Renewable Energy Developments in Malaysia

September 5, 2023

Glynn Cooper, Audrey Siew and Chelsea Choy

Malaysia has announced a new target for installed renewable energy (RE) capacity, aiming for 70% by 2050. As of December 2022, Malaysia’s installed RE capacity stood at 25% – the Malaysian government estimates that an investment of MYR 637 billion (approx. US$ 143 billion) will be required to achieve this new target.

In line with its Nationally Determined Contribution (NDC) under the Paris Agreement, Malaysia intends to reduce its greenhouse gas (GHG) emissions intensity against GDP by 45% by 2030, relative to its 2005 levels, on an unconditional basis. The Malaysian government has also previously announced its commitment to achieve net zero by ‘as early as’ 2050.

National Energy Policy 2022 – 2040

The National Energy Policy 2022 – 2040 was introduced by the Malaysian government in September 2022, and sets out the country’s Low Carbon Nation Aspiration 2040 which aims to achieve, among others, a higher level of RE in total installed capacity and total primary energy supply, with no new coal power plants being built.

The action plans set out in the policy include:

  • long-term pipeline of Large Scale Solar (LSS) projects;
  • exploring floating solar;
  • increasing availability and competitiveness of private capital for solar investments, with optimisation of equity holding rules;
  • investing in grid infrastructure upgrades and energy storage to support future mix with greater variable RE penetration; and
  • facilitating green virtual power purchase agreements (VPPAs).
Corporate Green Power Programme (CGPP)

In November 2022, Malaysia launched the Corporate Green Power Programme (CGPP) – a VPPA programme which allows eligible corporate consumers to enter into a VPPA with a solar power producer for the virtual purchase of RE, including the value of any green credits available from the generation of such RE.

Some of the key features of the CGPP are set out below:

  • Applications to participate in the CGPP can be submitted until 31 December 2023 or until the total quota has been allocated, whichever is earlier;
  • Total quota of 800MW – as of 7 August 2023, 70% of the total quota has been allocated;
  • Existing solar power plants are not permitted to participate in the CGPP;
  • Each applicant (solar power producer) can only submit one application associated with a solar power plant with export capacity between 5MW and 30MW. The export capacity cannot exceed the total capacity of the maximum demands of its corporate consumers;
  • The solar power producer must be either (i) a local company with Malaysian equity interest of at least 51%, or (ii) a consortium of local and/or foreign companies with Malaysian equity interest in the consortium of at least 51% and at least one member of the consortium being a local company;
  • A corporate consumer is only allowed to enter into one VPPA with a solar power producer; and
  • The price under the VPPA may be a fixed price per kWh or other price structure agreed between the solar power producer and the corporate consumer.
Export of renewable electricity

Malaysia has also recently lifted its ban on the export of renewable energy (which was put in place by the previous administration in 2021), allowing local companies in the RE business to benefit from the export of renewable energy, particularly to neighbouring Singapore which has announced that, post the 5-year transitional period from 2019 to 2023 (with carbon tax set at S$5/tCO2e), its carbon tax would be raised to S$25/tCO2e in 2024 and 2025, S$45/tCO2e in 2026 and 2027, with a view to reaching S$50-80/ tCO2e by 2030.

National Energy Transition Roadmap

More recently, the Malaysian government has published the National Energy Transition Roadmap (NETR). The NETR is guided by four core principles: (1) aligning the energy sector with sustainable development goals, (2) ensuring an equitable and efficient transition, (3) promoting comprehensive governance, and (4) creating valuable employment opportunities and economic prospects for small and medium-sized enterprises (SMEs).

The NETR outlines 10 flagship catalyst projects and initiatives for energy transition, including:

  • establishment of a pilot RE zone encompassing an industrial park, zero-carbon city, residential development and date centre;
  • development of centralised LSS parks with capacity of 100 MW per site across 5 sites in several states;
  • development of 2,500 MW hybrid hydro-floating solar (HHFS) potential at TNB hydro dam reservoirs;
  • development of utility-scale energy storage system to enable higher penetration of variable RE; and
  • development of the state of Sarawak into a green hydrogen hub.

The key initiatives under the NETR include:

  • development of a third-party access framework for RE, allowing solar power producers under the CGPP to sell excess RE to the single buyer (TNB);
  • establishment of a RE exchange hub to enable cross-border RE trading, and establishment of new or upgrading interconnection with neighbouring countries; and
  • allocation of MYR 2 billion as the initial seed fund for the National Energy Transition Facility (NETF). The NETF is intended to enable catalytic blended finance to ensure a seamless flow of financial resources towards energy transition projects that are marginally bankable or yielding below-market returns (with hydrogen being cited as one of the examples of such projects).
Potential carbon tax in Malaysia?

It has been unclear whether Malaysia will impose a carbon tax similar to that in Singapore – the Twelfth Malaysian Plan (2021 – 2025) states that a feasibility study would be conducted on carbon pricing, such as carbon tax or emissions trading scheme.

Based on Part 1 of the NETR, the Ministry of Finance (in collaboration with World Bank) is conducting a feasibility study on carbon pricing instrument (CPI) in Malaysia. The study is expected to be completed in 2025 to determine the CPI suitable for implementation in Malaysia.

Closing remarks

These developments show that Malaysia recognises the importance of the transition to RE, and is taking steps to achieve its commitments and targets (although it remains to be seen whether these will be sufficient). The hope is that the Malaysian government will continue to develop and implement initiatives to fast track the transition to RE in Malaysia.

For further information, please contact Glynn Cooper, Audrey Siew, or your usual Herbert Smith Freehills contact.

Glynn Cooper
Glynn Cooper
Partner, Singapore
+65 6868 9824
Audrey Siew
Audrey Siew
Associate, Malaysia
+603 2707 6505

 

 

 

 

 

 

 

 

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Malaysian Court finds that non-payment of arbitration fees alone will not render arbitration agreement inoperable

July 7, 2023

Peter Godwin, Craig Shepherd, Arnold Hoong and Charlene Kong

Refusing to pay arbitration deposits is a common strategy employed by parties to delay or make proceedings difficult for the counterparty.

Previously, the Malaysian Court of Appeal in Kebabangan Petroleum [2021] 1 MLJ 693 had, found an arbitration agreement to be inoperable due to the non-payment of arbitration fees, sheer unresponsiveness and complete abandonment of the arbitration agreement by one party. However, the recent case of JKP Sdn Bhd v Anas Construction Sdn Bhd [2022] MLJU 3058 clarifies that the effects of non-payment of arbitration fees are fact sensitive, and finds that non-payment alone will not always result in the arbitration agreement becoming inoperable.

Background

The plaintiff, JKP Sdn Bhd (JKP) had engaged the defendant, Anas Construction Sdn Bhd (Anas), as the main contractor to construct a number of low-cost apartment units in Malaysia. Disagreements arose between the parties on the quality of concrete used which led to a saga of legal proceedings.

JKP commenced a civil suit against Anas in the High Court (1st Civil Suit). Anas objected to the 1st Civil Suit on the ground that the contract had an arbitration clause. This resulted in JKP discontinuing the 1st Civil Suit and, in its place, referred the matter to arbitration. Subsequently, and during the course of the arbitration proceedings, Anas refused to make payment for the 2nd provisional advance deposit which created a situation where JKP was required to make the payment on its behalf.

Unhappy with the outcome, JKP terminated the arbitration proceedings and proceeded to file a second civil suit in the High Court (2nd Civil Suit). In the 2nd Civil Suit, Anas reiterated its position that arbitration is the proper forum for the dispute and filed an application to strike out or to stay the 2nd Civil Suit pending arbitration.

Decision

The High Court sided with Anas and allowed its application for a stay pending arbitration on the basis that, despite the non-payment of deposits by Anas, (i) the arbitration agreement was still operative and (ii) Anas had not taken a step in the Court proceedings.

The Court distinguished the earlier Court of Appeal case, Kebabangan Petroleum [2021] 1 MLJ 693 which was relied on by JKP. Whilst the Court in Kebabangan Petroleum previously decided that the non-payment of arbitration deposits by one of the parties can amount to inoperability of an arbitration clause, the High Court distinguished the case on several grounds:

  • Firstly, the extent of participation in arbitration. The parties’ conduct and treatment of the arbitration were drastically different. Anas actively participated in the arbitration proceedings with the exception of refusing to make payment for the 2nd deposit. In contrast, the respondent in Kebabangan Petroleum did not participate or pay the arbitration fees despite reminders until the civil suit was filed, which led to the Court of Appeal ‘s conclusion that the arbitration clause was inoperable as the respondent was disinterested and had abandoned the arbitration.
  • Secondly, the tribunal’s directions on the non-payment. Unlike in Kebabangan Petroleum, the arbitrator in the present case had expressly notified the parties that the arbitration could still proceed despite the non-payment by Anas. Pursuant to rule 14(7) of the AIAC Arbitration Rules 2018, JKP had the option to proceed with the arbitration by (i) paying Anas’ portion of the 2nd deposit or (ii) proceeding only with JKP’s claim against Anas without Anas’ intended counterclaim or indemnity against any third party. Despite being presented with options to validly proceed, JKP opted to terminate the arbitration proceedings on its own accord.
  • Thirdly, parties’ submission to Court proceedings. The Court in Kebabangan Petroleum and the present case took a different view as to whether the parties have submitted to the Court’s jurisdiction. Anas was not deemed to have submitted to the jurisdiction of the Court as Anas’ application was made on the basis that the Court lacked jurisdiction and did not require any consideration of the merits. In contrast, the respondent in Kebabangan Petroleum gave submissions and invited the Court to consider merits in its application and were therefore deemed to have submitted to the jurisdiction of the Court.
  • Finally, the specific circumstances of the case. The present Court commented that what likely swayed the Court of Appeal’s decision in Kebabangan Petroleum was the involvement of Respondent’s directors in the suit who were not party to the arbitration agreement and would not be able to participate in the arbitration.
Commentary

The Malaysian Court presents an insightful view on whether it will find an arbitration clause inoperable due to the non-payment of arbitration fees. Whilst non-payment can result in a finding that an arbitration agreement is inoperable, the present case suggests that this is dependent on whether a party’s conduct shows an intention to abandon the arbitration in favour of litigation.

This is interesting when compared to the English position. Specifically, in some English cases like Downing v Al Tameer Establishment [2002] EWCA Civ 721 and Delta Reclamation Limited v Premier Waste Management Limited [2008] EWHC B16 (QB), it has been found that like any other contract, an arbitration agreement can be repudiated – and where such repudiation is accepted, the arbitration agreement becomes inoperative. This, in practical effect, does not seem too far off from the Malaysian position.

Moving forward, the four factors mentioned above are certainly considerations for parties with arbitration agreements, for example, (i) the level of participation of parties within the arbitration, (ii) the directions by the tribunal, (iii) the nature and substance of parties’ submission in Court proceedings, and (iv) specific circumstances of the case. Parties should be wary of these factors lest they might find their arbitration agreements rendered unenforceable.

Looking at the bigger picture however, there are certainly many uncooperative parties in arbitrations when it comes to payment of fees. The High Court acknowledges the reality that finding arbitration agreements inoperative by virtue of non-payment of fees acts contrary to the arbitration framework and parties’ agreement to arbitrate. In practice, parties often use such methods to delay proceedings, frustrate the other party, or simply to force the other party to fork out payments first. The claimant in these circumstances will often opt to render payment on behalf of the counterparty to progress proceedings and improve their perception towards the tribunal. This is generally a wise tactical move as, if the claimant wins the case, it will likely be able to recoup the costs in the award.

Having said that, there is a possibility for a claimant to make an arbitration agreement inoperable due to non-participation and non-payment of arbitration costs by the other party, though Malaysian Courts will not readily allow it. A prudent claimant should therefore, prior to initiating the arbitration, factor in the possibility of having to bear such additional costs in advance so as not to potentially hinder its own claims.

For further information, please contact Peter Godwin, Craig Shepherd, Arnold Hoong, Charlene Kong, or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Malaysia
+603 2707 6504
Craig Shepherd
Craig Shepherd
Partner, Malaysia
+603 2707 6551
Arnold Hoong
Arnold Hoong
Associate, Malaysia
+603 2707 6554
CharleneYuiinYee Kong
CharleneYuiinYee Kong
Associate, Malaysia
+603 2707 6556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Fraudulent Trading and an Expectation that Counterparties do not commit Fraud in an Acquisition Transaction

July 3, 2023

Peter Godwin, Jarry Tay, Arnold Hoong and Tasmine Khaw

Should the directors and shareholders of a company be held personally liable for fraudulent trading if their company is used as a conduit to acquire a partnership interest in an orchestrated scheme which leaves the sellers unpaid?

In the recent Malaysian Federal Court case of Lai Fee & Anor v. Wong Yu Vee & Ors [2023] 4 CLJ 1, the Court reiterates the need for parties to have good faith in carrying through with their contracts and has shown that it will not hesitate to find a company’s shareholders or directors liable under Section 540 of the Companies Act 2016 when a company dishonestly conducts the contract in a way to avoid liability for their side of the bargain.

Facts

The plaintiffs, who were partners of one Fave Enterprise (Fave), entered into a sale and purchase agreement (SPA) with Centennial Asia Sdn Bhd (Centennial) to sell and transfer their interest in Fave to the defendants (who are individuals) for a consideration of RM 7 million (Purchase Price). In this case, Centennial was, in fact, a dormant company incorporated by the defendants solely as a vehicle to acquire Fave. The parties agreed that the purchase price was to be settled in three instalments. The first two instalments were to be paid by a third-party company known as Westhill Equity Sdn Bhd (Westhill) (a company also controlled by the defendants), with the final instalment to be paid by Centennial.

Upon signing of the SPA, the plaintiffs immediately relinquished their partnership of Fave to the defendants whilst waiting for payment. Subsequently, the first 2 instalments were paid by Westhill, but Centennial failed to pay the final instalment. As a result, the plaintiffs brought an action against Centennial and obtained a judgment for the balance Purchase Price. However, Centennial, being a vehicle with no substantial assets, did not satisfy the judgment debt.

Unhappy with the outcome, the plaintiffs filed an action against the three directors cum shareholders of Centennial for fraudulent trading under Section 540 of the Companies Act 2016, arguing that the defendants intended to defraud the plaintiffs by entering the contract through Centennial, and sought to render the defendants personally liable for the outstanding Purchase Price. The plaintiffs’ claim was dismissed in the High Court and Court of Appeal, and was ultimately brought to the Federal Court.

Federal Court Decision

Two key issues were brought before the Federal Court:

1.    Where the plaintiffs have agreed to transfer their interests in Fave to the defendants relying on Centennial’s representation that the balance Purchase Price will be paid, and Centennial failure to honour its obligations, were the defendants personally liable to the plaintiffs due to fraudulent trading under Section 540 of the Companies Act 2016?

2.    Is the common law principle that “the law does not expect people to arrange their affairs on the basis that other people may commit fraud” representative of the position of Malaysian law?

On the first issue, the Federal Court decided that the defendants were personally liable to the plaintiffs for the outstanding Purchase Price, as it found that there was an intention on the part of the defendants to defraud the plaintiffs under Section 540 of the Companies Act 2016.

The Federal Court drew references to a number of case laws for legal principles governing the concept of fraudulent trading under Section 540 (or in the past, Section 304 of the Companies Act 1956). The Federal Court also noted a few unusual features of the transaction:

  • Centennial was a dormant company, incorporated by the defendants for the sole purpose of acquiring Fave. Despite this, the defendants did not inject any funds or assets of value into Centennial in anticipation of Centennial’s obligation to pay the Purchase Price under the SPA.
  • The initial two instalments of the Purchase Price were paid by Westhill even though it was not a party to the SPA, and there was no provision in the SPA referring to this arrangement.
  • Fave was transferred to the defendants and not to Centennial, despite the fact that under the SPA, Centennial was the designated buyer and there was no provision on the appointment of nominees to acquire the interest in Fave.
  • The SPA provided for the immediate transfer of ownership of Fave upon the execution of the SPA even before the full settlement of the Purchase Price.

In view of the foregoing, the Federal Court found that the defendants had orchestrated a scheme to induce the plaintiffs to agree to transfer their interests in Fave to the defendants, on the representation that Centennial would pay the balance Purchase Price. It was found that Centennial and Westhill were used to create corporate layers, insulating the defendants against personal liabilities when the payment of the balance Purchase Price was not honored. On this basis, the Federal Court concluded that the defendants’ conduct was dishonest according to the ordinary standards of reasonable and honest people. The use of Centennial and Westhill also suggested that the defendants had knowledge that their conduct was dishonest.  Consequently, it was held that the defendants had an intention to defraud under Section 540 of the Companies Act 2016, and were, therefore, personally liable to the plaintiffs for the payment of the balance Purchase Price.

On the second issue, the Federal Court concluded that the English position that “the law does not expect people to arrange their affairs on the basis that other people may commit fraud”, as expounded by the English Supreme Court in Takhar v Gracefield Developments Ltd and Others [2019] UKSC 13, is representative of the position of Malaysian law.

In coming to this decision, the Federal Court observed that, as a starting point, the Contracts Act 1950 is the law that governs all contracts in Malaysia. In this regard, the Contracts Act starts on the assumption that all contracts are valid and enforceable because parties who enter into agreements assume the honesty, good faith and fair dealing of the other party. This thus underscores the principle that contractual parties are not expected to arrange their affairs on the basis that other people may commit fraud.

Comments

The Federal Court’s decision sees an interesting application of Section 540 (i.e., prohibition of fraudulent trading) to a transaction that involves the sale of interests in a partnership, and it is more than likely that the same concept will apply in any other merger and acquisition transactions involving the sales of shares. This decision should serve as a reminder that parties should conduct their contracts in good faith, and a reminder to directors and shareholders to be mindful of their actions so as not to be seen as having “intent to defraud”, otherwise they may risk finding themselves personally liable for the losses of the counterparty.

This decision also sheds light on the importance of ensuring that the terms and structure of a proposed sale are properly thought-through. As alluded to above, one anomaly of the transaction as called out by the Federal Court was that the SPA provided for an immediate transfer of ownership upon the execution of the agreement even before the full settlement of the Purchase Price. This is often unusual in an acquisition transaction because sellers, if well advised, commonly insist that ownership only changes hand when the entire purchase price (albeit subject to applicable price adjustments) has been settled.

Lastly, this case calls to mind the need for proper due diligence on the counterparty one is dealing with. In this case, from the perspective of the plaintiffs, it was fortunate that the Federal Court had decided the case in their favor, but this was only after a series of lawsuits that were likely to be both time-consuming and costly. Could the plaintiffs have saved themselves from the trouble had they performed adequate diligence on the counterparty? While it is common in an acquisition deal for a purchaser to conduct due diligence on the target and seller, there are equally good reasons for a seller to do the same in relation to its counterparty. At the very least, a seller should be reasonably aware of and comfortable with the financial standing of the buyer to complete a proposed transaction, or otherwise, take necessary steps to mitigate the risk. In circumstances where a buyer lacks the means to meet its commitment, it would not be unreasonable for a seller to ask from the buyer certain financial backing, including, for example, a bank or corporate guarantee.

For further information, please contact Peter Godwin, Jarry Tay, Arnold Hoong or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Malaysia
+603 2707 6504
Jarry Tay
Jarry Tay
Senior Associate, Malaysia
+603 2707 6528
Arnold Hoong
Arnold Hoong
Associate, Malaysia
+603 2707 6554

 

 

 

 

 

 

 

 

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Malaysian High Court implies additional duties for experts

May 22, 2023

Peter Godwin, Craig Shepherd, Tse Wei Lim and Charlene Kong 

For the first time, the Malaysian High Court has found that party-appointed experts owe implied duties to the court.  It is well-established that expert witnesses owe a duty to assist courts and arbitrators, but this is typically understood as requiring experts to provide their evidence independently and impartially.  The Court’s decision in Linsun Engineering Sdn Bhd v Shin Eversendai Engineering Sdn Bhd expands this duty by further requiring experts to ensure their ability and availability to give evidence at trial.

This is significant as experts in Malaysian disputes may now be personally sanctioned for a failure to testify at trial, a risk which experts should closely take note of.

Facts

Shin Eversendai Engineering Sdn Bhd (Shin) engaged Linsun Engineering Sdn Bhd (Linsun) to supply manpower and tools for the erection and dismantling of scaffolding in a power plant project in Malaysia.  Having commenced work, Shin terminated its contract with Linsun, prompting Linsun to commence a claim against Shin before the Malaysian High Court for the value of completed work.

Shin appointed two quantity surveying experts in the court proceedings and submitted a joint report by them.  However, following the close of Linsun’s case, Shin applied to file a fresh expert report by a replacement expert as Shin’s original experts were either uncontactable or unable to testify due to conflicting work commitments.

High Court Decision

The Court dismissed Shin’s application based on the general prohibition against parties calling fresh experts after trial and the potential prejudice Linsun would suffer if Shin’s application was granted.

Notably, the Court went further to find that Shin’s experts had by their conduct breached their implied duties to the court.  It is a well-established principle under Malaysian law – and other common law jurisdictions – that experts owe an overriding duty to assist the Court on the matters within their expertise.  The Court found that it was necessary to imply into this two additional duties for experts, namely:

  • a duty to ensure that the instructing solicitor can contact them for the purpose of the trial in question; and
  • a duty to ensure that they can give evidence in court, either physically or virtually.

The Court viewed that it was necessary to imply these duties to avoid an appointing party being unfairly prejudiced by its expert’s own failure or refusal to attend trial.  Thus, Shin’s experts breached their implied duties when they became uncontactable or had refused to testify due to conflicting work commitments, particularly since one could resort to testifying virtually to accommodate work schedules.

Despite finding that Shin’s experts had breached their implied duties to the Court, the Court ultimately did not sanction Shin’s experts as their breaches did not prejudice Linsun, which did not rely on expert evidence such that the determination of expert evidence fell away.

Commentary

Linsun Engineering introduces a new dimension to expert duties in Malaysian law disputes.  The expanded duty restricts the manner in which experts arrange their practices, and imposes a positive obligation on experts to ensure that they are able and have capacity to testify at trial.  Although Linsun Engineering considered this expanded duty within the context of Malaysian litigations, this common law refinement could arguably also extend to Malaysian-seated arbitrations in which expert evidence is frequently used.

Such a duty is, however, not new in Malaysia.  Rule 10.4 of the AIAC Rules 2021 (see our analysis here) prescribes a similar requirement for prospective arbitrators to ensure their capacity to determine the case in a prompt and efficient manner, mirroring the diligence duty under the initial draft of ICSID’s Code of Conduct for Adjudicators in Investor-State Dispute Settlement.

Notably, the expanded duty in Linsun Engineering presents significant implications for experts in Malaysian law disputes.  Generally, an expert’s failure to testify at trial would not amount to a breach of the expert’s duty, and would be addressed by reducing the weight of the non-testifying experts’ evidence or drawing an adverse inference against the expert’s appointing party.  However, post-Linsun Engineering, a failure to testify may risk an expert being personally sanctioned by:

  • a reference to their professional bodies for disciplinary action. This is usually considered in serious circumstances of experts having acted partially, providing untruthful evidence or where their conduct raises questions of fitness for practice; or
  • being made personally liable for costs. This is normally considered where an expert has acted with flagrant reckless disregard of their duties to the court.

Given the serious risks, experts in Malaysian law disputes should give closer attention to their ability and availability before accepting briefs.  It will be interesting to see how future Malaysian cases consider the expanded duty in Linsun Engineering, particularly how much allowance experts will be given in managing their availability for trial.

For further information, please contact Peter Godwin, Craig Shepherd, Tse Wei Lim, Charlene Kong or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Malaysia
+603 2707 6504
Craig Shepherd
Craig Shepherd
Partner, Malaysia
+603 2707 6551
Tse Wei Lim
Tse Wei Lim
Senior Associate, Singapore
+65 6868 8069
CharleneYuiinYee Kong
CharleneYuiinYee Kong
Associate, Malaysia
+60 3 2777 5156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Beyond statutory enforcement: Malaysia’s Apex Court dismisses a common law action for enforcement of foreign judgment due to failure to adduce the foreign judgment

March 28, 2023

Peter Godwin, Craig Shepherd, Tse Wei Lim and Emily Lim

There is a simple, but fundamental, difference between a statutory enforcement under Reciprocal Enforcement of Judgments Act 1958 (REJA) and a common law action.  REJA covers cases where a judgment creditor wants to enforce a decision from a jurisdiction which enforces Malaysian court judgments (the so called ‘reciprocity’).  When REJA applies, the foreign judgment can effectively be converted into a Malaysian judgment.  However, if a creditor holds a judgment from somewhere that does not enforce Malaysian decisions, then it may still be enforced through a common law action.  Here, the creditor brings a new Malaysian court case where it sues the debtor on the judgment.  The claim is not a full re-examination of the underlying dispute (e.g., ‘you owe me money because you are in breach of contract’), but it relies on the foreign judgment (e.g., ‘you owe me money because the courts of the UAE have said you do’).

The Federal Court in Pembinaan SPK Sdn Bhd v Conaire Engineering Sdn Bhd-LLC & Anor [2023] 3 MLRA 287 has recently affirmed the legal position in Malaysia that a judgment creditor may institute a fresh action in the local courts to enforce a foreign judgment from a non-reciprocating country.

The Court was asked 6 questions on the procedural and evidential requirements to enforce foreign judgments by common law actions:

  1. Whether a foreign judgment is enforceable by a common law action in Malaysia (the foreign country not being a First Schedule country under REJA) if the judgment is not proved as a foreign judgment or order in accordance with the Evidence Act 1950?
  2. Whether a foreign judgment purporting to be a default judgment where liability on quantum and assessment of compensation was decreed in absentia satisfies the basic rules of fair procedure and natural justice to be enforceable by way of a common law action in the Malaysian courts?
  3. In a common law action to enforce a foreign judgment not being a First Schedule country under the REJA, without the foreign judgment being proved in accordance with Chapter V of the EA 1950, whether there is a sustainable cause of action for other evidence to be admitted and weighed?
  4. In a common law action to enforce a foreign judgment not being a First Schedule country under the REJA, whether the party responding to the common law action is limited only to the defences set out in See Hua Daily News Bhd v Tan Thien Chin & Ors [1986] 2 MLJ 107?
  5. In a common law action to enforce a foreign judgment not being a First Schedule country under the REJA, whether the applicant suing upon that judgment as a cause of action is obliged to prove its claim on liability and quantum?
  6. Whether a non-REJA foreign judgment benefits from the same limited defences against the registration of a First Schedule of REJA foreign judgment under section 5 of REJA?
    In delivering its decision, the Court highlighted the requirements set out in the landmark Supreme Court decision in See Hua Daily News Bhd v Tan Thien Chin & Ors [1986] 2 MLJ 107 that a judgment creditor may sue in the local courts on a foreign judgment, as long as that judgment is (1) for a definite sum and (2) final and conclusive.
Background

By a letter of understanding, Al Tamouth Investments LLC (Tamouth) appointed a joint-venture company, SPK-Bina Puri JV (SPK-Bina Puri), as the main contractor for a development project in Abu Dhabi. SPK-Bina Puri appointed Conaire Engineering Sdn Bhd-LLC (Conaire) as the subcontractor to undertake certain construction works for the project.  That work was carried out and completed on time subject to certain claims of outstanding defective works.

Conaire subsequently initiated legal proceedings in Abu Dhabi against Tamouth and SPK-Bina Puri for payment of monies for work done in respect of the project and successfully obtained a judgment against SPK-Bina Puri (“Abu Dhabi Judgment“). After obtaining the Abu Dhabi Judgment, Conaire commenced proceedings against Tamouth and SPK-Bina Puri to enforce the Abu Dhabi Judgment in Malaysia. The action was resisted on several grounds, namely that there was a lack of knowledge of the existence of the Abu Dhabi Judgment and/or the related proceedings at the Abu Dhabi Court and that wrong parties were named in the enforcement action.

Decision

The Court had to consider the admissibility of copies of the Abu Dhabi Judgment which formed the underlying basis of the enforcement action. The Abu Dhabi Judgment was written in Arabic, and several versions of its English translation were tendered as evidence to support the enforcement action. The accuracy of the translations was however vigorously challenged due to discrepancies in the names and identities of the named defendants in the translations. None of the translations had the original copy of the Abu Dhabi Judgment attached, and the original copy of the Abu Dhabi Judgment was never produced in the enforcement action.

The Court found that the specific provisions of the Evidence Act 1950 and the evidentiary rules in Malaysia apply equally when dealing with a common law enforcement action. Since only copies and not the original of the Abu Dhabi Judgment was exhibited, and the copies exhibited were also not tendered in the manner prescribed under the law, there was no proof of the document central and critical to the underlying cause of action. Consequently, absent the Abu Dhabi Judgment, Conaire’s claim remained unproved, and the enforcement action was dismissed on this ground alone.

In reaching its conclusion, the Court answered the first and third leave questions in the negative and declined to examine the remaining questions dealing with the matter of defences.

Whilst the Court had declined to answer the remaining leave questions, it went on to endorse the pre-requisites and available defences laid out by the Supreme Court in See Hua Daily News Bhd in resisting a common law enforcement action, namely that (i) the foreign court had no jurisdiction; (ii) the foreign judgment was obtained by fraud; (iii) the foreign judgment would be contrary to public policy; and (iv) the proceedings in which the foreign judgment was obtained were opposed to the principles of natural justice.

Commentary

It is little surprise that the first and third questions were answered negatively – it is always going to be necessary to prove the existence of a judgment if you want to enforce it.  The interesting and novel point is the second question posed.  Most of the world’s court systems have a concept of default judgment – that is that a claimant can win if the defendant does not enter an appearance or submit a defence. It has become common for judgment debtors to resist the enforcement of foreign default judgments on the basis that the default judgments are not ‘final and conclusive’ in nature. Unfortunately, the legal world has no single agreed approach to dealing with this.  Some nations, such as India, have generally refused to enforce foreign default judgments. Others, such as England and Wales, have been happier to enforce, and to reject the argument that a default judgment is insufficiently final (as long as the defendant had proper notice of the proceedings). It remains to be seen what position the courts in Malaysia will take.  Will the courts allow the enforcement of default judgments outside the REJA regime?

Default judgments are common.  In considering whether to bring proceedings elsewhere and then enforce in Malaysia, there remains a real incentive to ensure that any proceedings are issued in a reciprocating state as, while Malaysia allows a creditor to sue on a non-REJA judgment, the value of non-REJA default judgments remains unclear.

For further information, please contact Peter Godwin, Craig Shepherd, Tse Wei Lim and Emily Lim or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Malaysia
+603 2707 6504
Craig Shepherd
Craig Shepherd
Partner, Malaysia
+603 2707 6551
Tse Wei Lim
Tse Wei Lim
Senior Associate, Singapore
+65 6868 8069
Emily Lim
Emily Lim
Associate, Malaysia
+603 2707 6507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

 

Malaysian Court reconfirms that tribunals take priority over courts when granting interim relief

February 23, 2023

Peter Godwin, Craig Shepherd, Tse Wei Lim and Kin-Hoe Loi

The Malaysian High Court has reconfirmed that if the same interim relief can be granted by an arbitral tribunal and the courts, a party should first apply to the tribunal. The decision in Malaysia Resources Corporation Bhd v Desaru Peace Holdings Club Sdn Bhd [2022] MLJU 3355 is significant for arbitrations with a Malaysian nexus as parties should prioritise tribunal-ordered interim relief in their case strategy where possible.  This case demonstrates that should a party fail to approach its tribunal in the first instance, the Malaysian courts would generally be reluctant to grant the interim relief sought, resulting in wasted costs.

Background

Malaysia Resources Corporation Bhd (MRCB) was the main contractor for upgrade works to a luxury resort owned by Desaru Peace Holdings Club Sdn Bhd (Desaru).  Disputes arose during the project, which led to MRCB commencing three separate adjudications against Desaru.  The adjudications, in turn, resulted in a series of related court actions.  The parties eventually agreed to refer all their disputes to arbitration, and to suspend the adjudication awards and related court proceedings, following which a three-member tribunal was constituted.

MRCB sought to have Desaru provide security for costs in the arbitral proceedings due to alleged concerns over Desaru’s financial position.  MRCB initially asked Desaru to provide this security.  This was rejected by Desaru, following which MRCB enquired if Desaru would have any objections to it commencing a security for costs application before the arbitral tribunal.  Desaru did not respond.

MRCB eventually filed a security for costs application before the Malaysian High Court pursuant to Section 11(1) of the Arbitration Act 2005 (AA 2005), rather than the arbitral tribunal.  Throughout the court proceedings, Desaru did not object to MRCB’s interim relief application to the Court.

High Court Decision

MRCB’s security for costs application was dismissed.  The Court, on its own motion, questioned whether MRCB’s application should first be filed before the arbitral tribunal. Following the parties’ submissions, the Court found that the framework of the AA 2005 required that MRCB seek the relief from the arbitral tribunal in the first instance before resorting to court as both fora could grant the same relief.

The Court’s decision centred on the interplay between Sections 11(1) and 19(1) of the AA 2005. Both provisions expressly granted the Court and arbitral tribunals concurrent jurisdiction to grant certain interim measures, including security for costs.  Although neither provision prescribed an order of priority between arbitrators and court – unlike the Singapore International Arbitration Act – the Court nevertheless found that the underlying intent of the AA 2005 was for arbitral parties to first use arbitral channels before resorting to the Malaysian courts, if both could grant the same relief.  This was consistent with the Malaysian courts’ role in supporting and aiding arbitral tribunals to ensure that their awards are not rendered impotent or unenforceable.

Notably, the Court also appeared to take the view that an agreement to arbitrate reflected a choice that the arbitral tribunal’s views would take precedence on matters relating to interim relief.  The Court’s refusal to entertain MRCB’s security for costs application therefore accorded with the principles of party autonomy and minimal judicial intervention (Section 8 of the AA 2005; Article 5 of the UNCITRAL Model Law) which underpin the AA 2005.  In the Court’s view, this approach avoided the potential conflicts that could arise from the court and the arbitral tribunal having concurrent powers and competences.

That said, the Court recognised that there were exceptional circumstances where the Court could first be approached.  These included where: the interim measure is sought against a third party over whom the arbitral tribunal has no jurisdiction; the matters are very urgent; the High Court’s coercive powers of enforcement are needed; or the arbitral tribunal has not been constituted.  However, MRCB could not demonstrate any of these exceptional circumstances.

Commentary

The Malaysia Resources Corporation Bhd decision is a helpful reminder of the established Malaysian position that arbitral parties should generally approach their tribunals for interim relief in the first instance before resorting to court if the same relief is available from both.

This has practical significance.  It is not uncommon for arbitral parties to simultaneously apply to tribunals and local courts for the same interim relief, particularly in multi-jurisdictional disputes.  Parties may at times consider tribunal-ordered interim relief as an avenue supplementary (or alternative) to the local court system.  In practice, therefore, arbitral parties sometimes attempt to first file an interim relief application before the Court and, if the decision is unfavourable, to file a similar application before the arbitral tribunal.

The Malaysia Resources Corporation Bhd decision makes it clear that Malaysian courts will not permit such conduct. Further, Malaysian courts will be unwilling to infer from the parties’ conduct or silence an implied agreement that interim relief applications are to first be made to court rather than tribunals.  In this regard, while Desaru did not raise a jurisdictional or preliminary objection against MRCB’s court interim relief application, this did not prevent the Court from scrutinising MRCB’s failure to first approach the tribunal.

This reemphasises Malaysia’s pro-arbitration stance and its alignment with the positions of other jurisdictions, notably:

  • Singapore, where Section 12A of the Singapore International Arbitration Act expressly limits the High Court’s role in granting interim measures in relation to international arbitrations to one that is subsidiary to the arbitral tribunal. Thus, the Singapore High Court may only grant interim measures when: (1) the case is one of urgency necessary for the purpose of preserve evidence or assets; (2) where there is no urgency, the application is made with the permission of the arbitral tribunal or with the agreement in writing of the other party; (3) the arbitral tribunal has no power or is unable for the time being to act effectively.  The Singapore Court of Appeal clarified that the same rule of precedence applies in respect of domestic arbitrations (NCC International AB v Alliance Concrete Singapore Pte Ltd [2008] SGCA 5).
  • England, where the House of Lords in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 expressed a similar view. In that case, the plaintiffs sought from the English courts a mandatory injunction to compel the defendants’ continuation of construction work.  The defendants sought to stay the plaintiffs’ action as the contract contained an arbitration clause. The House of Lords stayed the action so as to not “encroach on the procedural powers of the arbitrators“.  Similarly, in Gerald Metals SA v Timis [2016] EWHC 2327 (Ch), the English High Court found that where parties had sufficient time to obtain urgent relief from an expedited tribunal or emergency arbitrator, the English courts did not have the power to grant said urgent relief.

Thus, arbitral parties will need to carefully consider the nature of any interim relief required. Applications for common interim measures, such as freezing injunctions, prohibitory injunctions and security for costs, will likely have to proceed before arbitral tribunals in the first instance.  Parties preferring judicial recourse will need to provide compelling reasons and supporting evidence.  Hence, the need for good record keeping.

Alternatively, arbitral parties can agree to exclude their tribunal’s jurisdiction to grant interim measures and to leave this as a matter exclusively for the local courts.  This was an option noted by the Court and in our analysis of Gerald Metals.  This presents an option for parties who are certain that they would prefer recourse to courts for interim relief.

For more information, please contact Peter Godwin, Craig Shepherd, Tse Wei Lim, Kin-Hoe Loi or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Malaysia
+603 2707 6504
Craig Shepherd
Craig Shepherd
Partner, Malaysia
+603 2707 6551
Tse Wei Lim
Tse Wei Lim
Senior Associate, Singapore
+65 6868 8069
Kin Hoe Loi
Kin Hoe Loi
Associate, Malaysia
+603 2707 5000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Privacy law reform in Malaysia: One step closer to mandatory breach notification

August 23, 2022

Mark Robinson, Peggy Chow and Sue May Yeo

Currently, Malaysia does not have a data breach notification requirement under the Personal Data Protection Act 2010 (PDPA). One of the proposed amendments to be tabled for Parliament discussion in October 2022 is the introduction of a mandatory data breach notification regime.

Proposed amendments to the PDPA are expected to be tabled at the next Parliament sitting in October 2022. These amendments were selected from the public consultation paper on proposed reforms to the PDPA issued by the Personal Data Protection Commission (PDPC) in February 2020. Although there are 22 proposed amendments in the public consultation paper, it has been reported that only 5 out of those 22 proposed amendments will be tabled for discussion this year.

The proposed amendments include the introduction of a mandatory data breach notification requirement under the PDPA, which will require notifiable personal data breaches to be reported to the PDPC within 72 hours. The PDPC has proposed to issue guidelines to assist organisations to comply with this new notification requirement.

Based on publicly available information, the other 4 proposed amendments to be tabled for Parliament discussion are:

  • impose a direct obligation on data processors to comply with security principles under the PDPA;
  • require the appointment of a data protection officer;
  • the right to data portability, i.e. a data user should transfer personal data of a data subject to another data user in a user-friendly machine readable format at the request of the data subject data if this is technically feasible; and
  • instead of a whitelist, a blacklist of jurisdictions for cross-border data transfer out of Malaysia would be issued.
Our observations

Similar to other jurisdictions across Asia, the proposed amendments to PDPA will bring the Malaysia PDPA more in line with the EU General Data Protection Regulation, which is often regarded as the global standard.

It would be advisable for businesses to follow these developments closely to ensure that their current business practices will be updated to comply with the new requirements under PDPA.

For further information, please contact Mark Robinson, Peggy Chow, Sue May Yeo or your usual Herbert Smith Freehills contact.

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Mark Robinson
Mark Robinson
Partner, Singapore
+65 6868 9808
Peggy Chow
Peggy Chow
Of Counsel, Singapore
+65 6868 8054
Sue May Yeo
Sue May Yeo
Associate, Kuala Lumpur
+60 3 2777 5000

Directors Beware: Indemnity in a Company’s Constitution is not Foolproof

June 28, 2022

Glynn Cooper, Wan Jian Loh and Jarry Tay

The constitution (formerly known as articles of association) of companies in Malaysia generally contains an indemnity provision in favour of directors, indemnifying them against liabilities (for example, associated legal fees and financial costs) incurred by the directors in defending legal suits by third parties where judgement has been given in their favour in respect of any negligence, default, breach of duty or breach of trust. However, to what extent can the directors solely rely on an indemnity provision in a company’s constitution to bring an indemnity claim against the company? This question was considered by the Malaysian Court of Appeal in the case of Perdana Petroleum Bhd (formerly known as Petra Perdana Bhd) v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors [2021] 6 MLJ 663.

Facts of the Case

In this case, four former directors of Perdana Petroleum Berhad (Company) filed an action at the High Court to seek an indemnity against the Company to claim for their legal fees and expenses incurred in defending two previous lawsuits commenced by the Company (or on the Company’s behalf) against the directors for, among other things, breaches of statutory and fiduciary duties.

The directors successfully sought an order from the High Court, requiring the Company to indemnify the directors in respect of their legal expenses (approximately RM2.6 million) in connection with the previous lawsuits. The directors had largely relied on Article 170 of the Company’s constitution (which followed Article 113 of the Table A model articles under the now repealed Malaysian Companies Act 1965) in their indemnity claim, which provided as follows:

Indemnity

Every director, managing director, agent, auditor, secretary, and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application under the Act in which relief is granted to him by the Court in respect of any negligence, default, breach of duty or breach of trust.

Dissatisfied with the outcome, an appeal was brought by the Company to the Court of Appeal. One of the principal issues before the Court of Appeal, which forms the focus of this article, was whether the former directors were entitled to avail themselves of the above indemnity provision found in the Company’s constitution. To the directors’ dismay, the Court of Appeal answered the question in the negative and ruled that the former directors could not rely on Article 170 alone to claim for indemnity.

The Court of Appeal’s Decision

In coming to this decision, the Court of Appeal reasoned that the Company’s constitution constituted a binding contract only between the Company and its shareholders, and not between the Company and other third parties such as its directors or officers. As a result, even though the Company’s constitution contained Article 170 which provided an indemnity in favour of the directors, this alone, without more, could not give the directors a contractual right to enforce the relevant article against the Company. The Court of Appeal justified its reasoning based not only on local and other common law cases, but also the wording of Section 33(1) of the Malaysian Companies Act 2016 which, in essence, states that a constitution shall, “when adopted, bind the company and the members”.

The Court of Appeal also highlighted that for the directors to avail themselves of the protection offered by the Company’s constitution, Article 170 had to be incorporated into a separate binding contract between the directors and the Company. This can be done by way of an agreement, whether expressly or impliedly, like any other terms of a contract. In this regard, the court observed that “comparatively little is required for the incorporation of a term in the article that provides indemnity to an auditor or director who is appointed.” Without such incorporation, the provision in the Company’s constitution will not automatically become terms of a contract between the Company and the directors.

In the present case, since the directors were unable to point to any binding contract (whether in oral or written form) with the Company containing or incorporating Article 170, there was no contractual basis for the directors to seek an indemnity against the Company.

Comments and Takeaways

The Perdana Petroleum Berhad decision is not entirely surprising, and, in fact, it is consistent with the position in the United Kingdom. In Globalink Telecommunications Ltd v Wilmbury Ltd [2003] 1 BCLC 145, for example, Stanley Burnton J held that the articles of association of a company were not automatically binding between a company and its directors, unless they were expressly or impliedly incorporated into an agreement between them.

It goes without saying that directors are exposed to the risks of being held personally liable for wrongdoing arising in the course of managing a company. This is understandably so given that a host of different obligations and fiduciary duties are imposed on directors by either common law or statutory provisions. Given the Perdana Petroleum Berhad decision, there is now more reason for directors in Malaysia to look for other means to protect themselves from potential liabilities since merely having indemnity provisions in a company’s constitution is not sufficient.

At the very least, as guided by the Court of Appeal, one of the protections which directors could look to is to ensure that the relevant indemnity provisions are expressly incorporated in their contract of appointment or employment (which governs the overall contractual relationship between the directors and the company), or a separate deed of indemnity. It is worth noting that it takes very little effort to incorporate such indemnity provision as a term in the directors’ contract, but such incorporation is absolutely necessary if reliance is to be placed upon it.

One thing to bear in mind is that mere appointment of the director is not a valid argument for the directors to rely on the relevant indemnity provision in a company’s constitution. Appointing a director in accordance with the constitution of a company merely attests to the fact that the appointment was validly made. Provisions in the constitution are mainly mandates and authority given to directors of a company, and appointment does not per se, automatically constitute a binding contract between a director and a company. The company’s obligations in other contracts entered into with third parties would ultimately depend on the terms of these separate contracts.

Alternatively, directors may also consider taking up a directors’ and officers’ insurance to obtain additional protection against potential liabilities arising in the course of their duties. Taking the relevant steps as mentioned above is critical to give directors the peace of mind they need while discharging their onerous and demanding directors’ duties.

For further information, please contact Glynn Cooper, Wan Jian Loh, Jarry Tay or your usual Herbert Smith Freehills contact.

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Glynn Cooper
Glynn Cooper
Partner, Kuala Lumpur
+60 3-2777 5102
Wan Jian Loh
Wan Jian Loh
Associate, Kuala Lumpur
+60 3-2777 5143
Jarry Tay
Jarry Tay
Associate, Kuala Lumpur
+60 3-2777 5128

The rise of ESG – implications on the duty to act in the best interest of the company

March 31, 2022

Peter Godwin and John Ling

Under the laws of most jurisdictions, directors of a company are duty-bound to act in the best interest of the company. Traditionally, fulfilling this duty meant that directors would need to have regard to the benefit of shareholders as a whole, shareholders being the ultimate owners of the company. However, recently, there has been a shift away from this short-term shareholder-focused view towards a more long-term sustainable value creation-focused view.

Globally, there has been an increasing recognition that the conduct of a company affects various stakeholders around it, and that companies should have regard to environmental, social, human, and economic considerations. These considerations – commonly referred to as ESG considerations – once seen as a voluntary part of companies’ corporate governance framework, are now rapidly being enacted into hard law across different jurisdictions.

How are these recent shifts affecting the legal position on directors’ duty to act in the best interest of the company? In this article, we will explore the current legal positions in the UK, Europe and Malaysia on directors’ duty to act in the best interest of the company vis-à-vis ESG considerations.

Position in the UK

Presently, UK law incorporates ESG considerations as part of a director’s duty to act in the best interest of the company.

The Company Law Review Steering Group (CLR) was formed by the UK government in 1998 to review UK’s company law with a view of creating a more competitive economy. One of the key recommendations of the CLR was for there to be a shift in focus away from the individual interests of members to a focus on the “managing of the complex of relationships and resources which comprise the company’s undertaking”.

These recommendations were reflected in the law when the Companies Act 2006 was enacted. Under Section 172(1) of the Companies Act 2006, a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, directors are obliged to have regard to (amongst others):

  • the likely consequences of any decision in the long term;
  • the interests of the company’s employees;
  • the need to foster the company’s business relationships with suppliers, customers and others;
  • the impact of the company’s operations on the community and the environment; and
  • the desirability of the company maintaining a reputation for high standards of business conduct.

Since Section 172(1) of the Companies Act 2006 came into force in 2007, directors of UK-incorporated companies have been legally obliged to take into consideration various ESG matters as part of their decision-making processes. These include matters such as climate change, maintaining biodiversity, human rights, health and safety, bribery, corruption, competition and so on. A failure to comply with these obligations may result in directors being liable for losses suffered by the company as a result of such a breach.

Position in Europe

Recently, in February 2022, the European Commission published a proposal for a directive on corporate sustainability due diligence which includes an article providing that member states shall ensure that, when fulfilling their duty to act in the best interest of the company, directors must take into account the consequences of their decisions on sustainability matters, including matters such as human rights, climate change and environmental consequences. This obligation would not apply to companies meeting certain thresholds calculated based on the number of employees and worldwide turnover and would not apply to small and medium enterprises.

This proposal is currently being presented to the European Parliament and the Council for approval. Once adopted, member states will have two years to transpose the directive into national law.

Current position in Malaysia

As the position currently stands, there is no strict legal obligation on directors of Malaysian companies to specifically take ESG matters into consideration as part of their decision-making process.

Similar to the CLR, the Corporate Law Reform Committee (CLRC) in Malaysia was formed by the Companies Commission of Malaysia in 2003 to conduct a review of Malaysian companies law. While the CLRC acknowledged the importance of a company having regard to long-term, sustainability concerns, the CLRC was of the view that social obligations of the company should not be expressly incorporated into the scope of directors’ duties under the Companies Act.

Under Section 213(1) of the Companies Act 2016, a director of a company is required to exercise his powers in good faith in the best interest of the company. A breach of this duty is a criminal offence and may additionally result in directors being liable for losses suffered by the company.

Reflecting the CLRC’s position and in contrast to the UK Companies Act 2006, there is no express obligation under this section on directors to have regard to ESG considerations. We are also not aware of any Malaysian caselaw which has extended the scope of obligations of directors under Section 213(1) to specifically cover ESG matters.

That is not to say directors of Malaysian companies do not have any legal obligations vis-à-vis ESG considerations at all. Local regulators and governing bodies have also come up with their own standards in adopting ESG matters. Since 2016, Bursa Malaysia has required Malaysian public-listed companies to include sustainability reporting in their annual reports. Directors of large, listed companies are also required to apply the corporate governance and sustainability practices in the Malaysian Code on Corporate Governance.

Possible future direction for Malaysia

In terms of the impact on the ESG movement on director’s duty to act in the best interest of a company in Malaysia, we see two possible directions of travel:

  • Following the trends in other jurisdictions, Section 213(1) of the Companies Act 2016 may at some point in time be amended to expressly oblige directors to have regard to ESG considerations. That said, given the wide-ranging scope of ESG considerations, the liability (currently, a criminal liability) for a breach of this duty may need to be reconsidered. Following the approach taken in Europe, de-minimis exceptions may also be applied such that only directors of larger companies with sufficient resources are subject to this duty.
  • Even if legislative change does not occur, Malaysian courts may read into Section 213(1) of the Companies Act 2016 an obligation for directors to have regard to ESG considerations. A failure to manage ESG issues may result in legal, reputational, operational and financial implications on a company, and it can be argued that managing these risks are intrinsic to a director’s obligation to act in the best interest of the company.

Given the global focus on ESG, it would be prudent for directors of Malaysian companies to start incorporating ESG practices into a company’s business model where possible.

For further information, please contact Peter Godwin, John Ling or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
John Ling
John Ling
Senior Associate, Kuala Lumpur
+60 3-2777 5107

 

 

 

 

 

 

 

 

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.