LIA3010 - Islamic Banking Tutorial 5 PDF

Preview

Summary

Week 8 (Wednesday) – 8.Chapter 7: Islamic Banking TransactionsWeek 8, Tutorial 5Question 1: Why was the decision of the court of appeal in FLH LCT Services Sdn Bhd & Anor v Malaysian Debt Ventures Bhd [2016] 1 MLJ 248 decided differently from the High Court decision of CIMB Islamic Bank Bhd ...

Description

Week 8 (Wednesday) – 8.12.2020 Chapter 7: Islamic Banking Transactions Week 8, Tutorial 5 Question 1: Why was the decision of the court of appeal in FLH LCT Services Sdn Bhd & Anor v Malaysian Debt Ventures Bhd [2016] 1 MLJ 248 decided differently from the High Court decision of CIMB Islamic Bank Bhd v LCL Corp Bhd & Anor (2015) 8 MLJ 832? CIMB Islamic Bank Bhd v LCL Corporation Bhd & Anor [2011] 7 CLJ 594 1. Facts of the case: a. The first Defendant took a Bai Bithamin Ajil Facility (‘the first facility’) to refinance a Short-Term Advance Facility conventional facility granted by CIMB Bank Berhad. Because the first Defendant could not pay the conventional loan, it then took out an Islamic financing loan (second Bai Bithamin Ajil Facility to finance the first loan). The parties were plaintiff bank, the 1 st defendant corporation and the 2 nd defendant director who had provided the securities under a Memorandum of Deposit of Securities. b. The second Bai Bithamin Ajil facility agreement was transacted on the same day in the following manner i. The second Defendant, who was the Director, had in his possession share in LCL Corporation. He owned the shares, so what he did was since it was the company who was taking out the financing, he gifted voluntarily these shares or securities to the first Defendant. This gift is known as a Hibah and it was a voluntary action by the Defendant ii. After that, the first Defendant, who is the LCL Corporation sold the securities to the Plaintiff’s bank that is the CIMB Islamic Bank for RM12,125,000. This is the first leg of the financing transaction. This is the first contract of Bai-al Inah iii. The Plaintiff, who is the CIMB Islamic Bank, sold it back to the Defendant for the cost price plus profit at the price of RM16,087,500. iv. The first Defendant, who is the LCL Corporation, gifted it back to the second Defendant as a Hibah c. This whole transaction from the beginning to end was transacted into completed four times. The first Defendant owed CIMB Islamic Bank RM48,500,000 and they had to do this transaction four times for the RM12,125,000 to be equivalent to the RM48,500,000 d. Unfortunately, the first Defendant again defaulted and CIMB Islamic Bank sued the first Defendant to get the money back (the RM48,500,000) 2. Parties claim a. Plaintiff i. Plaintiff denied the allegations put forth by the Defendants and submitted that they are bound by the agreements that have been duly perfected. ii. In the absence of any manifest error on the Statement of Account, the Plaintiff claimed that the Court is obliged to hold that the said statement was the final and conclusive proof of indebtedness of the Defendants to the Plaintiff. b. Defendant claimed, inter alia, i. That the Bai Bithamin Ajil Facility is null and void,

ii. Defendant said the Bai Bithamin Ajil Facility was a sham to disguise a rescheduling of repayments under the First Facility as the First Facility had not been terminated and the same asset was utilized in both Bai Bithamin Ajil transactions. 3. Held a. Justice Mohd Zawawi, Paragraph 20-25 i. The First Facility and the Bai Bithamin Ajil Facility were two different transactions. Nothing in the Bai Bithamin Ajil Facility legal documentation showed that it was for the purpose of rescheduling repayments under the First Facility. The Bai Bithamin Ajil Facility was not for rescheduling but for refinancing the First Facility. ii. What is obvious in the above said arrangements is that it is not the intention of the parties to own the asset but to have liquidity available for the purpose of refinancing the first Bai Bithamin Ajil Facility iii. It looks like a Hiyal or legal stratagems to circumvent the prohibition of Riba by way of sale. iv. Hence, one might say that the sale is fictitious. In this present case, the nature of transaction embarked into by the parties is called al-Inah or Bai al-Inah. v. Al-‘Inah or Bai’ al-Inah conceptually refers to a sale of an asset, which is later repurchased at a different price, whereby the deferred price is higher than the cash price. It aims to obtain liquidity or cash money. vi. In the light of the above and in the absence of any legal factor that could vitiate a contract, this court has no reason but to uphold the transactions and contracts entered by both parties and the allegation by the Defendants that the Plaintiff failed to disburse the monies under the Bai Bithamin Ajil Facility is without merit. vii. The judge decided in favour of the Plaintiff and ordered summary judgment 4. Appeals a. High Court i. Justice Mohd. Zawawi entered summary judgment against both the defendants. b. Court of Appeal i. The first and second Defendants appealed to the Court of Appeal, but the appeal was dismissed. c. Federal Court i. On appeal, the Federal Court allowed the second Defendant's appeal. The first defendant was wound up after the summary judgement and did not obtained leave of the HC to proceed with the appeal against the summary judgment, thus the summary judgment still remained against the first Defendant. 5. At the full trial a. Defence claimed i. The said Bai Bithamin Ajil transactions were tainted with illegality as these transactions were not in compliance with the Syariah principle of financing premised on the Bai’ al-Inah principle b. Main issue before the Court

i. Whether the Asset Purchase Agreement, Asset Sale Agreement and letters of Hibah were in conformity with the Shariah principle of financing and legally binding 1. The Asset Purchase Agreement was between the Plaintiff bank and the first Defendant and the Asset Sale Agreement was between the Plaintiff bank and the first Defendant 2. There were two sale contracts of the Bai’ al-Inah ii. Whether the Asset Purchase Agreement, Asset Sale Agreement and the letters of Hibah were in conformity with the Shariah principle of financing and legally binding (Paragraphs 79 to 83) 1. According to the second Defendant, the series of transactions undertaken by the Plaintiff was to create the false impression that the parties were in fact transacting assets up to the value of RM48.5m in order to merely facilitate the purported disbursement of funds. The second Defendant contended that in reality the Plaintiff and the first Defendant were dealing with the same asset and upon the completion of the four transactions would provide a grossly undervalued security of RM9.44m. 2. The Plaintiff which defended that its actions were in compliance with the Islamic principle of financing premised on the Bai’ al-Inah contract. The Plaintiff claimed that it has satisfied all the requirements of a valid Bai’ al-Inah transactions. Hence, the Plaintiff claimed that these transactions were recognised, acceptable, valid and enforceable. 3. There was no direct authority on point, which had been decided by our courts or courts of similar jurisdictions. Therefore, I viewed this a good case of referral to the Shariah Advisory Council of Bank Negara. This matter was referred to the Shariah Advisory Council on 11 November 2013 for its views and/or ruling from the Islamic perspective 4. Summary a. The High Court Justice Asmabi was the learned Judge as she was then, decided that this issue on Bai’ al-Inah which has been transacted four times on the same asset is a Shariah issue which must be referred to the Shariah Advisory Council. 6. Questions to the Shariah Advisory Council a. With the concurrence of both learned counsel who were handling the trial at the material times, four Shariah issues were framed and referred to the SAC as follows: i. Asset and method of financing 1. Whether for a financing based on Bai-inah the same asset can be used a number of times through a number of Hibah, Purchase Price Agreement and Purchase Sale Agreement executed on the same date where the total value is more than the real value of the asset. 2. The Shariah Advisory decided that once the parties have complied with the pre-conditions as set further under the Paragraphs of 1 and 2 of the Bai’ al-Inah contract, it is valid and enforceable notwithstanding the fact that the transactions were in fact repeatedly using the same assets and executed on the same day 3. As long as the contracts were properly executed one after the other and they followed the condition as set down by the Shariah Advisory Council under their resolutions, then it did not matter whether the same asset was being used as the underlined asset and it did not matter

whether the contracts were being executed on the same day, it would be valid ii. Hibah and security 1. Whether the assets involved in the four Hibah under the Bai’ al-Inah above can be donated back to the original owner and used as collateral to secure the financing valued at four times more than the original value of the asset 2. Answer was that the conditions of Hibah under Paragraph 4 of the Shariah Advisory Council Resolutions must be complied with. A Hibah is valid although the same asset is being used repeatedly provided each Hibah contract is fully executed and is completed before the donor assets embarks into another Hibah a. It does not matter if the same assets are done, so long as the contracts were properly executed, and completed before another contract was entered into iii. Hilah 1. What type of Hilah can cancel a transaction from the perspective of Islamic law 2. Shariah Advisory Council says that if the object is the Hilah is to legalise the illegal notwithstanding the fact the mode made it permissible, then this type oh Hilah is categorised as a Hilah which is forbidden. On the other hand, if the purpose of the Hilah is to leave something which is forbidden and to achieve something which is Halal or permitted, then this type of Hilah is categorised as permissible Hilah iv. Effect of transaction 1. If the transaction in the illustration above are not legally compliant, what are the obligation of the parties from the perspective of Shariah in respect of the four financing and whether it provides any effect on collateral to guarantee the financing 2. The Shariah Advisory Council provided that if there are any irregularities in the rukun of an Aqad, the Aqad has no effect and it is to be treated as if it did not exist. Hence, the position of each parties to the contract would have to be reverted back to the original position before the contract 3. Follows Section 66 of the Contracts Act 1950 4. All the relevant documents pertaining to the transactions were also submitted to the SAC for its perusal b. LCL Corporation was required to pay the CIMB Bank as the whole transaction was considered to be relevant and Shariah compliant FLH LCT Services Sdn Bhd & Anor v Malaysian Debt Ventures Bhd 1. An appeal from the High Court 2. Facts a. It was a Bal’ al-Inah transaction where the customer required about RM9.5 million. So, the bank sold assets worth RM9.5 million to the customer and the bank repurchased it at RM14 million because the customer was to pay the bank over a long period of time. The Bai’ al’-Inah was for the purpose of constructing and developing a … centre facility and the customer was to pay profit rate for the said facility at 7% per annum. They were guarantors after payment for two months the

customer who is the Appellant in this case, did not pay and the default occurred. The bank allowed the rescheduling of the financing to occur, but the customer failed to complete payment and the bank therefore recalls facility and eventually sued customer on receiving payment. The High Court allowed the bank’s claims and dismissed the customer’s counter claim. Hence, this appeal. The Appellant submitted that the underlying assets in the Bai’ al-Inah transaction did not exist. Basically, the customer said that the Bai’ al-Inah occurred but there were no assets that were present 3. Held, allowing the appeal with costs a. The essence of Bai al-Inah transaction or contract in the matter entered into by the parties must necessarily be grounded upon the basic premise that it must involve the sale and buy back transactions of an asset of a seller. The existence of the asset in the transactions was an imperative without which such contract was not a Bai’ alInah contract, but something else outside the Shariah system. b. The Mudharabah General Investment Certificate attached to the inter-office memo could not have been the asset transacted on account that, firstly, the same was not mentioned in the LOs, the MFA, the Asset Sale Agreement and Asset Purchase Agreement. Neither was there any indication that the said certificate was intended to be the asset in the said transactions. Secondly, it was attached to an inter-office memo which was obviously for internal circulation only. Being an inter-office memo, it was doubtful whether the appellants had access to the same. c. The certificate was issued on 26 May 2009 and dated 13 July 2009. Obviously, it pre-dated the execution of the MFA, Asset Sale Agreement and Asset Purchase Agreement. As such if the certificate was intended to be the asset in the said transactions, then the parties should encounter no difficulty in naming the same as the asset in the MFA, Asset Sale Agreement and Asset Purchase Agreement. Obviously, this was not done. It was also obvious that at the time of the first LO this asset had yet to come into being. Otherwise, it would have been stated in the first LO. The said certificate was also endorsed with the endorsement 'tidak boleh dipindahmilik' (not transferable). In such event, the ownership of the asset could not be transferred to the purchaser. i. The Court of Appeal held that there was no assets that was identified in any of the financing documentation and because of this, this was not a Shariah compliant transaction, therefore the appeal was allowed and the customer won the appeal ii. What happened after the this is that the bank, Malaysian Debt Ventures, appealed and the Court allowed the appeal. The Federal Court overruled the Court of Appeal decision iii. Because of the absence of an assets that were transferred, the whole transaction was considered to be void Main differences between these two cases is that 1. In the case of FLH ICT Services Sdn Bhd v Malaysia Debt Ventures, the Bai’ al-Inah transaction was not valid 2. Whereas in the case of CIMB Islamic Bank Bhd v LCL Corp Bhd and Another, the Bal’ alInah transaction was valid. There contracts were executed completely in a complete manner and came one after another. Question 2: Aloo has been working for a petroleum company for the past 5 years, two years ago he was promoted and decided to purchase a house. He took an Islamic home financing

with Bank ABC Islamic. Unfortunately, early this year due to the drop in oil prices, the petroleum company had to lay off 30% of its workers. Aloo was one of those whose contract was terminated. Although Aloo received a handsome compensation, four months after being jobless he is finding it difficult to pay his bills. Aloo reads the home financing agreement and finds a clause which states that ‘ibra will be given at the discretion of Bank ABC Islamic’. Also in the agreement is a clause which states that Ta’widh is set at 2.5% from the date of default’. Advice Aloo. Would your answer differ if this scenario happened 20 years ago? First issue The first issue is whether Aloo can get a Ibra for his home financing agreement and whether Ibra is at the discretion of Islamic Bank Law 1. Ibra is unilateral contract where a debt is owed by one party to the other and the creditor has discretion to unilaterally reduce the amount that is be given by the debtor. 2. Contractually, a customer of an Islamic financial system has to settle total outstanding selling price in the case of early settlement. 3. Basically, if full payment is made earlier, differed payment may be waived. 4. Initially, Ibra is discretionary on the Islamic financial institution 5. In a situation where a customer is a halfway through a payment and unable to pay, bank usually will demand payment and get an order for sale of property (because the property is under charge). 6. In practice Islamic bank will give Ibra because there’s still period of time that customer has not utilized. Islamic bank will sometimes give Ibra even though the customer defaulted. 7. However, because Ibra is unilateral contract as it is on the bank’s volition whether to give Ibra or not. Cases 1. Bank Islam Malaysia Berhad v Adnan Omar [1994] a. Supreme court case 1994 b. The issue is whether the customer is entitled to Ibra c. Adnan Omar has taken financing from Bank Islam and he defaulted quite early in the financing period. Thereafter, Bank Islam claimed for the full sum. Full sum is bank selling price with no Ibra provided. Adnan Omar claimed that he was entitled to Ibra since it was long period of time for the financing. d. High Court decided that whether to give Ibra or not is on the discretion of Islamic Bank and since Islamic bank claimed for full selling price, he had to pay that. e. Supreme Court held that Adnan Omar knew what is in the contract and since the contract require him to pay full selling price and this is what he should pay and whether or not Ibra is given is at the discretion of Islamic bank f. Customarily all Islamic bank give Ibra after they are being paid of whatever due to them. However, the problem is that the customer was not made known that Ibra can be given, and also what was the calculation given to Ibra. 2. Arab Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd

a. Case that changed the trend b. Disagreed with Supreme Court, did not follow precedent but instead the court felt that it was unfair that the Islamic bank should be given discretion to give Ibra or not. He said that Ibra must be given as of right. c. He held that: i. When a Bai Bithamin Ajil financing is done, in a way where the customer sells the property to the bank and the bank sells it back directly to the customer, he held that this is not a real sale and therefore that this type of sale is actually void and that Section 66 of the Contracts Act apply and that the Islamic bank should pay back and end the void contract ii. When they way the Islamic bank contracted with the customer was such that it involves a tripartite agreement whereby the customer, the bank and the vendor were involved, he called it an ovation agreement. This is what some of the Islamic banks were doing. Some Islamic banks enter into an ovation agreement with a vendor and replace its name in the shoes of the vendor, and sold the property to the customer, just like a Murabaha contract rather than Bai’ al-Inah contract. He held that the contract is valid but Ibra must be given as of right to the customer and the Court will calculate how much Ibra should be given d. His opinion is that Islam is fair and just religion and therefore it is not possible, when a person takes Islamic financing the customer should pay more than they are taking conventional financing. This trend of allowing full discretion of giving Ibra and asked to pay full payment is wrong e. This case caused tremendous amount of uproar because the majority of contract was based of Bai Bithamin Ajil underline Bai al-Inah where the contract sale is from customer to bank and bank to customer. 3. Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and Other Appeals a. In less than a year, the appeal decision was made and passed in the case of Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and Other Appeals. It is actually the appeal decision of Arab Malaysian Finance, it is just that in the case of Arab Malaysian Finance, they were many parties because the Judge actually bundled up many cases together and decided it without listening to any of the parties because he believed that this problem was a huge problem in the banking industry. When it was appealed, one of the parties in the many cases in Bank Islam Malaysia. So, Bank Islam Malaysia was the first one to appeal b. When it went to the Court of Appeal, it overruled Arab Malayan Finance. It is no longer a correct law in Malaysia. Bank Islam Malaysia decided that the Bai Bithamin Ajil contract is a sale contract and you cannot compare it to a conventional financing contract as was done by Justice Abdul Wahab Pattail. i. The Court of Appeal held that these were two separate financing ii. They held that the Bai Bithamin Ajil contract is a valid co...