transaction is agreed upon.

If the percentage ratio is more than 25%, the corporation must, in addition to the above requirements, also appoint a Principal Adviser who, inter alia, advise whether such transaction is carried out on fair and reasonable terms and conditions, ensure that such transaction complies with the relevant laws & regulations, ensure full disclosure and all the necessary approvals have been obtained, that it has discharged its responsibility with due care in regard to the transaction.

More regulations apply where it is a very substantial transaction (close to 100%) and where the company is a property developer with core business in development and real estate with development potential,

B. Where it is an unlisted subsidiary whose holding company is a listed company

Directors of the Holding company would obtain a shareholders’ approval in a general meeting in addition to shareholders’ approval of the unlisted subsidiary.

C. “Dan Lain-lain”

A substantial value undertaking or property or a substantial portion is when it either:

  1. Exceeds 25% of the value of the assets of the company
  2. The net assets attributed to it amounts to more than 25% of the total net profit
  3. The value exceeds 25% of the issued share capital

Whichever is highest

For this, approval procedure for substantial value transaction and RPT are the same– shareholders’ approval at a general meeting.

4. What is not a RPT?

Under the Chapter 10.08 of the Listing Requirements, the below are not normally regarded as RPT:

  • The payment of dividend, issue of securities by the Company by way of a bonus issue or for cash
  • An acquisition or disposal by the Company or its subsidiaries, from or to a third party, of an interest in another corporation, where the related party holds less than 10% in that other corporation other than via the Company;
  • The provision or receipt of financial assistance or services by a licensed institution upon normal commercial terms and in the ordinary course of business;
  • Directors’ fees and remuneration
  • the entry into or renewal of tenancy of properties of not more than 3 years, the terms of which are supported by an independent valuation

…. And more.

The case is less clear for “Dan Lain-Lain” but we can gain some inspiration from the Listing Requirements about what is expected.

Conclusion:

RPT particularly acute hence it is highly regulated and scrutinised to ensure the company has its’ checks and balances on its’ directors under the required rules and regulations. A breach of these regulations entails not only civil liability but also under criminal law where the director can be imprisoned and have a heavy fine upon them. Corporations must ensure that they are conducting business in an ethical, moral and legal manner hence the Companies Act 2016 places much more responsibility and liability on directors compared to Companies Act 1965.

Case comment: Of con men and chargees

The author discusses the case of CIMB Bank Berhad v AmBank Berhad & 2 Ors [2017] 5 MLJ 142. It is a Malaysian land law case on deferred indefeasibility, the position of chargees and the meaning of ‘purchaser’ in the National Land Code 1965 (‘NLC’). To appreciate this article, the reader must have a basic understanding of how to interpret section 340 of the NLC.

Many candidates who sat for the Certificate In Legal Practice must have collectively groaned (inaudibly, of course) when they laid their eyes on the Professional Practice paper last month. One of the questions bore some similarity to the case of CIMB v AmBank where the Federal Court made significant statements in its majority judgment and Jeffrey Tan FCJ delivered a dissenting judgment that, I believe, piques the interest of land law enthusiasts.

I thought that CIMB v AmBank was interesting because, unlike most other significant decisions on indefeasibility, this one involved two titans going head-to-head with one another in a decision that concerned many banks and financial institutions.

In this post, I will briefly outline the case facts. Then, I will summarize the decisions of the High Court, Court of Appeal and Federal Court here and offer my thoughts on the case here.

The brief facts

Diagram 2

On 17 March 2006, as security for a loan, a charge was granted over a piece of land owned by Ching Ting Seng and Ching Chong Lup (‘the Chings’) in favour of Southern Bank Berhad (‘SBB’). Soon after, CIMB Group Holdings Bhd acquired SBB, thus CIMB Berhad took over SBB’s assets. On 14 November 2008, Wong Chee Keong (‘Wong’) applied for a loan from AmBank to finance the purchase of said land from the Chings. Wong created a charge over the land in favour of AmBank as security for said loan.

Both Wong and AmBank appointed solicitors who dealt with each other extensively. Eventually, AmBank’s solicitors received the purported document of title, the duly stamped Memorandum of Transfer (‘MoT’), the purported Discharge of Charge executed by CIMB and the duplicate of the charge from Wong’s solicitors. It is undisputed that the purported document of title was not issued by the registering authority and that the purported Discharge of Charge was forged.

Following one failed registration attempt, AmBank’s solicitors tried again. They presented the purported Discharge of Charge, the MoT and the charge in favour of AmBank (‘the AmBank Charge’) for registration. The authorities registered the purported Discharge of Charge, the transfer to Wong, and the AmBank Charge.

Judging from the above, it appears that Wong had masterminded the transfer of title and discharge of charge of land in one fell swoop. Strangely, there may be a positive side to this story.

If the documents were in fact legitimate, the successful registration of title and charge would have been lauded as a testament to the system’s efficiency. However, it was this same efficiency that allowed Wong to hoodwink CIMB of its registered interest.

The decisions of the High Court and the Court of Appeal

The sole issue for determination in both the High Court and the Court of Appeal was whether AmBank was an immediate or subsequent purchaser.

The High Court found AmBank to be an immediate purchaser. The Court of Appeal found AmBank to be a subsequent purchaser and stated that the High Court failed to appreciate the two-stage nature of the transaction:

  1. First, CIMB’s charge was discharged and the transfer occurred from the Chings to Wong, resulting in Wong becoming the immediate purchaser.
  2. Then, AmBank derived their interest in the property from Wong, making AmBank the subsequent purchaser.
12333.PNG
The blue arrow represents the High Court’s line of thinking and the red arrows represent the Court of Appeal’s argument that there was a two-stage transaction.

Now, what is an article on section 340 of the NLC without an excerpt of it?

340. Registration to confer indefeasible title or interest, except in certain circumstances
(1) The title or interest of any person or body for the time being registered as proprietor of any land, or in whose name, any lease, charge or easement is for the time being registered, shall, subject to the following provisions of this section, be indefeasible
(2) The title or interest of any such person or body shall not be indefeasible:
(a) in any case of fraud or misrepresentation to which the person or body, or any agent of the person or body, was a party or privy;
(b) where the registration was obtained by forgery, or by means of an insufficient or void instrument; or
(c) where the title or interest was unlawfully acquired by the person or body in the purported exercise of any power or authority conferred by any written law.
(3) Where the title or interest of any person or body is defeasible by reason of any of the circumstances specified in subsection 2:
(a) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and
(b) any interest subsequently granted there out shall be liable to be set aside in the hands of any person or body in whom it is for the time being vested:
Provided that nothing in this subsection shall effect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser.

Section 340(1) sets out the general rule that any registered title or interest is indefeasible. The exceptions to this is where one of the situations under section 340(2) applies. Holding AmBank to be an immediate purchaser has the effect of placing it under section 340(2). It is now trite law that section 340(2) cannot be read with the proviso under section 340(3). Following the High Court decision, AmBank was found to be an immediate purchaser and therefore its interest was defeasible.

The corollary to this is that holding AmBank to be a subsequent purchaser will enable the operation of section 340(3) and allows AmBank to rely on the protection under the proviso, which can only be read together with section 340(3).

Federal Court

At this point, you might be thinking that AmBank and its counsel thought to themselves “aiyah, no sweat” after receiving the Court of Appeal ruling. That is, until you learn that CIMB obtained leave to appeal to the Federal Court on the following question of law:

Whether a chargee comes within the meaning of ‘purchaser’ under the proviso to section 340(3) of the National Land Code?

But once again, AmBank’s counsel was victorious and CIMB’s appeal was dismissed by a majority of 4 to 1.

Md Raus Sharif CJ (as he then was) delivered the majority decision and concurred with the Court of Appeal in that AmBank was a subsequent purchaser, thus protected by the proviso. In answering the leave question, the majority judges referred to the definition of the word “purchaser” in section 5 of the NLC. The majority judgment agreed with the Court of Appeal that the transaction was done in two stages.

In his dissenting judgment, Jeffrey Tan FCJ held that both immediate and subsequent purchasers must be purchasers in good faith and for valuable consideration. His Lordship held that, since Wong was not an immediate purchaser in good faith, AmBank could not have been a subsequent purchaser. Thus, AmBank was an immediate purchaser and therefore its interest was defeasible.

Comments

1) On terminology

In the majority judgment, the former Chief Justice stated the following at Paragraph 14:

Thus, if a chargee does not come under the meaning of purchaser, then AmBank was an immediate purchaser and in such a situation AmBank’s interest as chargee was not protected by the principle of deferred indefeasibility. However, if a chargee comes within the meaning of purchaser, then AmBank was a subsequent purchaser, and thus was protected by s 340(3) of the NLC. (emphasis added)

This is confusing.

At face value, it looks like his Lordship suggested the following:

If a chargee WAS NOT a purchaser, then AmBank WAS an immediate purchaser;

If a chargee WAS a purchaser, then AmBank WAS a subsequent purchaser.

What his Lordship actually meant was:

If a chargee WAS NOT a purchaser within the meaning of the proviso, then AmBank was an immediate purchaser;

If a chargee WAS a purchaser within the meaning of the proviso, then AmBank WAS a subsequent purchaser.

I would like to humbly suggest that the use of the term “immediate purchaser” has the potential to bring about some confusion. This is because in section 340 the word “purchaser” only appears in the proviso and nowhere else. Perhaps a better term is “immediate transferee”.

My concerns are not imagined. In Paragraph 71, Jeffrey Tan FCJ stated,

With respect, the issue was not ‘whether a chargee comes within the meaning of s 340(3) of the NLC’ as proposed by the leave question. As rightly said by the Court of Appeal and agreed to by the first respondent before us, the issue was whether the first respondent was an immediate or subsequent purchaser. For if the first respondent, though purchaser, were not a subsequent purchaser, then the first respondent only acquired a defeasible interest. But of course, if the answer to the leave question were that a chargee does not come within the meaning of ‘purchaser’ under the proviso, then this appeal should be decided against the first respondent. (emphasis added)

In the highlighted text, Jeffrey Tan FCJ seems to have suggested that, following the leave question, if the respondent, though purchaser within the meaning of the proviso, were not a subsequent purchaser, then the first respondent only acquired a defeasible interest.

It is submitted that if the respondent is a purchaser within the meaning of the proviso, it must follow that it is a subsequent purchaser. In other words, it is impossible for a chargee to be protected by the proviso *and* be an immediate purchaser.

Aside from the highlighted text, I agree with his Lordship in that the true question was whether AmBank was an immediate purchaser or subsequent purchaser. His Lordship also expressed his disapproval over the framing of the leave question, which was “whether a chargee comes within the meaning of ‘purchaser’ under the proviso to s 340(3) of the National Land Code.” If answered in the negative, then it follows that chargees will never be able to benefit from the proviso. As Jeffrey Tan FCJ put it,

It would have far reaching consequences if financial institutions were excluded as purchasers.

His Lordship cited numerous authorities in support of the fact that a chargee comes within the ambit of “purchaser” within the meaning of the proviso. At one point, he even answered the leave question in the affirmative at Paragraph 90 even though he ultimately found in favour of CIMB.

I would like to propose that even though this case was a ruling on the meaning of “purchaser” within the meaning of the proviso, the most noteworthy comments were related to whether AmBank was protected by the proviso or not (i.e. “immediate purchaser” or “subsequent purchaser”) because it appears to conflict with OCBC Bank (M) Bhd v Pendaftar Hakmilik, Negeri Johor Darul Takzim [1999] 2 MLJ 511 (‘the OCBC case’).

2) Is the OCBC case still relevant?

CIMB’s counsel cited the OCBC case in support of its case. On the facts, Ng Kim Hwa (‘NKH’) alleged that Ng See Chow (‘NSC’) had forged a transfer of a piece of land and subsequently charged the land to OCBC. NKH only discovered the fraud when he was notified of an entry of a Registrar’s Caveat over the land.

Diagram 3

The title to NSC was defeated, but OCBC wanted to remain as chargee. The Court of Appeal held that OCBC could not rely on the proviso within the meaning of section 340(3) because section 340(3) had not been ‘activated’ to begin with. The late NH Chan JCA also stated the following:

A person who has no right or title to the land has no right to charge it because the land is not his, in the first place, for him to grant any interest (like a charge or a lease) in the land to someone else (such as a chargee or a lessee).

In light of CIMB v AmBank, it is clear that the above statement cannot stand. It is now clear that a charge (in favour of AmBank) will subsist even though the person who made the charge was not entitled to the ownership of the property in question (Wong). The majority reasoning may have been a long time coming, considering that the Federal Court at Paragraph 26 of Tan Ying Hong v Tan Sian San & Ors [2010] 2 MLJ 1 disapproved of the OCBC decision in obiter.

It was unfortunate that the majority judgment did not comment on the OCBC case. I believe that it would have been beneficial to do so, considering that the OCBC case also related to a two-stage transaction (i.e. of transfer and charge), yet OCBC’s interest was defeated. Since it was not overruled, we may still see counsel distinguishing CIMB v AmBank on the facts and preferring the OCBC case to defeat a registered charge.

Concluding remarks

All in all, I agree with the outcome of this decision. Surely, it is not feasible to deprive innocent chargees of protection in the absence of any principal-agent relationship (see: Abu Bakar Ismail v Ismail Husin [2007] 3 CLJ 97). Thus, the answer to the leave question could have only been ‘no’. Also, I prefer the majority decision’s ruling that there was a two-stage transaction.

It is clear from CIMB v AmBank that the concept of deferred indefeasibility reigns supreme and that there is still much room to expand on the jurisprudence relating to indefeasibility, particularly with regard to charges. I look forward to witnessing the continued maturity of this area of law.