In the recent case of Maple Amalgamated Sdn Bhd & Anor v Bank Pertanian Malaysia Bhd  [2021] MLJU 1245, the Federal Court had to consider the following leave question:

“Whether an unconditional agreement for the sale and purchase of an estate land by way of asset purchase agreement and asset sale agreement (‘Asset Sale & Purchase Agreements') pursuant to Bai Bithaman Ajil financing is in breach of section 214A of the National Land Code 1965 when no prior approval is obtained from the Estate Land Board before entering into the said Asset Sale & Purchase Agreements?”

The Federal Court led by Chief Justice Tengku Maimun answered the leave question in the negative and held that a Bai Bithaman Ajil Islamic financing transaction does not contravene section 214A of the National Land Code (“NLC”). In the course of doing so, the Federal Court revisited its findings in Gula Perak Bhd v Datuk Lim Sue Beng & other appeals [2019] 1 CLJ 153 (“Gula Perak”).

WHAT IS A BAI BITHAMAN AJIL FACILITY?

To appreciate the reasoning behind the leave question posed to the Federal Court in this case as well as the Federal Court's resulting decision, it is imperative to go back to the basics and break down the components of a Bai Bithaman Ajil (“BBA”) financing facility, i.e. a sale with deferred payment of the price, and consider how it differs from a conventional loan.

As a starting point, Islamic financing facilities are never referred to as “loans” for the simple reason that the practice of moneylending with the imposition of interest (riba) is prohibited (haram) under Shariah law as it is considered to be exploitative. Thus, financial institutions have come up with various Islamic financing “products” such as the BBA facility, in which financing can be given by banks in a manner which does not breach Shariah laws.

In a typical BBA financing transaction, the bank and the customer (the borrower in a conventional loan) would execute an Asset Purchase Agreement (“APA”) and an Asset Sale Agreement (“ASA”) simultaneously. Under the APA, the bank is said to have “purchased” an asset from the customer, which it then immediately “sells back” to the customer via the ASA on a deferred payment basis, at a sale price which includes a profit margin for the bank – thus the concept of “double sale” is born.

The purchase price for the “purchase” under the APA is paid by the bank to the customer forthwith or upon satisfaction of the conditions precedents, whilst the repurchase price for the “repurchase” by the customer under the ASA is on an agreed deferred payment basis.

Ultimately, regardless of the terminology employed, the net effect of either a conventional loan or a BBA facility is that in both instances, the bank will disburse monies to the borrower or customer, as the case may be, which they then have to repay to the bank.

SALIENT FACTS

In 2018, the customer in this case, Maple Amalgamated Sdn Bhd (“Maple”), brought a claim against Agrobank (“the Bank”) seeking to void the APA and ASA executed between Maple and the Bank as well other security documents involved in the BBA facility.

Maple's case against the Bank hinges solely on the interpretation of section 214A of the NLC. Maple argued that by executing the APA and ASA which revolves around the “sale” of a piece of land (“the Land”) and considering the fact that the APA contains a term purporting to pass the beneficial ownership of the Land to the Bank, the said BBA transaction violates section 214A of the NLC, which prohibits the ‘transfer, conveyance or disposal' of estate land without prior approval from the Estate Land Board.

In response, the Bank argued that due to the nature of Islamic financing transactions, the execution of the APA and ASA was merely a required formality in order for the bank to disburse the facility to the customer, and that throughout the whole BBA transaction, including the “double sale”, there was no actual or attempted transfer, conveyance or disposal of the Land, which was the security charged by Maple to the Bank in consideration for the facility given. The Bank submitted that section 214A of the NLC does not even come into play since the APA/ASA cannot be likened to a regular sale and purchase agreement for land/properties, in which the subject land/properties are intended to be sold and transferred between parties.

When analysing section 214A of the NLC, it is inevitable that the discussion will turn towards the fairly recent Federal Court case of Gula Perak where the Federal Court held inter alia that section 214A of the NLC needs to be read in totality in order to be interpreted correctly, and that the objective of the said provision is to control and prevent fragmentation of estate land. The Bank placed significant reliance on Gula Perak by highlighting the legislative intent behind section 214A of the NLC. However, Maple sought to distinguish Gula Perak on the basis that whilst the sale and purchase agreement in Gula Perak was a conditional agreement (subject to the Estate Land Board's approval), the APA and ASA (collectively “BBA agreement”) in the present case are unconditional agreements.

HIGH COURT

The Ipoh High Court found in favour of the Bank and dismissed Maple's suit. The High Court found that the APA and ASA did not fall within the purview of section 214A of the NLC and hence, the question of the BBA agreement being void in contravention of it did not arise. The Learned Judge opined that while there may have been a “purchase” and “repurchase” of the Land, no actual ‘transfer, conveyance or disposal' ever took place.

COURT OF APPEAL

Maple appealed to the Court of Appeal against the High Court's decision. On appeal, the Court of Appeal affirmed the High Court's decision:

The Court of Appeal noted that the BBA scheme was well accepted and endorsed in judicial decisions, primarily the Court of Appeal case of Bank Muamalat Malaysia Bhd & Ors v Redha Resources Sdn Bhd & Ors  [2017] 2 MLJ 686. In the usual BBA scheme, the transaction was not an asset sale and purchase transaction simpliciter. There was no actual conveyance or disposal of the Land by the mere execution of the ASA and APA to avail the Islamic banking facility.

The Court of Appeal rejected Maple's argument that Gula Perak was distinguishable for the reason that the agreement impugned in that case was conditional (the condition being the prior approval of the Estate Land Board). The Court of Appeal found that in Gula Perak, the Federal Court had examined the legislative intent of section 214A of the NLC and had concluded that it was only intended to apply to outright transfers.

FEDERAL COURT

Maple successfully obtained leave to appeal to the Federal Court on the leave question set out earlier in this article.

The Federal Court answered the question in the negative and dismissed Maple's appeal, and made the following observations:
 

  1. It is an undisputed fact that there has been no actual transfer of ownership of the Land from Maple to the Bank. No memorandum of transfer was executed and Maple remained the registered proprietor of the Land at all material times. 
  2. Even if the BBA agreement purports to vest beneficial ownership in the Bank, it is clear that in fact no such vesting ever took place. The Bank never in law or in equity became the owner of the Land as the arrangement was merely a means to finance an Islamic facility. Our courts have held that Islamic financing facilities transacted in this way, for example the BBA in this case, are valid and are recognised financial transactions (Dato' Hj Nik Mahmud bin Daud v Bank Islam Malaysia Berhad  [1998] 3 MLJ 393). 
  3. Section 214A of the NLC is intended to prevent actual and attempted transfers to the extent that it dispossesses the registered proprietor of any legal or equitable interest in the estate land. The raison d'être of section 214A is also to prevent fragmentation of estate land. 
  4. There are 2 possible approaches in considering the application of section 214A of the NLC to the facts of this case. The first is the one suggested by Maple, that the Land has been ‘disposed of' by virtue of the BBA agreement. The other is that on the true nature of the agreement there was no actual ‘transfer, conveyance or disposal of' the Land when considering the nature of the BBA agreement and the intention of the parties when they concluded it. As the latter avoids the possibility of contravening the law having regard to the Parliamentary intent behind section 214A of the NLC and good commercial sense, this method of construction is preferred. 
  5. On the facts, the BBA agreement does not amount either in form or in substance to a ‘transfer, conveyance or disposal'. It is a valid financial commercial transaction as permitted by the law. 
  6. Accordingly, the BBA agreement is not caught by the terms of section 214A of the NLC.

SIGNIFICANCE OF DECISION

Prior to this Federal Court decision, the compatibility between BBA facilities/Islamic “double sale” transactions and section 214A of the NLC had never been explored by the Malaysian courts. For many years, it was a trite legal position within the Islamic banking community that there are certain procedural requirements that have to be complied with in order for an Islamic facility to be disbursed, such as the execution of agreements which entail the “purchase” and immediate “repurchase” of a piece of land/property. It was a widely accepted practice that such formalities are necessary to stay clear of the prohibitions against moneylending with the imposition of interest under Shariah law.

That was the status quo until Maple filed this suit against the Bank and took its case all the way up to the apex court. In so doing, we now have a Federal Court decision that states in no uncertain terms that a BBA agreement which entails the “purchase” and “repurchase” of land/property are in reality merely an arrangement that was “a means to finance an Islamic facility”, and that such an arrangement is not capable of being subject to/contravening section 214A of the NLC since there is no actual transfer, conveyance or disposal of land/property to begin with.

Through this decision, the Federal Court has reinforced the prevailing understanding and practice in Islamic finance with regard to the effect of BBA transactions, and following in the footsteps of Gula Perak, provided further clarity to the legislative intent of section 214A of the NLC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.