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Legal Update 18 of 2018

    Home Legal Updates Legal Update 18 of 2018
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    Legal Update 18 of 2018

    By jhjadmin | Legal Updates | 0 comment | 16 October, 2018 | 0

    Is a Sale and Purchase Agreement to “circumvent” a policy of a bank illegal? And if so what is the consequence?

    Case:

    PANG MUN CHUNG & ANOR V CHEONG HUEY CHARN [2018] 4 MLJ 594

    Brief Facts:

    • Pang Mun Chung (“Pang”) is a non-citizen who applied for a loan to finance his family’s business but was unsuccessful for various reasons, one of which was the bank’s internal policy of not lending to non-citizen.
    • To circumvent the restriction from the bank, Pang then engaged Cheong Huey Charn (“Cheong”), his then-romantic interest who is a Malaysian in a plan to transfer his house to her name under the pretext of a sale and purchase agreement (“SPA”) which Cheong agreed to hold on trust for Pang’s family.
    • With the house registered in Cheong’s name, Cheong applied for a loan from the bank to finance the purchase. A charge was registered on the house as security for the loan.
    • Pang and his family serviced the loan and Pang’s parents stayed on in the property.
    • However, the loan went into default when Pang faced financial difficulties and the bank commenced foreclosure proceedings.
    • The bank then sold the house at a public auction, and from it there was a surplus of funds which went to Cheong as the house was still registered in the name of Cheong.
    • Pang then asked for the release of the surplus from Cheong but she refused.
    • Pang then sued Cheong in the Sessions Court and sought to enforce the trust previously agreed with Cheong to entitle him to the surplus.
    • The Sessions Court held in favour of Pang and found that the sum was held on trust for Pang.
    • Cheong appealed to the High Court on the ground that the SPA was a sham agreement created to circumvent the bank’s policy of not lending to non-citizens. She argued that as a consequence of the deception and the true nature of the proprietary transfer, Pang could not be entitled to the surplus which should belong to her.
    • The High Court found in favour of Cheong.
    • Pang then appealed to the Court of Appeal.

    COURT OF APPEAL DECISION – APPEAL BY PANG ALLOWED!

    The Court of Appeal allowed the appeal and ordered the surplus be released to Pang on the following basis:

    • There was no illegality in Pang’s conduct because the bank’s condition on lending was merely an internal policy without force of law; therefore Pang’s attempt to circumvent it cannot amount to an “illegal” act.
    • Even if the action was considered illegal, the illegality defence would not be sustainable since it would result in an outcome that was potentially unjust for one party. It was difficult to justify why Cheong should keep the money when she was similarly involved in the “sham arrangement”. To allow Cheong’s entitlement would confer her an unjust windfall.
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