Equipment Leasing in Malaysia

Equipment Leasing in Malaysia
DALAM MAHKAMAH PERSEKUTUAN MALAYSIA
BIDANG KUASA RAYUAN
RAYUAN SIVIL NO. 02( )-18-2010 (J)
ANTARA
AMBANK (M) BERHAD
(dahulunya dikenali sebagai MBf FINANCE BHD)
... PERAYU
DAN
1. KT STEEL SDN BHD
2. DR. KANIAPPAN A/L THIRUVEGADAM
3. SUKHMARAN A/L MURUGESAN
4. YAP GIM PENG
... RESPONDENRESPONDEN
[Mengenai Perkara Dalam Mahkamah Rayuan Malaysia
Di Putrajaya Rayuan Sivil No. J-02-351-07)
Antara
AMBANK (M) BERHAD
(dahulunya dikenali sebagai MBf FINANCE BERHAD)
... PERAYU
Dan
1. KT STEEL SDN BHD
2. DR. KANIAPPAN A/L THIRUVEGADAM
3. SUKHMARAN A/L MURUGESAN
4. YAP GIM PHENG
1
... RESPONDENRESPONDEN]
KORAM
Richard Malanjum, HBSS
Hashim Yusoff, HMP
Mohd Ghazali Yusoff, HMP
JUDGMENT OF THE COURT
1. On 13 October 2010 this court granted the appellant leave to
appeal on the following questions of law (a) Whether a lease agreement for business equipment declared to be a
money lending transaction/loan agreement is a bill of sale under s.3 of the
Bills of Sale Act, 1950;
(b) Whether a lease agreement for business equipment declared to be a
money lending transaction/loan agreement is illegal and void under s.4 of the
Bills of Sale Act, 1950;
(c) Whether a lessee who has executed a document titled a Lease Agreement
and thereafter expressly referred to the document as a lease agreement in its
subsequent correspondences is estopped from denying that the agreement is
a lease agreement when it does satisfy the requirement of a lease agreement;
and
(d) Whether a lessor must be seised with ownership of the equipment leased
at all material times; and
(e) Whether a lessee (borrower) has to repay the monies advanced by the
lessor (lender) pursuant to a lease agreement that had been declared illegal
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and void.
2. The appellant (the plaintiff in the originating action) is a
licenced finance company. The first respondent (the first
defendant in the originating action) is a locally incorporated
company and was incorporated on 21 September 1993.
The second, third and fourth respondents (the second,
third and fourth defendants in the originating action) were
the directors of the first respondent.
The facts
3. By a “Contract of Sale Agreement” dated 1 September
1996, the first respondent (‘the buyer’) purchased a used
piece of machinery, described therein as “the mill
equipment” (hereafter referred to as “the said mill
equipment”) from M & M Greaves (‘the seller’), a business
enterprise
based in Sheffield, England for the sum of
£750,000.
4. As a consequence of the said “Contract of Sale
Agreement”, the first respondent made an application for a
leasing loan on 27 September 1996 in the sum of RM2.5
million from the appellant for a proposed period of 60
months to finance the purchase of the said mill equipment.
It was stated in the application that the cost of the said mill
equipment was RM2,925,000-00 and that the deposit paid
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was RM425,000-00.
5. By letter dated 12 October 1996 (“the letter of offer”) the
appellant approved in principle the application for the
leasing loan, referred to therein as an “Equipment Lease
Facility” and informed the first respondent that “under this
facilities, we shall purchase the equipment ... and
thereafter, we will lease/hire it to you based on the
following terms and conditions” which, inter alia, included
the following (i) a monthly rental of RM50,792-00 for 59 months and a
final rental of RM50,772-00 for the 60th month;
(ii) “at the end of the lease period you will undertake to
indeminity (sic) us that the resale value of the equipment
should realise not less than RM234,000-00”;
(iii) “Security/Guarantee - (a) Equipment purchase by us
and thereafter leased to you will be covered by our
Standard Equipment Lease Agreement. The terms and
conditions of which has been agreed by you.”
6. Paragraph 16 of the letter of offer reads “Lessee/Hirer As Agent For MBf Finance Bhd:
The lessee shall be the agent for MBf Finance Berhad for the following
purposes :
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(a) For placing the order for the equipment and that the invoice is to be sent
direct to MBf Finance Berhad for payment.
(b)
If
the
lessee
for
whatever
reasons
make
payments
to
the
dealer/manufacturer such payments shall be deemed to have been made on
MBf Finance Berhad’s behalf and reimbursement shall be made to the lessee
for the purpose of this lease.
(c) Accepting delivery of the equipment on behalf of MBf Finance Berhad and
which without further act, irrevocably constitutes delivery and acceptance of
equipment by lessee from lessor.”
7. Paragraph 21 of the letter of offer reads “Termination:
Lease will be non-cancellable but the lessee can repay all remaining and
outstanding rentals after the end of the 24th month at a discount of 4% per
annum.” ;
and paragraph 25(b), inter alia, reads “The equipment is leased on a ‘as is’ basis.”
8. On 30 October 1996 the board of directors of the first
respondent resolved that the company accept the lease
facility.
9. On 20 March 1997 the appellant and the first respondent
entered into an “Equipment Lease Agreement” (“the said lease
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agreement”)
wherein the appellant is described as “the
Lessor” and the first respondent as “the Lessee”. The terms of
the letter of offer were also incorporated in the said lease
agreement. The following articles of the said lease agreement
would be relevant, namely (a) Article 1 (Lease Equipment) “The Lessor hereby agrees to Lease to the Lessee and the Lessee
hereby agrees to take on Lease the equipment ... for the period and upon
the terms and conditions herein set forth and SUBJECT ALWAYS to the
due and punctual payment of the rent hereinafter mentioned ...”;
(b) Article 7 (Delivery of Equipment) “(1) The Lessee shall inspect the Equipment and issue to the Lessor an
Acceptance Receipt ... ”;
(c) Article 8 (Ownership) “The Lessee acknowledges that ownership and title to the Equipment
after delivery thereof to the Lessee shall remain vested in the Lessor and
the Lessee shall have no right or interest therein otherwise than as bailee
thereof and it is agreed that the Equipment shall at all times remain the
sole and exclusive property of the Lessor.”;
(d) Article 12 (Defects in Equipment) -
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“(1) The Lessee, having negotiated with the Seller and having on its own
accord selected the Equipment for its own use on Lease, hereby
acknowledges and declares that the Lessor shall not in any manner be
responsible for any defects or for the quality or fitness of the Equipment or
any part or parts thereof.”;
(e) Article 21 (Default) “(1) If the Lessee fails to pay the Rent provided under Article 3 hereof
after the same becomes due and payable or any other sums or monies
due and payable under this Lease Agreement ... the Lessor have the right
forthwith to excise all or any of the following remedies without having to
give any prior notice or demand to the Lessee:-
(a) to declare a part of or the entire amount of the total amount
of the rent for the whole period of the initial Term payable under
this Lease Agreement and all other moneys, sum, costs and
expenses under this Lease Agreement immediately due and
payable by the Lessee;
(b) to take possession of the Equipment or demand its return;
(c) to terminate the Lease hereby created and to demand from
the Lessee the sum calculated in accordance with Article 24
hereinafter provided and in addition thereto to claim for
compensation for all loss and damages including but not limited
to loss or profits.”;
(f) Article 27 (Sale Of Equipment On Early Termination) -
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“(1) Equipment surrendered to or repossessed by the Lessor on early
termination shall be sold by private treaty by the Lessor as it deems fit.”;
(g) Article 42 (No Option to Purchase) “This Lease Agreement shall at no time and shall under no
circumstances whatsoever be deemed to be or read as a hire
purchase agreement as defined in the Hire Purchase Act, 1967 and
no option to purchase the Equipment is conferred to the Lessee.”.
10. Vide a “Letter of Guarantee” dated 20 March 1997 (“the
said letter of guarantee”), i.e., on the same day when the said
lease agreement was entered into by the parties, the second,
third and fourth respondents, viz., the directors of the first
respondent undertook to guarantee all sums owing by the
company under the said lease agreement. The appellant was
referred to therein as “the Lessor”. Section 2.01 of the said
letter of guarantee reads “In consideration of the Lessor’s promise to lease the said Equipment
at our request upon the terms and conditions of the Lease, we
hereby jointly and severally guarantee repayment to the Lessor all
sums of money together with interest costs charges and all other
sums payable by the Lessee in the event of the Lessee’s default in
paying interest due under the Lease or in the repayment of the Lease
or any part thereof or the breach of any terms governing the Lease
by the Lessee. Our liability herein is co-extensive with that of the
Lessee.”
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11. The first respondent paid only 21 monthly rent payments
(the term of lease was for 60 months) and thereafter
defaulted. Consequently the appellant filed this action and
claimed the rent payments outstanding under the said lease
agreement together with other charges, interest and costs;
vide paragraph 11(a), (b), (c) and (d) of the statement of claim,
the appellant claimed the sum of RM1,757,517-91 and interest
on that sum at 6.5% per annum until date of realisation and
costs.
12. In their statement of defence, the respondents disputed
the claim and contended that the appellant failed to comply
with the provisions of the Bills of Sale Act 1950 and in the
alternative averred that the loan was made without security
and hence contravened s.60 of the Banking and Financial
Institutions Act 1989. They further averred that the said letter
of guarantee is not valid as a director of the first respondent
named R.Gevage a/l Ramasamy, whose name appeared in
the said letter of guarantee did not sign the same.
[Note: S.60(1) of the Banking and Financial Institutions Act 1989
reads “Subject to an order made by the Bank under subsection (2),
no licenced institution shall give to any person any credit without
security.”]
13. The respondents then counterclaimed for a declaration
that the said lease agreement was not valid as it did not
9
comply with the Bills of Sale Act 1950. In addition to and in the
alternative, they sought a declaration that the said lease
agreement contravened s.60 of the Banking and Financial
Institutions Act 1989.
The High Court
14. According to the learned trial judge, Syed Ahmad Helmy
Ahmad J (as he then was), as reflected in his grounds of
judgment dated 28 March 2007, “the sole issue for
determination as agreed upon by the parties is whether the
Equipment Lease Agreement dated 20.3.97 is a lease
agreement or a loan agreement void under the Bills of Sale
Act 1950 for non-registration under Section 4 thereof”.
15. At the end of the day the trial judge dismissed the
appellant’s claim with costs; he made the following findings (a) that under ss.19 and 20 of the Sales of Goods Act 1957
the property in and the ownership of the said mill equipment
had passed to the first respondent; there is no evidence on
record to show that the ownership of the said mill equipment
was purchased or transferred to or belong to the appellant;
(b) that since the appellant “expressly covenanted” in the said
lease agreement that the “Lessor has agreed to purchase/has
10
purchased the Equipment”, it has the onus of proving that
“they have assumed the ownership of the Equipment through
documentary evidence which onus the Plaintiff have failed to
discharge”;
(c) that for a lessor to lease the said mill equipment it must be
seised with ownership and that evidence is lacking here;
(d) that the full sum of RM2.3 million was disbursed to the first
respondent on the same date as the execution of the said
lease agreement and was paid directly to the first respondent
and not directly to the seller of the said mill equipment and the
seller issued the invoice in the name of the first respondent
and not the appellant and this “to my mind is clear
contravention of clause 16(a) of the Letter of Offer”;
(e) that vide clause 16(b) of the said letter of offer the
appellant covenanted that there would be reimbursement of
any monies paid by the first respondent; in relation to this, the
monies that was released by the appellant on 20 March 1997
cannot qualify as “reimbursement” as the payment to the seller
was only effected on 25 March 1997 and hence “the
transaction cannot be an equipment lease agreement though
labelled as such”.
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16. For the aforesaid reasons, the trial judge concluded that
“to all intents and purposes the Equipment Lease Agreement
was a loan on the security of the equipment and a bill of sale
which by reason of it not being registered under the Bills of
Sale Act 1950 makes the transaction void”.
17. The trial judge then said “As I have stated to determine whether the transaction is a leasing
agreement or otherwise it is necessary to look behind the Equipment
Lease Agreement to discover its true nature and if the facts are not
truly stated in the documents there are circumstances tending to
show that the documents were a mere cloak - Major Kassim Sharif v
Kwong Yik Finance Bhd (2001) 6 CLJ 397.
Though the sum of RM2.3 million was paid to the seller nevertheless
there was still a shortfall occasioned by the Ringgit/Pound ratio which
had escalated from 3.8:1 to 7.5:1 during the 1997 recession which
shortfall was provided by the Plaintiff to the seller pursuant to a bank
guarantee dated 15.8.1997 in the seller’s favour. By the terms of the
guarantee the Plaintiff acknowledge that the agreement to purchase
the Equipment was entered into by the First Defendant and that the
Plaintiff guaranteed to pay the seller in the event the First Defendant
fails to make payment. The guarantee aforesaid reinforces the
Plaintiff’s role as a financier to assist the First Defendant to acquire
the Equipment for its business.”
18. With regards to the said letter of guarantee, the trial judge
noted that only the second, third and fourth respondents
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signed the guarantee whereas the said R.Gevage a/l
Ramasamy did not sign. He then referred to s.97 of the
Contracts Act 1950 which reads Where a person gives a guarantee upon a contract that the creditor
shall not act upon it until another person has joined in it as co-surety,
the guarantee is not valid if that other person does not join.
19. Premised upon what was discussed earlier, the trial
judge summarised the reasons for his decision to be as
follows (a) the property in or the ownership of the said mill
equipment remained with the first respondent at all material
times and the property in the said mill equipment never
passed to the appellant;
(b) the said lease agreement “is a sham to cloak and
disguise the money lending transaction” and “since it was
money lending transaction and the purported Lease
Agreement had not complied with the Bills of Sale Act
1950, it is illegal and void for non-registration by virtue of
section 4 of this Act”;
(c) since the loan and the guarantee was granted by the
appellant without security, it has also violated s.60 of the
Banking and Financial Institutions Act 1989;
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(d) by virtue of s.24 of the Contracts Act 1950 the said lease
agreement is void because of non compliance of the Bills of
Sale Act 1950 and the Banking and Financial Institutions Act
1989;
(e) “Since the Lease Agreement itself is an illegal transaction,
the Letter of Guarantee is also tainted by illegality and is
thereby unenforceable. Alternatively the guarantee is also void
by reason of section 97 of the Contracts Act 1950 (reproduced
earlier) as the guarantee was only signed by three out of the
four sureties who were supposed to have signed the surety
(sic)”; and
(g) “The guarantee is void by reason of uncertainty as the
name of the Lessee or the Lease Agreement was not stated in
the guarantee and therefore there is no indication showing
what the sureties were in fact guaranteeing”.
[Note: s.24 of the Contracts Act 1950 provides “The consideration or
object of an agreement is lawful, unless (a) it is forbidden by a law;
(b) it is of such a nature that, if permitted, it would defeat any law;
(c) it is fraudulent;
(d) it involves or implies injury to the person or property of another, or
(e) the court regards it as immoral, or opposed to public policy.
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In each of the above cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of which the
object or consideration is unlawful is void.]
Court of Appeal
20. The Court of Appeal dismissed the appeal by the appellant
and awarded costs to the respondents in the sum of
RM10,000-00. In delivering the judgment of the court Abdul
Wahab Patail JCA said “[12] ... No evidence was placed before the Court that the sale to the
First Respondent was novated or replaced with a sale to the
Appellant who then leased the equipment to the First Respondent.
[13] On the face of it, one might ask why it should matter when the
Appellant and the First Respondent agreed to have the transaction
between them appear to be an Equipment Lease Agreement and not
a loan transaction. If the issue whether the transaction or agreement
is an equipment lease or a loan is one that is solely of a contract
between the parties, it might not have mattered.
[14] But the issue arises because the law provided for a distinction
between a hire purchase transaction and a loan transaction. In an
equipment leasing, even though the hirer chooses the equipment, the
equipment is sold to the “financier”, who purchases the equipment
and causes it to be delivered to the hirer for monthly lease payments.
See Malayan Credit Ltd v Mohamed Kassim [1965] 1 LNS 111. It is
recognised as not a financing transaction. On the other hand, a loan
transaction is a money-lending transaction and is specifically
regulated by legislation to require licensing, and without a license,
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the loan transaction is illegal null and void.
Hence, in order to
determine the true nature of the transaction rather than merely to see
what the parties sought to make it appear to be, it is essential that
the facts as a whole should be considered.
[15] The Contract of Sale Agreement signed on 1.9.1996 between
the First Respondent and the seller M&M Greaves Machinery Atlas
Works is a Sale and Purchase Agreement and not an agreement to
sell. It is not the Appellant’s case here or below that on 1.9.1996 it
was an agreement to purchase and not a purchase by the First
Respondent. The First Respondent is unequivocally stated to be the
buyer. The application for a leasing loan was made on 27.9.1996,
and the offer was made on 12.10.1996.
The equipment lease
transaction was thus sought, obtained and structured after a
purchase by the First Respondent.
The submissions for the
Appellant focused entirely on the acts and results of the structuring of
the transaction as an equipment lease. It however overlooked that
the First Respondent had purchased the equipment, and no amount
of “deeming” would change the fact the First Respondent had
purchased the equipment.
[16] The focus by the Appellant to defend the transaction as a leasing
transaction, and avoiding it being termed as a loan transaction, is
somewhat strange as the facility was then offered under the name
MBf Finance Bhd, unless it was not at the time licensed to give loans.
[17] It may seem that in the upshot the First Respondent obtains an
unconscionable advantage over the Appellant as a result. Upon
consideration, we hold the conclusion that the apparently unfair result
and the threat similar advantage might be taken in future
transactions, would discourage similar transactions and ensure that
the objects of the law be achieved against unlicensed money16
lending. To accept the Appellant’s approach will only encourage
equipment and other lease transactions that are not bona fide leasing
transactions but are in fact money-lending transactions.
[18] For the above reasons, we dismissed the appeal.”
The appeal before this court
Submission by the appellant
21. Learned counsel for the appellant pointed out that before
the High Court, the sole issue for determination was whether
the said lease agreement was a genuine lease agreement or
a loan transaction. The trial judge ruled that the said lease
agreement being a loan agreement was void and illegal for
non-registration by virtue of s.4 of the Bills of Sale Act, 1950.
The Court of Appeal also held that the said lease agreement
was a loan agreement but stopped there; the Court of Appeal
never considered the relevant provisions of the Bills of Sale
Act 1950. The Court of Appeal observed that such
transactions must be discouraged to ensure that the objects of
the law be achieved against unlicensed money-lending but
failed to consider whether the appellant is a licensed financial
institution.
22. The arguments canvassed by counsel for the appellant
can be summarised as follows (a) the said lease agreement was a genuine lease agreement;
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in the alternative, if the Court finds the said lease agreement
to be a loan agreement then the effect would be that the sums
payable under the agreement are still recoverable as a loan,
viz., it is an unsecured agreement and not a bill of sale;
(b) the provisions of the Bills of Sale Act 1950 do not apply to
invalidate the said lease agreement.
(c) for a lease agreement for business equipment declared to
be a money lending transaction/loan agreement it becomes a
bill of sale under s.3 of the Bills of Sale Act 1950 only if the
equipment is given to the lender as security for the loan;
(d) for a lease agreement for business equipment declared to
be a money lending transaction/loan agreement to be
declared illegal and void under s.4 of the Bills of Sale Act
1950, it must first be proven that the equipment was given to
the lender as security for the loan;
(e) a lessee who has executed a document titled a lease
agreement and thereafter expressly referred to the document
as a lease agreement in subsequent correspondence may be
estopped from denying that the agreement is a lease
agreement if the correspondence all point to the fact that the
agreement is a lease agreement;
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(f) a lessor need not be seised with ownership of the
equipment leased at the time of entering into the lease
agreement; and
(g) a lessee (borrower) has to repay the monies advanced by
the lessor (lender) pursuant to a lease agreement unless the
agreement is void as a bill of sale, that is, a loan secured by
the equipment financed and not registered pursuant to the
Bills of Sale Act 1950 or an unlawful money lending
transaction, that is, where the lender is an unlicensed money
lender; as the appellant is a licenced financial institution the
alleged loan is not invalid.
Submission by the respondents
23. The arguments canvassed by learned counsel for the
respondents can be summarised as follows (a) by virtue of the said “Contract of Sale Agreement” the first
respondent has become the owner of the said mill equipment;
the appellant has nothing to do with the said “Contract of Sale
Agreement”;
(b) the first respondent has become the owner of the said mill
equipment by virtue of ss.19 and 20 of the Sale of Goods Act
19
1957;
(c) thus, the first respondent who owns the said mill equipment
at all material time cannot then be said to have leased the
equipment from the appellant and therefore the said lease
agreement “is not [a] genuine one, it is a sham agreement for
a money lending transaction”; it is a money lending or loan
transaction that was couched in the form of an equipment
lease agreement;
(d) being a money lending transaction “couched in a sham
equipment lease agreement”, it has failed to comply with s.4 of
the Bills of Sale Act 1950;
(e) it has become void because it was not attested and
registered as required under the Bills of Sale Act 1950;
(f) s.3 of the Bills of Sale Act 1950 defines any agreement
entered into as a security of debt is a bill of sale and the
personal chattels shall also include trade machineries, which
is defined as the machinery used in or attached to any factory
or workshop; the first respondent is a factory which had
purchased the said mill equipment to be used and attached to
its factory in Kota Tinggi;
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(g) being a licensed finance company the appellant had
violated s.60 of the Banking and Financial Institutions Act
1989 by granting facilities that are unsecured; and
(h) pursuant to s.2 (g) and (j) of the Contracts Acts 1950, the
said lease agreement cannot be enforced in law as it is void
and by virtue of s.24 of the Contracts Act 1950 the agreement
is void because of non-compliance of the Bills of Sale Act
1950 and the Banking and Financial Institutions Act 1989.
Judgment
24. What is exactly an equipment lease agreement? Basically,
it is an agreement between two parties whereby one party
wishes to rent equipment which is owned by the other for a
specific period of time and consideration.
In other words,
equipment leasing is when a business obtains the use of
equipment, e.g., machinery on a rental basis. This avoids the
need to invest capital in equipment. Ownership rests in the
hands of the financial institution or leasing company, while the
business has the actual use of it.
It has been said that
equipment leasing provide many benefits to business owners
compared to the outright purchase or regular financing of
equipment, such as minimal upfront costs, tax savings and
minimal risk of equipment becoming obsolete.
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25. The business owner who is leasing the equipment is the
“lessee” and the bank or financial institution that is renting the
equipment to the business owner is the “lessor”. Legal title to
the equipment stays with the lender, i.e., the lessor but the
business owner have the right to use the equipment according
to the terms of the lease in exchange for regular payments
made over the contracted period of time.
26. In an article which appeared in the Malayan Law Journal
and titled Equipment Leasing in Malaysia: Some Legal
Aspects and Problems [1981] 1 MLJ xiii by Wong Kim Fatt, an
advocate and solicitor, the learned writer said (at page xiii) “The legal nature of equipment leasing is that of a contract of
bailment. There are only a few sections (section 101 - 124) in the
Malaysian Contracts Act, 1950 (revised 1974), dealing with bailment,
which is defined under section 101 as follows :
‘101. A “bailment” is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed
of according to the directions of the person delivering them. The
person delivering the goods is called the “bailor”. The person to
whom they are delivered is called the “bailee”.
Explanation - If a person already in possession of the goods of
another contracts to hold them as a bailee, he thereby becomes
the bailee, and the owner becomes the bailor, of such goods,
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although they may not have been delivered by bailment.’ ”
27. The learned writer of the aforesaid article then said (at
page xiv) “No court in Malaysia has attempted to define the term ‘equipment
leasing’. ...
The Equipment Leasing Association, London, defines a lease as
follows:
‘A lease is a contract between a lessor and lessee for the hire of
a specific asset selected from a manufacturer or vendor of such
assets by the lessee. The lessor retains ownership of the asset.
The lessee has possession and use of the asset on payment of
specified rentals over a period.’
The fundamental purpose of a lease is to enable the lessee to
acquire possession and use of the equipment without incurring its full
capital cost, while at the same time allowing the lessor as owner to
receive income or returns from the lessor’s capital investment. ...
Financial leases are the main source of income and main financial
tool for a leasing company. In a financial lease, the services of the
lessor, as the term suggests, are financial ones, i.e. the financing of
the equipment leased or hired to the lessee who pays the rentals
over regular specified intervals. A financial lease tends to be a fullpayout transaction, that is the rentals payable by the lessee fully
amortize the asset in the books of the lessor at the end of the
primary leasing period. It is non-cancellable over a period of time with
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total rentals payable by the lessee exceeding the cost of the
equipment. The lessee has no right or option to acquire title to the
equipment. In the event of any breaches of the terms of the lease
agreement, the lessor may terminate the agreement and assume
immediate of the equipment. Primary risks to the lessor are the
lessee’s liability to pay the rentals punctually. ...”
28. According to the learned writer of the aforesaid article,
the main features of a typical financial lease include the
following (a) the lessor agrees to lease and the lessee agrees to take
on lease a specified equipment on a fixed term at an
agreed rental usually payable monthly; the agreement may
stipulate a payment of deposit or prepaid rents;
(b) the lessee selects the equipment which the lessor
purchases for lease to the lessee; the lessor is not
responsible for any delay in delivery or non-delivery by the
vendor or supplier of the equipment or for the defects,
quality or fitness of the equipment;
(c) the lessee shall have possession and use of the
equipment, subject to punctual payment of the rentals and
observation of the covenants on his part contained;
(d) the ownership and title to the equipment shall remain
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vested in the lessor; the lessee shall have no right to
acquire ownership and title to the equipment at a future
date during the subsistence of the lease agreement; the
lessee is prohibited from selling, assigning, sub-leasing or
otherwise subjecting the equipment to encumbrances;
(e) the agreement provides for the right of the lessor to
immediate termination of the agreement or immediate
possession of the equipment in the happening of certain
events prejudicial to the lessor, such as suspension or
dissolution, winding-up or bankruptcy of the lessee, as the
case may be, or when the lessee suffers execution,
attachment or distress, or abandons the equipment; and
(f) provisions for charging and payment of interest on
overdue payments.
29. In another article, titled Analysis of Equipment Leasing
Contracts released by the United Nations Centre on
Transnational Corporations (United Nations Publication
1984), the features of leasing is explained as follows “The fundamental characteristic of leasing is the differentiation of use
from ownership. The lessee is the bailee of the equipment and
acquires the use of the equipment without the necessity of
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ownership. With the exception of those cases involving a purchase
option, the lessor retains legal title to the equipment during and after
the lease period.”
“... the origin of the leasing operation is the bailment/contract of hire
situation in which the lessor is the owner of the property and the
lessee is entitled only to use rights of a varying magnitude.”
30. In relation to a finance lease, paragraph 20 of the
aforesaid article illustrated it as follows “A finance lease reflects a complex and, at times, triangular
transaction whereby a ‘financier’ (the lessor) on the specifications of
the ‘user’ (the lessee) purchases from a supplier plant, capital goods
or equipment, the use of which he grants to the lessee. This
transaction usually presents the following particular characteristics :
(a) The choice of the equipment and the supplier lies with the lessee;
(b) The latter uses the equipment for business or professional
purposes;
(c) The equipment is purchased by the financier/lessor on the basis
of a contract providing for its use which has either been concluded or
is projected between the financier/lessor and the user/lessee;
(d) The financier/lessor is the owner of the equipment provided for
use;
(e) The contract between the financier/lessor and the user/lessee is
concluded for a term which takes the period of depreciation of the
equipment into consideration;
26
(f) The parties may choose from among various options either during
the course or at the end of the contract between the lessor and the
lessee.”
31. In the instant appeal, we do not think that it can be
disputed that the appellant is a licenced finance company.
S.2 of the Banking and Financial Institutions Act 1989,
which is an interpretation provision, states that a “finance
company” means “a person which carries on finance
company business” and “finance company business”
means (a) the business of receiving deposits on deposit account, savings
account or other similar account; and
(b) (i) giving of credit facilities;
(ii) leasing business;
(iii) business of hire-purchase, including that which is subject to the
Hire-Purchase Act 1967; or
(iv) business of acquiring rights and interests in a hire-purchase,
leasing or other similar transaction;
(c) such other business as the Bank, with the approval of the
Minister, may prescribe;.
In relation to the words “leasing business” s.2 of the Act
reads –
“leasing business” means –
27
(a) the business of letting or sub-letting movable property on hire for
the purpose of the use of such property by the hirer or any other
person in any business, trade, profession or occupation or in any
commercial, industrial, agricultural or other economic enterprise
whatsoever and, where the lessor is the owner of the property,
regardless whether the letting is with or without an option to purchase
the property, but does not include the business of hire-purchase
which is subject to the Hire-Purchase Act 1967; and for the purpose
of this definition, “movable property” includes any plant, machinery,
equipment or other chattel attached or to be attached to the earth or
fastened or to be fastened, permanently or otherwise, to any thing
attached to the earth; or
(b) such other business as the Bank, with the approval of the
Minister, may prescribe;.
32. In a book titled Lease Financing & Hire-Purchase
including Consumer Credit by Vinod Kothari (3rd ed - 1991),
the learned writer, in describing the legal aspects of leasing
said (at pages 292-293) “A lease of goods, or rental or hiring agreement is a contract under
which one party for reward allows another the use of the goods. A
lease may be for a specified period or in perpetuity. A lease differs
from a hire-purchase agreement in that the lessee, or hirer, is not
given an option to purchase the goods. Common law rules governing
the rights of the parties to a hiring agreement are in large measure
the same as for hire-purchase, but there are certain vital differences
stemming from the absence of the option to purchase, and the
triangular nature of the agreement combining the trio of the supplier,
28
the lessor and the lessee.
NATURE OF THE HIRING AGREEMENT
A hiring agreement (or lease), unlike a hire-purchase agreement, is a
contract of bailment plain and simple, with no element of sale
inherent. A bailment has been defined in section 148 of the Indian
Contract Act, 1872 as “the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them.”
“The nature of an equipment lease is exactly as above. Therefore,
most of the principles governing leases are those that govern
agreements of bailments. Most of the countries of the world have not
developed separate enactments governing leases.”
33.
At page 691 of his book, the learned writer
distinguished hire-purchase from a lease as follows “A contract of lease, legally called hiring agreement or rental
agreement, differs from a hire-purchase agreement in that the former
does not provide the hirer (lessee) an option to purchase the goods.
Ownership remains vested in the owner throughout and the hirer is
given no authority to acquire title. ... However, where the hirer
(lessee) is given the option to take perpetual lease, the agreement
will tantamount to hire-purchase.”
34. In the instant case, the trial judge held that the said lease
agreement “is a sham to cloak and disguise the money
lending transaction” and “since it was money lending
transaction and the purported Lease Agreement had not
29
complied with the Bills of Sale Act 1950, it is illegal and void
for non-registration by virtue of section 4 of this Act”. He also
held that “since the Lease Agreement itself is an illegal
transaction, the Letter of Guarantee is also tainted by illegality
and is thereby unenforceable”.
The Court of Appeal
dismissed the appeal by the appellant on the premiss that “to
accept
the
Appellant’s
approach
will
only
encourage
equipment and other lease transactions that are not bona fide
leasing
transactions
but
are
in
fact
money-lending
transactions.”
35. With respect, we find it difficult, if not impossible, to affirm
the judgments of both the High Court and the Court of Appeal.
It cannot be denied that the trial judge and the Court of Appeal
rather misappreciated the whole matter from a different
perspective resulting in misappreciation of the points in
controversy. There is clearly a flaw in the conclusion of facts
and on the law reached by the trial court and the Court of
Appeal.
36. This Court has ruled that neither statute nor public policy is
against a equipment lease. In Syarikat Bunga Raya Timor
Jauh Sdn Bhd v Tractors Malaysia [1980] 2 MLJ 127 where
the subject-matter were nine equipment leasing agreements,
Chang Ming Tat FJ said (at page 128) -
30
“It is not contended by the appellants that entering into an equipment
leasing agreement is contracting outside the Hire Purchase Act
(Revised) 1978 with its statutory provisions for the protection of hirers
and the safeguard of the subject of the hire, which the courts will not
sanction. In the same way as parties can agree to take a licence in
preference to a lease of premises which would give the protection of
the relevant Rent Acts: Mohd Mustafa s/o Seeni Mohd v Kandasami
s/o Kaliappa Gounder [1979] 2 MLJ 109, Demuren v Seal Estates
[1979] SJ 222; 249 EG 440 and Rossvale v Green [1979] SJ 610;
250 EG 1183, it is similarly open to the parties to come to an
agreement for a lease of equipment rather than to a hire-purchase
agreement. To adapt the words of Geoffrey Lane LJ (as he then was)
in Aldrington Garages v Fielder (1978) 247 EG 557: if there is here
only a lease of goods and not a hire-purchase dressed up in the
verbiage and trappings of a lease, the lessor is entitled to succeed in
its action for recovery of possession, arrears of rentals and all the
other claims in the agreement. Neither statute nor public policy is
against a equipment lease: see also the recent decision of Eusoffe
Abdoolcader J in Tan Chin Kim Sawmill & Factory Sdn Bhd & Anor v
Lindeteves-Jacoberg (M) Sdn Bhd [1980] 2 MLJ 204.
In fact
equipment leasings confer certain advantages on both lessor and
lessee principally in connection with tax reliefs available to both
parties and the facility afforded to the lessee to return a piece of
equipment which had become obsolete at the end of the minimum
period without having to incur liability for payment of its full value and
to replace it: see Goode on Hire-Purchase Law and Procedure (2nd
Ed) at pages 881-3.”
37. In the instant appeal, the following facts must be noted,
namely 31
(a) it was the first respondent which made the application for
“a leasing loan” from the appellant; it was stated in the
application that the amount of loan applied was RM2.5 million;
(b) the first respondent had possible alternative sources of
finance and was not bound to enter into the said lease
agreement with the appellant;
(c) the first respondent was aware of the terms and conditions
of the said lease agreement and accepted them;
(d) the appellant had not been involved in the negotiations
which led to the supply of the said mill equipment; and
(e) the first respondent paid the first 21 monthly rent payments
for the said mill equipment without making any issue or
challenging the validity of the said lease agreement but
thereafter defaulted (there were 39 more monthly rent
payments to be paid).
38. It must also be noted that the said letter of offer, which is
the appellant’s letter of approval in principle to the application
for a leasing loan, clearly stated that the first respondent (as
lessee) shall be its agent for placing the order for the said mill
32
equipment and that any payments to M & M Greaves shall be
deemed to have been paid on behalf of the appellant (as
lessor). We do not think it can be disputed that the monies
approved under the leasing loan were disbursed by the
appellant to the first respondent and the latter utilised it
towards payment due to M & M Greaves for the purchase of
the said mill equipment.
39. With regards to ownership, article 8 of the said lease
agreement clearly stated that the first respondent (as lessee)
acknowledges that ownership and title of the said mill
equipment, after delivery to the first respondent, shall remain
vested in the appellant (as lessor) and that the first respondent
shall have no right or interest therein otherwise than as bailee
thereof and that the mill equipment shall at all times remain
the sole and exclusive property of the appellant. Article 42 of
the said lease agreement stated that the agreement “shall at
no time and shall under no circumstances whatsoever be
deemed to be or read as a hire purchase agreement as
defined in the Hire Purchase Act, 1967” and that no option to
purchase the said mill equipment is conferred to the first
defendant.
40. Article 21 of the said lease agreement provide the
remedies that the lessor have in the eventuality the first
33
respondent defaults in its rental payments.
41. Another fact that is not disputed and must be noted is that
in the said letter of guarantee, the second, third and fourth
respondents “jointly and severally guarantee repayment to the
Lessor all sums of money together with interest costs charges
and all other sums payable by the Lessee in the event the
Lessee’s default” in its payments. We would think that the fact
that a director of the first respondent named R.Gevage a/l
Ramasamy did not sign the said letter of guarantee although
his name appeared therein is, to us, a non-issue. It was a joint
and several guarantee and further, that director is not a party
to these proceedings.
42. Premised on the aforesaid material gleaned from the
appellant’s said letter of approval for the leasing loan read
together with the said lease agreement, we cannot see any
illegality in the transaction and hence find it difficult to
comprehend the trial judge’s finding that the agreement “is a
sham to cloak and disguise the money lending transaction”. It
is clear as day that in such a transaction as this, there has to
be financing on the part of the appellant, it being a licensed
finance company falling within the contemplation of s.2 of the
Banking and Financial Institutions Act 1989. The appellant is
licenced to, inter alia, give credit facilities and conduct leasing
34
business. That is the concept of lease financing. After all, it
was the first respondent which applied for a leasing loan. It did
not apply for a conventional loan.
43. It is preposterous to label the said lease agreement as a
sham to cloak and disguise a money lending transaction.
Lease as a concept involves a contract whereby the
ownership, financing and risk taking of any equipment or asset
are separated and shared by two or more parties. The lessor
may finance and lessee may accept the risk through the use
of it. Alternatively, the lessor may finance it and own it while
the lessee enjoys the use of it and bears the risk as in the
instant
appeal.
A lease transaction is
a commercial
arrangement whereby an equipment owner conveys to the
equipment user the right to use the equipment in return for a
rental. In other words, a lease is a contract between the owner
of an asset (the lessor) and its user (the lessee) for the right to
use the asset during a specified period in return for a mutually
agreed periodic payment (the lease rentals). The important
feature of a lease contract is separation of the ownership of
the asset from its usage. Leasing contracts are more flexible
so lessees can structure the leasing contracts according to
their needs for finance.
44. Under the arrangement in the instant appeal, the said mill
35
equipment is not physically exchanged but it all happens on
record only. This is nothing but a paper transaction. Under this
transaction the first respondent assumes the role of the lessee
and the appellant assumes the role of the lessor. The first
respondent (lessee) borrows the purchase price from the
appellant (lessor) and buys the said mill equipment and the
appellant, as financier is paid off from the lease rentals directly
by the first respondent. In the said lease agreement the first
respondent acknowledges that the appellant is the owner of
the said mill equipment. The said lease agreement was tailormade in respect of the lease period and the lease rentals
according to the convenience and requirement of the first
respondent as lessee.
45. Counsel for the respondents referred to a few cases on
hire-purchase in the course of his arguments. We would think
that hire-purchase differs from leasing. Lease financing is a
commercial arrangement whereby an equipment owner
conveys to the equipment user the right to use the equipment
in return for a rental whereas hire purchase is a type of
instalment credit under which the hire purchaser agrees to
take the goods on hire at a stated rental, which is inclusive of
the repayment of principal as well as interest with an option to
purchase. In lease financing no option is provided to the
lessee (user) to purchase the goods whereas in hire purchase
36
such an option is provided to the user.
46. Thus, a lease is in essence an extended rental agreement
wherein the owner of the equipment (the lessor) allows the
user (the lessee) to operate or otherwise make use of the
equipment in exchange for periodical lease payments. How
the said lease in the instant appeal can be equated to “a sham
to cloak and disguise the money lending transaction” escape
us. As such, we find it difficult to comprehend the reasons put
forth by the trial judge premised on the materials on record
and we also find it difficult to comprehend the judgment of the
Court of Appeal.
47. With regards to the Bills of Sale Act 1950, as discussed
earlier, the respondents contended in their defence that the
appellant failed to comply with the provisions of this Act. In
their counterclaim they sought a declaration that the said
lease agreement was not valid as it did not comply with the
provisions of the Bills of Sale Act 1950. In relation to this, the
trial judge ruled that “since it was [a] money lending
transaction and the purported Lease Agreement had not
complied with the Bills of Sale Act 1950, it is illegal and void
for non-registration by virtue of section 4 of this Act”. The
question here is whether the said agreement is a bill of sale
and if it is one, whether it is void for non-registration under s.4
37
of the Bills of Sale Act 1950.
48. In his grounds of judgment, the trial judge did not explain
how he came to the conclusion that the said lease agreement
is a bill of sale and hence void for non-registration. The Court
of Appeal, on the other hand, did not deal with this issue at all.
Further, we have also noted that the respondents have not
shown how the said lease agreement can be said to be a bill
of sale falling within the contemplation of s.3 of the Bills of
Sale Act 1950. What is a bill of sale? In a book titled The Bills
of Sale in Singapore and Malaysia by Kala Anandarajah, the
learned writer answered the question as follows (at pages 5-6)
“A bill of sale ‘in its ordinary meaning is a document which is given
where the legal property in goods passes to the person who lends
money on them, but possession does not pass’ (Mills v Charlesworth
(1890) 25 QBD 421 at 424). The existence of a document is a prerequisite to the existence of a bill of sale. In Malick V Lloyd (1913) 16
CLR 483 (at p 489), the High Court of Australia said that a bill of sale
meant nothing more than an assignment of personal chattels in
existence. The document must amount to an assurance or a transfer.
A document which merely records the terms of a transfer of goods by
delivery as security for money is not a bill of sale. Another important
feature is that the grantee must have power to seize and take
possession of the subject matter of the bill of sale; ie the contract
must be capable of specific performance. What this means is that if
possession is given to the grantee when the bill of sale is first
38
created, the Act will not apply. Yet another important element of a bill
of sale is that reliance must be placed upon the document to
establish the transfer of title.
There are two kinds of bills of sale: the absolute bill of sale and the
conditional or security bill of sale. The conditional or security bill of
sale is designed to secure a payment of money. The absolute bill of
sale is given otherwise than as security for the payment of money.
When s 3(1) of the Act [s 3(1) of the Malaysian Act] provides that a
bill of sale include a ‘bill of sale’, it is not surprising that Sykes (The
Law of Securities (4th Ed) at p 545) observes that the Act is
‘remarkable for its clumsiness’. The definition in s 3(1) then stretches
on for two pages and broadly encompasses all assignments in which
the legal or beneficial ownership passes, or where a creditor is given
a charge or security pursuant to which a right to take possession is
conferred, or where a power to seize goods arises in equity, with
possession continuing to remain with the grantor. More specifically, it
can be divided into the following five categories :
(a) assignments, transfers, declarations of trust without transfer,
inventories of goods with receipt thereto attached, or receipts for
purchase moneys of goods, and other assurances of personal
chattles;
(b) powers of attorney, authorities, or licences to take possession of
personal chattels as security for any debt;
(c) any agreement, whether intended or not to be followed by the
execution of any other instrument, by which a right in equity to any
personal chattels, or to any charge or security thereon shall be
conferred;
39
(d) every attornment, instrument or agreement whereby a power of
distress is given or agreed to be given by any person to any other
person by way of security for any debt or advance and whereby any
rent is reserved or made payable as a mode of providing for the
payment of interest on such debt or advance or otherwise for the
purpose of such security only; and
(e) agreements for the hire of personal chattels entered into for the
purpose of securing the repayment to the lessor of such channels of
money advanced by him to the hirer.”
49. In his book in relation to the same question, viz., as to
what is a bill of sale, Vinod Kothari said (at page 296) “A Bill of Sale is a document by which the property in the goods is
transferred from one person to another. In an ordinary contract of
sale, no written document is necessary as the contract is completed
by mere delivery. A bill of sale is designed for transactions in which
the seller is to remain in possession of the goods after disposing of
the property given. Since the transferee is not given the possession it
is plainly necessary for his protection that he should have some
document evidencing his title to the goods. For example, A is in need
of finance. A is the owner of a machine under the Bill of Sale device.
A sells the asset to B without transferring the delivery of the machine
to A.”
50. In the instant appeal, the first respondent never sold the
said mill equipment to the appellant. In the said lease
agreement the first respondent acknowledged that the
appellant is the owner of the said mill equipment. The first
40
respondent is not the owner of the said mill equipment
machinery neither did it disposed of the same to the appellant.
Pursuant to the said lease agreement, the first respondent is
paying rental for the use of the said mill equipment.
That
being the position, we cannot see how the said lease
agreement can be said to be a bill of sale. As to whether the
said lease agreement is a bill of sale is a question of fact to be
determined by the trial judge. This, the trial judge failed to do
so. The trial judge was wrong in assuming that the said lease
agreement was a bill of sale and hence need to be attested
and registered under the Bills of Sale Act 1950 just because
the respondents pleaded so and counsel for the respondents
said so.
51. In the end result, as there are flaws in the conclusion of
facts and the law reached by the trial court and the Court of
Appeal, it is our decision that this appeal must be allowed.
The judgment and all orders of the High Court and the Court
of Appeal are accordingly set aside. As consequence thereof,
we would order that judgment be entered against the
respondents and grant the prayers sought in paragraph 1(a),
(b), (c) and (d) of the appellant’s statement of claim. We would
also order that the counterclaim of the respondents be
dismissed with costs.
52. In relation to the questions of law posed by the appellant,
41
we find no necessity to answer them. It is our decision that the
evidence showed the said lease agreement was a bona fide
transaction and is not prohibited by any Act of Parliament or
void by reason of some principle of law. The first two
questions were based on an assumption that the said lease
agreement is a money lending transaction and is a bill of sale
under s.3 of the Bills of Sale Act 1950 and hence illegal and
void under s. 4 of the Act. The third question posed relates to
estoppel which is a rule of evidence and this issue was never
ventilated in the courts below. The fourth and fifth questions
posed are superfluous under the circumstances of the instant
appeal.
Dated this 19th day of January 2012.
(Mohd Ghazali Mohd Yusoff)
Judge
Federal Court Malaysia
Counsel
For the Appellant :
Hargopal Singh
Sukhjit Kaur Gill
Tetuan Hargopal Singh & Co.
For the Respondents :
S. Palanivel
S. Surendran
Tetuan Palani Aishah & Co.
42
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