INTRODUCTION
Contracts that require prior regulatory approval as condition precedent are generally treated as conditional agreements, enforceable only upon obtaining the required consent. However, if the parties proceed with substantive or material performance of the contract before securing that approval, the contract may be rendered unenforceable and void for contravening statutory requirements. Whether such performance has occurred depends on the specific facts and circumstances of the case.
This article discusses the Federal Court’s decision in Detik Ria Sdn Bhd v Prudential Corporation Holdings Limited & & Anor [2025] MLJU 575, which clarified the legal effect of contracts subject to regulatory approval under the Insurance Act 1996 (“IA 1996”). The key issues were whether two option agreements relating to the acquisition and disposal of a 49% stake in the controller of an insurer, namely a Call and Put Option Agreement (“CPOA”) and a Supplemental Call and Put Option Agreement (“SCPOA”) were valid conditional or contingent contracts that could be specifically performed despite the absence of consent from the Minister of Finance under section 67 of the IA 1996, and whether the failure to obtain such consent rendered the agreements unenforceable.
BACKGROUND OF THE CASE
The Appellant in this case, Detik Ria Sdn Bhd (“Detik Ria”) held 49% and the respondent, Prudential Assurance (“Prudential”) held 51% of the shares in Sri Han Suria Sdn Bhd (“SHS”) which held all the issued shares in Prudential Assurance Malaysia Berhad (“PAMB”). Around February 2002, both parties entered into a CPOA involving their shares in SHS, where Detik Ria agreed to grant a call option to Prudential, and Prudential agreed to grant Detik Ria a put option. Since SHS was the sole shareholder of PAMB, a licensed insurer, the agreement had implications for control of a regulated entity. Crucially, the arrangement was made conditional on obtaining prior approval from the Minister of Finance, which was never obtained.
Around December 2008, Detik Ria issued a notice to Prudential to exercise the put option, with the purchase consideration amounting to over RM114 million. Subsequently, in April 2009, a Memorandum of Deposit was executed between Prudential, Detik Ria, and its shareholders as security for the redemption by Prudential of the ‘A’ preference shares in SHS. Under the Memorandum, Prudential was entitled to affect the transfer of the shares without notice to or consent from Detik Ria, whereas Detik Ria was restricted from dealing with the shares without Prudential’s prior written consent and was required to vote as directed by Prudential.
On September 2009, Detik Ria and Prudential entered into a Supplemental Call/Put Option Agreement (“SCPOA”) which deferred the completion date of the put option indefinitely, until Prudential could procure a purchaser acceptable to Bank Negara. The SCPOA also amended key terms of the CPOA, including the purchase consideration formula and the removal of the original 12-year put option period.
A Supplemental Memorandum of Deposit was also executed on the same date, creating a further charge over the shares in SHS. This effectively placed Prudential in a position of trust, as it held the shares for any party approved by it and Bank Negara or the Minister of Finance. Between 2009 and 2019, Detik Ria only received RM109 million which is the purchase price, while Prudential, as the sole holder of the ‘A’ preference shares, having received dividends amounting to RM4.2 billion within the said period.
On 30 June 2013, the Financial Services Act 2013 (“FSA 2013”) came into force, repealing the IA 1996. Following the FSA 2013, the requirement for approval that was previously obtained from the Minister of Finance under section 67(1) of the IA 1996 was replaced by a requirement to obtain approval from Bank Negara under section 87(1) of the FSA 2013.
Nearly a decade later, by a letter dated 30 April 2018, Detik Ria wrote to Prudential expressing its intention to rescind the put option and retain its 49% shareholding in SHS. In response, Prudential maintained that the put option remained valid, irrevocable, and incapable of rescission, further stating that they intended to proceed with the acquisition of the option shares upon obtaining the necessary regulatory approvals. Prudential Corporation submitted an application to Bank Negara for approval to acquire Detik Ria’s 49% effective interest in PAMB, and Bank Negara granted its approval in principle in May 2018 based on Prudential’s representations. Years later, in 2023, Detik Ria wrote to the Ministry of Finance to inquire whether prior written approval had been granted for the acquisition under the CPOA. The Ministry confirmed that it had no record of granting such approval to Prudential Assurance.
HIGH COURT AND COURT OF APPEAL DECISION
Both the High Court (“HC”) and the Court of Appeal (“COA”) upheld the validity of the CPOA. The HC found that the agreement was not illegal as it was a conditional contract, only enforceable upon obtaining regulatory approval, and therefore the issue of restitution under section 66 of the Contracts Act 1950 did not arise. The Court also rejected Prudential’s argument of mutual mistake, citing the parties’ conduct in extending timelines and making payments, and held that Detik Ria was estopped from denying the validity of the CPOA. On appeal, the COA affirmed the HC’s findings, holding that the applicable law was the Insurance Act 1996 and that Bank Negara’s letter constituted the requisite approval under section 67 of IA 1996. As such, the absence of prior approval at the point of execution did not render the agreement illegal or void, so long as the acquisition or disposal or shares did not occur without fulfilling the required conditions (which is the approval from Bank Negara).
Here, the courts below appeared to centre their analysis entirely on whether the absence of Bank Negara’s approval at the time of entering into the CPOA and SCPOA rendered the agreements illegal. However, this narrow focus overlooked the fact that, under the IA 1996, which they acknowledged as the applicable law, the approval ought to have been obtained from the Minister of Finance and not Bank Negara.
FEDERAL COURT FINDINGS
The Federal Court departed from the decisions of the High Court and Court of Appeal, holding that the CPOA and SCPOA were void and unenforceable due to the failure to obtain prior approval from the Minister of Finance, as required under the IA 1996. In arriving at this conclusion, the Federal Court considered, among others, the following issues:-
First issue: What is the relevant legislation that applies for the purposes of this dispute, the Insurance Act 1996 or the Financial Services Act 2013?
In this case, Detik Ria argued that since CPOA was entered into in 2002, the IA 1996 was the applicable law, and that the agreement was void ab initio due to the failure to obtain the Minister of Finance’s prior written consent as required under section 67(1) of the IA 1996.
Prudential, on the other hand, accepted that IA 1996 was in force in 2002, but argued that the relevant law was the FSA 2013, as performance of the agreement, specifically the share transfer only arose in 2018, after the FSA 2013 came into force. Since section 87(1) of the FSA 2013 required approval from Bank Negara Malaysia, Prudential contended that Bank Negara approval in 2018 sufficed. It further relied on section 270 of the FSA 2013 to argue that no agreement should be rendered void for a breach of the Act unless expressly provided.
However, the Federal Court rejected Prudential’s argument and affirmed the view of COA that the applicable law was the IA 1996, as it was the statute in force when the CPOA was executed. The Court emphasised that the legal obligations under the IA 1996 continued to apply despite its subsequent repeal, as the FSA 2013 does not operate retrospectively. Given that the parties entered into the agreement in 2002, they could not have foreseen or relied upon the FSA 2013. Accordingly, compliance with section 67(1) of the IA 1996 namely, obtaining the prior written approval of the Minister of Finance was a statutory requirement at the material time.
In sum, the Court concluded that the IA 1996 was the applicable legislation and that the CPOA was subject to the requirements of section 67(1), rendering Prudential’s reliance on the FSA 2013 and Bank Negara’s approval misplaced.
Second issue: How is section 67 of the Insurance Act 1996 to be construed and what is the effect of a contravention?
In determining whether the CPOA was illegal and void for contravening section 67 of the IA 1996, the key issue was the absence of prior approval from the Minister of Finance. It was undisputed that the agreement involved the disposal of more than 5% of shares, thereby triggering the statutory requirement for the consent of the Minister of Finance.
The Federal Court held that section 67 of the IA 1996 must be interpreted purposively, in line with section 17A of the Interpretation Acts 1958 and 1967. It was not enough for parties to merely include ministerial approval as a condition precedent in the agreement. The law clearly required that prior written approval from the Minister of Finance must be obtained before entering into any agreement to dispose of more than 5% of shares in a licensed insurer. Therefore, even though the CPOA stated that it would only be performed upon obtaining approval, the act of entering into the agreement itself without first securing such approval was already in breach of section 67 of the IA 1996.
Nonetheless, the Court also recognised that the CPOA was structured to give effect to the statutory requirement. The agreement made it clear that no disposal or acquisition would take place unless and until approval was obtained. Because of this, the Federal Court ultimately concluded that the CPOA was not illegal, void, or invalid, since the agreement was conditional and had not yet given rise to any actual dealing in shares.
Third Issue: Whether the CPOA and SCPOA are illegal or void ab initio for being entered into without prior approval from the Minister of Finance, despite containing a condition precedent requiring such approval?
The FC stated that both parties cannot therefore be said to have entered into the CPOA with an intention to contravene s 67 of the Insurance Act 1996. The CPOA was not contemplated to be for an illegal purpose by either or both of the parties as the existence of the express condition precedent evidences the fact that both Prudential and Detik Ria fully intended to comply with the law.
The courts below addressed the key issue of whether conditional contracts become “illegal” due to a failure to obtain the necessary approvals before entering into them. The FC clarified that such contracts do not become unlawful merely because the required approval such as from the Minister of Finance has not yet been obtained at the point of signing. This is because conditional contracts only take effect once the specified condition precedent is fulfilled. Therefore, entering into these agreements does not, in itself, violate the law or render the contract void. What the law actually prohibits is the performance of transactions like the acquisition or disposal of shares in an insurer without regulatory consent, not the act of entering into conditional agreements that expressly require such approval before any execution.
Fourth issue: Whether the CPOA and SCPOA remained valid and specifically enforceable, despite the parties having substantially performed their obligations without fulfilling the condition precedent.
The FC, upon objectively reviewing the entirety of the documentary evidence, concluded that both the CPOA and SCPOA had been effectively or substantially performed without the consent of the Minister of Finance between 2009 and 2018. Prudential did not provide any clear or convincing rebuttal to challenge this finding and such performance was therefore carried out in contravention of Section 67 of the IA 1996, such as:-
- A total of RM109 million from the purchase price had already been paid;
- Detik Ria was restricted from dealing with the Sale Shares;
- Prudential acknowledged that the option shares were held on trust by Detik Ria for Prudential’s benefit;
- In a letter dated 24 September 2018, Prudential informed Bank Negara that it held more than 70% of shares in Prudential Assurance, which would only be accurate if part of Detik Ria’s 49% shareholding was treated as belonging to Prudential;
- The Memorandum of Deposit required Detik Ria to exercise its voting rights in line with Prudential’s directions to avoid harming Prudential’s interests;
- It was also recognised that Prudential had the discretion to sell the Sale Shares.
As the CPOA had been substantially or effectively carried out without obtaining the necessary approval from the Minister of Finance, the FC held that this amounted to a breach of Section 67 of the IA 1996, rendering the contracts void.
ANALYSIS/SIGNIFICANCE
In this case, first, the FC scrutinised whether the contractual arrangements had been validly formed and lawfully performed in light of regulatory requirements. The central issue was not that the condition precedent namely, obtaining approval from the Minister of Finance was itself invalid or unlawful. Rather, the invalidity arose from the parties’ conduct in substantially performing the contract prior to fulfilling this condition. Although the CPOA expressly required ministerial approval before it could be acted upon, the parties nonetheless proceeded with significant acts of performance, this includes payment of RM109 million and restriction of share dealings. These conduct effectively bypassed section 67 of the IA 1996, which prohibits the disposal or acquisition of shares in an insurer without regulatory approval. As a result, the FC held that the agreement had “become void” due to illegality in performance, thereby invoking section 66 of the Contracts Act 1950 to restore the parties to their pre-contractual positions.
This decision underscores that where a statute imposes a condition precedent such as prior ministerial approval that requirement must be strictly complied with, failure to obtain such approval before performance renders the contract unenforceable and void for illegality.
Aside that, the FC reaffirmed that laws are presumed to operate prospectively unless expressly stated otherwise. Since the FSA 2013 contains no provision granting it retrospective effect, the IA 1996 remains the applicable statutory provision that was in force at the relevant time.
In addition, FC emphasised that when a contract has been wholly or substantially performed prior to obtaining the necessary regulatory approval, an otherwise valid agreement may be rendered void by operation of law. In this context, the illegality did not stem from the mere formation of the CPOA, but from the premature execution of its terms in contravention of statutory requirements.
The FC also provided structured guidance on when section 66 of the Contracts Act 1950 ought to be applied, highlighting that restitution may be available where the contract becomes void due to statutory non-compliance, so long as granting such relief does not defeat the underlying purpose of the statute.
In essence, any commercial contract that is entered into in contravention of the law, executed without obtaining the required statutory or regulatory approvals, or structured in a manner designed to circumvent mandatory legal requirements may be rendered void. Such contract becomes unenforceable regardless of the intentions or agreements of the parties. Consequently, under principles such as Section 66 of the Contracts Act 1950, both parties are legally obliged to restore or return any benefits, payments, or advantages received, thereby placing each in the position they were in prior to the formation or performance of the contract.
