KUALA LUMPUR (Aug 28): Pre-factoring-i facilities — typically under a murabahah set-up, where a financier provides a cash advance directly to suppliers before invoices are issued — do not constitute moneylending, the appellate court has ruled.
A three-member Court of Appeal (COA) panel, led by COA judge Datuk Wong Kian Kheong, overturned a prior High Court decision in a case related to a financing agreement dispute linked to the Kasawari Gas Development Project off the coast of Sarawak.
Back in November last year, the High Court ruled in favour of oil and gas company KL Petrogas Sdn Bhd, which had sued finance company SA Puncak Management Sdn Bhd that offers shariah-compliant factoring and financing services.
The High Court ruled that pre-factoring-i facilities still constitute moneylending, and therefore providers were required to possess legitimate licences under the Moneylenders Act 1951.
The nub of the case was that KL Petrogas claimed that the factoring facility was never used, and the alleged monies 'owed' was essentially moneylending "disguised as Islamic funding".
SA Puncak countered that the agreements were in accordance with valid shariah-compliant tawarruq financing, and were thus exempt from conditions under the law. It also claimed that KL Petrogas defaulted on its obligations, and must therefore pay it back.
In overturning this decision, the COA said that unless it is expressly clear that a genuine financing agreement is prohibited by law, the courts should uphold and enforce said agreement. The court added that all agreements before the court are valid and enforceable by SA Puncak against KL Petrogas.
At the onset of his 60-page ground of judgement released on Tuesday, Aug 25, Wong said that this appeal posed a novel question of law, particularly on whether debt financing in the form of whole turnover agreements — also known as receivables purchase agreements, among others — had violated the Moneylenders Act 1951.
In particular, the panel considered whether the agreements in the appeal had violated Section 5(1) concerning the licensing of moneylenders.
A turnover agreement is a contract where a company sells its outstanding invoices (accounts receivable) to a bank, factoring company, or special purpose vehicle, to get immediate cash flow. It transfers ownership of receivables and shifts collection responsibility and credit risk to the purchaser.
The COA panel, which also consisted of Datuk Ismail Brahim and Datuk Dr Shahnaz Sulaiman, was of the view that pre-factoring-i facilities in this case cannot constitute moneylending.
"The purpose of the Islamic pre-factoring facility was to finance KL Petrogas' need for working capital with regard to the project, [the company's] other business ventures, [and its] operations.
"This debt financing in the form [of the pre-factoring facility] was clear from SA Puncak's direct payments of KL Petrogas' debts to [its] suppliers/subcontractors, employees and creditors.
"[In contrast], a moneylender merely lends money to the borrower and does not finance the borrower's business by paying directly to the borrower's creditors and/or employees.
"The Islamic pre-factoring facility was not a sham or facade for SA Puncak to conduct a moneylending business," Wong said.
Wong also noted that many countries have recognised whole turnover agreements as a lawful tool for debt financing, and Malaysia should follow suit.
"If otherwise, Malaysian businesses would be deprived of a valuable source of debt financing in the form of whole turnover agreements," he said.
If such agreements are unlawful according to the Moneylending Act, the judge added that local businesses would have to seek debt financing outside of Malaysia and be subjected to foreign laws governing those contracts.
He also noted that debt financing is borderless in the current digital age.
Counsels Yudistra Darma Dorai, Melody Tham, and Balasubramaniam Ravi Shankar of Messrs Raj, Ong & Yudistra appeared for SA Puncak, while Mak Lin Kum, Layyin Teh Hassan, and Sean Low of Messrs Mak LK & Co appeared for KL Petrogas.