This article first appeared in The Edge Malaysia Weekly on November 9, 2020 - November 15, 2020

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.

Court of Appeal (‘CA’): The Moneylenders Act 1951 (‘Act’) is a statute that is designed to protect the public generally, or a section of the public or class of persons, and the provisions of the Act cannot be waived

The Act provides for the regulation and control of moneylending, the protection of borrowers of the monies lent and other matters in connection with moneylending. Unless a person is exempted from complying with the provisions of the Act, only persons who are licensed to carry out the business of moneylending may lend money to borrowers. However, it is not the intention of the Act that every case of lending money without a licence makes the lender a moneylender within the meaning of the Act and being unlicensed, the transaction is illegal or the moneylending contract is unenforceable. The test is whether that the person lending money is in the business of moneylending without a licence. In cases of a licensed moneylender, the provisions of the Act must be strictly observed.

Issues

Can a licensed moneylender assert that its borrower had waived compliance with the provisions of the Act, or its borrower is estopped from raising non-compliance with the provisions of the Act, such that the non-compliance does not render the moneylending contract unenforceable? These issues were considered by the CA in Powernet Industries Sdn Bhd v Golden Wheel Credit Sdn Bhd (judgment dated 10.6.2020) in the context of s 16 of the Act — a stamped copy of the moneylending contract must be given to the borrower before the loan is disbursed.

Case summary and decision

Powernet Industries Sdn Bhd (‘Powernet’) borrowed monies from Golden Wheel Credit Sdn Bhd, a licensed moneylender (‘Moneylender’). The Moneylender sued Powernet in the Sessions Court for the recovery of monies that were lent. Powernet unsuccessfully applied to strike out the action premised on the grounds that the moneylending contract contravened the Act, one of which was s 16 of the Act. On appeal, the High Court (‘HC’) allowed Powernet’s appeal but also granted liberty to the Moneylender to file a fresh action. Powernet appealed to the CA. Its main contention was that the moneylending contract was null and void because of the infringement of s 16 of the Act. The Moneylender argued that Powernet should not be allowed to take advantage of the non-compliance because it had waived compliance with, or was estopped from relying upon, s 16 of the Act. In a unanimous decision delivered by Nantha Balan JCA (Suraya Othman and Has Zanah Mehat JJCA, concurring), the arguments of the Moneylender were rejected. In allowing the appeal, the CA held that the Act is a piece of social legislation that was enacted to protect the public generally or some section of the public or a class of persons. In this category of statutes, waiver of the protective provision or estoppel is inoperative.

High Court (‘HC’) explains and clarifies the statutory provisions of ESA in an action against a registered consumer by Tenaga Nasional Bhd (‘TNB’) to recover revenue loss due to the offence of tampering with the electrical meters installed at premises

The ESA regulates, amongst other matters, the electricity supply industry, the supply of electricity, licensing of electrical installations and control over electrical installations. Section 37 creates various offences connected with the supply of electricity to premises, including what is commonly known as “meter tampering”. Under s 38(1), the supply of electricity may be disconnected from the premises if an employee of TNB “finds upon the premises evidence, which in his opinion, proves that an offence has been committed under section 37”. Section 38(3) to (5) provides to the effect that the consumer may be required to pay TNB the loss of revenue due to the offence, a written statement certified by TNB’s employee shall be prima facie evidence of the sum that is required to be paid by the consumer and the certified sum is recoverable by TNB in a civil action.

Issues

Must TNB in a civil action prove that it was the registered consumer who had tampered with the meter? Does “tampering” mean that there must be actual physical tampering with the meters installed? What is the “maximum back-billing” period that is permissible? These issues were considered by the HC in Tenaga Nasional Berhad v L&A Packaging Sdn Bhd (judgment dated 30.9.2020).

Case summary and decision

TNB claimed a sum in excess of RM3.6 million as loss of revenue from L&A Packaging Sdn Bhd (‘Registered Consumer’) due to tampering of the metering system at its factory — the main meter and the reference meter recorded only 1 phase of electricity consumption instead of the user’s 3 phase electricity supply. Due to the alleged tampering, the main meter and the reference meter did not record the actual 3 phase usage. The Registered Consumer’s principal defence was that there was no tampering and TNB failed to prove how the tampering had occurred and had affected usage. Evidence was led by the Registered Consumer that it had no access to the meter room because only TNB had the key to it. Also, there was no evidence that physical tampering had taken place on the meter installation and the meter seal bits and stickers were intact. On the evidence, there was no dispute that the meter room was within the compound of the premises and to gain access to the meter room, access to the compound of the premises must first be through the gate of the Registered Consumer’s premises. TNB’s witness testified that the key to the padlock of the meter room could be duplicated by anyone “who could have interest to tamper the meter”. The learned Judge, following earlier decisions of the Court of Appeal, held that there was no requirement under the ESA for TNB to prove who had access or who had tampered with the meters. Additionally, the evidence presented by TNB’s witnesses were consistent and credible that the meter configuration had been tampered with. The learned Judge also rejected the argument that there must be proof of physical tampering because the nature of tampering under consideration did not require physical tampering but meter configuration from 3 phase to 1 phase consumption.

In relation of the computation of loss of revenue, the learned Judge held that the “average” methodology adopted was fair and reasonable and the five years back-billing following the advice contained in the guidelines of the Energy Commission was not arbitrary. The absence of evidence of a sudden drop of electricity consumption at any point in time in the case was due to the fact that the tampering was “permanent”.

High Court (‘HC’) upholds decision of the Special Commissioner of Income Tax (‘SCIT’) that gains derived from an agreement to settle disputes in appropriate cases are taxable but disagreed that the failure to set out particulars in an additional notice of assessment is fatal

Section 140(1)(a) of the Income Tax Act 1967 (‘ICTA’) provides that if the Director General of Inland Revenue (‘DGIR’) has reason to believe that any transaction has a direct or indirect effect of altering the tax payable (‘Transaction’), the DGIR may disregard or vary the Transaction and make such adjustments as he thinks fit with a view to counteract the whole or any part of the direct or indirect effect of the Transaction and treat the gains derived from the Transaction as chargeable income under s 4 of the ICTA.

Issues

A taxpayer owned shares in a company and following disputes between the shareholders, a settlement agreement was entered into to resolve the disputes (‘SA’). Under the SA, the taxpayer was paid a sum of money as the purchase price for his shares. Under what circumstances the DGIR may invoke s 140(1)(a) of the ICTA by treating the purchase price as “settlement gains”, raise an additional tax assessment and impose a penalty against the taxpayer? These issues were considered by the High Court in Mohd Zainuri v Ketua Pengarah Dalam Negeri (judgment dated 25.9.2020) by way of a case stated — an appeal against the deciding orders made by the Special Commissioner of Income Tax (‘SCIT’).

Case summary and decision

Mohd Zainuri (‘Taxpayer’) was a director and 40% shareholder of IMT Defence Sdn Bhd (‘IMTD’). Dato Seri Mohd Adib (‘DS Adib’) was his fellow director and shareholder. DS Adib controlled and managed the affairs of IMTD. The Taxpayer’s 40% shares were ‘given’ to him by DS Adib at a consideration of RM2.00. In 2001, a Russian State company (‘Russian Principal’) appointed IMTD as a consultant to facilitate the signing of contracts between the Russian Principal and the Government of Malaysia (‘GOM’). On the same date, IMTD signed a supplementary agreement to provide assistance to the Russian Principal in concluding a contract for the sale of SU-30MKM (‘Sukhoi Jets’) to the GOM. Upon the expiry of the contractual relationship between the Russian Principal and IMTD, the Russian Principal signed an agreement with IMT Defence (L) Bhd (‘IMTD Labuan’) as the new agent to market the Sukhoi Jets to the GOM. IMT Labuan successfully marketed the Sukhoi Jets to the GOM and an agreement was signed for the sale and purchase of 18 Sukhoi Jets. IMTD Labuan was entitled to a commission of US$108 million. The Taxpayer was not happy and wrote letters to the Ministry of Defence (‘MINDEF’) that IMTD had valid reasons to take action against the Russian Principal for the commission. A police report was also lodged. The dispute escalated and the Taxpayer filed an oppression action when his removal as a director of IMTD was sought. He also sought to convene a general meeting to commence action against IMTD Labuan, DS Adib and others for diverting business to IMTD Labuan and the Russian Principal for consultancy fees. At the behest of a Russian personality of Irkutsk Aviation, the matter was settled in 2007 pursuant to the SA. Amongst other terms, the Taxpayer was to sell and transfer his 40% shares to DS Adib, withdraw the oppression action in Court, inform the Police that the matter had been settled amicably and to refrain from discussing or making any statements concerning the Russian Principal, GOM or MINDEF or any political parties, or politicians, concerning the relationship between IMTD or IMTD Labuan and the Russian Principal. In respect of these settlement items, DS Adib paid RM30 million to the Taxpayer. DS Adib then requested the Russian Principal to release the commission payments to enable him to pay the Taxpayer, which was done. The Taxpayer transferred his 40,000 shares to DS Adib and resigned as director of IMTD. Following a tax audit on the Taxpayer in 2008, the DGIR took the position that the RM30 million was not for the value of his shares but to settle a dispute under the terms of the SA and invoked s 140(1)(a) of the ICTA for YA 2007. In 2010, an additional tax assessment and penalty under s 113(2) of the ICTA were raised against the Taxpayer. The Taxpayer disputed the additional assessment and penalty and the matter was rereferred to the SCIT. The SCIT found in favour of the DGIR but set aside the additional assessment — the failure to provide the Taxpayer with the particulars of the adjustment required under s 140(5) of the ICTA with the notice of additional assessment was fatal and not curable. The Taxpayer appealed against the penalty and the DGIR appealed against the dismissal of the additional assessment.

Decision on ‘settlement gains’

The learned Judge held that under the applicable law, the Court may only intervene with the deciding orders of the SCIT if the SCIT had erred on a question of law, resulting in a manifest error in the deciding orders. In this respect, the SCIT applied the correct legal test in interpreting the true nature of the SA by examining the factual matrix and historical events forming the background of the SA and had adopted an objective approach. The SA was not a mere sale of shares. The learned Judge also upheld the decision of the SCIT that the RM30 million was “settlement gains” and this fell within the meaning of s 4(f) of the ICTA.

Decision on penalty imposed by the DGIR

The HC upheld the decision of the SCIT that the DGIR had exercised his discretion to impose a penalty under s 113(2) of the ICTA because the Taxpayer had made an incorrect return by omitting the RM30 million income.

Decision on additional assessment

The learned Judge held that the SCIT had no jurisdiction to declare the notice of additional assessment null and void on account of the failure to provide the Taxpayer with the particulars of the adjustment required under s 140(5) of the ICTA. According to the learned Judge, the jurisdiction of the SCIT is to deal with the merits of the assessment made by the DGIR and the SCIT’s jurisdiction is triggered only when a taxpayer files an appeal to the SCIT under s 99(1) of the ICTA. In cases where the DGIR did not provide particulars in the notice of additional assessment, it is open to the affected taxpayer to apply for an order of mandamus to compel the DGIR to furnish the particulars to facilitate an appeal to the SCIT. As a matter of fact, the particulars of the assessment were furnished to the Taxpayer before the commencement of the proceedings before the SCIT to enable the Taxpayer to prepare the appeal against the DGIR’s assessment.

High Court (‘HC’) grants anti-arbitration injunction in favour of Federal Land Development Authority (‘FELDA’) and Felda Investment Corporation Sdn Bhd (‘FIC’) concerning FELDA’s lands at Jalan Semarak

The general policy of the Court is to uphold arbitration agreements made between parties to resolve their disputes and not to interfere with arbitral proceedings (‘GP’). In appropriate cases, the Court may depart from the GP by issuing an interim injunction to stay or to stop a party to an arbitration agreement from taking any or further step to continue with the arbitration proceedings until the disposal of an action that has been filed in Court.

Issues

Where several actions are pending disposal in Court over the same fundamental subject matter involving several parties and arbitral proceedings are commenced by one or more of the parties in the pending actions, what are the matters that the Court would take into account as to make it an appropriate case for the Court to depart from the GP by issuing an anti-arbitration injunction? In Federal Land Development Authority and one other v Tan Sri Haji Mohd. Isa bin Dato’ Haji Abdul Samad and 20 others (judgment dated 25.9.2020), the High Court adopted a multi-factorial approach to justify the grant of an anti-arbitration injunction.

Case summary and decision

FELDA is the registered proprietor of 24 parcels of land along Jalan Semarak, Kuala Lumpur (‘FELDA’s Semarak Lands’). FIC is FELDA’s wholly owned subsidiary. FELDA and FIC brought an action (‘Action 843’) against 21 defendants, including Synergy Promenade Sdn Bhd (‘SPSB’) and Synergy Promenade KLVC Sdn Bhd (‘SPKLVC’). In essence, Action 843 was to set aside various instruments concerning FELDA Semarak Lands (‘Instruments’), including a development agreement dated 2.6.2014 (‘DA’) entered into between SPSB and FIC ostensibly for the development of a project (‘Proposed KLVC Project’). The DA annexed a Power of Attorney (‘PA’) said to be given by FELDA to SPSB to deal with FELDA’s Semarak Lands. FELDA and FIC alleged that after the 14th General Election on 8.5.2018 and after the directors of FELDA and FIC and their respective management personnel had been replaced, the new board of directors of FELDA and FIC discovered that certain wrongdoings had been allegedly committed by the defendants by conspiracy — (a) SPSB, SPKLVC and their directors and their solicitors; (b) the defendants who were members of the board of directors of FELDA and FIC; and (c) the defendants who were in management of FELDA and FIC, or any 2 or more of them had carried out a series conspiracy (‘Conspirators’) against FELDA and/or FIC to cause loss and damage to FELDA and FIC. It was alleged that the Conspirators caused FELDA and FIC to enter into a series of fraudulent dealings on FELDA’s Semarak Lands to defraud or injure FELDA and FIC of their interest and rights relating thereto through the Instruments (‘1st Conspiracy’) and in an attempt to cover up the 1st Conspiracy, the Conspirators, executed a memorandum of understanding (‘2nd Conspiracy’). Apart from Action 843, the parties had filed various other actions in Court, with FELDA and/or FIC either as plaintiffs or as defendants and with SPSB and/or SPKLVC either as plaintiffs or defendants concerning FELDA’s Semarak Lands. The other actions are pending disposal. After Action 843 was filed on 14.11.2019, SPSB commenced arbitration proceedings against FIC on 25.11.2019 pursuant to the arbitration clause in the DA (‘Arbitration Proceedings’). FELDA was not made a party to the Arbitration Proceedings. In the Arbitration Proceedings, SPSB sought a declaration that the DA is valid and for specific performance of the DA. The issues in the Arbitration Proceedings (‘Arbitration Issues’) included whether (a) the DA is valid; (b) FIC had breached the DA in that it failed to deliver vacant possession of FELDA’s Semarak Lands; (c) there was conspiracy with intent to defraud and injure FIC and (d) the terms of the DA would cause substantial losses to FIC.

Wong Chee Lin J held that when a non-party to an arbitration agreement applies for an anti-arbitration injunction, the test is whether (a) there are serious questions to be tried; (b) the balance of convenience lies in favour of granting the injunction; and (c) damages would be an adequate remedy. The learned Judge held that there are serious questions to be tried and had to resolve the issues of “balance of convenience” and adequacy of damages before granting the anti-arbitration injunction. It was held that although the Arbitration Proceedings would conclude faster than Action 843, there are the risks of inconsistent findings with respect to the overlapping or common substantive issues before the Court and the arbitral tribunal. A particular factor that tilts the balance in favour of granting the anti-arbitration relates to the question of which other parties who are not parties to the arbitration agreement had conspired with SPSB as alleged. If the Court proceedings go first, a finding by the Court that particular persons had or had not conspired with SPSB will bind the arbitrator. It was further held that SPSB was not in a position to pay substantial damages to FELDA and FIC.

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