The Edge Court Judgments Report
This monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge.
Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here.
STRATA TITLE MANAGEMENT ACT 2013 (‘SMA’)
Federal Court: Debts owing by unit owners to the management corporation (‘MC’) are not priority debts
A common problem faced by the liquidator of a wound-up company (‘Insolvent’) owning a unit (‘Parcel’) in a strata development project (‘Project’) is that the MC would allow the liquidator or receiver to get into the Parcel for the purpose of winding up of the affairs of the Insolvent only if the liquidator pays the outstanding sums owing to the MC. This problem is traceable to the differences in commercial and legal opinions as to the proper meaning of s 77 of the SMA — any amount of money lawfully incurred by the MC in the course of the exercise of any of its powers or functions or carrying out of its duties or obligations shall by virtue of the section be guaranteed by the proprietors for the time being.
Issues
Do the words ‘shall by virtue of [s 77] be guaranteed’ mean that the debt owing to the MC is a priority debt such that it enjoys the status of a secured debt within the meaning of the statutory insolvency regime in s 292 of the Companies Act 1965 (‘CA 1965’) (now s 527 of the Companies Act 2016)? May the MC sue for the debt, or must it file its proof of debt with the liquidator of the Insolvent? The Federal Court was asked to consider these issues in Dubon Berhad (in liquidation) v Wisma Cosway Management Corporation (Judgment dated 21.5.2020).
Case summary and decision
The Appellant, Dubon Berhad (in liquidation) (‘Dubon’) was the beneficial owner of a Parcel in Wisma Cosway. The Respondent was the MC of Wisma Cosway. In the process of realising Dubon’s assets, Dubon’s liquidator requested the developer of Wisma Cosway, Stephens Properties Sdn Bhd (‘Stephens’), to execute the transfer of the Parcel.
Stephens refused to do so unless the MC had given clearance that a defined sum payable as outgoings and services charges in respect of the Parcel owed to the MC and another sum owing to Stephens as ‘administrative and application fees’ had been settled. Dubon’s liquidator denied the claim on the basis that (a) the MC and Stephens are unsecured creditors; (b) payment to them is subject to the availability of funds; and (c) payment to them will be in the order of priority of creditors who had proven debts in accordance with the pari passu principle. The liquidator filed a claim at the Strata Management Tribunal (‘ST Proceedings’) to get into the Parcel. In response, the MC filed a counterclaim and applied for leave in the Winding-up Court to commence the counterclaim in the ST Proceedings. The HC dismissed the leave application. The Court of Appeal (‘CA’) reversed the decision and granted leave to the MC to proceed with MC’s counterclaim in the ST Proceedings. On further appeal, the Federal Court (‘FC’) in a unanimous decision delivered by Nallini Pathmanathan FCJ (Azahar Mohamed CJM, David Wong Dak Wah CJSS (as he then was), Rohana Yusuf FCJ (now PCA) and Mohd Zawawi FCJ concurring) reversed the decision of the CA.
The FC held that the word ‘guarantee’ in s 77 of the SMA does not dislodge the statutory priority regime in CA 1965 nor has the effect of elevating the payment of management fee to the status of a secured debt. The word ‘guarantee’ only denotes ‘a statutory obligation between the MC and a parcel proprietor, entitling the MC to recover maintenance and other related service charges from a parcel owner as a debt that is recoverable under s 77(3) in proceedings before the Strata Management Tribunal. Additionally, the MC is an unsecured creditor and the statutory duty of a liquidator is to apply available unencumbered assets of the wound-up company to preferential debts under s 292 of the CA 1965 and, secondly, to pay unsecured debts of the company pari passu.
[30] There is nothing in the language of section 77 which even makes reference to or purports to oust such insolvency principles. That is because section 77 was never crafted nor intended to encroach upon, or disrupt the priority regime in the Companies Act. Any provision which seeks to achieve priority can only be done by way of statutory provision and that too, vide positive, clear and unambiguous words. It is evident from a perusal of section 77 that Parliament never intended to displace any part of the statutory insolvency regime.
[31] It served instead to statutorily provide that the non-payment of management fees creates an undisputed debt. The term ‘guaranteed’ ensures the fact of the existence of such a debt. It ensures that parcel proprietors do not evade their obligations to make such payments. The recovery of such debts is thus assured and can simply be effected under the section.
[32] As such, a reading of section 77, which purports to accord such a debt priority on a parity akin to a secured debt, is to miscomprehend and misconstrue both the effect of the section and the statutory insolvency regime in this jurisdiction.
[33] Ultimately, therefore, section 77 was never intended to, and does not go further than ensuring a fail-safe method of recovering management fees as an undisputed debt from parcel proprietors at the behest of the MC.
Justice Nallini Pathmanathan
The FC also held that it was wrong for the Winding-Up Court to grant leave to the MC to recover its debt. The MC ought to have filed its proof of debt in the Winding-up Court.
LAND LAW: THE DIFFERENCE BETWEEN DEFERRED AND IMMEDIATE INDEFEASIBILTY
Federal Court (‘FC’) rules against chargee bank that its registered charge is indefeasible
Section 340(2) of the National Land Code 1965 (‘NLC‘) provides for the circumstances under which the registered title or interest of an immediate purchaser (‘IMP’) may be defeated. The IMP’s title or interest is liable to be set aside if registration in the IMP’s name was obtained (a) by fraud or misrepresentation to which the IMP, or its agent, was a party or privy; (b) by forgery or by means of an insufficient or void instrument; or (c) the title was unlawfully acquired in the purported exercise of any power or
authority conferred by written law. In this regard, the IMP’s good faith or bona fides is irrelevant. On the other hand, if the person is not an IMP but is a subsequent purchaser for valuable consideration, or is a person claiming through such subsequent purchaser (‘SPVC’), the SPVC’s title to, or interest in, the land is indefeasible or is protected by the proviso to s 340(3), which provided that the SPVC had acted in good faith, or had no knowledge of the vitiating elements in s 340(2) of the NLC.
Issues
Where A had fully paid for the purchase price of a property to a developer but the title to the property is not registered in A’s name as yet, what is the relationship between A and the developer in law? When the title is issued but the developer, despite having received the full purchase price from A, registers the property in its name and charges the property to a bank, is the registered interest of the bank as chargee that of an immediate or subsequent purchaser? If the bank is an immediate purchaser, is the charge defeasible under s 340(2) at the instance of A even if the bank had acted in good faith? Can equitable principles or the equitable interest of A in the land coexist with the legal and statutory principles embedded in the NLC that adopts the Torrens system of registration? These were the major issues that confronted the FC in two appeals (heard together) in He-Con Sdn Bhd v Bulyah binti Ishak and anor (Judgment dated 25.6.2020).
Case summary and decision
Bulyah and Noraini are the joint administrators of the Estate of Nor Zainir (‘Deceased’). The Deceased had purchased a property (‘Property’) from a developer (‘He-Con’) and had fully paid the purchase price. At that material time, title had not been issued. He-Con, the grantor, executed a power of attorney in favour of the Deceased in respect of the Property (‘1st PA’). The 1st PA was registered at the High Court and it contained powers and obligations as if the Deceased was the grantor of the 1st PA. In turn, the Deceased appointed Bulyah as substitute attorney (‘2nd PA’). Following appointment as joint administrators, consent was requested from He-Con to directly transfer the Property into Bulyah’s name. He-Con refused. Later, Bulyah found out that the aggregate of quit rent and stamp duty payable was in a hefty sum and due to financial constraint, the idea to carry out the transfer into Bulyah’s name was postponed. Meantime, Bulyah paid all outgoings in respect of the Property and had been collecting rentals in relation to the Property. These matters were consistent with the terms of the 1st PA. Subsequently, a vesting order was obtained to administer the Property and it was discovered that the Property had been registered in the name of He-Con and He-Con had charged the Property to a bank (‘AmBank’). AmBank applied for an order of sale as He-Con had defaulted under the terms of the charge. Bulyah and Noraini sued He-Con, its directors and AmBank. The action against He-Con’s directors were withdrawn when they were adjudged bankrupts.
The High Court (‘HC’) held that He-Con, having received the full purchase price, was a bare trustee of the Property and it had no right to deal with it and had no power to charge the Property to AmBank. However, AmBank had acted in good faith or had not acted negligently. As such, the HC held that AmBank had the right to proceed with the order of sale, auction off the Property and any remaining proceeds from the auction sale be paid to the joint administrators. The Court of Appeal (‘CA’) affirmed the HC’s decision that He-Con was a bare trustee but overruled the decision that the title of AmBank was not defeasible merely because AmBank had acted in good faith. He-Con and AmBank appealed to the FC. In a unanimous decision delivered pursuant to s 78(1) of the Courts of Judicature Act 1964 by Abang Iskandar FCJ (Tengku Maimun CJ, Mohd Zawawi and Rahman Sebli FCJJ concurring) following the retirement of Idrus Harun FCJ (as he then was), the FC affirmed the decision of the CA.
Bare trustee and application of equitable principles
The FC affirmed the decision of the HC and CA that He-Con was a bare trustee in equity and that the documentary evidence showed that the full purchase price had been paid to He-Con. Further, the terms of the 1st PA ‘had literally put the deceased in the shoes’ of He-Con in the sense that the Deceased was empowered to deal with the Property and was obligated to discharge all obligations binding upon it as if the Deceased was a registered owner. In the circumstances, He-Con had divested all its interest in the Property in equity and equitable principles can coexist with the legal and statutory principles under the Torrens system of land registration. Referring to earlier decisions of the Supreme Court (now the FC) and the FC, Abang Iskandar FCJ held that (a) the Torrens system under the NLC is designed to provide simplicity and certitude with respect to land dealings without depriving equity of the ability to exercise its jurisdiction in personam on grounds of conscience; and (b) there is nothing in the NLC which expressly or by necessary implication excludes or prohibits any equitable interest in land and the Court should give effect to ordinary commercial transactions created by contracts outside any statutory provisions for registration of title under the NLC.
The registered interest of AmBank as chargee
Whether the registered interest of AmBank as chargee was defeasible under s 340(2) of the NLC, or was saved by the shield of indefeasibility pursuant to the proviso to s 340(3) depended upon whether AmBank was an IMP or a SPVC in good faith. In cases where an IMP obtains registration of title or interest by any of the vitiating means in s 340(2) committed by the perpetrators of the wongdoing, the FC held that the registered title or interest of the IMP is defeasible and is liable to be set aside by the true owner. In this res-pect, it does not matter whether the title of the true owner is legal or equitable in nature. Accordingly, the FC rejected the arguments of AmBank that its registered interest as chargee could not be defeated by an unregistered interest, that it had acted at all material times in good faith and could not have discovered the unregistered interest of the true owner. This was because, the FC held, AmBank was an IMP within the meaning of s 340(2) of the NLC and in this circumstance, its good faith was irrelevant.
[87] … under the NLC, only a bona fide subsequent purchaser for value is protected under the express proviso to section 340(3) of the NLC. In this case before us, it is clear that the 4th Defendant had its loan secured by registering a charge over the said loan immediately from the 1st Defendant. At that material time, the 1st Defendant had no longer any interest to be dealt with because it was then only a bare trustee for the deceased. In other words, no interest passed to the 4th Defendant when the charge was registered by the 4th Defendant. The transaction between the 1st Defendant and the 4th Defendant was a direct and immediate purchase. It was a transaction that was vitiated by section 340(2) of NLC as it was based on an insufficient or otherwise, void instrument, as the 1st Defendant could not pass any title or interest in respect of the said Property to the 4th Defendant.
[88] That being the case, the 4th Defendant being an immediate purchaser, under the law, it must have its interest by virtue of the registered charge, defeasible. Being an immediate purchaser, the 4th Defendant, in the circumstances of this case, cannot invoke the proviso to section 340(3) of NLC…
Justice Abang Iskandar
LAW OF GIFTS
Court of Appeal: Where a gift is subject to a condition and the condition is breached, in principle, the gift comes to an end
It is especially common in the affairs of a family for the parents or grandparents (‘Donor’) to make a gift inter vivos to their children or to their grandchildren respectively (‘Donee’). At times, the gift is subject to a condition or conditions (‘Condition’).
Issues
Assuming that it is proven that the Condition is breached and the gift is land which had been transferred to the Donee, what is the resulting relationship between the Donor and Donee? Is the title of the Donee defeasible? Can the Donor lodge a caveat over the land? These issues confronted the CA in Hannah Kam Zhen Yi v Tan Sri Dato Kam Woon Wah & Anor and another appeal (Judgment dated 16.7.2020) in the context of whether Tan Sri Dato Kam could lodge a caveat over the land (‘Property’). The other appeal was by the purchaser of the Property (‘Ong’) who entered into an agreement to purchase the land from Hannah Kam.
Case summary and decision
Tan Sri Dato Kam is the biological grandfather of the appellant (‘Hannah’), the daughter of Dato Seri Kam (‘Andrew Kam’). Andrew Kam is the biological son of Tan Sri Dato Kam. The Property was originally owned by Lead Enterprises Sdn Bhd (‘Lead’) and Tan Sri Dato Kam and Andrew Kam were the only shareholders and directors. It was undisputed that Lead was indebted to Tan Sri Dato Kam. Lead agreed to settle the debt owing by transferring the Property to Tan Sri Dato Kam or his nominee. A settlement agreement was made between Tan Sri Dato Kam and Lead (‘SA’) and the former nominated Hannah to be the recipient of the Property pursuant to a deed of gift (‘DG’). Hannah became the registered proprietor of the property in July 2017. In 2018, Hannah entered into an agreement to sell the Property to Ong, the appellant in the second appeal in which Tan Sri Dato Kam was also the respondent. Tan Sri Dato Kam lodged a caveat over the Property, filed an action against Hannah and Ong to have the Property transferred back to him and also applied for extension of the life span of the caveat. The action was premised on the basis that the gift of the Property was conditional in that Hannah must not use or allow the Property to be used to help Andrew Kam due to the acrimonious relationship between father and son. The Condition was made or imposed orally at the time the SA and DG were executed. The oral Condition was confirmed by Hannah’s sister in an affidavit.
The High Court (‘HC’) held that the status quo of the Property should be maintained as there were serious issues to be tried. Accordingly, the HC dismissed the arguments that Tan Sri Dato Kam had no right to lodge the caveat or seek its extension, that Hannah was free to deal with the Property and her interest in the Property was indefeasible. In short, the subject matter of the dispute must be tried. Hannah and Ong appealed to the CA.
In a unanimous decision delivered by Kamardin bin Hashim JCA (Abdul Karim Abdul Jalil and Mohamad Zabidin Mohd Diah JJCA concurring), the appeals by Hannah and Ong were dismissed. The CA held that the learned Judge of the HC was correct in arriving at the decision that there were serious issues to be tried and status quo should be maintained until disposal of the action filed by Tan Sri Dato Kam. The CA further held that if the Condition which was imposed orally by Tan Sri Dato Kam when making the gift to Hannah could be proved at trial (without expressing any opinion on its merits at this stage of the proceedings), Tan Sri Dato Kam had caveatable interest and the title of Hannah to the Property could be defeated.
[31] Without going into the merit, we agreed with learned counsel for the Plaintiff’s submission that once the conditions of the gift failed or unfulfilled, no matter the condition is one to be performed before the gift takes effect or after the gift has taken effect, the gift will be put to an end. When the 1st Defendant breaches the said condition, the gift will come to an end and the 1st Defendant will hold the property on trust for the Plaintiff. By claiming the title to the said Property, thus his application has disclosed a caveatable interest as envisaged under section 323(1)(a) of the NLC. Therefore it is our considered view that the 1st Defendant’s title and interest in the said Property can be challenged and was defeasible.
Justice Kamardin bin Hashim
CONSTRUCTION INDUSTRY AND ADJUDICATION ACT 2012 (‘CIPPA’)
High Court: The CIPPA is not unconstitutional
The CIPPA was enacted for the purposes of facilitating regular and timely payment in respect of construction contracts and quick resolution of disputes through the adjudication processes provided in the statute. The intention of Parliament in enacting the CIPPA was to arrest the mischief caused by the pervasive payment problems which stifled cash flow in the construction industry.
Issues
Is the CIPPA statutory adjudication scheme unconstitutional in that it violates (a) article 8(1) of the Federal Constitution (‘Constitution’) that provides that all persons are equal before the law and are entitled to equal protection of the law; and (b) article 121 of the Constitution, which vests judicial power of the Federation in the Courts. These two issues, amongst other issues, were raised in the High Court (‘HC’) in Mega Sasa Sdn Bhd v Kinta Bakti Sdn Bhd and 6 other parties.
Case summary and decision
Mega Sasa Sdn Bhd (‘Mega’) was an employer. It employed the 1st defendant (‘Kinta’) to carry out sub-contract works. Payment disputes arose and Kinta initiated proceedings against Mega under the CIPPA. In response, Mega filed action in Court. The action, amongst others, named the director of the Asian International Arbitration Centre (‘AIAC’), AIAC, the Minister of Works and the Government of Malaysia as defendants. Mega argued that (a) CIPPA’s adjudication scheme was discriminatory in that the adjudication scheme was non-consensual, unlike arbitration proceedings where there is a prior agreement between parties to have disputes and differences arbitrated. Under the CIPPA, Mega’s participation was mandatory and it had to incur substantial costs when Kinta initiates adjudication proceedings under the statute. Thus, Mega and Kinta are not equal before the law within the meaning of article 8(1) of the Constitution as it is at Kinta’s option to compel Mega to submit to adjudication proceedings; and (b) that only the Courts can make judicial decisions binding on Mega under article 121 of the Constitution. The scheme of statutory adjudication under CIPPA, it was argued, violates article 121, or usurps the judicial powers of the Courts. In the HC, Lim Chong Fong J dismissed Mega’s arguments.
Article 8(1) of the Constitution
Referring to a decision of the Federal Court, the learned Judge held that the equality provision is not absolute in that it does not mean that all laws must be applied uniformly to all persons in all circumstances everywhere. Article 8(1) envisages that there may be lawful discrimination based on classification provided it is reasonable or permissible. In this context, the reasonableness of classification may be within the purview of Parliament but the Court is entitled to examine whether or not the classification is reasonable or permissible in the exercise of judicial power. The learned Judge held that the classification, which is restricted to disputants in the construction industry, is reasonable and particularly in light of its statutory purposes.
Article 121 of the Constitution
The statutory adjudication scheme under the CIPPA does not usurp judicial powers vested in the Courts under article 121 of the Constitution. The learned judge held that there is a distinction between judicial powers and judicial functions — statutory adjudication under the CIPPA, like adjudication under the Tribunal for Homebuyer Claims and other inferior tribunals, is not a replacement of the Courts envisaged in article 121 of the Constitution. Further, adjudication proceedings under the CIPPA is only binding but not final. It is open to the disputants to have the same dispute determined by the Courts without attracting the doctrine of res judicata and issue estoppel notwithstanding the dispute had been adjudicated upon under the CIPPA.
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