Latest Court of Appeal's decision on the issue pertaining to legality of Loan Agreement for abandoned project

CIMB BANK BHD v. GAN TEOW HOOI & ORS [2012] 9 CLJ 1003 

COURT OF APPEAL, PUTRAJAYA

ZAINUN ALI JCA, RAMLY ALI JCA, KANG HWEE GEE JCA

[CIVIL APPEAL NO: W-02(IM)(NCC)-2470-2010]

CONTRACT: Loan - Default of repayment of loan - Sale and purchase of Land to build House - Construction Agreement - Execution of loan Agreement - Investigation by Local Government and Housing Ministry on project - Vendor/contractor did not possess licence as Housing developer - Whether sale and purchase Agreement and construction Agreement void ab initio

The respondents had entered into a sale and purchase agreement with Paragon Nova Sdn Bhd ('the vendor') to purchase a vacant land at the price of RM125,000. Concurrently, the respondents also entered into a construction agreement with Atlaw Housing Sdn Bhd ('the contractor') to build a two and a half storey house on the vacant land at the price of RM200,000 which was to be paid in accordance with the third schedule of the construction agreement. The respondents applied for a housing loan in the sum of RM280,000 and this was approved by the appellant. The agreement stipulated that RM100,000 was to be released to the vendor for the purchase of vacant land while RM180,000 was for the building or construction price to the contractor. A loan agreement between the appellant and the respondents was executed and the loan sum of RM 100,000 was released to the vendor for the purchase of vacant land while the balance sum of RM180,000 was released to the contractor, pursuant to cl. 2 of the Third Schedule of the construction agreement. Since there was no notice of completion of work sent to the appellant, the sum of RM180,000 was not released to the contractor. The respondents defaulted in the repayment of the loan as stipulated in an express term of the loan agreement and several notices of demand were issued to the respondents. Almost a year later, the respondents lodged a police report against the vendor and contractor, on the basis that they did not have license as housing developer. On 9 April 2008, the Local Government and Housing Ministry issued a letter informing them they are in the process of investigating the said project. The appellant subsequently sent a notice of demand claiming for the total loan amount which was released to the respondents inclusive of the accrued interest. However no payment was made by them. The appellant then filed the writ of summons against the respondents. In the High Court, the main issue raised by the appellant was whether the sale and purchase agreement and construction agreement were void ab initio since the vendor/contractor did not have licence as housing developer. The appellant's claim was dismissed with costs. Hence, the present appeal against the said decision by the trial judge.

Held (allowing appeal with costs)

Per Zainun Ali JCA delivering the judgment of the court:

(1) The learned trial judge had misdirected himself in arriving at the decision he did. The said loan agreement was valid even if the sale and purchase agreement and construction agreement was illegal and void. Even if there was non-compliance with the Housing Development (Control and Licensing) Act 1966 for failing to obtain the required license as housing developer, it would not render the sale and purchase agreement and or the construction agreement as null and void. (paras 24-25 & 33)

(2) The loan sum had been released at the respondents' request and at all material times, there was no instruction from the respondent borrowers to stop the progressive release of the loan. Relying on such representation by the respondents, the appellant was under no duty to further verify the legality of the sale and purchase agreement and construction agreement. The principle of estopped applies. The respondents did not take either of these courses of action, and as such, must be deemed to have affirmed the legality of the agreements. In any case too, it would be unjust and inequitable to allow the respondents to raise the issue of illegality after seven of years the sale and purchase agreement and construction agreement having been executed. (paras 27-28 & 35-36)

Case(s) referred to:

Badiaddin Mohd Mahidin & Anor v. Arab Malaysian Finance Bhd [1998] 2 CLJ 75 FC (refd)

Beca (M) Sdn Bhd v. Tang Choong Kuang & Anor [1986] 1 CLJ 20; [1986] CLJ (Rep) 64 SC (refd)

Kin Nam Development Sdn Bhd v. Khau Daw Yau [1984] 1 CLJ 347; [1984] 1 CLJ (Rep) 181 FC (refd)

Legislation referred to:

Contracts Act 1950, s. 24

Housing Development (Control and Licensing) Act 1966, ss. 5(1), 18(a)

Counsel:

For the appellant - Hizri Hasshan (Ashmadi Othman & Mohd Helmy Razelan with him); M/s Che Mokhtar & Ling

For the respondent - Teh Beng Boon (Soo Pei Ping with him); M/s BB Teh

[Appeal from High Court, Kuala Lumpur; Suit No: D-22-NCC-193-2009]

Reported by Najib Tamby