Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

I am just setting out my thoughts and where I will be planning to write a more extensive article on this area. I have always been fascinated between the interaction of the statutory process of winding up and the contractual bargain of arbitration. Will one process always necessary trump the other?

There are now several cases which try to deal with whether there would be a form of a stay of the Court winding up proceedings in favour of arbitration. The winding up itself can arise from either a creditor petitioning on the grounds of insolvency or a shareholder petitioning on the just and equitable grounds. In the former scenario, the petition may be grounded on a debt arising from a contract containing an arbitration clause. In the latter, the shareholder’s complaints may be arising from a shareholders’ agreement with the other shareholders. I now just record down some cases in the scenario of a petition being presented by a creditor on the grounds of insolvency.

There is a recent English Court of Appeal decision in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ  which held that the mandatory stay provisions in the English Arbitration Act would not apply to stay winding up proceedings. Instead, the Companies Court would exercise its usual discretion in whether to stay or dismiss a winding up petition, for example, if there was a bona fide dispute of the debt on substantial grounds.

This is a similar approach taken in Hong Kong, where its Arbitration Ordinance closely follows the Model Law (and therefore, may be more persuasive in Malaysia). The case of Jade Union Investment Limited [2004] HKCFI 21 also similarly held that the mere existence of an arbitration clause does not mean that the mandatory stay provisions under the Arbitration Ordinance would apply. The Court would still apply the test as to whether there was a bona fide dispute of debt when hearing the petition. Another case of Re Sinom (Hong Kong) Ltd [2009] HKCFI 2201 similarly followed Jade Union when deciding whether to grant an injunction to restrain the presentation of a petition.

It will be interesting to see how such a situation would play out in Malaysia. I am not aware of any such case involving a stay of a winding up petition or an injunction to restrain presentation based on the Arbitration Act 2005 (“AA”). I know of one or two cases under the old Arbitration Act 1952 where a stay of winding up proceedings was sometimes granted and sometimes not.

If there is an arbitration clause in a contract and a statutory demand is made for payment under the contract, would the other contracting party be able to apply under section 11 of the AA for an injunction to restrain the presentation of the petition? What would the test for such an injunction be? Would it still be the Tan Kok Tong Court of Appeal test of a bona fide dispute of debt on substantial grounds? Or would the mere existence of an arbitration clause be sufficient? Or would an application for an injunction have to be grounded outside of the AA and the Court would exercise its inherent jurisdiction to grant a Fortuna injunction to restrain the presentation?

If the Petition was filed, would a stay of those Court proceedings be allowed under section 10 of the AA? The test for a stay under section 10 of the AA will not require the Court to decide on whether there is a bona fide dispute (that original provision has been taken out) and it is almost mandatory for a stay unless the arbitration clause can be questioned (e.g. the clause is null and void or inoperative).

I will try to deal with these questions in my more extensive article and after I have done more research.

The Repetitive Restraining Orders

Background and History to the Restraining Order

Under the scheme of arrangement framework, the Court can grant a restraining order under section 176(10) of the Companies Act 1965 (“Act”) to restrain further proceedings in any action against the company undertaking a proposed scheme. This allows the financially distressed company to have a moratorium and have breathing space from creditor action, while the company attempts to restructure or compromise its debts. Ordinarily, it would be the company itself which would apply for a restraining order but section 176(10) of the Act allows any member or creditor of the company to also make such an application. I had earlier written a general overview on the law of schemes of arrangement.

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The restraining order would have to strike a balance between different interests. On the one hand, a moratorium may be beneficial to the overall pool of creditors in order to prevent the scramble by creditors to execute against the distressed company’s assets. The restraining order could therefore facilitate the orderly restructuring of the debts where there was a genuine and viable scheme proposal. On the other hand, a wide stay of legal proceedings could also be abused. A company could sit on a restraining order, without any viable scheme proposal, and frustrate the actions by the creditors.

The potential for the abuse of the restraining order may have led to the amendment to our Act in late 1998 to tighten up the use of restraining orders. Additional restrictions and creditor-protection provisions were built in through the introduction of sections 176(10A) – (10G) of the Act. Essentially, it limited the grant of each restraining order to prima facie not more than 90 days with certain mandatory requirements to be met. Further, once the restraining order was granted, there could not be the disposition of any property of the company outside the ordinary course of business.

A recent case highlighted a situation where there could be the repeated use of a restraining order. That might delay legal proceedings by creditors but it may also be a lifeline for an ailing company, if there was a viable scheme proposal.

The Repeated Use of a Restraining Order

In the unreported case of Dynawell Corporation (M) Sdn Bhd (in provisional liquidation) v Universal Trustee (M) Berhad (Seremban High Court Originating Summons NCVC-24M-63-06-2013) (see [2013] 1 LNS 1391), the High Court was made aware of multiple applications for a restraining order and made a finding that the application for a restraining order was mala fide. Dynawell can also be read together with the related High Court decision in RHB Bank Berhad v Gula Perak Berhad [2013] 1 LNS 1409. From a reading of both the cases, the brief facts appear to be as follows.

Gula Perak Berhad was listed on the stock exchange and in May 2010, it was classified as a PN17 company. It was eventually de-listed in May 2011. In turn, Dynawell is a wholly-owned subsidiary of Gula Perak Berhad and where its core asset is the Dynasty Hotel. Several secured lenders initiated legal proceedings against both Gula Perak and Dynawell, including foreclosure proceedings on the Dynasty Hotel. Winding up proceedings were also taken against Gula Perak and Dynawell and where both companies had Provisional Liquidators appointed over them.

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During the course of these legal proceedings, there appeared to be at least 6 different applications filed in different Courts seeking for a restraining order on the basis of a proposed scheme of arrangement. Applications were filed in Kuala Lumpur, Shah Alam, Seremban and Taiping. There were different applicants, some may have been creditors or members of Gula Perak/Dynawell or in the Dynawell case, it was Dynawell itself. It was noted in the Dynawell judgment that the proposed schemes of arrangement applications had similar grounds and traits and where the averments in the affidavit in support were largely the same. Justice Zabariah Yusof remarked that this indicated that it originated from the same source or author.

Procedurally, an application for such a restraining order would ordinarily be taken out ex parte. This is because  only the Applicant would need to apply and need not necessarily add in any other party, or to add in any of the other creditors with pending legal proceedings for instance. Once the initial restraining order is granted ex parte, and this should only be for a limited time not exceeding 90 days, it will then have a universal effect in restraining all legal proceedings by all the creditors listed in the proposed scheme. The onus then shifts to the opposing creditors to intervene and to attempt to set aside the restraining order or to oppose the extension of the restraining order.

Hence, the two judgments show that the opposing creditors had to go to each of the different Courts to apply to set aside the restraining orders obtained by different parties. The restraining orders and the related legal proceedings also delayed the foreclosure and the winding up proceedings.

The history of the litigation then led to the High Court in Taiping and in Seremban making orders that any further application for a restraining order be made inter partes and for such an application to be advertised in 3 newspapers.

Justice Zabariah Yusof made the following critical remarks:

“In view of the circumstances and the time line of the ex parte Originating Summons in Enclosure 2 filed, clearly shows the mala fide intent of Dynawell to conceal the application from UTB and at the same time concealing the material and relevant facts from the court.

Section 176(1) of the Companies Act does not state that an RO application may be made ex parte. It merely states that a party may apply. However, given the chequered history of Dynawell, the propose (sic) scheme of arrangements and the ROs applications which have been explained above, this is a case of abuse of process of the highest order. I would be failing in my duty if I do not invoke my inherent jurisdiction to curb further abuse by Dynawell.”

Costs of the setting aside of the restraining order were then made personally against the director of Dynawell.

Conclusion

A restraining order is usually a useful and often crucial mechanism to achieve a viable restructuring. However, this case shows how the repeated use of a restraining order could amount to an abuse of process. The present provisions in the Act, and the impending amendments to the Act, will not address this potential for abuse. An application for a restraining order can continue to be taken out ex parte, and where an applicant may still attempt to bypass the mandatory protection laid in the section 176(10A) requirements. Any creditor or member of the company could potentially also apply for a restraining order, thereby resulting in multiple and parallel restraining orders. The protection against any abuse of process therefore rests on the vigilance of the Courts when hearing such ex parte applications.

Moving the Call of Carmen Tham: A Tale of Two Vocations

In Malaysia, the admission to the Malaysian Bar is known as the Call to the Bar. It marks a pupil’s qualification as an Advocate & Solicitor. A member of the Bar with more than 7 years of experience will move the pupil’s Call, and to submit on behalf of the pupil as to why the pupil now qualifies to be admitted to the Bar. I can do no better than to refer to Fahri Azzat’s LoyarBurok article if you want to read more about the significance of the Mover and the Call to the Bar.

Other jurisdictions have started to move to a form of a mass Call and they do away with individual ‘submissions’ and speeches by the Mover. I think it is still a fine tradition to maintain here, despite the length of time taken. It is a delicate balance, with the increasing number of pupils being admitted to the Bar, and with judicial time being taken away.

On a personal note, I always get nervous when I have to move a pupil’s Call. Firstly, I recognise that this is a once-in-a-lifetime experience to get Called to the Malaysian Bar. Secondly, it is also not very often that we get a chance to publicly address and thank our loved ones, in particular to express our gratitude to our parents. With all these factors, I always get nervous in wanting to give the best speech that I can. Most times, I will try to write the speech from scratch, having had a chance to meet up with the pupil for a chat.

There was added pressure on this occasion since I was moving the call of a LoyarBurokker who is a pupil of another fellow LoyarBurokker. As the main theme of this speech, I wanted to focus on the term “vocation” since I thought it was very apt in describing Carmen’s future.

 

With leave My Lady,

I am Lee Shih for the Petitioner. My learned friends for the Attorney-General Chambers, the Bar Council and the Kuala Lumpur Bar Committee have been introduced earlier.

With leave My Lady, allow me to introduce the Petitioner.

The Petitioner was born on 6 November 1989. She is the eldest child of Mr Tham Kam See and Madam Chan Soo Kum. The Petitioner’s father cannot be in Court today but the Petitioner’s mother and sister are present in Court.

My Lady, the Petitioner read law at Aberystwyth University in Wales and graduated in 2010. She completed her Bar Professional Training Course at City University, London, and she was called to the English Bar at the Honourable Society of Inner Temple.

The Petitioner then completed her pupillage under my learned friend, Marcus van Geyzel, of Peter Ling & van Geyzel.

At the Petitioner’s Call to the Bar today, I think it is apt to draw our attention to the term “vocation.” Vocation is derived from the Latin word meaning “to call.” Hence, I find it very accurate to describe the legal profession as a vocation. Being members of the legal profession, we answer the call to serve others.

Now, having completed her 9-month journey as a pupil, the Petitioner is about mark her entry into this vocation of the legal profession.

In addition, the Petitioner is also about to complete another significant 9-month journey. Soon, the Petitioner will mark her entry into another vocation; the vocation of motherhood.

Both vocations will be a lifetime journey for the Petitioner. They will be filled with some challenges, but I have no doubt that both will bring her much pride and happiness.

On this day, the Petitioner would like to take this opportunity to thank the following:

1. Firstly, her parents, Mr Tham Kam See and Madam Chan Soo Kum, for having sacrificed so much for her. In my conversation with the Petitioner, the Petitioner described her father as loving but stern, and who instilled a lot of discipline in the Petitioner. Mr Tham, the sole breadwinner in the family, through his hard work provided her with the best education that she could ever ask for. Madam Chan, on the other hand, provided the whole family with delicious meals every day. A dish is never repeated, and Madam Chan would have drawers after drawers filled with recipe books. Madam Chan’s cooking would be the impetus to draw all the family members back home to have dinner together.

2. To her spouse, Mr Clinton Wong, for being her pillar of strength and for his unconditional care and love throughout Bar school and pupillage.

3. To her colleagues, former colleagues and bosses in Peter Ling & van Geyzel, particularly Li Ying and Jin for making her pupillage experience rewarding, unforgettable and fun.

4. To her pupil master, Marcus van Geyzel, who, in her words, is the coolest pupil master ever and also a very good friend who has imparted on her great knowledge and wisdom. As I have known the Petitioner’s pupil master for years now, I have no doubt that he would have bestowed some of his wealth of sartorial sense on to the Petitioner as well.

5. Finally, the Petitioner would like to thank her friends who took the time and effort to be present here today to witness this special occasion.

My Lady, I believe that the Petitioner’s papers are in order and that the relevant bodies have no objections. I humbly pray that the Petitioner be admitted and enrolled as an Advocate and Solicitor of this Honourable Court.

I seek leave from this Honourable Court for my learned friend, Marcus van Geyzel, to robe the Petitioner.

Call

The MAS Administration Bill: Malaysia Airlines to Soar Again?

This is my article originally published on LoyarBurok and then picked up by The Malay Mail.

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As part of the massive restructuring plans for Malaysia Airlines (MAS), the Malaysian Airline System Berhad (Administration) Bill 2014 was tabled before Parliament on 26 November 2014.

As a general overview, I will just touch on some of the interesting aspects of this Bill.

  1. A new entity, the similar-sounding Malaysia Airlines Berhad (MAB), will be incorporated under the Companies Act 1965.
  2. The Bill proposes for its provisions to apply for 5 years or upon the successful listing of the shares of MAB on the official list of Bursa Malaysia, whichever is earlier.
  3. It appears that MAS and its subsidiaries listed in the Bill may be placed under administration. Malaysia does not have a formal administration regime like in the UK but this is the mechanism referred to in the Bill. It effectively allows MAS and its subsidiaries to be placed under the management and control of an Administrator, and the Administrator will, among others, have the powers to manage the business and operations, manage the assets, assume all the powers of management, and to make any arrangement or compromise.
  4. An Administrator need not hold a liquidator license but merely needs to be an approved company auditor (as under the Companies Act 1965) and one who is, in the opinion of the appointer, capable of performing the duties of an administrator.
  5. Upon the appointment of the Administrator over any of the listed companies, a very wide moratorium will apply. This will essentially prevent any form of legal proceedings to be taken against MAS and its subsidiaries. The moratorium will apply for a period of 12 months, unless the administration is terminated. The 12-month moratorium can be extended by the Minister.
  6. Undue preference would apply on the appointment of the Administrator and with the effective date being the date of the coming into force of the eventual Act. This could pose difficulties and uncertainty for the creditors  of the MAS companies, with a possible clawback period of 6 months before the coming into force of the Act.
  7. Interestingly, there is some scope to ‘cherry-pick’ the assets or liabilities to be transferred into the new MAB entity and to leave other assets or liabilities behind. This will be carried out through a vesting order under the eventual Act. The Administrator has the power to re-negotiate existing contracts of the MAS companies.
  8. Further, MAB has the sole discretion to offer employment to the employees of the MAS companies, on the terms and conditions as MAB may determine. It is made very clear that MAB is not deemed to be a successor employer in any way. This allows MAB to make a very clean break from the MAS employment contracts. There is also a specific provision to deal with MAB negotiating with trade unions and associations.
  9. There can be no Court Orders which stays, restrains or affects the powers of the Administrator or which compels the Administrator to do or perform any act.

The provisions of the Bill appear to be very specific in targeting some of the possible issues that MAS faces in its restructuring. As part of its restructuring, MAS may find that it needs to extricate itself from certain commercial contracts and employment contracts. The Bill will provide the Administrator with very wide powers and with a wide array of options in attempting to restructure MAS. Nonetheless, a balance must be struck in protecting the MAS creditors’ and employees’ interests.

Hopefully, the new entity of MAB will be able to take flight, like a phoenix soaring up again. Nonetheless, a balance must be struck in order to protect the interests of the MAS creditors and employees.

Auditors Beware: Auditors Owe a Duty of Care to Company’s Investors

[this article was originally published in Skrine’s Legal Insights Issue 3/2014]

The Court of Appeal in CIMB Investment Bank Bhd v Ernst & Young & Another Appeal [2014] 6 CLJ 438 (see the Grounds of Judgment from the Kehakiman website) held that in carrying out statutory audits under the Securities Industry Act 1983 (“SIA”), the auditors of a fund management company owed a duty of care to the company’s investors.

This appellate decision is significant as it confirms the tests to be applied to ascertain whether auditors owe a duty of care to the company’s investors. On the facts of this case, the auditors’ agreement to conduct an SIA audit for a fund manager created a special relationship between the auditors and the company’s investors which gave rise to a common law duty of care on the part of the auditors to undertake a proper audit in the course of carrying out their statutory duty.

BACKGROUND FACTS

SJ Asset Management Sdn Bhd

The appeal centred on SJ Asset Management Sdn Bhd (“SJAM”), a licensed fund management company under the SIA and the Capital Markets and Services Act 2007 (“CMSA”). The appellants in one appeal were clients, or in other words investors, of SJAM. In the second appeal, the appellant had caused its clients to invest in SJAM. SJAM held, administered and managed various investments of the appellants.

SJAM had engaged the respondent auditors to perform the necessary statutory audits under the Companies Act 1965 (“CA”) and under the SIA. Pursuant to their engagement, the auditors produced audit reports.

Following complaints against SJAM, the Securities Commission (“SC”) investigated SJAM, revoked its capital market services license and eventually wound up SJAM.

The appellants, in turn, appointed their own accountants to investigate the accounts of SJAM. Based on their accountants’ findings of fraud in the management of the funds of the clients, the appellants commenced the High Court action against the auditors based on negligence. The appellants’ contentions were that they had relied on the auditors’ audit reports to make, advise on or facilitate investments in SJAM.

Preliminary Issues for Determination by the High Court

In the High Court action (reported in CIMB Investment Bank Bhd v Ernst & Young and Another Case [2014] 3 CLJ 322), the Court heard an application for the determination of the issue on whether the auditors owed a duty of care to the appellants in the two situations that arose in this case.

The first situation was when the auditors were carrying out the statutory audits in accordance with the CA for SJAM and issuing the CA audit reports. The second situation, and what was more significant in this appeal, was when the auditors were carrying out the statutory audits in accordance with the SIA for SJAM and issuing the SIA audit reports.

The High Court decided in favour of the auditors and found that the auditors owed no duty of care to the appellants in both situations. For the CA audit reports, it was held that CA audit reports were not intended for the appellants, as investors of the company, but were meant for SJAM and its shareholders in the general meeting. As for the SIA audit reports, it was held that they were not meant for making investment decisions but to enable SJAM to furnish such information to the SC.

Therefore, the appellants’ claims were dismissed. The appellants appealed to the Court of Appeal.

FINDINGS ON THE DUTY OF CARE

Guiding Principles on Establishing a Duty of Care

The Court of Appeal was guided by the Federal Court decision in The Co-operative Central Bank Ltd v KGV & Associates Sdn Bhd [2008] 2 CLJ 545 in accepting the guidelines laid down by the House of Lords in Her Majesty’s Commissioners of Customs and Excise v Barclays Bank [2007] 1 AC 181.

The Federal Court in Co-operative Central Bank acknowledged that three general tests could be used to determine whether a duty of care existed in cases that involved economic loss.

The first is the ‘assumption of responsibility’ test as to whether the defendant assumed responsibility for what he said and did vis-à-vis the claimant, or is to be treated by the law as having done so. The second is the threefold test: whether loss to the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; whether the relationship between the parties was one of sufficient proximity; and whether in all the circumstances it was fair, just and reasonable to impose a duty of care on the defendant towards the claimant. The third is the incremental test.

Against this backdrop, the Court of Appeal found that the High Court had determined the existence of the duty of care solely on the basis of the threefold test. In applying this test, the High Court had ruled that the appellants had failed to satisfy the ‘sufficient proximity’ element. The Court of Appeal held that instead, the High Court should have applied the guidelines in Barclays Bank, in particular, the first test of assumption of responsibility.

Duty of Care on the Part of the Auditors

The application of the assumption of responsibility test would mean that:

(a) reliance on the auditors’ report is no longer an essential ingredient to establish a duty of care;
(b) no anterior relationship between the appellants and the auditors is necessary to satisfy the ingredients of foreseeability and proximity; and
(c) the ingredient relating to proximity is satisfied so long as the assumption of responsibility may be inferred by reason of the existence of a special relationship.

The Court of Appeal drew a distinction between the CA audit and the SIA audit and found that Parliament could not have intended for both audits to be for the same purpose. There would be a difference in the scope and approach of the SIA audit as compared to the CA audit.

The focus of the SIA audit included the safeguarding of the assets of the appellants held by SJAM. The report by the auditors would serve to alert the SC and/or the relevant government authority to take such further action as is required. If in the course of the audit, the auditors come across a transaction or an accounting entry that does not comply with the provisions of Division 3 of Part VII of the SIA, the auditors had a duty to look deeper. The auditors could not ignore the irregularity or breach. Therefore, the SIA audit framework is a critical means of both ensuring compliance and detecting non-compliance by SJAM in relation to the management of the appellants’ assets.

The Court of Appeal also disagreed that any breach of the SIA provisions could only be enforced by the SC. Further, this was an appropriate case where the legislative framework in the SIA could be a basis to found the claim for breach of the common law duty of care arising from the careless performance of a statutory duty.

In concluding that the auditors owed a duty of care, the Court of Appeal stressed that the appellants were in an unusual situation whereby their funds and investments were in the hands of a trustee fund manager (SJAM) but over which funds they had no control. The auditors’ agreement to conduct the SIA audit for SJAM with knowledge or imputed knowledge of the unusual situation in which the appellants were placed, gave rise to a duty on the part of the auditors to undertake a proper audit in the course of carrying out their statutory duty. This obligation created a relationship between the auditors and the appellants so as to give rise to a common law duty of care.

If the auditors had not breached their duty of care, the SIA audit reports would have been qualified and the irregularity in the accounts of SJAM would have been reported to the SC. Such a report to the SC, in turn, would have caused the SC to take the appropriate action thereby causing SJAM to cease trading and consequently, diminish the losses of the appellants. However, because the audit reports that were produced by the auditors were ‘clean’, the SC took action much later and the ensuing winding up of SJAM was correspondingly delayed, thereby causing substantially more losses to the appellants.

The Court of Appeal therefore ruled that the auditors owed a common law duty of care to the appellants. The Court of Appeal ordered that the matters be remitted to the High Court for the trial on the issue of the liability of the auditors, if any, to the appellants.

CONCLUSION

This decision is significant in confirming that auditors who carry out a statutory audit under the SIA for a fund management company owe a duty of care to the investors of that company. Although the SIA has been repealed and replaced by the CMSA, it is likely that a similar duty of care on the part of the auditors would arise under the CMSA.

It is also likely that the Court would still impose such a duty in favour of the investors of the company even if the auditors build disclaimers into such a statutory audit (whether under the SIA or CMSA) to exclude liability or obligations to third parties.

MIA International Conference 2014

I will be moderating a session at the Malaysian Institute of Accountants Conference 2014 this Wednesday 5 November 2014. It will be on the new Companies Bill and its impact on Malaysian businesses and economy. It should be a very interesting session and I have been liaising with the speakers on the panel. Will keep the format as a group discussion and try to draw out all the different issues.

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What is a ‘court’ for a stay of court proceedings pending arbitration?

The Supreme Court of Victoria in Subway Systems v Ireland [2014] VSCA 142 interpreted the meaning of the term ‘court’ under the Australian Commercial Arbitration Act 2013 for the purposes of a stay of court proceedings pending arbitration. In line with the Model Law, the term ‘court’ was extended to cover an administrative tribunal. Therefore, those tribunal proceedings were stayed pending arbitration. This is also of significance to Malaysia on how the Arbitration Act 2005 may be interpreted for a stay of court proceedings pending arbitration.

Subway Decision

A dispute arose between the parties to a franchise agreement involving a Subway sandwich business. The agreement contained an arbitration clause. The franchisees sought to have the dispute heard in the Victorian Civil and Administrative Tribunal (VCAT) while Subway argued that VCAT was precluded from hearing the proceeding and must instead refer the parties to arbitration.

There is a useful summary of the principles from this decision in this Allens commentary. I quote a section from this commentary.

In interpreting the Act and the definition of the word ‘court’, the majority recognised the aims of the Model Law, of uniformity and harmonisation, given the Act’s genesis from the Model Law. The policy behind the Model Law was central to the majority’s analysis of whether VACT fell within the definition of a ‘court’ for the purposes of s8 of the Act. If VCAT was found to be a court in this instance, disputes to be heard in VCAT, where an arbitration agreement existed, would be referred to arbitration under the Act. Conversely, if VCAT was found not to be a court, parties would have a choice of forum in which to have their disputes heard: either at VCAT or under arbitration. The majority judges recognised the wholly unsatisfactory position of the latter option.

In analysing whether VCAT was a ‘court’, the Acting Appeal Justice Kyrou (in the minority) noted instances in legislation where the definition of court intentionally omitted VCAT, and observed that VCAT lacks the typical indicia of courts at common law, as it:

  • is not bound by the rules of evidence;
  • cannot enforce its own decisions;
  • is constituted by some members who are not legally trained;
  • can apply government policy; and
  • can provide advisory opinions.

Acting Appeal Justice Kyrou’s analysis focused on the text of the Act and other statutes where the word ‘court’ is applied and noted the intentional omission of VCAT in various definitions of court in legislation. This led his Honour to find that VCAT was not a ‘court’ for the purposes of s8 of the Act.

Conversely, Appeal Justice Beach (in the majority) held that VCAT possesses the six features typical of courts at common law and noted instances where the definition of courts in statutes has been held to include VCAT. President Maxwell focused on the international development, and aims, of the Model Law that were picked up in the Act and the effect of these on interpreting the definition of ‘court’ under the Act.

As a matter of statutory construction, the majority considered the text, context and purpose of the Act, and held that both the Model Law and the Act had application to ‘a body or organ of the judicial system,’ which extended to VCAT.

Malaysian Context

Section 10 of the Arbitration Act 2005 (“AA 2005″) provides that: “A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall … stay those proceedings and refer the parties to arbitration … (emphasis added)”

In the AA 2005, similar to the Subway decision, there is no definition of the term ‘court’. This is in contrast with the definition in Article 2(c) of the Model Law where ‘court’ means a body or organ of the judicial system of a State. The term ‘court’ in the AA 2005 does not appear to mean only a High Court (i.e. the High Court in Malaya and the High Court in Sabah and Sarawak) since other sections in the AA 2005 refer specifically to the term ‘High Court’ and ‘High Court’ is defined in section 2 of the AA 2005 (for example, section 11 of the AA 2005 states that “a party may … apply to a High Court for any interim measure and the High Court may make the following order …”).

Further, I would also argue that there is a difference between ‘court’ (with the small ‘c’) and ‘Court’ (with the capital ‘C’). ‘Court’ is defined in the Courts of Judicature Act 1964 as the Federal Court, the Court of Appeal or the High Court. So if there is a deliberate use of ‘court’ (with the small ‘c’) in the AA 2005, could it be argued that Malaysia can also draw on the Model Law definition of ‘court’ as being a body or organ of the judicial system?

In line with this wider definition, the term ‘court’ should encompass this broader definition in order to allow the Subordinate Courts (i.e. the Magistrate and Sessions Court) to also grant a stay of proceedings to refer parties to arbitration. The Subordinate Courts do not fall within the definition of ‘Court’ under the Courts of Judicature Act 1964, but  it has been largely assumed that the Subordinate Courts would have the power to grant a stay of proceedings under section 10 of the AA 2005 (for example, see Sundra Rajoo & WSW Davidson (2007) ‘The Arbitration Act 2005: UNCITRAL Model Law as applied in Malaysia’, para 10.3).

If we accept this broader definition of ‘court’ under the Model Law, could this then be extended to other forms of statutory tribunals, the Industrial Court or other regulatory bodies for the purposes of a ‘court’ ordering a stay of proceedings? It will be interesting to see how this will develop and be argued in the Malaysian courts.