Book Review: Modern Advocacy – Perspectives from Singapore

Picked up Modern Advocacy – Perspectives from Singapore from the library and just before I browsed through it, I half-expected it to be another book covering the usual objectives of cross-examination, how to frame your questions, or how to best make opening or closing submissions. But I couldn’t be more wrong and the book is a treasure trove of invaluable tips and lessons on trial advocacy. It provides in-depth coverage on all aspects of the craft of advocacy and very uniquely, from a Singapore perspective. A lot of the content and advice can equally be applicable here in Malaysia, due to our very similar laws on civil procedure.

The book is split into 20 chapters, and each chapter is authored by a leading litigator or judge in Singapore. The book does not just focus on the oft-perceived concept of advocacy being only the arguments made in court or deft cross-examination of the witnesses on the stand. Advocacy, or good advocacy, covers the entire span of trial preparation, from developing a case theory from the start, the drafting of pleadings to fit with that case theory, interviewing your witnesses, interlocutory proceedings and pre-trial and the eventual trial proceedings.

The chapters take the reader through this entire process of advocacy, each author giving advice and lessons while also peppering their writings with their own personal experiences. It is a wonderful read as the book either gives you a new perspective on how to approach a case or reinforces some of the approaches you have already adopted in your practice.

For instance, in the chapter covering ‘Advocacy in Interlocutory Applications’, Steven Chong SC shares with us litigation strategy on what sort of interlocutory applications should be applied for. The example of discovery is used, where the application for discovery is not so much to see what the opposing party will disclose, but to see what the opposing party refuses to disclose. It is useful to use such an application to gauge whether you have hit the other side’s “raw nerve”. An application for specific discovery of supposed non-relevant and undisclosed documents may then eventually cause the opposing party’s case theory to unravel. Applications for summary judgment or striking out can be useful – not necessarily and only to succeed in these applications, but to also assess the other party’s strengths and weaknesses and to force the other party to commit to a case theory or position very early on in the proceedings.

The book does not only focus on civil trial proceedings, but there are two chapters devoted to criminal trial proceedings and another focusing on advocacy in arbitration and alternative dispute resolution. Appellate advocacy is also covered as well as an overview from the Bench.

This is a fantastic read so I would highly recommend the purchase of it. It’s not too expensive so I want to pick up a copy for myself as well.

Plugging the Legal Brain Drain

(from The Star, 26 September 2008)Thirteen thousand. That is roughly the number of lawyers currently practising in Malaysia. It gives the impression that there are more than enough lawyers here. So why should we worry if a few hundred, or even a thousand, lawyers leave the profession to work in other jurisdictions?

Around 1,000 new lawyers join the profession annually so shouldn’t there be plenty of legal talent here in this country?

There is, however, cause for worry. Increasingly, law firms are complaining of a general decline in the quality of lawyers entering the profession. Our brightest and best law graduates are choosing instead to practise in other countries.

Further, the pace of lawyers leaving Malaysia for other jurisdictions like Singapore, Hong Kong and the Middle East appears to have also accelerated, and this exacerbates the legal brain drain that we are facing.

In her Putik Lada article ‘Not as Glamorous as Boston Legal’ (The Star, Aug 15), Melissa Tai touched on some of the problems the profession faces in attracting and retaining legal talent. What I will be setting out is a wish list of sorts and some solutions to this problem.

Wish List

At the top of any lawyer’s wish list would be the obvious factor of higher pay. Undoubtedly, other jurisdictions offer a significantly more attractive remuneration package, even after factoring in the higher cost of living.

It is accepted that present market forces result in relatively low legal fees being charged, which in turn contributes to a relatively low amount of pay compared with other jurisdictions.

The difficulty in attracting lawyers to stay in Malaysia goes beyond the issue of pay. One of the strong appeals of working overseas is the opportunity to be exposed to more international and high-calibre work. There is no easy answer to this, as other countries like Singapore, for example, also grapple with the same issue of lawyers leaving for this reason.

One possible solution could be a controlled liberalisation of the Malaysian legal market to allow foreign law firms to practise in Malaysia. This may help to provide international exposure within a local setting. This idea has been in the pipeline for many years and it remains to be seen when it will be implemented.

Steps which law firms themselves can take would include a change in the work culture and the general improvement of the work-life balance of their lawyers. Firms may need to restructure the work and careers of their lawyers to meet both the firm’s needs and the lawyers’ personal priorities.

Law firms must also recognise that up to 70% of the younger lawyers are women and that part-time and flexible work arrangements have to be offered. The existence of family-friendly parental leave schemes would be more beneficial than having such talent leave practice altogether.

Bringing back respect to the profession

Taking a step back from what law firms can do, there is the more over-arching issue that must be addressed. Respect must be brought back into the profession in order to continue to attract and retain our brightest talent.

Firstly, the starting point has to be the improvement of the quality of law graduates entering the profession. Hence, the announcement of a Common Bar Examination is welcomed and it must be compulsory for all graduates, whether from local or foreign universities, to pass the Common Bar Course before they are admitted to the Bar. Everyone has to go through the same gatekeeper, and higher standards can be more easily maintained.

The implementation of the Common Bar Course would have to go hand-in-hand with an improvement to the present pupillage system. Pupillage is the compulsory nine-month period in which a law graduate undergoes training with a senior lawyer to gain practical experience before being admitted to the Bar.

A proper pupillage structure for the determination of certain core skills, the teaching of such core skills by the senior lawyer or the law firm, and an assessment of such skills must be put in place.

Secondly, an essential aspect of bringing back respect into the profession is the need for an efficient and strong judicial system. The frustration of having cases unduly postponed or court hearing dates being fixed more than five years down the road will drive lawyers away from practice in Malaysia.

The surfacing of images of a lawyer apparently brokering the appointment of judges leads us to question the integrity of the judicial system. The sluggish investigation into the findings resulting from this apparent brokering of judges and the stalling of the implementation of the Judicial Appointments Commission also raises doubts on the sincerity for judicial reform.

Conclusion

The fall-out from the subprime crisis has resulted in large lay-offs from major law firms in America and in England. China, post-Beijing Olympics, may well also experience some slowdown. The effect of these events is that it may result in a brief respite from the exodus of legal talent from Malaysia as job opportunities in other jurisdictions may become harder to come by.

But immediate steps must be taken to allow us to continue to attract and retain our legal talent. The solutions I have touched on are not exhaustive but may well go a long way to plugging the legal brain drain we are experiencing.

Grounds of Judgment for Statutory Derivative Action

I had previously highlighted the news on an aggrieved shareholder obtaining leave from the High Court to bring a statutory derivative action on behalf of Celcom (Malaysia) Berhad.The unreported decision is now out in Mohd Shuaib Ishak v Celcom (Malaysia) Berhad[2008] 1 LNS 314 where Ramly J set out his detailed grounds of judgment. It makes for very interesting reading.The Judge confirmed that the test in assessing “good faith” is whether there is an arguable case for Celcom to bring a claim against the proposed Defendants. Self-interest on the part of the applicant was insufficient to lead to a finding of bad faith.In determining whether it was “prima facie to be in the best interests of the company that the application for leave be granted”, the Judge held that the test to be whether an applicant has adduced sufficient evidence which on the face of that evidence discloses that it is, so far as can be judged from the disclosure, in the interests of the company to pursue the action.It is very useful that the Court has set out in great detail the list of authorities, mainly drawn from Canada and Singapore, governing the principles governing an application for leave under section 181A of the Companies Act 1965. There are some questions arising from the second half of the judgment though, where I find it curious that the Court saw the need to see if the proposed Defendants (ranging from Celcom’s directors, Telekom, to the advising banks) owed a duty of care to the shareholders. The action, once leave is given, is brought by the Company against the Defendants. The applicant, although being a shareholder, is only seeking leave to ‘borrow’ the name of the Company in order to bring an action. Hence, the issue of an arguable case has to be an analysis of the cause of action that the Company has against the proposed Defendants, and not vis-a-vis the shareholders and the proposed Defendants.A procedural point also arises once leave to bring an action has been granted. The successful applicant would of course want the very same Judge who heard the leave application to also hear the suit itself. In Carr v Cheng [2005] BCSC 445, the Supreme Court of British Columbia, in dealing with a leave application under similar provisions, did warn against this and held that “It is obvious that a Judge hearing an application for leave to commence an action, cannot try the action.”

That could be the correct position of law to be applied here. More issues then arise.

While having a suit filed in another court in the Company’s name, parties may well have to go back to the first court which granted leave in order to obtain further directions or seek relief for non-compliance for the orders made: disclosure or inspection of documents for instance, or for the payment of the indemnity of costs.

Another issue, with one High Court having found an ‘arguable case’ in the leave stage, would that exclude or severely hamper the Defendants from striking out the derivative suit filed in the other High Court? These Defendants were not heard at the leave stage, so should proposed Defendants automatically apply to intervene at the leave stage? The wording of the Companies Act does not make it clear who should be made respondents to a leave application.

Something Old Something New: Which Arbitration Act to apply?

The Arbitration Act 2005 (“2005 Act”) came into force on 15 March 2006, and by virtue of section 51(1) of the 2005 Act, it repealed the previous Arbitration Act 1952 (“1952 Act”). The changes in the 2005 Act were far-ranging, marking a shift from the English Arbitration Act 1950 to that of the UNCITRAL Model Law.To further enforce the agreement struck between parties to arbitrate, section 10 of the 2005 Act makes it almost mandatory for a Court to stay court proceedings pending arbitration except in very specific circumstances. The stay provisions under section 6 of the 1952 Act gave the Court more discretion to refuse such a stay of the Court proceedings and to continue to hear the case.

Justice Ramly Ali J in the High Court decision of Putrajaya Holdings Sdn Bhd v Digital Green Sdn Bhd [2008] 1 LNS 92 had to consider whether to grant the order for a stay of the Court proceedings. The arbitration agreement had been entered into prior to the coming into force of the 2005 Act, and the question arose as to whether the 1952 Act or the 2005 Act should apply when determining the stay application.

Under section 51(2) of the 2005 Act, it seemed clear that the 1952 Act would apply only where arbitration proceedings had commenced before the coming into force of the 2005 Act. Section 51(2) states:

“(2) Where the arbitral proceedings were commenced before the coming into operation of this Act, the law governing the arbitration agreement and the arbitral proceedings shall be the law which would have applied as if this Act had not been enacted.”

However, one of the grounds that led the High Court to apply the 1952 Act was that the Judge found that the Bahasa Malaysia version of section 51(2) of the 2005 Act states:

“Jika perjanjian timbang tara dibuat atau prosiding timbang tara dimulakan sebelum permulaan kuat kuasa Akta ini, undang-undang yang mengawal perjanjian timbang tara dan prosiding timbang tara itu adalah undang-undang yang sepatutnya terpakai seolah-olah Akta ini tidak diperbuat.” (emphasis added)

The Bahasa Malaysia version essentially translates to:

“Where the arbitration agreement is made or the arbitration proceedings were commenced before the coming into operation of this Act, the law governing the arbitration agreement and the arbitral proceedings shall be the law which would have applied as if this Act had not been enacted.”

The Judge found that the Bahasa Malaysia version expressed the intention of Parliament to exclude the applicablity of the 2005 Act from applying “where the arbitration agreement is made or the arbitration proceedings were commenced before the coming into operation of this Act”. As an aid to interpretation, the Judge also found it incongruous and inconsistent that in the English version of the section 51(2) of the 2005 Act, the second portion after the comma (,) made reference to ‘arbitration agreement’ but the first portion before the comma (,) made no reference to ‘arbitration agreement’.

This, along with other factors, led the Judge to make the finding that the 1952 Act applied in this case.

This decision stands in contrast to an earlier High Court decision in Majlis Ugama Islam dan Adat Resam Melayu Pahang v Far East Holdings Bhd & Anor [2007] 10 CLJ 318 where an identical issue arose. In that case, the joint venture agreement, containing the arbitration clause, was signed in 1992 and the Judge, interpreting the English version of section 51(2) of the 2005 Act held that since the arbitration proceedings in that case only commenced after the coming into force of the 2005 Act, the 2005 Act and its stay provisions applied.

This is a stunning discovery that the Bahasa Malaysia version of the statute is different from the English version. Arguably, the decision in Putrajaya Holdings should be the correct interpretation of section 51(2) of the 2005 Act since the Bahasa Malaysia version will be the authoritative version, under section 6 of the National Language Act 1963. It has now been brought to my attention that under P.U. (B) 62/2006, pursuant to section 6 of the National Language Act 1963/67, the authoritative text of the Arbitration Bill 2005 introduced in the Third Meeting of the Second Session of the Eleventh Parliament is the text in the English language. I understand that the decision of Putrajaya Holdings is not under appeal and this discrepancy in the Bahasa Malaysia and the English version must be corrected by Parliament.

Requirements for Restraining Order in a Scheme of Arrangement

Hishamudin J in the recent (as of now still unreported) decision of PECD Bhd & Anor (Applicants) (No. 2) [2008] 1 LNS 324 examined the requirements for the grant of a restraining order under section 176(10A) of the Companies Act 1965 (“the Act”).

A restraining order is a far-reaching stay-like order applied for under section 176(10) of the Act when a company is undergoing a scheme of arrangement. The company or any member or creditor of the company may apply to the Court to restrain further proceedings in any action or proceeding against the company, except by leave of the Court. Such an order to restrain ‘any action or proceeding’ would not only extend to restraining legal suits or winding up petitions filed against the company, but also to any possible de-listing procedures taken by Bursa Malaysia. A restraining order is applied for on an ex parte basis so it is timely that the High Court has clarified the requirements that need to be satisfied at the initial application stage.

Section 176(10A) of the Act sets out that the Court may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if-

(a) it is satisfied that there is a proposal for a scheme of compromise or arrangement between the company and its creditors or any class of creditors representing at least one-half in value of all the creditors;

(b) the restraining order is necessary to enable the company and its creditors to formalise the scheme of compromise or arrangement for the approval of the creditors or members pursuant to subsection (1);

(c) a statement in the prescribed form as to the affairs of the company made up to a date not more than three days before the application is lodged together with the application; and

(d) it approves the person nominated by a majority of the creditors in the application by the company under subsection (10) to act as a director or if that person is not already a director, notwithstanding the provisions of this Act or the memorandum and articles of the company, appoints the person to act as a director.


I will not delve too much into the facts of the case, but the issue to be determined in PECD Bhd was whether the stringent requirements of section 176(10A)(a) – (d) must be complied with even where the application for a restraining order did not exceed the period of 90 days. It boiled down to an interpretation of the phrase “…may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if.”

The Court held that “the four paragraphs apply to any application for a restraining order pursuant to subsections (10) and (10A) of section 176 of the Companies Act regardless of the length of the period of the restraining order applied for.”

Prior to this, the weight of the authorities (see Metroplex Bhd & Ors v Morgan Stanley Emerging Markets Inc & Ors [2005] 6 MLJ 487 and Re Kai Peng Bhd [2007] 8 CLJ 703) already supported this interpretation but they were all decided in the context of an extension of the restraining order past the 90-day period. There was also the seemingly-contrary High Court decisions in Jin Lin Wood Industries Sdn Bhd & Ors v Mulpha International Bhd (unreported) (2004) and Pelangi Airways Sdn Bhd v Mayban Trustees Bhd [2001] 2 MLJ 237, but Hishamudin J distinguished Pelangi Airways in this case.

This case is pending appeal I believe but I think that this is the correct interpretation of section 176(10A). There is firstly, the plain reading of the section, which Hishamudin J held that if it were intended that the requirements were to only apply for the period after 90 days, the draftsman would have drafted it differently.

Secondly, the background of the introduction of subsection 10A was the abuse of the restraining order provisions especially during the period of the last financial crisis. Restraining orders would be sought for long periods of time, and then further extended, with the debtor company enjoying a moratorium against their creditors and allowing the company to drag its feet in the implementation of the scheme of arrangement.

The need to comply with the requirements of section 176(10A) at the very initial application ensures that the creditors are not caught by surprise by the ex parte restraining order. The applicant company would have already sought most of their views and the creditor-nominated director would ensure that there is proper management of the assets of the company during the restraining order period. There would also be full disclosure of the financial information of the company at the very start.

eLawyer Legal Blog Writing Contest

eLawyer is holding what could be the first ever legal blog writing contestin Malaysia.

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The topics you can select from are:

1) Towards an independent judiciary in Malaysia

2) Common Bar Exams: The creation of a new problem or a solution for an old one?

3) Welcome CheDet.com: the impact of Tun Mahathir’s blog

4) Anti-party Hopping Law- Agree or Disagree?

You are to send in an entry not exceeding 1,000 words and you stand to win up to RM 500 cash! Successful entries will be featured in an exclusive section on the eLawyer website. You’ll have to sign up for free as an eLawyer member to participate.

I have been invited to be a judge of the contest and I am privileged to have with me as judges as well, Dr Azmi Sharom from the University of Malaya and Fahri Azzat.

Hope you all support the contest and send in your entries!

The Implied Undertaking Rule

An interesting read, Allens Arthur Robinson’s update on the implied undertaking rule which was affirmed by the recent Australian High Court decision of Hearne v Street[2008] HCA 36.The implied undertaking rule is that a party receiving documents in litigation holds them subject to an implied undertaking to use them only in the proceedings in which they were produced. The reasoning behind such a rule was explained by Denning in Riddick v Thames Board Mills Ltd [1977] QB 881:

“A party who seeks discovery of documents gets it on condition that he will make use of them only for the purpose of that action, and no other purpose.
…
Compulsion [to disclose on discovery] is an invasion of a private right to keep one’s documents to oneself. The public interest in privacy and confidence demands that this compulsion should not be pressed further than the course of justice requires. The courts should, therefore, not allow the other party – or anyone else – to use the documents for any ulterior or alien purpose. Otherwise the courts themselves would be doing injustice.”

Hearne v Street summarised that the implied undertaking rule applied to all documents and information that one party to litigation is compelled, whether by reason of a rule of court, a specific order of the court or otherwise, to disclose, including:

(i) documents inspected after discovery;
(ii) answers to interrogatories;
(iii) documents produced on subpoena;
(iv) documents produced for the purposes of taxation of costs;
(v) documents produced under a direction from an arbitrator;
(vi) documents seized under an Anton Pillar order;
(vii) witness statements served under a judicial direction;
(viii) affidavits; and
(ix) expert reports.

The implied undertaking is usually released once the relevant material is tendered or read in open court. A breach of this implied undertaking (which is given to the Court) would mean that a party is in contempt of Court.

Application of Implied Undertaking Rule

Let me just highlight some issues and the application of this rule in the context of a shareholder dispute.

A shareholder who is not a director, or a director-shareholder who has been denied access to company documents, will not have access to crucial documents to help evidence any of his complaints. A shareholder may wish to bring an oppression petition under section 181 of the Companies Act 1965 to seek for a share buy-out or other reliefs. One of the drawbacks of a petition is that there is no automatic right to discovery. In fact, in See Hua Realty Bhd v See Hua News Holding Sdn Bhd [2007] 7 CLJ 152, discovery of documents in the oppression petition was disallowed.

Would the new statutory derivative action provisions assist such a shareholder? The new provisions allow for wide ranging powers for inspection and to effectively order discovery of documents at the leave stage. At a talk I attended, it was suggested by a senior corporate litigator, that he did not see the inconsistency in bringing a section 181A statutory derivative action for the specific purpose of discovery, and to have an oppression petition run in parallel. This was to get over the hurdle and difficulty of obtaining discovery in the oppression petition.

However, I would think the implied undertaking rule should strictly apply in preventing the use of any documents obtained under the section 181A proceedings for use in the oppression petition proceedings.

Similarly, if the shareholder agreement contains an arbitration clause, any order for discovery by the arbitrator (or even interim order for discovery to be granted by the Courts under section 11 of the Arbitration Act 2005) should mean that the documents or evidence can only be used within the arbitration proceedings and not be used for other litigation proceedings.

That means a shareholder may have to continue to grope in the dark and not be able to have access to documents to evidence at least some of the complaints the shareholder may have.

Tony Blair’s Upholding the Rule of Law: A Reflection

I was in attendance at the Mandarin Oriental on Friday to attend the 22nd Sultan Azlan Shah Law Lecture series. The speaker for this year was Tony Blair, former PM of the United Kingdom, and he would speak on the topic ‘Upholding the Rule of Law: A Reflection’.

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It took a while for Blair to delve into the topic proper, although it was still entertaining to hear him speak about his barrister days and his eventual move into politics.

Very quickly, you could tell that Blair adopted a very utilitarian approach to his topic on the Rule of Law. You may first ask, what is the Rule of Law? A basic description of it would be that no one is above the law. As Dicey would put it, one of the principles of the rule of law is the absolute supremacy of regular law as opposed to arbitrary power. Some of the elements that Blair identified would constitute the Rule of Law is that of an independent and strong judiciary, as well as an independent Bar.

In this day and age of the awakening of China and India and the economic forces they wield, the rise of sovereign wealth funds, and the development of new business sectors, made the Rule of Law all the more relevant rather than it being cast aside. ‘Footloose capital’, as Blair put it, would need an outlet, the growing global workforce would need an outlet to live and work. The Rule of Law would aid in such a process.

“Get good governance. Get a proper judiciary, proper laws”.

“Get a reputation that there is a commercial and criminal legal system that operates fairly and then wait for businesses to come, because they will.”

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Blair stressed that a judiciary which was still corrupt indicated the immaturity of a country. A judiciary that became corrupt, was an indicated of a country in decline. He also emphasised that the Rule of Law did not just mean an independent judiciary, but it also necessitated an efficient judicial system. He repeated the oft-used phrase that justice delayed is justice denied. Further, judges could not be tainted with any allegations of corruption. The public’s confidence in the judiciary must be upheld at all times.

Blair also shared with the audience the obvious tension he felt between the executive, in making laws, and that of the judiciary, who interpreted the laws he, as Prime Minister, had crafted. He was almost critical of the judicial activism in making law rather than interpreting it.

He shared with the audience the passing of certain anti-terrorist laws which provided for preventive detention. These laws were eventually challenged in the House of Lords, where the Court declared these laws contrary to the Human Rights Act. He expressed his steadfast disagreement with the decision, but he was also steadfast in agreeing that the Court had the power to make such a decision.

“It is right that they can; that they are above me and not me above them.”

I have to say that Tony Blair is an excellent speaker. His oratory skills and ability to command attention. I cannot say that I enjoyed the content of his speech that much, but it was enlightening though to see the viewpoint from the Executive, from his vantage point of Prime Minister and wishing to create laws with the greater public good in mind, but having the necessary stumbling block of the check and balance of the Judiciary interpreting such laws. The speech hardly broke new ground in academic discourse, but still interesting to listen to Blair speak nonetheless.

Statutory Derivative Action in Malaysia

In what could possibly one of the first successful statutory derivative actions filed here in Malaysia, it was reported that a former shareholder of Celcom (Malaysia) Bhd had obtained leave from court to initiate a statutory derivative action on behalf of Celcom against Telekom Malaysia Bhd (TM). I had previously touched on the law of the new statutory derivative actionhere in Malaysia.From the public announcements, we see that leave under section 181A of the Companies Act 1965 was granted on 9 July 2008. Further details of the action being brought is also found in another recent Bursa announcement.

Quoting from the Edge Daily article, the action a former shareholder of Celcom, Mohd Shuaib Ishak, is suing TM and its wholly-owned subsidiary Telekom Enterprise Sdn Bhd (TESB) pertaining to the amended and restated supplemental agreement dated April 4, 2002 entered into between, among others, Celcom and DeTeAsia, the acquisition of Celcom shares by TESB, the consequent Mandatory General Offer (MGO) exercise implemented by TM and the de-merger exercise of the mobile and fixed-line businesses of the TM Group.

DeTeAsia was formerly the strategic partner of Celcom and made its entry into the mobile phone operator when it was majority-owned by companies belonging to Tan Sri Tajudin Ramli. After Tajudin defaulted on his debts, his shares in Celcom were forced sold by Pengurusan Danaharta Bhd to TM via TESB. TM then made a MGO for the rest of the Celcom shares at RM2.75 each.

DeTeAsia accepted the MGO but also filed a claim for additional RM4.25 per share with an international arbitration panel. It subsequently won the claim and TM paid a further RM740 million to DeTeAsia.

In the suit, Shuaib on behalf of Celcom has named as defendants TM, TESB and nineteen others, including the former and existing directors of Celcom and TM. Among the relief Shuaib is seeking on behalf of Celcom are:

(a) The sum of US$232,999,745.80, being the amount paid by Celcom to DeTeAsia under the Award;

(b) A declaration that the Sale and Purchase Agreement dated 28.10.2002 between Celcom and TM (or TESB) for the aquisition by Celcom of the shares in TM Cellular Sdn Bhd is illegal and void and of no effect;

(c) A declaration that all purchases of shares in Celcom made by TESB from the MGO is illegal and void and of no effect;

(e) That TM by itself, its servants and agents be restrained from giving effect to or executing any of the proposals set out relating to the proposed de-merger of the mobile and fixed-line businesses of the TM Group or in the event that any such proposals have been completed that TM, by itself, its servants and agents take all such steps as shall be required to rescind such completed proposals.

It will be very interesting to see the developments in this case, and the public will be able to follow any developments through the public announcements as well. The law on this area is still in its infancy and it already appears that shareholders are quick to use this procedure to bring an action in the interests of the company. It remains to be seen if my initial opinion that the floodgates of shareholder litigation will not be opened under this new derivative action.

Edit: The Court of Appeal has overturned the High Court decision, but the written grounds of judgment are not out yet.

The Limited Liability Partnership in Malaysia

IntroductionTraditional business models tend to veer between two options, that of a partnership and a corporation. While a partnership offers flexibility in allowing its members to agree and strike a bargain on the form of its arrangement, a corporation must adhere to a more mandatory framework with a division between its management and its members. However, a corporation enjoys its own separate legal personality with its shareholders enjoying limited liability.Within the practice of law here, legal practitioners can only choose between operating as a sole practitioner or to form a partnership.

A need for flexibility in running a business and to overcome certain limitations in all the above business models have led to the call for a hybrid vehicle to be enacted, that of a Limited Liability Partnership (LLP).

…it combines the protection of limited liability whilst offering a degree of flexibility of the partnership arrangement…

As its name suggests, it combines the protection of limited liability for its members whilst offering a degree of flexibility of the partnership arrangement for the internal management of the business. The most attractive feature of an LLP is that it is a separate legal entity and has a continuing legal existence independent of its members as compared to the traditional partnership of which its legal existence is dependent upon its membership.

The Companies Commission of Malaysia (CCM) has revived the consultation process in relation to the LLP and issued a second consultative document. The CCM recommends that the LLP should be a vehicle afforded to all business and not merely certain professional groups. It believes that the LLP provides businessmen and investors the flexibility to select the best business entity suited for its business.

It has been reported that the CCM hopes to implement the LLP model by 2009.

This article will highlight and touch on the CCM’s recommendations and the likely features of the LLP structure here in Malaysia. The discussion here highlights the proposals of the CCM.

The Conferment of Limited Liability Status

The proposed LLP Act will confer a separate legal entity status on the LLP – one that is distinct from its partners that will come into existence upon registration of the business entity.

Partners of the LLP will be accorded limited liability in respect of tort and contractual claims. However, it will not insulate a partner of the LLP which he would otherwise incur by his own wrongful act or omission, even though such acts were carried out in his role as a partner of the LLP. This is in line with the approach taken in the UK whereby the House of Lords applied the decision in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, HL, to LLPs.

The CCM was of the view that that there should be mandatory bonds/insurance for professional LLPs there should be mandatory bonds/insurance. For instance, Article 6 of the Jersey Act requires an LLP to make financial provision for a sum of £5 million to be paid by a bank/insurance company to creditors of the LLP upon the dissolution of the LLP.

Partners of the LLP will be accorded limited liability in respect of tort and contractual claims

However, the majority of the respondents in the first round of consultation disagreed that the bond requirement be mandated by the legislation as the requirement is specific for professionals only and instead, such requirement should be determined by the rule of the relevant professional bodies.

Registration Procedures

Registration will be simplified through the process of a single registration instrument. The CCM proposes that the information to be included in the registration form consists of inter alia the name and principal activities of the LLP, the address of the registered office of the LLP, the names and addresses of the partners and the name and address of a designated partner of the LLP. However, the Registrar may request additional information be included as part of the registration requirement. All this information will be made available for public inspection.

However, the partnership agreement will not be lodged with the Registrar in order to preserve the confidentiality of the agreement between the partners.

Membership Structure and Eligibility

The LLP should have a minimum number of 2 partners with no upper limit to its partnership. In the event that the number of partners drops below the required minimum, a certain grace period can be allowed to achieve the requirement, after which the LLP must cease to operate and be wound up.

Membership to an LLP should be made available to both natural and legal persons, in line with the Partnership Act 1961.

There were some concerns whether all partners to an LLP should be subject to the same disqualification and penalty provisions as that under sections 130 and 130A of the Companies Act, 1965, which is the position under the UK LLP Act. In Singapore however, the disqualification and penalty provisions are only applicable to the persons managing the LLP, who need not necessarily be a partner of the LLP. The CCM’s recommendation is to follow the Singapore position. The person who is involved in the management of an LLP should be subject to the same disqualification criteria faced by directors of companies.

Designated Compliance Officer

An LLP will require a designated compliance officer to ensure that the compliance requirements under the proposed LLP Act are fully adhered to. This will be a similar role to that of company secretaries and directors in relation to the Companies Act 1965.

The designated compliance officer need not necessarily be a partner of the firm. It is proposed that further conditions to be imposed on the designated compliance officer is that he or she must be a natural person ordinarily resident in Malaysia and subject to the same disqualifications criteria under sections 125, 130 and 130A of the Companies Act 1965.

Liability of Partners

Limited liability is to be given to innocent partners only and that it should be clearly stated that the defaulting partner is jointly liable with the LLP for the damage, loss or injury suffered by a third party.

Partners of an LLP should be accorded limited liability in respect of tort and contractual claims. A partner of an LLP should not, by reason only of being a partner of the LLP, be held personally liable for the conduct of other partners or the transactions or liabilities of the LLP.

It is also proposed that in the event an LLP becomes insolvent, a partner’s liability should be limited to the amount of his capital contribution to the LLP subsisting at the time.

Partners’ Authority to Bind LLP

The proposed LLP Act shall provide that partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP.

The circumstances in which an LLP will not be bound by acts of its partners are the following: –

…partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP

(i) the partner has no authority to act on behalf of the LLP; or

(ii) the third party dealing with the partner is aware of this; or

(iii) the third party does not know or believe that the partner is a partner of the LLP.

In the case of transactions with a former partner of an LLP, such transactions are still valid transactions binding the LLP unless the third party has actual notice that the partner is no longer a partner of the LLP at the time of the transaction.

It has been recommended that only actual notice will suffice and that constructive notice should not be applicable where transactions with a third party are concerned. This may be controversial since it may be too onerous on former partners if the doctrine of constructive notice is not applied. The respondents in the first round of consultation seemed to go both ways on this issue.

It may be in the public interest to only allow for actual notice and this view is supported by the approach taken by the Jersey LLP Act where it provides that for the purposes of determining whether a partner has authority to act on behalf of an LLP, no person is deemed to have notice of any records by reason only that they are made available by the Registrar for inspection.

Relationship between the LLP and Partners

The CCM is of the view that default rules should be provided in the proposed LLP Act. However, such default rules are only applicable in the absence of a partnership agreement or when certain matters are not dealt with in such agreement.

The default rules will cover areas relating to inter alia:
(i) Contribution of capital, sharing of profit and loss;
(ii) Right to indemnify;
(iii) Involvement in the management of the LLP;
(iv) Remuneration of members; and
(v) Introduction and withdrawal from membership to the LLP;

Creation of Debentures or Charges

The LLP should be allowed to create debentures or charges in order to raise loans and the CCM is in favour of this. Traditional partnerships would have to rely on the personal guarantee of the partners to secure a loan.

Creditors’ Protection Mechanism

The proposed LLP Act will contain claw-back provisions requiring contributions from partners and former partners who have withdrawn any property from the LLP within a stipulated time frame of the commencement of the winding up, if it can be shown that the LLP was insolvent at the time of withdrawal or that the partner(s) knew or have reasonable grounds for believing that the LLP was or would not be able to pay its debts.

The time frame may mirror the 6-month window under insolvency laws or a longer period may be adopted.

Such claw-back provisions should be limited to only the amount withdrawn by the partner or former partner of the LLP.

An LLP is deemed to be insolvent if at anytime the LLP is unable to pay its debts when they are due in the normal course of business or at any material time the value of the LLPs’ assets is less than the value of its liabilities. This is a clearer definition of insolvency than that contained in the Companies Act 1965 and codifies one of the common law tests for insolvency.

The circumstances of the LLP’s inability to pay debts should be made consistent with section 218(2) of the Companies Act 1965 which states that the inability of a company to pay its debts is when the company is indebted in a sum exceeding five hundred ringgit loans. This in itself may be controversial since there already is a criticism of the low 500 ringgit threshold for companies, and any amendment to the Companies Act 1965 to raise this limit should similarly be adopted under the proposed LLP Act.

Dissolution of the LLP

The partnership agreement can dictate the methods for dissolving an LLP and an LLP should not be affected by the death or bankruptcy of its partner.

An LLP can be voluntarily dissolved if its partners agree to do so. This may very well entail the filing of the necessary certificate of solvency with the Registrar or the making of a statutory declaration that the LLP is solvent before the commence of the winding up process (as is the position under the UK LLP Act).

The Court may also be empowered to order an LLP to be dissolved in certain
circumstances. The CCM is in favour of adopting the Singapore position, where some of the circumstances in which the Court can dissolve an LLP are:

(i) the partners have resolved that the LLP be wound up by the Court;
(ii) the LLP is unable to pay its debts;
(iii) the Court is of the opinion that it is not reasonable/practicable to carry on the business of the LLP in conformity with the partnership agreement;
(iv) the Court is of the opinion that it is just and equitable that the LLP be wound up; or
(v) the LLP is being used for unlawful purposes or for purposes prejudicial to public peace, welfare or good order or against national security or interests.

…the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public…

Conclusion

It is very encouraging to see the CCM pushing hard for the implementation of the LLP model. Aside from the proposed LLP Act which will adopt most of the above features, legislation like the Income Tax Act, and other statutes governing professional bodies, for instance the Legal Profession Act, will also have to be amended accordingly. It may be too much to ask to implement the entire structure by 2009 but at least that is the targeted time frame presently.

This new LLP vehicle will aid small and medium sized business as well as professionals in the running of their respective businesses. The CCM is already mindful that the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public dealing with the LLPs.