Court of Appeal allowed Maybank Islamic Berhad’s appeals for Summary Judgment of RM 45 mil and struck out Counterclaim of RM 95 mil in relation to a Murabahah Financing Transaction
07 January 2021
On 6 January 2021, the Court of Appeal in Maybank Islamic Berhad v Golden Base Construction Sdn Bhd & 2 Ors in two appeals heard together, allowed Maybank’s appeal to enter summary judgment of RM 45,371,146.09 and struck out the Respondents’ counterclaim of RM 95,835,335.57. This decision is significant to Islamic financial institutions. Maybank was represented by our Partners, Leong Wai Hong and Claudia Cheah Pek Yee, and Senior Associate, Aufa binti Radzi.
a. Non-compliance with Shariah principles does not render an Islamic financing facility contract illegal and unenforceable.
b. Mere allegation of breach of Shariah principles does not amount to a triable issue as held by the High Court below.
Maybank granted an Islamic Murabahah financing facility of RM 50 million to Golden Base Construction Sdn Bhd for the construction of a highway. The facility was secured by two individual guarantors.
The financing was structured on the Shariah principle of Murabahah whereby Golden Base made a request to Maybank to purchase underlying Shariah compliant commodities (“Murabahah Asset”) at a purchase price equivalent to the financing amount, and an undertaking by Golden Base to purchase the same Murabahah Asset from Maybank repayable on deferred payment terms.
Golden Base and the guarantors defaulted in repayments. Maybank commenced a suit at the High Court. In their Defence and Counterclaim, Golden Base and the guarantors alleged inter alia, that the financing is void and unenforceable for being non-Shariah compliant and counterclaimed for a sum of RM 95,835,335.57 for loss of profit and loss of investment.
Decision of the High Court
At the High Court, Maybank’s applications for summary judgment and striking out of counterclaim were dismissed. The High Court found there were two triable issues. The triable issues were whether the Murabahah transaction complies with Bank Negara Malaysia’s Shariah guidelines and that the Murabahah Asset has not been identified in the financing documents. The High Court inter alia, held that the mere use of the words “Shariah compliant commodities determined by the Bank as per the e-certificate” in the financing documents was insufficient to identify the underlying asset. Thus, the legality of the Murabahah transaction was in question due to the uncertainty of the underlying Murabahah asset, and this called for evidence of a Shariah expert to be given at a full trial.
Decision of the Court of Appeal
On appeal to the Court of Appeal, counsel for Maybank argued that the High Court erred because non-compliance with Shariah principles does not render a financing facility contract illegal and unenforceable based on existing case law and Section 281 of the Islamic Financial Services Act 2013. The Court of Appeal found merits in the argument advanced by Maybank’s counsel and unanimously allowed Maybank’s appeals. The Court of Appeal entered summary judgment against Golden Base and the guarantors as prayed for in the High Court, and struck out the counterclaim.
This decision is important as to-date, there is no Court of Appeal decision on the effect of Section 281 of the Islamic Financial Services Act 2013 which reads :
|"Breach or contravention not to affect contract, agreement or arrangement
||281. Except as otherwise provided in this Act, or in pursuance of any provision of this Act, no contract, agreement or arrangement, entered into in breach or, contravention of any provision of this Act shall be void solely by reason of such breach or contravention:
Provided that nothing contained in this section shall affect any liability of any person for any administrative, civil or criminal actions under this Act in respect of such breach or contravention."
If you have any queries, please contact our Partners, Mr. Leong Wai Hong (firstname.lastname@example.org), Ms. Claudia Cheah (email@example.com) and Senior Associate, Ms. Aufa Radzi (firstname.lastname@example.org).