I will be giving a talk to the Malaysian Institute of Accountants to cover certain aspects of the new Companies Bill 2013. The talk will be on Tuesday 17 December 2013 at Concorde Hotel.
The registration form can be obtained off the MIA website here.
I will be giving a talk on 10 December 2013 at Renaissance Hotel as part of the Breach of Contract 2013 talk. I will be covering the sessions on breach of contract and options available following such a breach.
Here is the registration form if you are interested in attending.
I have attached the Singapore Court of Appeal Grounds of Judgment for the Astro v Lippo dispute. I had earlier written a commentary analysing the High Court’s decision and the Court of Appeal has now allowed the Lippo Group’s appeal. This meant that the Court of Appeal allowed the setting aside of a majority of the enforcement orders for the arbitral awards.
The grounds are reported as PT First Media TBK v Astro Nusantara International BV & 7 others [2013] SGCA 57.
I reproduce below my article published on LoyarBurok which is an updated version of my article originally published in the July-September 2013 issue of Malaysian Bar’s Praxis. I set out the new legal framework which will allow foreign lawyers and foreign law firms to practise foreign law in West Malaysia.
The liberalisation of the legal market in West Malaysia to allow for the entry of foreign lawyers has been the subject of discussion stretching as far back as 1999.
The momentum for such liberalisation had picked up pace over recent years as Bank Negara was keen to allow for foreign lawyers and their foreign expertise to enter Malaysia to develop Malaysia into an international Islamic financial hub.
The Legal Profession (Amendment) Act 2012 (“Amendment Act”), which amends the existing Legal Profession Act 1976 (“LPA”), was passed on 13 June 2012. Although it has been gazetted, it has not come into force yet. Once brought into operation, the Amendment Act will insert a new Part IVA into the LPA to allow for foreign law firms and foreign lawyers to practice foreign law in West Malaysia. For ease of reference, the relevant provisions of the LPA I will be referring to will be the sections as amended by the Amendment Act.
This article will briefly analyse the legal framework for the impending liberalisation of the legal market although it will necessarily be confined only to West Malaysia in which the LPA applies.
It would however be useful to first briefly set out a snapshot of the present Malaysian legal market in terms of how foreign law firms already have some form of presence here.
Part B. The Present Legal Market
Baker & Mckenzie has had its member law firm in Malaysia for years now while Trowers & Hamlins opened a non-trading representative office in Kuala Lumpur in July 2012. It was the first foreign firm to obtain such an approval from the Malaysia Investment Development Authority to do so.
Two of Singapore’s largest law firms have also made its Malaysian presence felt relatively recently whereby Rajah & Tann and Allen & Gledhill have links with their associate law firms in Malaysia.
Foreign law firms also regularly advise on Malaysian corporate transactions, where these firms are based offshore in Singapore or in other countries.
The liberalisation as set out in the Amendment Act will provide for more options for foreign law firms and foreign lawyers to practice and advise on foreign law within Malaysia.
Part C. The Three Entry Routes into Malaysia
There will be three entry routes into Malaysia for foreign law firms and foreign lawyers. While the amendments to the LPA sets out the general framework, the specific details on the conditions and criteria for entry will be set out in the rules to be approved by the Bar Council and the Attorney General.
I am made to understand that these rules have been finalised by the Bar Council and they are presently to be approved by the Attorney General. Therefore, the details I highlight in this article are subject to the final approved version of the rules.
C.1 Permitted Practice Areas
Before fleshing out the three entry routes, I will highlight that the common element for all three is that each of these routes will allow a foreign law firm or foreign lawyer to only practise in permitted practice areas (see section 40F(8)(a) of the LPA for International Partnerships, section 40G(7) of the LPA for Qualified Foreign Law Firms and section 40J(2) of the LPA for foreign lawyers).
While the permitted practice areas are not defined in the Amendment Act, the rules to be passed under the LPA will likely define the permitted practice areas as a transaction regulated by Malaysian law and at least one other national law, or a transaction regulated solely by any law other than Malaysian law. In the case of a Qualified Foreign Law Firm, such aspect of work regulated by Malaysian law shall be undertaken in conjunction with a Malaysian lawyer holding a practising certificate.
The permitted practice areas will also specifically exclude areas of work such as:
From a reading of the definition and the exclusions, the permitted practice areas are defined broadly to allow for foreign law expertise to be brought in to advise on foreign law or elements of foreign law.
There seems to be a specific exclusion on work that deals solely with Malaysian law which would then still be areas within the exclusive domain of Malaysian lawyers. Further, there are ring-fenced areas of work, such as conveyancing and litigation, which are again areas only Malaysian lawyers can practise in.
In allowing for foreign firms and lawyers to practise in the permitted practice areas, there are then three licenses which can be applied for which are set out below.
C.2 Stand-alone model: Qualified Foreign Law Firm
A foreign firm may be licensed to operate in Malaysia as a Qualified Foreign Law Firm (“QFLF”) and under this licence, the QFLF can operate on a stand-alone basis.
It is expected that up to five QFLF licences will be granted and where this policy was emphasised during the debate on the Legal Profession (Amendment) Bill 2012 where it was stated that: “Sehubungan dengan itu, profesion undang-undang di Malaysia akan diliberalisasikan bagi membolehkan lima firma guaman antarabangsa terulung yang mempunyai kepakaran dalam bidang kewangan Islam antarabangsa menjalankan amalan mereka di Malaysia.”
Based on the Bar Council’s recommendations, the foreign lawyers in the QFLF will have to be resident in Malaysia for 182 days, and not less than 30% of the lawyers in the QFLF would have to be Malaysian lawyers.
It is important to note however that Malaysian lawyers who work in the QFLF would have to give up their practising certificate (see section 40G(8) of the LPA which states that a “Malaysian lawyer employed in a qualified foreign law firm shall be disqualified from obtaining a practicing certificate under Part III”).
So the QFLF, even when advising on a transaction involving elements of both foreign law and Malaysian law, would not be able to practice Malaysian law and would have to instruct external practising Malaysian lawyers.
C.3 Joint Venture Model: International Partnership
The International Partnership (“IP”) is a joint venture between the foreign law firm and the Malaysian law firm.
The permissible equity ownership and voting rights of the foreign law firm in the IP shall be determined by the Selection Committee [see section 40F(9) of the LPA] and the recommendations made by the Bar Council are that the Malaysian law firm should not have less than 60% and the foreign law firm no more than 40% of the equity and voting rights and of the total number of lawyers in the IP.
Both the foreign firm and the Malaysian firm in a proposed IP would have to demonstrate that they have the relevant legal expertise and experience in the permitted practice areas. It seems that the IP will not require specific expertise in international Islamic finance unlike in the case of a QFLF.
The IP will be entitled to bill its clients as a single law firm [see section 40F(8)(b) of the LPA] as well as recover costs and retain payments in respect of practicing in the permitted practice areas [see section 40F(8)(c) of the LPA].
Under this route, it appears that there will be a separate entity in the form of an IP, and with a Malaysian lawyer being both part of its Malaysian law firm as well as part of the IP entity.
C.4 Foreign Lawyers
Individual foreign lawyers will also be allowed to be employed by a Malaysian law firm to practise in the permitted practice areas. It has been recommended by the Bar Council that the number of foreign lawyers employed by a Malaysian law firm shall not be more than 30% of the total number of lawyers in that firm.
All individual foreign lawyers working in a QFLF, IP or Malaysian law firm will have to register as a foreign lawyer under the LPA. The registration of a foreign lawyer shall be in respect of a calendar year and may be renewed annually.
Part D. Application for Licenses and Regulation
An application for a license for the QFLF, IP or foreign lawyer will have to be made to the Bar Council. The new legislation provides for the establishment of a Selection Committee to make recommendations to the Bar Council for the granting of such licenses.
The Selection Committee will be co-chaired by the Attorney General and the President of the Malaysian Bar, and the other members would be a person to be appointed by the Attorney General from the public sector and two members of the Malaysian Bar practising in the permitted practice areas relevant to the applications.
It is expected that there will be annual reporting and accounting requirements in respect of QFLFs and IPs, and annual performance reporting in respect of foreign lawyers employed by Malaysian law firms.
All QFLFs, IPs and foreign lawyers shall comply with the same rules and regulations applicable to Malaysian lawyers relating to professional conduct and ethics and therefore also subject to, for the purposes of disciplinary actions, the control of the Disciplinary Board.
Part E. Prohibition against “fly-in fly-out”?
The Amendment Act inserted a new section 37(2A) into the LPA which makes it an offence for any unauthorised person to do or solicit the right to do any act which is customarily within the function of an advocate and solicitor, including the provision of legal advice (whether Malaysian or otherwise). This provision would appear to prevent foreign lawyers (who are not licensed under the LPA) from flying in and out of the Malaysia to provide advice and to carry out any work relating to Malaysian law or even foreign law.
This may be too wide a prohibition and this provision had attracted some criticism, especially with regard to restricting foreign lawyers from advising or acting in international arbitrations in Malaysia. Under the present law, there is no restriction against foreign lawyers acting in arbitrations in Malaysia (see the High Court case of Zublin Muhibbah Joint Venture v Government of Malaysia [1990] 3 MLJ 125 which was upheld by the Supreme Court).
Two Bills were passed by the Dewan Rakyat on 24 September 2013 to relax this restriction imposed under section 37(2A) of the LPA. The new subsections 37(2A) and (2B) to be inserted into the LPA would have two main effects. Firstly, a foreign lawyer will be able to enter Malaysia to advise or consult with a client on any matter pertaining to foreign law provided that the accumulated period of stay will not exceed 60 days in a calendar year and that immigration authorisation has been obtained.
Secondly, foreign lawyers advising or rendering any other assistance in arbitrations, or who appear as counsel or arbitrators in arbitrations in Malaysia, will be permitted to enter the country at any time and with no limit on the duration of their stay.
Part F. What Does the Future Hold?
It will be difficult to predict what the future holds in terms of the entry of foreign firms and whatever challenges the legal market will face. I list out some observations as I try to hazard a guess as to what may be expected and some of the challenges that may come along.
F.1 Competition for High-End Corporate Work
As seen from the Amendment Act, the liberalisation of the Malaysian legal market is gradual and with the primary areas of practice for the QFLPs and IPs being that of foreign law albeit within the physical territory of Malaysia.
While the QFLPs must demonstrate an expertise in international Islamic finance work, it is unlikely that the licensed foreign firms will wish to practice exclusively in the Islamic finance practice area. It is unlikely to be commercially attractive to do so and this has been highlighted years ago. So the licensed foreign firms, whether in the form of a QFLP or IP, will likely want to compete for work in the higher-end corporate practice areas. This may then impact the larger local firms as well as the boutique firms which are already competing in these areas. A higher level of competition will be to the benefit of the clients giving them more choice while also ensuring that the Malaysian firms raise their game to compete.
F.2 Ring-fenced areas: Protection for Local Law Firms
It was common throughout the debates leading to the Amendment Act and of the two recent Bills on 24 September 2013 to hear certain quarters advising caution in that liberalisation must not lead to local law firms being cast aside.
I believe that with the present restrictions built into the permitted practice areas, a majority of law firms and lawyers will not find that their work is being taken away by foreign law firms. So for instance, litigation, whether it is civil or criminal work, conveyancing and banking will still be in the exclusive domain of local lawyers.
The local law firms which already regularly work with foreign lawyers to advise or to act in matters involving elements of Malaysian and foreign law may however feel the impact. Our foreign counterparts who used to be our instructing solicitors or who were working in the same cross-border team of lawyers as us, may now have a Malaysian presence and would be competing directly with us for such work.
F.3 Knowledge Sharing
In terms of knowledge transfer, whereby the experience and expertise of the foreign firms entering Malaysia will be shared with the Malaysian firms, it can be seen how the Amendment Act and the eventual rules are intended to promote such a transfer.
QFLFs can primarily only advise on matters on foreign law but will have to employ at least 30% of Malaysian lawyers. QFLFs would still have to engage external practising Malaysian lawyers to advise on any matters concerning Malaysian law.
The joint venture model of the IP would also allow the Malaysian law firm partner to benefit from knowledge transfer.
F.4 Is this Attractive Enough?
There may be questions as to whether this proposed framework will be sufficient to attract foreign firms to enter Malaysia. It does appear to have generated some interest in the UK already.
The foreign firms would not be able to draw on their non-practising Malaysian lawyers (in a QFLP) or their Malaysian partners (in a IP) to advise on a matter dealing solely with Malaysian law, even if it were to arise in a specific permitted area such as a merger or an acquisition. Hence, the foreign firm would not be able to market themselves as a seamless provider of legal services for cross-border financial work.
The foreign law firms may then have to decide between the present existing system of maintaining associate or members firms in Malaysia and being able to advise on Malaysian law (and thus market themselves as being able to provide such seamless cross-border service) or the new system of limiting themselves into QFLPs or IPs.
On the joint venture IP model, the similar joint law venture scheme in Singapore was of limited success and with substantial revamps that have been carried out over the years. It remains to be seen whether Malaysia’s IP scheme will enjoy better success.
I am also not sure how comfortably the foreign lawyers and foreign law firms will fit into the present disciplinary regulations which were drafted to specifically govern the conduct of advocates and solicitors of the High Court of Malaya and had not taken into account foreign lawyers. How will our rules and restrictions, for instance on publicity or on websites, impact on foreign law firms if they practise in Malaysia?
Part G. Conclusion
The balancing act to be struck is that of liberalising the Malaysian legal market to allow for the entry of foreign firms while also managing the liberalisation plan to give Malaysian firms time to mature and develop with the market. While on the one hand liberalisation can promote healthy competition and bring in legal expertise, the impending liberalisation will be gradual and can be tailored to fit the situation as the market evolves.
It will be interesting to see the changes and the developments that occur once this framework is brought into operation.
I was a speaker at the joint seminar on 8 October 2013 by the Insolvency Practitioners Association of Malaysia (iPAM) and Bar Council focusing on liquidation and legal issues arising from abandoned housing projects.
My short segment focused on the use of schemes of arrangement in reviving such abandoned projects. A copy of my slides can be downloaded here.
The Chief Justice of Singapore cautions on the issues arising from dramatic growth of new entrants, third-party funding and rising costs in international arbitration.
At the Chartered Institute of Arbitrators International Arbitration Conference held in Penang on 22 August 2013, which I had the pleasure of attending, The Honourable The Chief Justice Sundaresh Menon delivered his keynote address entitled “Some Cautionary Notes for an Age of Opportunity.”
Chief Justice Menon highlighted the essential role that arbitration plays in the global infrastructure and in the development of an international rule of law. However, he cautioned that how successfully this Titanic continues to sail ahead would depend on the diligence of its stewards in spotting and reacting to the approaching icebergs.
He identified three distinct issues which he believed the international arbitration community needed to take cognizance of.
1. Dramatic growth in number of new entrants
The first was the “explosive growth in the number of new entrants to the global arbitration community, many from diverse legal traditions“. The result, he feared, was that: “[i]mplied understandings or shared values no longer provide any meaningful means of shaping or influencing conduct in this context. Arbitrators can no longer consider themselves bound by peer standards, because there are no peers in the true sense, amidst all this diversity.”
Chief Justice Menon posed the question as to what yardstick should be applied in the present setting of a largely unregulated industry with little, if any, barriers to entry. Drawing an analogy from sports, “[i]f football were played without rules but with massive stakes and rewards, how would we condemn those playing the man instead of playing the ball?’
2. Third-Party Funding
The second issue was “the growing incidence of third party funding and the participation of funds in international arbitration” and the “virtual absence of any form of regulation” in contrast to third party funding for litigation.
Chief Justice Menon gave examples of a European gas company announcing that a Luxembourg fund would finance its €1 billion ICSID claim and of a Canadian mining company having made an agreement with a third-party funder to cover the costs of a multi-billion arbitration claim brought by its subsidiary against Bolivia.
In particular, he touched on how the prevalent use of third-party funding in international arbitration has seen the emergence of a market for the sale of the payment obligation that will be owed by the claimant in the event of success, as a chose in action to third-party speculators. Such practices are reminiscent of and have the potential to replicate the vulture funds that were prevalent in the 1990s.
Would funders create a portfolio of high risk claims, consisting of frivolous or unmeritorious claims, hedged by low risk claims, consisting of claims with a good chance of success, and sell them as a diversified basket of claims to third-party speculators? This would make it possible to profit from frivolous and unmeritorious claims that would not otherwise have a market with speculators if they were sold individually.
3. Rising Cost
Finally, Chief Justice Menon raised the issue of the rising costs of international commercial arbitration and warned that there was a “growing recognition amongst users that the level of costs in international arbitration is rising at an unsustainable rate“.
While he acknowledged the various reasons for such rising costs, he stated that it was “unsatisfactory that the international arbitral community has not acted with dispatch to address this issue. On the contrary, the trend might even point somewhat the other way“.
4. Possible Responses to these Challenges
Chief Justice Menon suggested two ways to combat these three issues.
The first is to develop and implement codes of ethics to set uniform standards for both arbitrator and counsel conduct. He then proceeded to distinguish the common arguments in opposing the implementation of such a uniform code.
The second is for arbitral institutions to play a larger role in developing and implementing a regulatory framework to apply and enforce such standards.
This speech completed a trilogy of views expressed by Chief Justice Menon on the topic of international arbitration. The first were the views expressed in his keynote address at the 21st International Council for Commercial Arbitration Conference on 11 June 2012 which were then expanded on at the seminar at Queen Mary, University of London on 27 September 2012.
The Federal Court has recently released its Grounds of Judgment for its decision in the arbitration case of Ajwa for Food Industries Co (MIGOP), Egypt v Pacific Inter-link Sdn Bhd. This is the first reported Federal Court decision relating to the Arbitration Act 2005 and I had written earlier on the Court of Appeal decision.
The facts of this case involved Court applications to set aside or vary two PORAM arbitration awards. The parties had dealt with each other in an informal basis and that agreements were concluded through telephone conversations and email exchanges prior to any formal documentation. The Appellant, Ajwa, did not dispute purchasing the products from the Respondent, Pacific. Ajwa contended however that it never agreed to refer any disputes to PORAM arbitration.
Ajwa’s contention was that the Sales Contracts relied on by Pacific did not contain any specific dispute resolution clause and in most cases, were unsigned. Pacific had also relied on certain Standard Terms and Conditions (“STC”) and which Ajwa contended it had never seen nor agreed to. Therefore, Ajwa’s case for setting aside was essentially that the PORAM Tribunal had no jurisdiction to conduct the arbitral procedings as there was no agreement, written or otherwise, to refer the disputes arising from the purchases.
The Federal Court had granted leave to appeal on these two questions of law:
1st Question:
Whether for the purpose of section 9(5) of the Arbitration Act 2005, the agreement in writing where a reference is said to be made to a document containing an arbitration clause must satisfy the conditions of an agreement in writing as set out in section 9(4) of the Arbitration Act 2005.
2nd Question:
Whether an arbitration agreement in writing in respect of specific transactions, can be constituted by reference in an agreement to a document containing an arbitration clause pursuant to section 9(5) of the Arbitration Act 2005, where:
(i) The document containing an arbitration agreement is not attached to the purported agreement or otherwise published; and/or
(ii) Notice of the document containing an arbitration clause is purportedly founded on past conduct of the parties in referring to arbitration disputes arising out of unrelated transactions.
It was held at [28] that:
I was anticipating this Federal Court decision not so much on the specific legal issues raised but more on the chance for our apex Court to lay down a conclusive pro-arbitration policy for the judiciary under the Arbitration Act 2005. From that aspect, I was left disappointed.
Intelek Timur Sdn Bhd v Future Heritage Sdn Bhd [2004] 1 MLJ 401 (FC) but this was under the old Arbitration Act 1952. In my view, it would have been useful for our apex Court to have seized this opportunity to explain the significance of our Arbitration Act 2005 in adopting the Model Law and to reiterate the policy of judicial non-interference save in the exceptional and the specific circumstances provided for under Model Law / the Arbitration Act 2005.
This pro-arbitration approach by the judiciary can be seen time and time again in the apex Court of Singapore. We see such a pronouncements such as in the decisions of Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR 86 (CA), Tjong Very Sumitomo and others v Antig Investments Pte Ltd [2009] 4 SLR 732 (CA) and AJU v AJT [2011] 4 SLR 739 (CA). In England, we also see a similar pro-arbitration stance taken by the House of Lords in Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] 4 All ER 951 (HL).
It is hoped that in the near future, through the guidance of submissions of Counsel, Malaysia’s Federal Court will lay down this marker that Malaysia is very much in support of the party’s right to choose arbitration and that the Court will not easily interfere in the arbitration process.
[Originally published in the Malaysian Institute of Arbitrators Newsletter 2013]
In upholding the contractual agreement for parties to arbitrate a dispute, a party who obtains an arbitral award in his favour should be entitled to expect that the Court will enforce the award as a matter of course. After the award has been issued however, the successful party will likely still face Court challenges by the losing party through an application filed to set aside the award or to oppose the enforcement of the award.
If such an application is unsuccessful however, there may be a case to argue that the successful party should then be allowed costs on the higher indemnity basis rather than just the standard basis.
This article will analyse how the different jurisdictions have dealt with this issue and how in Malaysia, there is a case for costs on an indemnity basis to be awarded in such unsuccessful challenges to an arbitral award.
Hong Kong’s Position in Support of Indemnity Costs
The Hong Kong Court of Appeal in Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd [2012] HKCA 332 has affirmed the principle that an unsuccessful party in applying to set aside an arbitral award, or in resisting the enforcement of the award, in the absence of special circumstances, will be liable to pay costs on an indemnity basis.
The Court of Appeal affirmed the principle set out by Reyes J in the Hong Kong Court of First Instance case of A v R [2009] HKCFI 342 and its own approach in Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor (No 2) [2012] 1 HKC 491 in holding that, given that the parties had agreed to arbitration, applications by a party to set aside an arbitral award or to resist enforcement should be exceptional events.
The reasoning is that if the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.
Therefore, it now appears quite settled in Hong Kong that the onus is on the losing party who is unsuccessful in such a challenge to demonstrate the special circumstances why an indemnity costs order ought not be granted.
Australia and England
By contrast to the Hong Kong position however, the cases from Australia and England adopt the position that in an unsuccessful challenge to an arbitral award, costs should still only be awarded on the standard basis unless there are other circumstances to justify an indemnity costs order.
In Australia, the Court of Appeal of Victoria in IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248 considered the issue of whether indemnity costs should be awarded in an unsuccessful challenge to an arbitral award. The Judge at first instance had adopted the approach of Reyes J in A v R in awarding such indemnity costs. However, the Court of Appeal overturned this decision and held that there was nothing in the Victorian civil procedure statute or in the nature of enforcement proceedings for arbitral awards which, of itself, warranted costs being awarded against an unsuccessful party on a basis different from that on which they would have been awarded in other civil proceedings. The general position would be that costs will ordinarily be awarded against the unsuccessful party on the standard basis unless the successful party can establish special circumstances.
In England, the English courts may likely award indemnity costs where proceedings are brought in breach of a binding arbitration agreement. In the High Court decision of A v B (No 2) [2007] EWHC 54 (Comm) for example, court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.
Similar to the Australian position however, the English decisions have not appeared to adopt the Hong Kong approach in leaning towards awarding indemnity costs for unsuccessful challenges. The general position is that an order for indemnity costs will be made only where there is some conduct or some circumstances which takes the case out of the norm (see the English High Court decision of Fiona Trust & Holding Corporate and ors v Yuri Privalov and ors [2011] EWHC 664 (Comm) summarising the general principles justifying the award of indemnity costs).
The English High Court decision of Exfin Shipping (India) Ltd. Mumbai v. Tolani Shipping Co. Ltd Mumbai, [2006] EWHC 1090 (Comm) is an example where costs were awarded on an indemnity basis. The applicant was unsuccessful in applying to set aside an arbitral award and it was held that the applicant had acted in its own perceived commercial interest and without merit. That was sufficient to take the case “out of the norm” thus justifying the order for indemnity costs.
Malaysia
An award of costs on an indemnity basis is set out in Order 59 Rule 16(4) of the Rules of Court 2012 (“RC”) which essentially allows for all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred.
The issue of whether costs on an indemnity basis should be allowed in unsuccessful challenges to an arbitral award does not appear to have been considered by the courts here. Thus far, the general principle in Malaysia on indemnity costs would also require something out of the norm in order to depart from costs on the standard basis. The Federal Court in Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181 set out some of the guideless for an award of indemnity costs and emphasised that the discretion to award such costs is unfettered.
Order 59 Rule 8 of the RC does provide some guidance on the special matters to be taken into account in the exercise of the Court’s discretion in the award of costs, one of which is to consider the “conduct of all parties, including before and during the proceedings.” The act of challenging an arbitral award can be seen as an exceptional event (see this general sentiment expressed in the Federal Court decision of Intelek Timur Sdn Bhd v Future Heritage [2004] 1 MLJ 401 and the Court of Appeal in AJWA For Food Industries Co (MIGOP), Egypt v Pacific Inter-Link Sdn Bhd and another appeal [2013] 2 CLJ 395). Therefore, similar to the Hong Kong position, the losing party should bear the full consequences of its unsuccessful attempt at challenging the award by being penalised with indemnity costs.
It remains to be seen which direction we will move towards and whether we will adopt the more punitive approach of awarding indemnity costs for unsuccessful challenges to an award. This may then enhance Malaysia’s position as an arbitration-friendly jurisdiction, with the courts upholding awards and discouraging frivolous challenges.
[Originally published in Skrine’s Legal Insights Issue 3/2013]
Lehman Brothers. WorldCom. General Motors. Enron. These companies are among the largest bankruptcies in US history and they held a total of US$900 billion in assets at the time of filing for protection under Chapter 11 of the US Bankruptcy Code.
While a company seeking relief under Chapter 11 is often seen as entering ‘bankruptcy’ or insolvency, it will be shown that the Chapter 11 process is more akin to a debt restructuring mechanism rather than liquidation. The aim of this process is to allow the company to have some breathing space to reorganise its affairs and to then exit its financial distress.
This article will touch on some of the interesting features of the Chapter 11 framework while also drawing parallels with the debt restructuring mechanism of a scheme of arrangement under section 176 of the Companies Act 1965 (“Act”).
PROCEDURE
A typical Chapter 11 process is initiated through the debtor company filing a petition with a bankruptcy court setting out a list of its creditors and a summary of its assets and liabilities. The debtor has a legal right to initiate the procedure subject to the court determining that the petition was filed in ‘good faith’ primarily for the purposes of reorganising its debts.
Technically, there is no requirement of ‘insolvency.’ For instance, in 1995, the Dow Corning Corporation filed for Chapter 11 protection from creditors when it faced massive personal injury suits involving silicone-gel breast implants. It emerged from Chapter 11 only after nine years.
DEBTOR IN POSSESSION
Unlike liquidation which involves a liquidator taking over the management of the company, in a Chapter 11 scenario, the control of the debtor remains with its management through the concept of ‘debtor in possession.’ A trustee is rarely appointed to oversee the debtor’s operations. The rationale behind this concept is the belief that the management represents the most economical and efficient means to reorganise since they would have the most knowledge of the company’s affairs.
As a safeguard, the debtor will be subjected to oversight by the bankruptcy court and the United States Trustee (a representative of the Department of Justice responsible for overseeing bankruptcy cases). Generally, a committee of creditors would also be appointed to act in a supervisory role.
MORATORIUM
Upon the filing of the Chapter 11 petition, an automatic moratorium would stay legal proceedings against the debtor and enforcement of judgments and security without leave of the bankruptcy court. The stay is effective during the entire time the petition is pending but creditors and other parties may apply to lift or modify the stay.
This is similar to the moratorium enjoyed under a restraining order granted pursuant to section 176(10) of the Act although there is no automatic grant of a restraining order. Instead, the requirements under section 176(10A) must be met for the grant of a time-limited restraining order as well as for any extension of this order.
PROPOSALS TO CREDITORS
Under Chapter 11, the debtor has the exclusive right to formulate the plan of reorganisation for 120 days from the date of filing and this exclusivity period can be extended up to a maximum of 18 months.
In contrast, in a scheme of arrangement, the company, any creditor, any member or the liquidator (where the company is being wound up) can apply to the High Court to initiate the scheme of arrangement process.
DISCLOSURE STATEMENT
Before the debtor solicits approval for the restructuring plan, it must provide creditors with a disclosure statement that has been approved by the bankruptcy court as containing adequate information to allow a reasonable hypothetical creditor to be able to consider the plan.
This is very similar to the scheme of arrangement requirement of the explanatory statement under section 177 of the Act. The explanatory statement must provide the creditors with sufficient or material information to make a meaningful decision. However, the explanatory statement is not subject to the added safeguard of requiring approval by the Court before its issuance to the creditors.
CLASSIFICATION OF CREDITORS AND VOTING
Chapter 11 requires creditors to be classified into classes on the basis that claims that are substantially similar should be classified together. This is similar to a scheme of arrangement scenario.
The creditors of each class would need to vote in favour of the plan by a majority in number and two-thirds in amount of those actually voting (while in a scheme of arrangement, the approval threshold is higher in that a majority in number and three-fourths in value is required). The minority is bound by the class vote.
UNDUE PREFERENCES
Similar to winding up, the US Bankruptcy Code gives a debtor certain powers to avoid or recover certain transfers of property. Generally, a debtor can avoid such transfers made within 90 days before the filing of the petition to a creditor on account of a pre-existing debt if such a transfer allows the creditor to receive more than it would have received compared to other creditors. These are called preferences.
A debtor can also avoid fraudulent transfers made within one year before the filing of the petition. In this context, a fraudulent transfer is one which is made with the intent to hinder, delay or defraud a creditor.
CHERRY-PICKING
Under the US Bankruptcy Code, the debtor generally has the power to pick which contracts or leases by which it wants to be bound following its reorganisation. Further, under certain circumstances, the company can adopt its favourable contracts and then assign them regardless of whether the contracts themselves prohibit such an assignment.
The Bankruptcy Code prescribes deadlines within which different types of contracts may be rejected. The debtor is not required to perform the obligations under the rejected contracts but will be liable for “rejection damages” that arise from its non-performance of the obligations under such contracts.
Chapter 11 therefore provides the debtor with wide-ranging powers with which it can reject, adopt or assign contracts. This power, especially when combined with the ability to sell assets and borrow money, enables the company to address its operational needs.
INCENTIVES FOR LENDER FINANCING
The Bankruptcy Code gives lenders incentives to provide financing to the debtor (called Debtor in Possession or DIP financing). DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. The lender may be given a lien over assets that are not pledged to other lenders. The bankruptcy court may also authorise liens superior to certain priority claims in the bankruptcy process or even grant new senior liens on collateral already pledged to another party.
‘QUICK-RINSE’ BANKRUPTCY
The term ‘quick-rinse’ bankruptcy generally describes a pre-packaged bankruptcy where the debtor has negotiated a plan and solicited votes even before the filing of the Chapter 11 petition. An example of this is Chrysler in 2008, where it entered and exited Chapter 11 in less than two months with the sale of most of its assets to a new entity. Similarly, General Motors in 2009 exited Chapter 11 in just over a month, having also sold most of its assets to a new General Motors entity and shedding almost US$90 billion in debt.
CONCLUSION
The Chapter 11 procedure allows a great deal of flexibility for the resuscitation of a financially distressed company with the breathing space of a moratorium. However, criticisms have been levelled against the fact that the persons who caused the company to petition for relief continue to be the same ones in control; akin to leaving the fox in charge of the hen house.
In one of the more recent Court of Appeal decisions, the Court of Appeal reiterated the entrenched principle in that it is only in rare and exceptional circumstances in which the Courts should interference with the discretion exercised by the Advocates & Solicitors Disciplinary Board in coming to a disciplinary decision of an advocate & solicitor. Alizatul Khair Osman Khairuddin JCA referred to this well-established principle in the decision of Majlis Peguam v Mohinder Kaur d/o Balbir Singh Deol (Court of Appeal Civil Appeal No. W-04-1324-2008). This Court of Appeal decision was appealed to the Federal Court via Federal Court Civil Appeal No. 02-60-10/2011 and on 25 June 2013, the Federal Court dismissed the appeal and affirmed the Court of Appeal decision.
The summary of this principle is that the statutory mechanism for disciplinary proceedings of advocates & solicitors provides that a lawyer will be heard and tried before his own peers. It is for the statutory body, the Disciplinary Board, to then best assess the appropriate sanction and hence the Courts should rarely interfere in such decisions.
This approach is set out in the following appellate authorities in Malaysia.
In the Federal Court decision of Keith Sellar v Lee Kwang Tennakoon v Lee Kwang [1980] 2 MLJ 191 (F.C.), Hashim Yeop A Sani J held:
“We feel bound to reiterate here that the legal profession is an honourable profession whose members are expected to conduct themselves honourably. The appellants here were dealt with in a proceeding by virtue of a statute enacted to govern the conduct of members of their profession. Morever, they were tried by their own peers. Members of the Disciplinary Committee were senior members of the profession who made firm findings of fact and they concluded that the appellants were guilty of misconduct in their practice as advocates and solicitors. The Chief Justice stated in Au Kong Weng’s case that statutes relating to the legal profession now entrust the supervision of advocates and solicitors’ conduct to a committee of the profession, for it knows and appreciates better than anyone else the standards which responsible legal opinion demands of its own profession.”
In adopting the Privy Council decision of Colin Kenneth McCoan v General Medical Council [1964] 1 WLR 1107
“it would require a very strong case to interference with sentence in such a case, because the Disciplinary Committee are the best possible people for weighing the seriousness of the professional misconduct.”
Secondly, in the Court of Appeal decision of Gana Muthusamy v LM Ong & Ors [1998] 3 MLJ 341 (C.A.) (“Gana Muthusamy”), Gopal Sri Ram JCA (as he then was) held:
“It is primarily for members of the Bar to decide what amounts to conduct unbecoming of an advocate and solicitor in particular circumstances, according to standards established by members of that honourable profession. Courts must necessarily exercise caution when entertaining an appeal in which the central question is whether particular conduct is unprofessional and cases meriting curial interference will be rare. Otherwise it will be the court and not the profession that will determine the yardstick of professional behaviour.”
Thirdly, the Court of Appeal decision of Gana Muthusamy was also recently approved by the Court of Appeal in Loh Chow Tet v Kok Bun Kau (Court of Appeal Civil Appeal No. P-02-929-2010). The Court of Appeal upheld the High Court decision which in turn had upheld the Disciplinary Board’s decision. Low Hop Bing JCA held that:
“[16] We note that in this Appeal, the DB has considered the factual report of the Disciplinary Committee (“the DC”). The DB has been entrusted with the responsibility of investigating and deciding on the conduct of the A & S. Whether the A & S has measured up to the professional standard expected of a member of the profession or conduct unbecoming of an advocate and solicitor is a matter which is eminently within the domain of the DB, and not the Court. This sentiment was expressed in Guna Muthusamy v LM Ong [1998] 4 CLJ 878 …”
The above appellate authorities is also consistent with the English approach. In the English Court of Appeal decision of Bolton v Law Society [1994] 2 All ER 486 (C.A.), Sir Thomas Bingham MR held that:
“A solicitor who discharged his professional duties with anything less than complete integrity, probity and trustworthiness had to expect severe sanctions to be imposed upon him by the Solicitors Disciplinary Tribunal, and except in a very strong case, an appellate court should not interfere with the sentence imposed by the tribunal. The decision whether to strike off or to suspend involved a difficult exercise of judgment made by the tribunal as an informed and expert body on all the facts of the case, and only in a very unusual or venial case would the tribunal be likely to regard as appropriate an order less severe than one of suspension.”
While the approach in Bolton still remains as good law, one must just take note of the subsequent English Court of Appeal decision of Law Society v Brendan John Salsbury [2008] EWCA Civ 1285. This decision took into account the Human Rights Act 1998 and held that:
“It was now an overstatement to say that a ‘very strong case’ was required before the court would interfere with the sentence imposed by the tribunal. The correct analysis was that the Solicitors Disciplinary Tribunal comprised an expert and informed tribunal, which was particularly well placed in any case to assess what measures were required to deal with defaulting solicitors and to protect the public interest. Absent any error of law, the High Court had to pay considerable respect to the sentencing decisions of the tribunal. Nevertheless, if the High Court, despite paying such respect, was satisfied that the sentencing decision was clearly inappropriate, then the court would interfere …”
Of Counsel 