The Federal Court has in its recent decision of Tan Chee Hoe & Sons Sdn Bhd v Code Focus Sdn Bhd (Civil Appeal No. 02(f)-32-06/2013(W), 4 March 2014) taken the opportunity to clarify the scope and application of section 66 of the Contracts Act 1950 in the context of agreements which have become void due to contraventions of mandatory statutory requirements.
In Tan Chee Hoe, the plaintiff Tan Chee Hoe & Sons Sdn Bhd had entered into a sale and purchase agreement (“SPA”) with the defendant Code Focus Sdn Bhd for the purchase of the entire issued and paid-up share capital of one Choo Hoe Sdn Bhd. Pursuant to the SPA, the plaintiff paid the defendant a 10% deposit amounting to RM1.6 million. The completion of the sale was subject to conditions precedent, one of which was the approval of the Foreign Investment Committee (“FIC”) and the other the approval of the sale of shares by the Defendant’s shareholders in an Extraordinary General Meeting. The plaintiff failed to pay the balance purchase price before the stipulated date in the SPA, resulting in the defendant forfeiting the 10% deposit. The plaintiff disputed the forfeiture on the ground that the defendant was in breach of the SPA in that the defendant, among others, failed to obtain the required approvals of the FIC and its shareholders. The defendant’s position was that the parties had by way of a side letter (“Side Letter”) waived the performance of the conditions precedent.
The plaintiff commenced proceedings against the defendant seeking, among others, the return of the 10% deposit as well as damages for breach of contract. Its claim failed in the High Court, but was allowed by the Court of Appeal. The defendant obtained leave to appeal to the Federal Court, with one of the questions of law framed for the court’s determination being as follows:-
Where contracting parties waive a mandatory statutory provision prior to the entering of a contract, whether a court of law may order restoration of consideration paid under that contract and further order damages for breach of contract in favour of one of the contracting parties notwithstanding s66 of the Contracts Act 1950?
The Federal Court unanimously dismissed the defendant’s appeal. The court observed that section 132C of the Companies Act 1965, which provides that a company may not transact for the disposal of a substantial portion of the company’s property unless the transaction has first been approved by the company in a general meeting, was a mandatory statutory requirement which could not be waived by the plaintiff and the defendant as parties to the SPA. On the facts, the court held that the plaintiff had actual notice of the defendant’s non-compliance with section 132C of the Companies Act 1965 but had agreed consciously to waive the performance thereof. The knowing and conscious waiver by the parties of the requirements of section 132C was unlawful pursuant to section 24 of the Contracts Act 1950 and the SPA was accordingly void. The plaintiff had knowingly participated in the contravention of the statutory requirement under section 132C and could not enforce the SPA which was invalid and void.
Against this background, the Federal Court’s turned to the question of whether section 66 of the Contracts Act 1950 applied on the facts. After reviewing the leading authorities including the decisions of the Privy Council in Harnath Kaur v Inder Singh (1922) LR 50 IA 69 and Menaka v Lum Kum Chum [1977] 1 MLJ 91, the Federal Court observed:-
The SPA in this case became void when the mandatory statutory requirement of shareholders’ approval was not obtained and was consciously waived by the parties at the time when it was executed. Therefore, section 66 of the Contracts Act 1950 came into play i.e. that Defendant who had received an advantage (in the form of the 10% deposit of RM1.6 million) under the void agreement or contract (the SPA) is bound to restore it to the Plaintiff from whom he received it. …
Section 66 of the Contracts Act 1950 is clear … that when a contract becomes void (as in the present case) the party who has received any advantage under the contract or agreement is bound to restore it to the person to whom he received it. The advantage to be restored under the section refers to the advantage that he had actually received from the other person. If the advantage received was in the form of 10% deposit of RM1.6 million, that same advantage must be restored or refunded to the Plaintiff. If that cannot be done for whatever reason, then the Defendant is bound to make compensation for it – either one, not both.
It is seriously doubtful whether the Federal Court in Tan Chee Hoe was correct to award the plaintiff restitution pursuant to section 66 of the Contracts Act 1950. It should be noted that the Federal Court had clearly found that the plaintiff had actual knowledge of and knowingly participated in the contravention of a statute, by entering into the illegal contract with the defendant purporting to waive shareholders’ approval for the sale and purchase agreement which was required by section 132C of the Companies Act 1965. Notwithstanding this, the Federal Court nevertheless ordered that the plaintiff was entitled to restitution of the RM1.6 million deposit it had paid to the defendant under the void contract. The difficulty is that all of the leading and binding authorities of the Privy Council and the Federal Court on the interpretation of section 66 have made it absolutely clear that a plaintiff may not rely on section 66 to obtain restitution where the Plaintiff has knowledge of or is party or privy to the illegality: see, e.g., Menaka v Lum Kum Chun [1977] 1 MLJ 91, PC; Ahmad bin Udoh v Ng Aik Chong [1970] 1 MLJ 82, FC; Singma Sawmill Co Sdn Bhd v Asian Holdings (Industrialised Buildings) Sdn Bhd [1980] 1 MLJ 21, FC; Yep Mooi v Chu Chin Chua [1981] 1 MLJ 14, FC; Wong Yoon Chai v Lee Ah Chin [1981] 1 MLJ 219, FC. It is impossible to reconcile the decision of the Federal Court in Tan Chee Hoe with this long, unbroken line of authorities, all of which lead to the irresistible conclusion that the plaintiff in Tan Chee Hoe could not possibly have been entitled to restitution due to it having full knowledge of the illegality.
It is extremely difficult to see how the plaintiff could nevertheless be entitled to restitution, since the plaintiff would clearly have been relying on its own illegality to found its claim in restitution. Regrettably, in awarding restitution to the plaintiff, the Federal Court in Tan Chee Hoe appears to have overlooked the pertinent observations of Raja Azlan Shah AG CJ (Malaya) (as HRH then was) in Singma Sawmill Co Sdn Bhd v Asian Holdings (Industrialised Buildings) Sdn Bhd [1980] 1 MLJ 21 at 24, FC:
[N]o person can claim any right or remedy whatsoever under an illegal transaction in which he has participated. The courts do not overlook the fact that they do not assist a person who comes with unclean hands”.