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This article first appeared in The Edge Malaysia Weekly on September 9, 2019 - September 15, 2019

This monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge.

Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here.

 

 

ISLAMIC BANKING AND DISPUTE RESOLUTION

 

CONSTITUTIONALITY of Bank Negara’s Shariah Council’s Rulings on issues affecting Islamic financial transactions

Sections 56 and 57 of the Central Bank of Malaysia Act 2009 (‘BNM Act’) require the Court and an arbitrator to refer a Shariah issue which has arisen in legal proceedings relating to Islamic financial business to the Shariah Advisory Council (‘SAC’) of Bank Negara Malaysia (‘BNM’) for a ruling. The ruling of the SAC is binding on the Court and the arbitrator.

 

Issue

The fundamental issue is whether Sections 56 and 57 of the BNM Act are unconstitutional for taking away the power of the judiciary to deliberate and decide on an issue in a dispute in Court by vesting the resolution of that issue with the SAC. This question confronted the Federal Court in JRI Resources Sdn Bhd v Kuwait Finance House Bhd. The serious importance raised by this issue in financial transactions based on Islamic principles inspired the Federal Court, for the first time in history, to convene a nine-judge panel, to deliberate upon the issue. Apart from the original parties involved in the litigation, BNM and the Association of Islamic Banking Institution of Malaysia (‘AIBIM’) intervened and actively participated in this case. BNM, AIBIM and the respondent, Kuwait Finance House Bhd (‘KFH’) defended the constitutionality of the statutory provisions.

 

Summary sketch of the facts

KFH had provided JRI Resources Sdn Bhd (‘JRI’) with an Islamic financing facility under the principle of ijarah (leasing) to fund the acquisition of vessels. In essence, KFH purchased the vessels from a third party at the request of JRI and KHF became the owner of the vessels. The vessels were then leased to JRI. Subsequently, KFH sued JRI in Court for outstanding lease payments.

JRI’s defence was that the vessels had failed to generate income due to KFH’s failure to carry out major maintenance works on the vessels. This, JRI claimed, was the responsibility of KFH as the owner of the vessels. KFH, on the other hand, claimed that pursuant to a clause in the Ijarah Facility Agreement (‘Relevant Clause’), it was JRI’s responsibility to undertake all major maintenance works in respect of the vessels. JRI argued that the Relevant Clause was against Islamic law and appointed a Shariah scholar, Dr. Azman Mohd Noor, to act as an expert witness in the Court proceedings. Dr. Azman’s expert opinion was that the Relevant Clause was not in compliance with Islamic law. KFH also provided expert evidence through its Shariah scholar, Dr. Aznan Hasan. Dr. Aznan agreed that the Relevant Clause was non-compliant with Islamic law but took the view that the non-compliance was immaterial and did not result in any invalidity. A Shariah question on the validity of the Relevant Clause from the Shariah perspective was therefore raised in the proceedings. The High Court referred the issue to the SAC under Sections 56 and 57 of the BNM Act. The SAC ruled in favour of KFH. The ruling was thus binding on the High Court, which then scheduled the case for trial.

Before the trial started, JRI applied to refer to the Federal Court for a determination on the constitutionality of Sections 56 and 57 under which the SAC had given its ruling. The nine-judge panel of the Federal Court was sharply divided in its decision with a five to four majority in favour of the constitutionality of the provisions.

 

Decision of the majority

The leading judgment of the majority was written by Justice Mohd Zawawi Salleh (Azahar Mohamed, Ahmad Maarop, Ramly Ali and Alizatul Khair Osman Khairuddin FCJJ concurring).

Justice Mohd Zawawi Salleh referred to Section 52 of the BNM Act, which sets out the functions of the SAC, one of which is to ‘ascertain the Islamic law on any financial matter and issue a ruling upon a reference made to it’. Accordingly, the learned Judge held that the SAC only ascertains the Shariah rules that may be in dispute between the parties and the SAC does not determine the ultimate outcome of the litigation and which rests with the Court. As such, the exercise by SAC of its power under ss 56 and 57, including the binding effect of its ruling on the Court, does not involve an exercise of judicial power and does not usurp any power of the judiciary.

Justice Azahar Mohamed (now, CJM) agreed, holding that the ascertainment of Islamic laws are a function or power delegated to the judicial branch and the SAC. In the words of the learned Judge, ‘the impugned provisions could not and did not trespass or intrude onto the judicial power; the provisions did not violate the doctrine of separation of powers’. The majority also justified the impugned provisions by drawing a comparison to the mandatory sentencing regime of the criminal law where it is the Parliament, not the Court, that fixes the punishment on a convicted person. Similarly, it was therefore proper for the Parliament to vest the function of ascertaining Islamic law in respect of Islamic banking to the SAC, which arguably is part of the executive, whose decision is binding on the Court.

Critically, the majority drew attention to the diverse opinions amongst Shariah scholars on any particular Shariah issue which had led to uncertainty in the Islamic finance industry. In disputes brought to Court, there had been several decisions where the Judges on one hand had disregarded the Shariah issues and on the other hand referred to the various sources of Islamic law on their own. Thus, it was important that measures be taken to promote consistent implementation of Shariah contractual principles. This is especially because members of the Judiciary are not trained in Shariah.

In upholding the legislation, Justice Zawawi held that the traditional notion of the principle of separation of powers that there are separate and distinct roles for the executive, the legislature and the judiciary has changed over time and that there are overlapping and blending of functions between the branches of the government to facilitate efficient operation of the government. Ultimately, the Federal Court, by a majority judgment, held that Sections 56 and 57 did not provide for the usurpation of the Court’s judicial function by the SAC.

 

‘… separation of powers of government has never existed in pure form except in political theory. In reality, there is an overlap and blending of functions, resulting in complementary activity by the different branches that makes absolute separation of powers impossible.’

Justice Zawawi Salleh

 

Decision of the minority

On the other hand,Richard Malanjum CJ (as he then was) wrote one of the dissenting judgments for the minority (David Wong, Zaharah Ibrahim and Idrus Harun FCJJ concurring).

The then CJ anchored his dissenting judgment on the principle of separation of powers between the executive branch of the Government and the Judiciary.

The then CJ accepted that there might be partial overlapping of functions. However, the overlaps have always been found between the legislative and the executive only. There is no overlapping with the Judiciary, which has ‘absolute independence’. Judicial powers cannot be conferred upon any other body which does not comply with the constitutional safeguards conferred upon the Judiciary.

Further, after accepting that judicial power is the power of the sovereign to decide controversies between subjects and between subjects and itself, it was nonetheless held that the resolution of questions of law arising from judicial proceedings is an exercise of judicial power. This, the then CJ observed, is an aspect of adjudication, not ascertainment of principles. The other aspect of adjudication is the resolution of rights and liabilities of parties in dispute.

In context, Sections 56 and 57, the SAC’s functions intrude in the midst of ongoing judicial proceedings. The intrusions involve determinations affecting rights and liabilities of parties who are before the Court and are not mere general pronouncements on policies applicable for the future. The SAC’s ruling cannot be challenged with any contrary expert evidence, nor reviewed by the High Court nor overturn on appeal. Thus, the rulings of the SAC are not subject to any check and balance mechanism. In this context, it was held that it is immaterial whether the label ascribed to SAC’s function, as held by the majority, is one of ‘ascertainment’ rather than determination. The true nature of the functions can only be discovered upon consideration of the substance and actual effect of the provisions.

Justice Wong Dak Wah CJSS rejected the argument that the impugned provisions ‘do not vest any judicial power on the SAC’, relying particularly on Article 121 of the Federal Constitution that endows judicial power exclusively in the Civil Courts. Although the learned Judge expressed doubt that the test for judicial powers can be simplified into checklist of factors, nonetheless held that applying the three basic elements of ‘adjudication, finality and enforceability’ to test the inherent nature of judicial power, the impugned provisions are unconstituitional. Accordingly, once the SAC had ruled on the Relevant Clause, there is nothing left for decision.

 

‘… the partial overlap between functions is confined to the spheres of legislative and executive powers … the justification … is to promote efficiency of government … In contrast, questions of judicial power occupy apart under the constitution due to its special nature. The absolute independence of the judiciary is the bulwark of the constitution against encroachment whether by the legislature or by the executive…

Based … on a proper understanding of the principle of separation of powers, [there] are some … basic tenants in relation to judicial powers …(i) judicial power cannot be removed from the judiciary; (ii) … judicial power cannot be conferred upon any other body which does not comply with the constitutional safeguards to ensure its independence; (iii) non-judicial powers cannot be conferred by another branch of the government onto the judiciary …

The legislative purpose behind the enactment of Sections 56 and 57 of the Central Bank of Malaysia Act 2009 is a commendable one … However, good legislative intentions do not excuse a constitutional transgression.’

Richard Malanjum CJ (as he then was)

 

 

CONSTITUTIONAL LAW

 

The extent of the discretionary power of the Attorney General (‘AG’)

Section 9(1) of the Government Proceedings Act 1956 (‘GPA’) provides that where there is a trust for public, religious, social or charitable purposes, or where directions from the Court is necessary for its administration, the AG or two or more persons having an interest in the trust, having obtained the consent in writing of the AG, may institute action or be joined as a party in any existing suit on behalf of the Government or the public for various purposes.

 

Issue

If the AG refuses to give his consent under Section 9(1) of the GPA, is the decision of the AG not justiciable or subject to judicial review? The orthodox common law principle is that the decisions of the AG are not justiciable and the AG is regarded as the sole guardian of public interest over the matters in Section 9(1) of the GPA. Should the Malaysian Judiciary depart from orthodoxy? The Federal Court was called upon to determine this issue in two appeals which were heard together — Peguam Negara Malaysia v Chin Chee Kow (as secretary of Persatuan Kebajikan dan Amal Liam Hood Thong Chor Seng Thuan) and another appeal [2019] 3 MLJ 443.

 

Case summary and decision

In the first appeal, a testator willed funds and lands to trustees under a charitable trust to build a pagoda for worshippers of a Buddhist deity. The initial and current trustees did not carry out the testator’s wishes. The funds dedicated for that purpose were spent. Third parties promised to fund the association on condition that the association be appointed as trustee in addition to or to replace the current trustees. The AG declined to give consent as consent was given earlier to the current trustees. The High Court granted leave to the association to commence judicial review proceedings for an order of certiorari to quash the AG’s decision and a mandamus order to compel the AG to grant consent. The High Court and the Court of Appeal granted leave. The AG appealed to the Federal Court.

In a unanimous decision delivered by Zawawi Salleh FCJ (Richard Malanjum CJ (as he then was), Zaharah Ibrahim CJM (as she then was), Azahar Mohamed and Balia Yusof FCJJ (concurring), the Federal Court rejected the argument that the AG is accountable only to Parliament. The Federal Court accepted that while the Court would be reluctant to review the exercise of powers by the executive in areas that are more appropriately entrusted to the political branches of the Government, a decision under Section 9(1) of the GPA is justiciable. The AG in modern times cannot be regarded as the sole guardian of what is public interest.

 

‘we … reiterate … that the power of judicial review cannot be changed or altered by Parliament by way of a constitutional amendment … judicial review is essential to the constitutional role of the courts, and inherent in the basic structure of the constitution.

… unfettered discretion is contradictory to the rule of law. Therefore, the AG’s power to give consent or otherwise under s 9(1) of Act 359 is not absolute and is subject to legal limits.’

Justice  Zawawi Salleh

 

 

CORPORATE GOVERNANCE

 

Meaning of ‘intent to defraud’ and personal liability of knowing participants in fraudulent trading

The fundamental statutory attribute of an incorporated company is its legal personality. As a legal person, it is capable of owning assets and incurring debts and liabilities in its own right. Members of a company merely own shares that carry a bundle of rights as set out in the Companies Act 2016 (‘CA 2016’) and its constitution, and nothing more. The separate legal personality doctrine may be abused but the arms of the law are long. Under Section 540(1) the CA 2016, the Court may declare the abusers of the doctrine personally liable without any limitation of liability for all or any debts or other liabilities of a company.

 

Constituent elements and issues

In the course of the winding up of a company, or in any proceedings against a company, if it appears to the Court that the business of the company had been carried on with intent to defraud creditors or for any fraudulent purpose, the Court may under Section 540(1) disregard the separate legal entity principle and make the knowing participants in fraudulent trading personally liable. What is meant by ‘intent to defraud’, ‘fraudulent purpose’ and what is the standard of proof? These issues came before the Court of Appeal in Tradewinds Properties Sdn Bhd v Zulhkiple A Bakar & Ors [2019] 1 MLJ 421.

 

Case summary and decision

Zulhkiple was a director of two companies, A and B. He admitted that A and B were under his absolute control. Tradewinds sued Zulhkiple and A and a consent judgment was entered into. Prior to the consent judgment, B was incorporated to receive by way of assignment professional fees for works already undertaken by A for its clients. Through this route, professional fees due to A was hived off to B and A became dormant. The Court of Appeal had to decide whether B was also liable to Tradewinds in respect of the professional fees it had received from the clients of A. The important point was whether Zulhkiple, A and B were knowing participants in a dishonest design with intent to defraud Tradewinds of its fruits under the consent judgment. If so, then Zulhkiple, A and B are liable for the debt.

Hasnah Hashim JCA (Mohd Salleh Zawawi and Vernon Ong JJCA concurring) held that the central element in ‘intent to defraud’ and ‘fraudulent purpose’ is dishonesty. The test for ‘dishonesty’ is a combined objective and subjective test — a reasonable and honest man will think it is dishonest and the actor knows that it is dishonest by that standard and fraud may be proved on a balance of probabilities. Where dishonesty is found, the separate legal personality principle will be disregarded. The Court of Appeal reversed the decision of the High Court on the facts and found Zulhkiple and B jointly and severally liable for the debt owing by A to Tradewinds under the consent judgment.

 

‘The central element of fraudulent trading is ‘an intent to defraud’ or ‘fraudulent purpose’ … Thus, in order to establish dishonesty …the court must find that: (a) according to the ordinary standard of reasonable and honest people, what was done was dishonest; and (b) that the actor himself must have realised that the act was by those standards dishonest …’

Justice Hasnah Hashim

 

 

THE SECURITIES COMMISSION ACT 1993 (‘SCA’)

 

The role of the Court when public interest immunity is claimed against discovery or production of evidence in a trial

The Securities Commission (‘SC’) in carrying out its functions under the SCA, or when enforcing its provisions, is empowered under Section 126 (1) of the SCA to examine books or other documents, accounts and transactions of any persons licensed, approved, recognised or authorised under any securities laws (‘Licensed Persons’), or any person performing any outsourced function for the Licensed Persons or a branch or subsidiary of the Licensed Persons. Under Section 148B, the Licensed Persons or its directors, officers or auditors are prohibited from disclosing any document or information to any person, unless authorised by the SC.

 

Issues

Is the SC, without more, entitled to claim public interest immunity in refusing to disclose documents on the grounds that the disclosure would be injurious to the public interest? When such a claim is asserted, it calls into question the role of the Judiciary. These were some of the issues that the Court of Appeal had to grapple with in Ernst & Young v SJ Asset Management Sdn Bhd (In Liquidation) & Anor [2019] 4 CLJ 160.

 

Case summary and decision

SJ Asset Management (‘SJAM’) was a licensed fund manager. The SC conducted an examination on SJAM and appointed a consultant (‘BDO’) as independent auditor to do so. Regulatory breaches were found. The SC revoked the licence of SJAM and appointed BDO to be the liquidator in the winding-up of SJAM. A bank and several individuals sued SJAM’s auditor (‘EY’) for failure to detect fraud, which EY denied (‘Private Action’). EY applied to discover documents from BDO relating to the details and documents to all investigations and reports issued by BDO as independent auditors in the Private Action. The SC intervened and objected to the application on grounds of public interest immunity. Although the High Court agreed that the documents contained evidence relevant to the issues in the Private Action and such evidence may advance EY’s defence, the application was dismissed because the SC declined to give its consent to BDO under Section 148B of the SCA.

On appeal, the decision was reversed and the matter was remitted back to the High Court to examine the discovery documents to determine whether the ‘public interest immunity’ claim is sustainable. Harmindar Singh JCA delivered the judgment (Tengku Maimun JCA (now, CJ) and Abdul Karim Jalil JCA concurring). It was held that it was wrong to accept ‘vague, bare and unsubstantiated’ statements in the affidavit of the SC to support the public interest immunity claim against disclosure. It was also wrong that once a statutory body claims public interest immunity, that ends the matter. This approach has the effect of vesting the judicial power of adjudication into the hands of the statutory body to the exclusion of the Judiciary.

 

‘… when public interest immunity is asserted, the court will be faced with competing public interests where disclosure is concerned. On the one hand is the public interest of preventing harm to the nation and the public service by such disclosure of documents. On the other hand is the public interest of promoting the fair and effective administration of justice where harm would be caused if the withholding of material evidence results in the court being unable to make a fair determination of the dispute …’

Justice Harmindar Singh

 

 

 

BANK AND CUSTOMERS

 

Secrecy of Customers’ accounts

Under Section 97 (1) of the Banking and Financial Institutions Act 1989 (BAFIA), a director or officer or an appointed agent of a bank having access to any banking information relating to the affairs, or in particular, the account of any customer, is prohibited from giving, producing, divulging, revealing, publishing or otherwise disclosing, to any person, or making a record for any person, of any information or document whatsoever relating to the affairs or account of a customer (‘Banking Information’). The prohibition in Section 97(1) extends to a person who is in possession of Banking Information which he knows had been disclosed in contravention of the provision. A breach of the secrecy provision is an offence and on conviction, the offender is liable to be sentenced to imprisonment for a term not exceeding three years or a fine not exceeding three million ringgit.

Section 97(2) provides an exception — the prohibition does apply to any information or document which at the time of disclosure is, or has already been made, lawfully available to the public from any source other than the bank.

Note: BAFIA has been repealed. The provisions of banking secrecy are now governed under Division 4 of the Financial Services Act 2013.

 

Issues

In National Feedlot Corporation Sdn Bhd & 4 Ors v Public Bank Bhd (Judgment dated 1.8.2019), three basic issues were raised in the High Court. These were (a) whether a customer may rely on the BAFIA to establish liability of a bank in a civil claim for the tort of breach of statutory duty; (b) if not, is a bank as the ‘sole and exclusive custodian’ of Banking Information under a fiduciary duty to protect and prevent any unauthorised disclosure; and (c) is there an implied contractual duty of confidentiality by virtue of the banker and customer relationship?

 

Case summary and decision  

A person (‘Rafizi’) made and distributed statements at a press conference (‘Press Conference’) concerning the accounts of the plaintiffs. Rafizi relied on the statements as evidence of wrongdoings by the plaintiffs. It was alleged that an officer of the bank (‘Johari’) disclosed the Banking Information to Rafizi. The plaintiffs sued Public Bank, the sole defendant, for breach of BAFIA, breach of fiduciary duty and breach of contract to keep the Banking Information confidential. In respect of the breaches, a sum of RM 560 million was claimed for the loss and damage suffered.

In dismissing the action, Su Geok Yiam J (as she then was) held that the BAFIA could not be relied on by the plaintiffs to establish liability within a civil claim for the tort of breach of statutory duty. This is because the prohibition in Section 97 of the BAFIA is directed against individuals — director or officer or an appointed agent — and the defendant is not an individual.

The alternative submission that the bank was a fiduciary was dismissed on the grounds that a fiduciary relationship is only created if a bank offered financial and advisory services. In cases where a customer merely deposits money with a bank, or when a bank provides a loan to a customer, the relationship is of a contractual nature, i.e. only as creditor and debtor.

On the third issue, the High Court agreed with the plaintiffs that there is an implied contractual duty of confidentiality in a banker and customer relationship. Otherwise, it would be repugnant to the statutory protection of Banking Information. However, the implied contractual duty is not a strict or freestanding duty in the sense that the liability for breach of confidentiality is fault-based — failure to provide the services with reasonable care and skill. On the facts, the learned Judge held that the bank was not in breach of its duty of reasonable care and skill as it had in place policies and procedures as part of its security system to safeguard the confidentiality of Banking Information (‘Security System’). The plaintiffs did not challenge the bank’s Security System as such save that the assistant manager of the bank, using his own password and ID, had signed on Johari’s computer to enable Johari to access and print information.

On documentary evidence, the learned Judge was not persuaded that the printed documents produced as evidence by the plaintiffs were the bank’s documents and accepted the testimony of the bank’s witnesses that the printed documents were different — the bank had its own type of print and there were numerous differences between the bank’s own print and the printed documents tendered as evidence. Additionally, in the oral evidence of the plaintiffs’ witnesses, it was admitted that the defendant’s manager regularly visited the plaintiffs on a weekly basis to provide summaries and statements to the plaintiffs’ finance manager. However, the finance manager was not called to give evidence even though she was on the plaintiffs’ witness list. Also, the plaintiffs’ witnesses were not able to testify with confidence that it was Johari who had given the information to Rafizi, or that it was not possible that it was the plaintiffs’ finance manager who had given the information to Rafizi.

With respect to the exception in Section 97(2) of BAFIA, it was held that prior to the Press Conference, it was admitted by a witness of the plaintiffs that there were already news reports available in the public domain on how the Government’s soft loan of RM250 million was used or misused.

 

‘… the plaintiffs have pleaded that the defendant owed them an implied contractual duty of confidentiality by virtue of the banker-customer relationship … [and it is contended] that confidentiality is the cornerstone of all banking business … I agreed with [counsel for the plaintiffs] … However, I agreed with [counsel for the defendant that where the contract is one for the supply of services alone] … the liability … is not strict and it must be fault-based … [and] the plaintiffs bear the burden of proof that the [bank] has disclosed [the banking information to Rafizi] … the plaintiffs have failed to discharge their burden of proof … the implied duty of confidentiality is not absolute and there are exceptions as seen in Section 97 (2) of the BAFIA and common law.’

Justice Su Geok Yiam (as she then was)

 

 

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