BANK CONFIDENTIALITY A BRIEF INSIGHT INTO THE LAWS OF BANK DISCLOSURE & SECRECY IN MALAYSIA by Ong Chin Wei

INTRODUCTION

Today’s society needs banking services. The relationship between banker and client is prem‐ised on trust and it therefore becomes important to clearly determine the rights, duties and re‐sponsibilities of respective parties in this rela‐tionship.

Among the many duties and responsibilities of the banker, one clearly manifests itself; ie. that the banker does not disclose the information and records of the client’s account for such infor‐mation is private and confidential. This duty of maintaining confidentiality is what “Duty of the Secrecy of Banks” refers to.

DUTY OF SECRECY

The Duty of Secrecy of Banks is a statutory duty under Section 97(1) Banking and Finan­cial Institutions Act 1989 which provides that no director or officer of any licensed institution, whether during his tenure of office, or during his employment, or thereafter, shall give, produce, divulge, reveal, publish or otherwise disclose to any person any information or document what‐soever relating to the affairs or account of any customer.

The duty relates to the customer’s account, which the banker must maintain with utmost confidentiality. It arises out of the confidential nature of the banker‐customer relationship, as enunciated in Tournier v. National Provincial an Union Bank of England, where the English Court of Appeal decided that a banker owed a qualified duty to keep the affairs of a customer confidential. The court stated that this duty was contractual in nature and was to be implied from the banker and customer relationship. However, the court clearly stated that the duty of secrecy was subject to four (4) exceptions as follows:‐ • Where disclosure is under compulsion by

law; • Where there is a duty to the public to dis‐

close;

• Where the interests of the bank require dis‐closure; and

• Where the disclosure is made by the express or implied consent of the customer.

Therefore, it appears that under the law today, the banker cannot and must not disclose the informa‐tion of the customer unless any one or more of the four exceptions stated above applies. (a) Where disclosure is under compulsion by law

A court of law has the power and jurisdiction to compel the bank to disclose the state of its cus‐tomer account. For example, provisions exist un‐der Bankers’ Books (Evidence) Act 1949, Anti­Corruption Act (year) and Kidnapping Act that allow the state of customers account in a bank to be divulged in the interests of justice.

In Goh Hooi Yin v Lim Teong Ghee, the judge

opined that the main object of the Section 7(1) of the Bankers' Books (Evidence) Act, 1949 is to enable evidence to be procured and given and to relieve bankers from the necessity of attending and producing their books.

Further, in Maurice Robertson v Canadian

Imperial Bank of Commerce, disclosure of secrecy was allowed as the bank was compelled to produce a bank statement of its customer to the court un‐der a subpoena (compulsion by law). With this, duty of secrecy can be diluted by compulsion of law and hence the courts must exercise their dis‐cretion carefully in requiring a bank to make such disclosure. (b) Where there is a duty to the public to disclose

This situation occurs where the danger to the state or public duty supersede the duty of secrecy of a banker to his client. For example, if there is a possibility of a terrorist link, a bank may in law be compelled to disclose to the authorities (e.g. po‐lice) all information to facilitate in investigations on the grounds of public interests. In Pharaon v Bank of Credit and Commerce International S.A., the court decided that public interest in making documents relating to an alleged ‘fraud’ available to a litigant could outweigh the duty of confidenti‐ality a banker owed to a customer.

However, it must be borne in mind that the

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No. KDN: PP15706/02/2009

(020636)

IN THIS ISSUE • Bank Confidentiality 1 • The Power of One 2 • Private Caveat 6 • Sovereign Power 8 • Preventive Detention Laws 12 • Post FIC Liberalization 13

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disclosure should only be limited to what was reasonably necessary as for the purpose of public interests and should not be misused as a tool to encroach the duty of the secrecy of the bank. c) Where the interests of the bank require disclosure

Where the bank’s interest is in issue as where it is suing or be‐ing sued, it would be within the bank’s rights to make such disclo‐sure. Thus, disclosure is permissible whenever there is litigation between the bank and its customers.

In Sunderland v Barclays Bank Ltd, the court held that the

interest of the bank warranted the disclosure of information as it was unwise for the bank to continue supplying overdraft facilities to the plaintiff for her involvement in gambling; moreover the bank was justified in disclosure to her husband because there was a per‐sonal attack (i.e. dishonour of cheques) on the bank’s reputation. Malaysia, this principle of implied consent was adopted in Tan Lay Soon v Kam Mah Theatre Sdn Bhd. (d) Where the disclosure is made by the express or implied consent

of the customer

The last exception to the duty of secrecy would be where the customer (expressly or impliedly) authorizes the release of informa‐tion by his bank. In Sunderland v Barclays Bank Ltd the court held that the consent of a customer to permit the disclosure of informa‐tion might be ‘implied’ from the conduct of the customer (i.e. in that case, the manager was justified in thinking that plaintiff did not ob‐ject to his explanation to her husband). In Malaysia, this principle of implied consent was adopted in Tan Lay Soon v Kam Mah Theatre Sdn Bhd. CONCLUSION

It is a general principle that the banker has a duty of secrecy towards the customer and the banker must not reveal any information regarding its customer’s account to any third parties under whatever circumstances. How‐ever, unavoidably the secrecy of the customer is subject to the four excep‐tions as stated above. It must be pointed out also that although the information of the customer would be revealed based on the above exceptions, such discretionary power (exceptions) must be exer‐cised prudently and carefully by the court, bank or the parties in‐volved so that it would be only for the purposes of public interests and would not violate any rights of the secrecy of the customers. Footnotes 1[1924] 1 KB 461 2[1977] 2 MLJ 26 3[1995] 1 ALL ER 824; [1994] 1 WLR 1493 4[1998] 4 ALL ER 454 5[1938] 5 Legal Decisions Affecting Bankers 163; The Times, 24th and 25th November 6[1992] 2 MLJ 435. Joseph Jr. J decided that customer who enters into an agreement to sell to a third party certain assets held by bank as security so that the proceeds of sales could be used to discharge the customer’s indebt‐edness to the bank might be said to have implied consent, if not express con‐

sent to bank revealing to third party the debt owed by the customer.

ONG CHIN WEI Associate Conflict Resolution Department ongchinwei@jhj.com.my

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Imagine yourself as a person with a revolutionary idea or design that can change the lives of many and consistently gener‐ate a steady flow of revenue; Envision that this idea or design could very well set you on your way to an early retirement and allow you and your family the chance to enjoy all the comforts, privileges and pleasures of life that you once thought impossible to achieve; Visualize that this project has the potential of placing you among the elite.

But reality soon sets in when you begin to realize that you

don’t have the requisite funds to bring your idea or design into fruition and need the financial assistance of others to do so but you remain unfazed and determined as you are convinced of the project’s potential. As such, you muster all the preliminary and interim financial support that you can and commence with the first step to the realization of your dream.

You will most likely start your project with the incorpora‐

tion of a special purpose vehicle company (as opposed to an un‐incorporated business setup like a partnership or sole proprie‐torship where among other things, liability is personal and does not come with the separate legal entity status) which you will use to spearhead your project. You will thereafter gather a team of professional and industry related supporting personnel as your project promoters to assist you in your endeavor wherein a comprehensive marketing and business plan for your project will be prepared and subsequently presented to potential investors/financiers for the procurement of the required investment/financing to bring this project into fruition. Assuming that you are able to convince these investors/financiers to financially support and participate in your project, then in all likelihood, this is where your nightmares may begin and the need for proper and prudent corporate and commercial structuring will become ap‐parent and essential.

Perhaps the greatest flaw in man is their undying thirst for

greed and power and this can often be seen in the management of today’s business ventures which can be described as “ruthlessly competitive”. Trust, loyalty and support are bonuses which businesses today strive for and awards are rarely given for ethics and fair play.

THE POWER OF ONE AN OVERVIEW OF THE GOLDEN SHARE & ITS APPLICATION by Adrian Low

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In a society where commercial capitalism thrives, unless capi‐tal investment or project financing options are procured from loved ones, more often than not, it will be derived from independent sources and often comes attached with a series of disproportionate terms and conditions that include inter alia exclusivity, access, con‐trol and major equity participation in your company. While admit‐tedly, there are no fixed rules in this regard but generally, the de‐mands for such terms and conditions are common as your company is a start‐up with no proven track record.

While all the demands and requirements of the financier or investor may appear justifiable at the beginning but without sound and appropriate commercial structuring at this juncture, your greatest fears may just be realized when your company becomes administratively, technically and financially sound. Your earlier decision to enlist independent financial assistance may have just exposed your potentially lucrative project to a “pack of wolves” just waiting for the right opportunity to “sell you out”.

This would be especially apparent when you realize that your business partners decides to part with the technology or know‐how you created to a competitor without you being able to do much about it. This is where you soon realize that you were never really in control and from the moment the company is stabi‐lized, your position is transformed from a pioneer and founding member to a surplus requirement and a commercial liability. As profit maximization is the key and an unfortunate part of capital‐ism, you may find your position and influence in the company even‐tually and completely eradicated.

Herein lies the question, what can you do to protect your rights in the company from being diminished and subsequently eradicated and yet still have the ability to realize, maintain and live your dreams? The answer may well lie in the adoption and use of a special species of shares known to many as the “Golden Share” or to some in the UK as “Weighted Share” or as “Dual Class Share” to the Americans, which when properly structured and drafted can and will serve to protect your interests and prevent the loss of your dream. WHAT IS A GOLDEN SHARE?

According to the Reuters Financial Glossary as cited in the arti‐cle “Golden Share in the case of the European Court of Justice; Are golden shares still shinning? By Dr. Michele Giannino at the Seminar on EU Internal Market Strategies & Administrative Law, “… it is a share that confers sufficient voting rights in a company to maintain control and protect it from takeover. The golden share prevents po­tential predators from buying shares and using to outvote the com­pany’s existing owners ...” While there is no definitive description, it is widely accepted as a special class of share in a company, usually of nominal value and attached therewith special rights which allow the holder to enjoy certain voting powers over a company’s charter. This species of share gives the holder the right of a decisive vote over certain matters of the company, thus to veto all other share‐holders regardless of holder’s nominal shareholding. CHARACTERISTICS

The golden share is usually in the form of preference shares attached with certain special voting rights. The holder has discre‐

tion to exercise under certain circumstances and may be set out in the resolution creating that class of shares, the memorandum and articles of association of the particular company or a shareholders’ agreement.

Designed to give specific shareholder(s) voting control, golden

shares are primarily created to satisfy those who do not wish to lose control of a company but do want the public equity market to provide financing. In most cases, these shares are not publicly traded and company founders and their families are most commonly the controlling groups in such companies. It is often used to prevent stake or share building above a certain percentage ownership level or to give the holder veto powers over any major corporate action, such as the sale of a major asset or subsidiary or of the particular company.

In essence, it is a grant of “power” to the holder by his or her fellow shareholders. It does not however, give the holder absolute management over the administration of the company. But it does give the holder the power to prevent certain events from being realized and according to the findings in case of Scottish Insurance Corporation v Wilson & Clyde Cop. Ltd. (1949) AC 462, the law in this regard presumes that where specific preferential rights is con‐ferred, that right is exhaustive. There are generally two types of golden share, one with a specified time limit and the other with no time limit. HISTORY

The use and effect of the golden share is best illustrated in the case of Bushell v Faith (1970) AC 1099 where a “director‐shareholder” was faced with the proposal of a resolution in a gen‐eral meeting to remove him from office as a director. On the show of hand, the resolution was carried. The said director‐shareholder then demanded a poll so that he could take advantage of the follow‐ing provision in the articles “... In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on poll in respect of such resolution carry the right to three votes per share ..”, and on this basis the resolution was defeated on the poll. Both the Court of Appeal and the House of Lords in this case upheld the right of the company to issue shares with “weighted” voting rights.

The golden share gained major recognition in the 1980s in

Britain during Thatcher administration where rapid privatization of nationalized industries was occurring. The golden share was held by the government and has attached to it rights which are among others, enhanced in certain circumstances to prevent con‐trol of a particular company and its assets from passing to a third party of whom the government disapproves. It gave the then UK Government the necessary power and authority to intervene and outvote all other shareholders in certain major corporate decisions. The rationale apparently was to allow newly privatized company to become accustomed to operating in a public environment and to protect national interests and national security. It was then re‐garded by its proponents as a solution that addresses legal or eco‐nomic concerns. But others are of the opinion that it is merely an instrument of politicians to appease opponents of privatization.

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VALIDITY OF THE GOLDEN SHARE IN MALAYSIA Opposing Viewpoint

In Malaysia and on the surface, the concept and effect of the golden share appears to be in contravention with the KLSE Listing Requirements and Section 55(1) of the Companies Act 1965 which upholds the “one vote one share” rule for all ordinary shares and equity share issued at a poll at a general meeting respectively and when applied literally, it appears to nullify the effects of the golden share.

Proponents of the golden share may suggest for it to be incor‐porated as a provision in a shareholders agreement to counter or avoid the effects of Section 55(1) of the Companies Act 1965 or the KLSE Listing Requirements. But there is likelihood that such a provi‐sion may be regarded by the courts as void and unenforceable by virtue of the provisions of Section 24 read with Section 25 and Sec­tion 2(g) of the Contracts Act 1950 which provides for contracts with unlawful objects or considerations to be regarded as void at law. Consequently, the creation of such shareholders’ agreement (or the portion involving the golden share) may be interpreted by the courts as a sham and an attempt to contract out the statute which is unlawful and therefore cannot be enforceable. The effects of sham contracts can be seen in the case of Seascope Sdn. Bhd. v Syed Izhar Syed Salleh (2006) 2 MLJ 756 which, although not di‐rectly related to the use of the golden share, held that sham con‐tracts are illegal and unenforceable. The Seascope case, inter alia involves the creation of a call option agreement. This was subse‐quently held to be a sham and a mere device with the object of se‐curing payment in a money lending transaction without license under the Moneylenders Act of 1951.

At this juncture, the obvious question is whether a golden share provision in a shareholders agreement or the articles of asso‐ciation is valid and enforceable in Malaysia? Supporting Viewpoint Articles and the memorandum of association represent the primary means by which a company governs its internal management and administrative affairs and it imposes binding obligations on mem‐bers in their dealings with the company as members or sharehold‐ers (but not as individuals). The case of Bisgood v Henderson’s Tran­vaal Estates Ltd. (1908) 1 Ch 743, inter alia states that “... the pur‐pose of the memorandum and articles is to define the position of theshareholder as a shareholder, not to bind him in his capacity as an individual ..”. The Bisgood case provides the support that man‐agement of a company can be independently arrangements (eg. shareholders agreement) between shareholders.

Section 30(1) of the Companies Act 1965 allows for the option

to shareholders to adopt (in part or in whole) the model articles of association as provided in Table A of the Fourth Schedule of the Companies Act 1965 as the agreed mode and manner by which a company may be governed. Article 4 of Table A of the Forth Schedule further provides for the issuance of special rights shares (an essen‐tial element of the golden share). This is provided it is consented to by at least three‐fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the shareholders of the shares of the class.

Section 65 and 66 of the Companies Act 1965 also deals with the issuance of preference shares (an element of the golden share).

From the reading of Sections 30(1), 65 and 66 of the Companies

Act 1965 and Bisgood Case, inference can be drawn that the legisla‐ture had never intended to interfere with the administration of a company or to prevent shareholders in a company from issuing shares with such rights as it thinks fit provided of course that such rights may be conferred by law. As such, if shareholders elect to incorporate the golden share as part of their company’s articles of association or through a shareholders’ agreement then they should be free to do so. APPLICATION International Application

The listing of the internet company called Google Inc.¹ in the US offers a present day illustration of the use of the golden share where Google Inc. was listed with Class‐A shares which carried one vote per share

and Class‐B shares which carried 10 votes per share. The use of the golden share or “Dual Class Share” as it is sometimes called in the US can also be seen in Ford Motor Company where its dual class stock structure allows the Ford family to retain 40% control of shareholder voting power with only 4% of the total equity in the company In Europe, where the European Commission3 favors the principle of proportionate ownership and the “one vote one share“ rule, the golden share is regarded as undesirable as it creates a wedge be‐tween voting and cash‐flow rights. 4The European Court of Justice (“ECJ”) has held that national laws conferring on state, special

rights in the form of golden shares do contravene the fundamental principle of freedom of move‐ment of capital between member states and be‐tween member states and third countries. But the use of the golden share among member states re‐mains widespread and this can be seen in the fol‐lowing 4ECJ cases:‐

(i) 4athe Republic of Portugal, which involved a prohibition on the

acquisition by foreign nationals/entities of more than a speci‐fied number or value of shares in undertakings operating in the banking, insurance, energy and transport sectors and the requirement of prior authorization and right to oppose share transfers or voting rights held was exceeded and right to op‐pose share transfers;

(ii) 4bthe Republic of France, which is similar to the Portuguese Republic, involved inter alia a requirement that prior notifica‐tion and authorization were to be given where a limit on the number of shares or voting rights held was exceeded; and

(iii) 4cthe Kingdom of Belgium, which involved inter alia a right to oppose, retrospectively, decisions concerning the transfer of shares or the granting of security over certain assets;

The ECJ held that both the Portuguese and the French situation

were clearly unlawful without valid justification but where the Bel‐gian legislation in concerned, although prima facie unlawful, its use

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was justifiable. Local Application

In Malaysia, according to an article², the ap‐plication and usage of the golden share can be seen in the privatization of among others,

Malaysia’s national airlines namely, the Malaysia Airlines Systems (MAS) and Malaysia’s national telecommunication provider namely, Telekoms Malaysia (TM). POSITIVE EFFECTS

At commercial level and in so far as private business ventures are concerned, the practice of creating and incorporating such shares offers founding members and their families who often have longer term vision the ability to insulate against the usual short‐term and quick‐gain mindset of investors who are usually more focused on quarterly figures.

On a larger scale and particularly in respect of the privatiza‐

tion of state owned utilities, it enables governments to ensure com‐pliance by newly privatized companies with social and/or economi‐cal policy objectives without the need for proportionate share own‐ership and/or excessive financial exposure. NEGATIVE EFFECTS

At macroeconomic level, the introduction of golden share in a company structure will likely create a negative effect on the market for corporate control as the golden shares can act as a shield for market managers from market discipline. It creates an inferior class of shareholders in a company and places significant power to a select few. These people are then allowed under certain circum‐stances, to pass the financial risk onto others. Situations like these often tend to promote the interests of some regardless of their abilities and performance. Hence it is believed that the golden share inadvertently creates an avenue for management to make bad or undesirable decisions with few consequences.

At microeconomic level, there is an 5academic research that offers strong evidence that companies with golden share structures hinder corporate performance and other researches offer findings that show negative performance of privatized companies as a result of government interference in management. In addition and proba‐bly for the reasons as mentioned above, there is another school of thought that companies incorporated with golden share structures may find it more difficult to attract investors as opposed to compa‐nies with proportionate shareholding ownership schemes. CONCLUSION

The golden share is a creature ingeniously created by capital‐ism and depending on where one stands it can when used properly serve its purpose to protect the holder to a very effective extent. But quite often in practice, the golden share serves less noble ends and unless properly controlled through proper drafting, it can and most likely will be subject to abuse and exploitation.

Footnotes ¹“The Two Sides of Dual Class Shares” by Ben McClure in www.investopedia.com, a Forbes Digital Company); ²“Golden Share” by Samant Kumar 5th Year BBA LLB, Symbiosis Law School, Pune (see: www.articlesbase.com); ³One Share, One Vote: The Empirical Evidence, ECGI Working Paper Series in Finance; Finance Working Paper N°. 177/2007 May 2007 Renée Adams & Daniel Ferreira; 4“United Kingdom: The Legality of Golden Shares in the European Union”, 30 August 2002 by Jeff Soal; (http://www.mondaq.com/article.asp?articleid=17738); 4aC‐367/98 Commission vs. Portugal; Judgment of 4th June 2002; 4bC‐483/99 Commission vs. France; Judgment of 4th June 2002; 4cC‐503/99 Commission vs. Belgium; Judgment of 4th June 2002; 5 In the US, a Wharton School and Harvard Business School study shows that while large ownership stakes in managers' hands tend to improve corporate performance, heavy voting control by insiders weakens it. Shareholders with super‐voting rights are reluctant to raise cash by selling additional shares‐that could dilute these shareholders' influence. The study also shows that dual‐class companies tend to be burdened with more debt than single‐class companies. Even worse, dual‐class stocks tend to under‐perform the stock market.

ADRIAN LOW Associate Corporate & Commercial Affairs adrianlow@jhj.com.my

INTRODUCTION There are four types of caveats provided under the National Land Code 1965 (“NLC”). These caveats are the registrar’s caveat, private caveat, lien‐holders’ caveat and trust caveat. The provisions relating to private caveats are found in Sections 322 to 329 of the NLC. The most common is the private caveat. Private caveats are most commonly used in transactions involving sales and purchases of land which include vacant or industrial land, houses, condomini‐ums, apartments and loan transactions to finance the purchase of the property. A person or a body who enters a caveat on the land is called a caveator whereas the person or body whose land or inter‐est is bound by the caveat is often referred to as a “caveatee”.

The effect of a private caveat is to prohibit any dealing on

alienated land or interest therein bound by the caveat as provided under Section 322 (2) & (3) of the NLC. A private caveat merely protects whatever caveatable interest the caveator has in the land in question pending the final determination of the dispute by the

PRIVATE CAVEAT COMMERCIAL APPLICATION OF THE PRIVATE CAVEAT by Stanley Gabriel

6 LEGAL CAULDRON

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courts. The NLC does not define what a caveatable interest is. It has

been defined by case laws a caveatable interest may be said to be an interest in alienated land with a document of title over which a caveator may enter a private caveat.

A private caveat takes effect when a caveator presents it with the prescribed fees for registration at the relevant land office. As long as all the formalities are complied with, the Registrar or Col‐lector has no power to reject a caveat. The Registrar or Collector cannot require a caveator to establish his claim. If the claim of the caveator to an interest in land is prima facie good, the caveat should be registered.

The purpose of a private caveat is not to enlarge or add to the existing proprietary rights of the caveator upon which the caveat is founded, but to protect those rights, if he has any. The effect of a private caveat is to preserve the status quo pending the taking of timely steps by the caveator to enforce his claim to an interest in the land by proceedings in the court. Before a person enters a private caveat over any land, he must make sure that he has a caveatable interest in the land.

Gopal Sri Ram JCA (as he then was) in the Court of Appeal case of Luggage Distributors (M) Sdn Bhd v Tan Hor Teng [1995] had paraphrased Section 323(1) (a) to conclude that a private caveat may be entered by any person or body who claims either:‐ (a) the title to the land; or (b) any registrable interest in the land.

The parameters of caveatability are therefore circumscribed

by these words “title” and “registrable interest”. It is only one who makes a claim to either of these in land may enter a private caveat. Over the years the courts in various cases have held the following persons have a caveatable interest in land.

(a) a purchaser having a valid agreement; (b) an option holder; (c) a chargee; (d) a lessee; (e) a sublessee; (f) a beneficiary who has obtained letters of administration; and (g) a beneficiary of a wakaf land.

A common misconception is that a debt or claim for money gives rise to a caveatable interest in the debtor’s land. However the Privy Council in Registrar of Titles Johor v Temenggong Se­curities Limited [1976] concluded that the interest which the registrar is empowered to protect under Section 320(1)(b) are confined to interests in the land that are recognized by the NLC as being either registrable or otherwise entitled to protection. An unsecured creditor of the proprietor of land has no such interest in the land.

Over the years the courts have held in various cases that the following persons have no “caveatable” interest.‐ (a) a creditor or judgment creditor of a proprietor of land is not

(a) entitled in law to enter a private caveat against a debtor’s land

to secure or realize a debt as it is not an interest relating to land;

(b) a purchaser who has paid the full purchase price so the private caveat has to be removed;

(c) a purchaser who sought only the refund of the deposit and other expenses, the caveat entered by the purchaser was re‐moved because the purchaser was not interested in the land;

(d) the claimant for a mere chose in action arising out of or inci‐dental to a contract for the sale of land is not entitled to enter a private caveat;

(e) a tenant with an option for having it renewed has no caveat‐able interest;

(f) a purchaser of shares in a company has no caveatable interest in the land of the company; and

(g) a shareholder or officer of a company does not have a caveat‐able interest in the land sold by the company.

LIFESPAN & VALIDITY OF CAVEAT

The statutory lifespan of a private caveat under Section 328(1) is six years unless extended by order of the High Court or ear‐lier withdrawn or removed. Once a caveat has lapsed, a caveator is allowed to enter a further caveat to protect the same interest based on the same ground, provided the caveator claim or interest is still subsisting and not barred by limitation. In determining whether a caveat should remain in force, the courts will have to address itself whether the caveator is claiming title to or registrable interest in an alienated land or any right to such title or interest. If he does not, the caveat cannot be allowed to remain. In Kho Ah Soon v Duniaga Sdn Bhd [1996], the Federal Court ordered that the caveat be re‐stored as “there are indeed serious questions for trial”. Lord Diplock in the Privy Council in Eng Mee Yong v Letchumanan [1997] said that a serious question for trial could mean a question not being vexatious or frivolous.

WITHDRAWAL & REMOVAL OF PRIVATE CAVEATS

A caveator may withdraw his caveat at any time by presenting

to the Registry or Land Office a notice in Form 19G accompanied by the prescribed fees. However if a caveatee, i.e the person or body whose land or interest is bound by the private caveat wants to re‐move the caveat he has two ways to proceed under the NLC. One way is by an application under Section 326 in Form 19H to the Registrar or Land Administrator as the case maybe and paying the prescribed fee. The other way is by application to the High Court as an aggrieved person under Section 327(1) of the NLC. In order to convince the courts to sustain a caveat, a caveator must establish that:‐ (a) he has disclosed a caveatable interest in his application; (b) the evidence produced in support of his claim discloses a seri‐

ous question to be tried; and (c) the balance of convenience or justice lies in favour of the ca‐

veat remaining on the register pending the disposal of the suit. NO FURTHER CAVEAT ON REMOVAL A caveator is prohibitied from entering further caveats on the same like claims after removal by the court or Registrar as provided un‐der Section 319(2) of the NLC. Where the court has ordered the

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removal of any private caveat under Section 327, or has refused an application under Section 326 (2) for an extension of time with respect to any caveat, or where the Registrar has removed any ca‐veat pursuant to Section 326 (3), the Registrar shall not entertain any application for the entry of a further caveat in respect of the land or interest in question it is based on the like claim as that on which the former one was based. CAVEATING ONE’S OWN LAND

The right of a registered proprietor to enter a private caveat

against his own land under the NLC was considered in two recent decisions of the High Court, namely Eu Finance Berhad v Siland Land Sdn Bhd [M&Z Frozen Food Sdn Bhd, Intervener] (1989) and Hiap Yiak Trading Sdn Bhd & Ors v Hong Soon Seng San Sdn Bhd (1990). The court in each case took a differing view of the matter. LC Vohrah J in Eu Finance Berhad v Siland Land Sdn Bhd [M&Z Frozen Food Sdn Bhd, Intervener] held that the defendant (Siland) merely as registered proprietor, was not entitled to enter the caveat against its own land. His Lordship found it difficult to accept the view that the defendant could be said to be “claiming” title to the land when the title was already registered in its name.

However in Hiap Yiak Trading Sdn Bhd & Ors v Hong Soon

Seng San Sdn Bhd, the court held that the registered proprietor of land is competent to enter a private caveat against his own land. Richard Talalla JC (as he then was) held that the registered proprie‐tor could caveat his own land, and the caveat in question should remain as the nature of the agreements and the compensation issue should be tried. He added the defendant had succeeded in showing that their claim to the land raised a serious question to be tried. In the light of the above two High Court decisions which conflict, with one another, the basic question to be resolved is whether a regis‐tered proprietor can enter a private caveat against his or its own land being a person or body claiming title to or registrable interest in the land within the meaning of Section 323 (1)(a) of the NLC.

The provisions in Section 323 (1) or any other section in the

NLC are silent on the question as to whether a registered proprie‐tor can or cannot caveat his own land. DAMAGES FOR WRONGFUL CAVEAT

It is a serious matter to caveat a person’s property unless you

have a caveatable interest in the land. A wrongful caveator is liable to pay compensation. The courts normally order damages to be paid by the wrongful caveators. The burden of proving loss or damage rests on the caveatee, i.e the person or body whose land or interest is bound by the private caveat. In practice the task of prov‐ing loss or damage suffered is not easy. In Plentitude Holdings Sdn Bhd v Tan Sri Khoo Teck Puat [1994], the court awarded a total of RM16.7 million in damages on appeal the Federal Court reduced the huge damages awarded by the High Court to a mere RM10.00. CONCLUSION

The effect of a private caveat is to preserve the status quo and pro‐tects whatever caveatable interest the proprietor or caveator has in the land in question. A registered proprietor can claim his title is indefeasible (indisputable) under Section 340(1) of the NLC and as such he need not enter a private caveat over his own land. How‐ever, there may yet arise situations where by reasons of fraud or

forgery a registered proprietor’s land can be transferred without his knowledge to a bonafide purchaser for valuable consideration.

Therefore it is necessary to restrain the registration of the transfer by entering a private caveat. Failure to do so could result in the bonafide purchaser in good faith and for valuable considera‐tion obtaining an indefeasible title upon registration under Section 340(1) of the NLC.

STANLEY GABRIEL Associate Conveyancing Department stanley@jhj.com.my

One might wonder after reading the title of this article, “why is this topic so important for me to read? Why should I get to know about state jurisdiction? What is the importance of state jurisdiction?” My responses to these questions are very simple: Do you know the power of the state that you are living in? Do you know why Malay‐sian courts have the jurisdiction to try and sentence foreign crimi‐nals without much protest from the criminal’s home state? Do you know why the Malaysian courts have jurisdiction to decide and sentence the foreign criminals even though the crime did not involve a Malaysian citizen? Do you want to know the answers for these questions? Let’s explore the following piece of writing. It is a well established principle under international law that: One state should not exercise jurisdiction in the territory of another state unless there is any prior permission, understanding or agree­ment between the states; and

A state is entirely free to project its jurisdiction over any matter tak­ing place outside its territory so long as it is not prohibited by any rule of international law. [Please see Lotus Case (France v. Turkey) (1927) PCIJ] Ser A No. 10] Having said that, a state is not precluded from having power in its own territory in respect of any crime which took place abroad. This is true whereby under international law, there is no prohibition against a state extending its legislative jurisdiction over its citizens committing any crime outside its territory. International law recog‐nizes two types of state jurisdiction: (a) the ‘prescriptive jurisdic­tion’ and (b) ‘jurisdiction to enforce’. Generally jurisdiction means the limits within which any particular power may be exercised, or within which a government or a local court has authority to hear.

SOVEREIGN POWER UNDERSTANDING THE JURISDICTION & SOVEREIGNTY OF A STATE UNDER PUBLIC INTERNATIONAL LAW by T. Manoharan

8 LEGAL CAULDRON

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Prescriptive jurisdiction is the power of a state to bring any matter within the scope of its local law. The state has full authority to claim jurisdiction or to assert the applicability of its local laws to any matters arising within and outside its territory, irrespective of the nationality. However, although a state may have a general power under international law to prescribe jurisdiction, the en‐forcement of that jurisdiction can only take place within its terri‐tory unless there is an agreement or permission granted to exercise enforcement in an area under the sovereignty of another state. Therefore, a state cannot enforce its prescriptive jurisdiction in the territory of another state. Each state has complete and abso‐lute jurisdiction within the parameters of its boundary, and there‐fore no state may perform any governmental act in the territory of another state without special permission being granted to that ef‐fect. As an example, ‘if a man commits murder in Malaysia and es­capes to India, the Malaysian courts have jurisdiction to try him, but the Malaysian police cannot enter the territorial boundaries of India and arrest the offender’. A typical example of this approach is the firing of a gun across a state border causing the death of a person on the other territory.

Another example can be seen in the Lotus Case, where in this case there was a collision on the high seas between a French steam ocean liner, the Lotus, and a Turkish steam ocean liner. The Turkish ship sank killing eight sailors on board. When the Lotus arrived at a Turkish sea port, its French officer on board was arrested and charged with the crime of manslaughter. The French objected to the Turk’s assertion of jurisdiction over a French national. The Per‐manent Court of International Justice (‘PCIJ’) [Currently known as International Court Of Justice (‘ICJ’)] held that the Turkish vessel is part and parcel of the Turkish territory, and as such, Turkey was entitled to assert its jurisdiction over the French national for man‐slaughter as the purported crime occurred on Turkish territory. It is pertinent to take note that Turkey was given the right to exercise jurisdiction because the crime was committed in the Turk’s terri‐tory and the French officer on board was arrested in Turkish sea port, which was within the territorial limit of Turkey. Having discussed the case, you might want to ask me a question as to which state has jurisdiction over the example of ‘firing of a gun across the border’ given earlier. My answer to that is very simple, both states will have jurisdiction but as to which court should hear the matter depends on the ‘physical presence’ of the offender and on the understanding and diplomatic relationship between the states. Are you eager to know why it is so? Let’s explore the write‐up be‐low. There are five general scopes of jurisdiction on which criminal ju‐risdiction are claimed by states as follows:‐ (a) Territorial Jurisdiction; (b) Nationality Jurisdiction; (c) Protective Jurisdiction; (d) Universal Jurisdiction; and (e) Passive Personality Jurisdiction. The territorial jurisdiction is very simple whereby a state will have full power to exercise jurisdiction over persons, property, acts or events occurring, within its territorial limits.

On the other hand, under the nationality jurisdiction, a state will have the power to exercise jurisdiction over its nationals for crimes committed anywhere in the world. However, the jurisdiction can only be exercised if the national physically comes within the terri‐tory of his home state. Under the principle of nationality, a national is entitled to the diplomatic protection of his or her state at all times. Apart from that, a state also has universal jurisdiction over certain crimes which are regarded very dangerous to the international order and the interests of the international community as a whole (‘delicta jure gentium’ – crimes against all mankind). Universal juris‐diction can be exercised irrespective of where the act constituting the crime takes place and the nationality of the person committing it. It is generally accepted that all states are entitled to arrest and punish the perpetrators of crimes, regardless of nationality, coun‐try of residence, or any other relation with the prosecuting country. For example, universal jurisdiction exists in respect of crime of piracy, genocide, torture, slavery, war crimes, and crimes against humanity, extrajudicial executions, drug‐trafficking, hostage‐taking and hijacking. For instance, Lord Wilberforce in DPP v. Doot [1973] AC 807, was clearly of the opinion that drugs related of‐fences were crimes of universal jurisdiction and in the case of US v. Yunis (1988) 681 F. Supp 896, the US court indicated that both air piracy and hostage‐taking were open to the jurisdiction of any state. Similarly, a state also has protective jurisdiction, whereby a state can punish acts dangerous to its security, integrity, or national in‐terest, irrespective of where those acts take place or by whom the acts are committed. Based on this principle, the national or local laws are said to operate extra‐territorially as they cover jurisdic‐tion in respect of acts which take place wholly outside the state territory. Protective Jurisdiction is different from universal jurisdic‐tion in the sense that the universal jurisdiction is applicable in re‐spect of offences of an international character. However protective jurisdiction on the other hand, is applicable only to any matter harmful to the particular state. Further, a state also has passive personality jurisdiction where a state would have jurisdiction over all crimes if a victim of a crime is its national, irrespective of the place where the crime was commit‐ted or the nationality of the criminal. This jurisdiction can be said as an opposite version to nationality jurisdiction. Passive personal‐ity jurisdiction is based on the main idea of every national is enti‐tled to the diplomatic protection of his own state. This principle is indeed an unnecessary extension of state jurisdiction and it may cause considerable practical problems such as when the act which is an offence under the law of the state of nationality of the victim could be not an offence under the law of the state where it was committed or the law of the criminal’s home state. However, the occasions on which a state would wish to exercise passive person‐ality jurisdiction will be limited depending on the circumstances of each particular case and strictly based on the territorial limit of a state. Based on the observation to the principle of jurisdiction discussed above, it is pretty clear that there will be circumstances where two or more states may be entitled to exercise jurisdiction over the same person in respect of the same event.

9 LEGAL CAULDRON

“We Care”

For an example, both the protective and the effects doctrines are liable to cause overlap with territorial principle, leading to a dis‐pute between the state that has custody of the person and the state that wants custody. This is known as concurrent jurisdiction be‐tween states. Concurrent jurisdictional issue will give rise to pro‐longed jurisdictional disputes between two states. However, when more than one state has jurisdiction over a particu‐lar matter under international law, practically the priority depends solely on the custody of the offender. Normally, the state which actually has custody of the accused person will have the authority to deal with the matter compared to the state that wants custody. Sometimes, this issue will not be that simple as the offender could have fled to some other third state which will not have jurisdiction or is interested to determine the committed offence. In this sce‐nario, the states have to depend on the co‐operation of the other states in order to obtain the surrender of suspected criminals who have fled abroad. To have the co‐operation of foreign states, the state claiming for the surrender of the criminal should have extradition agreement with the foreign states, without which the foreign states will not have any obligation to make the demanded surrender. Extradition is therefore the surrender by one state to another of an individual accused of or convicted of an offence. Hence, it is very important for the neighboring states to have extradition treaties because a state does not have any obligation under international law to sur‐render the alleged criminal to a foreign state as one principle of sovereignty is that every state has legal authority over the people within its border. There is no certain principle of jurisdiction that can be relied on conclusively when the offender flees to another foreign state after committing a criminal offence. The question to which state the criminal will be surrendered to by the foreign state will depend on factors such as whether there is an extradition agreement between the states, the nature of diplomatic relationships between the states and the state practice. Having discussed that, let us see whether a state will have jurisdiction over a criminal who has been detained and forcibly taken into custody by a state claiming juris‐diction. This is important because there have been several cases where criminals have been kidnapped from the territory of one state to be tried in another state. In this sense, some courts especially in United Kingdom, South Af‐rica and New Zealand have refused to exercise jurisdiction over criminals brought before them by way of kidnap. On the other hand, some states especially US, French, and Israel have insisted that how a person is brought before them is not a matter for them to think about, but they are only concerned with the fact of the criminal’s presence in the territory. This approach is called ‘male captus, bene detentus’ which can be loosely translated as improp‐erly captured, properly detained. Therefore, there is no uniform and consistent practice of states on this issue. For example, the US Supreme Court in United States v. Alvarez­Machain 504 U.S. 655 (1992) has held that it has jurisdiction over the criminal who has been brought into US by way of kidnap. In this case, a US Drug Enforcement Administration (DEA) agent was killed in Mexico in 1985. Five years later, Dr. Alvarez Machain, a Mexican citizen, was indicted by US Federal grand jury for having participated in the murder.

At the request of DEA, Alvarez Machain was abducted from his office in Mexico by a former Mexican policeman and three others on a private plane to Texas, where Alvarez was immediately ar‐rested by US Federal agents. Alvarez Machain argued that the US courts have no jurisdiction to try him because of the manner he was brought into US was in violation of International law. The US Supreme court rejected Alvarez’s arguments and held that although the abduction may have been a violation of International Law, the US court could still exercise jurisdiction against him.

Similarly, in Eichmann case, Eichmann was kidnapped in Argentina by persons who were probably agents of Israeli government to Israel without the knowledge of the Argentinean government. Eichmann was prosecuted in Israel for war crimes, genocide and crimes against humanity and he was convicted and sentenced to death in Israel. Israel apologized, but its courts did not decline to exercise jurisdiction even though the act is in violation of international law. The decision in Alvarez and Eichmann’s case disappointed many states because the deci‐sion of the courts was an unprecedented extension of extra‐territorial exercise of police powers without any regard to the im‐munity of the other states and well‐established territorial princi‐ples of International law. On the contrary, UK courts have taken a different approach in the exercise of jurisdiction over persons brought into the UK by unlaw‐ful means. This can be seen in the case of R v. Horseferry Road Mag­istrates’ Court, ex parte Bennett [1993] 3 ALL ER 130, whereby in this case Bennett, a New Zealand citizen was wanted in the UK in respect of allegations of fraud. Bennett was located in South Africa and the UK police asked the South African police to send him forci‐bly to the UK. This was done by the South African Police. The House of Lords held that since Bennett’s presence before the court had been procured by abuse of process and in violation of interna‐tional law, the UK courts should not exercise jurisdiction. This deci‐sion of the House of Lords, upheld the integrity of international legal standard and principles of jurisdiction. However, it is unfortunate that in the case of R v. Staines Magis­trates’ Court, Ex parte Westfallen [1998] 4 ALL ER 2101, the UK court has drifted from this position whereby the UK court decided that the Bennett principle applied only if the UK authorities had participated in or procured the accused in an unlawful manner or in violation of international law and not otherwise. Nevertheless, to show respect to the principles of jurisdiction under International law, it is not prudent for any state to exercise jurisdiction in all cases where international law has been violated, irrespective of the degree of involvement of the local authorities in the violation. Briefly, that is the basic knowledge and instances that we need to have about the sovereignty of state territory and the local courts jurisdiction under the public international law. Nonetheless, there are also other areas in the world where the ju‐risdictional rights may be shared by all states in the world. These areas are communal areas which are beyond the national jurisdic‐tion, not open to acquisition by any state and no state in the world can exclusively enjoy the jurisdiction over the areas. These areas include Outer space, Antarctic, Arctic and High Seas. All these places are regarded as ‘common heritage of all mankind’ and there‐fore open for use by all states in the world.

10 LEGAL CAULDRON

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Apart from the unique places above, the state also has exclu‐sive jurisdiction over the airspace immediately above its territory. Hence, unless otherwise agreed between states, a state may pro‐hibit all aircraft movement over its territory and may take neces‐sary steps to preserve its sovereignty. It is pertinent to note that an invasion of airspace is no different from an invasion of territory. Briefly, the basic principle of the use of airspace is found in the 1994 Chicago Convention on International Civil Aviation. This Convention provides for certain exceptions to the complete and exclusive sovereignty of states over airspace, which generally permits aircraft to fly over the territory of a contracting state only. However, it is important to note that air service may not be oper‐ated without the authorization of a particular state. My conclusions are as follows:‐ (i) Territorial Sovereignty is the master of all things and every

person present in state territory is subject to the jurisdiction of the local courts unless there is any agreed immunity be‐tween the states such as diplomatic immunities.

(ii) Jurisdiction of a state is confined within the parameters of its boundary at all times and a state is not allowed to exercise its jurisdiction in another state without special permission to do so.

(iii) All states in the world have jurisdiction over outer space, Ant‐arctic, Arctic and High Seas which are regarded as ‘common heritage of all mankind’.

(iv) A state has exclusive jurisdiction over the airspace immedi‐ately above its territory, and this right is subject to the privi‐lege to fly across the territory agreed between states.

T.MANOHARAN Associate Conflict Resolution Department manoharan@jhj.com.my

James Baldwin, a writer once said that “words like ''freedom,'' ''justice,'' ''democracy'' are not common concepts; on the contrary, they are rare. People are not born knowing what these are. It takes enormous and, above all, individual effort to arrive at the respect for other people that these words imply.” It is only natural to think about the Internal Security Act 1960 (ISA) when preventive detention law is mentioned. ISA was en‐acted in 1960 to replace the Emergency Regulations 1948 (Ordinance No.10/1948).

The infamous Act has gained reputation for many reasons. For those who don’t know the im‐plication of the Act, ISA allows the detention of a person for two years without any trial and the order for detention is extendable at the behest of the Home Minister.

ISA was enacted under article 149 of the Federal Constitution which states that if an action threatening or prejudicial to the pub‐lic order is committed, any law enacted to stop that action is valid even though it may contradict with fundamental liberties such as article 5,9,10 and 13 of the Federal Constitution. ISA empowers the Home Minister to issue a detention order for certain period but not exceeding two years pursuant to section 8 of the Act. The order can only be issued if the Home Minister is satis‐fied that an order for arrest and detention is necessary to prevent that person from acting in a manner prejudicial to the order and security of the country. But before the Home Minister’s authoriza‐tion is even required, Section 73 of the Act allows a person to be detained by the police for a period of up to 60 days to facilitate in‐vestigations. This means that the power of initial arrest and detain vests entirely with the police.

After looking at the history of ISA and the mechanism of the Act, one would wonder if such a law has a place in the current de‐velopment of the society as we are progressing towards a nation which emphasizes on human rights and development of the society.

Apart from contravening laws and rights on fundamental liber‐

ties accorded under the Federal Constitution, the ISA also contra‐venes with rights provided under international law instruments such as the Universal Declaration of Human Rights (UDHR).

Article 3 UDHR states that 'everyone has the right to life, liberty and security of person,' meanwhile Article 7 UDHR states that ‘all persons [grave] are equal before the law and are entitled to equal protection of the law. Article 9 of the UDHR also prohibits arbitrary arrest, detention or exile. Malaysia is among the few countries in the world where the constitution allows for preventive detention during peacetime without safeguards that elsewhere are under‐stood to be basic requirements for protecting fundamental human rights. For instance, the European Court of Human Rights has long held that preventive detention, as contemplated in the Malaysian Constitution, is illegal under the European Convention on Human Rights regardless of the safeguards embodied in the law. So, then what is the purpose of having a law that contradicts with the basic human rights accorded to a person and is it effective? To answer that question, it is pertinent to look at the development of case laws that has laid some ground principles regarding preven‐tive detention law. In Re Tan Sri Raja Khalid bin Raja Harun and also Minister of Home Affairs & Anor v Jamaluddin bin Othman, the Supreme Court nullified the detention orders respectively for the simple reason that the grounds of detention proffered in the deten‐tion orders did not come within the scope of the enabling statute because the alleged unlawful misconduct of the detainees could not

PREVENTIVE DETENTION LAWS TIME FOR CHANGE? by Barvina Punnusamy

11 LEGAL CAULDRON

“We Care”

be regarded as a threat to or affecting the security of the Federa‐tion. On the other hand, in Re Application of Tan Boon Liat @ Allen, the detainee was trafficking in drugs as a member of an interna‐tional drug syndicate which by its very nature was tantamount to 'acting in a manner prejudicial to public order' in accordance with s 4(1) of the 1969 Ordinance.

The case of Abd Malek Hussin v Bor­han Hj Daud & Ors [2008] 1 CLJ 264 has proven that the Courts will not hesitate to find a detention made under ISA unlawful if the arrest and detention were unlawful. The Plain‐tiff was never properly informed of the grounds of his arrest as re‐quired by art. 5(3) of the Federal Constitution and there was insuffi‐cient justification for the detention.

Upon reading the facts of the case, the Court held that the ISA was used for a purpose other than protecting national security, i.e. to interrogate the relationship of the Plaintiff with an opposition leader and using torturous methods to interrogate. Hence, the Court awarded RM 2.5 million as compensation and Hishamudin Mohd Yunus J stated that “judges are protectors of the fundamental liberties of the citizens and that this is a sacred duty or trust which judges must constantly uphold.” The decision has not only tampered with the unshaken belief that ISA is pertinent to protect the na‐tional security but also created doubt that perhaps the time has come for us to abolish the Act. The late Prime Minister Tun Abdul Razak had made statements in Parliament to the effect that the Internal Security Bill was restricted or limited to fighting commu‐nist insurgencies only. This notion is supported by the decision of local cases that the powers of preventive detention under the ISA have been abused as the Act was enacted to counter subversion and a state of emergency arising from the communist threat.

Some people though might agree with Baron de Montesquieu’s view that liberty is the right to do what the law permits and there‐fore neither the existence nor the effectiveness of ISA should be subjected to any scrutiny as it is a law enacted through legitimate means. But, must it come with such heavy price of annihilation of basic human rights? Surely, there are other viable means than re‐sorting to preventive detention laws as we are rich with statutes.

Regardless of the controversies surrounding ISA, it does have a fair share of supporters as well. One the justifications for the sup‐port is that although there are cases of mistreatments of detainees, that reason alone does not dispute the need or relevancy of preven‐tive laws as Parliament takes cognizance of the fact that the secu‐rity of the country is by far more important than an individual’s freedom and that public order cannot be compromised at the ex‐pense of an individual’s freedom. In dissenting with this line of argument, however, I would say that there are sufficiently other laws available to uphold the safety and security of the country without compromising the constitutional rights of a person. So, why do we still need the ISA? In view of the above, it is incumbent to determine whether the Act is still needed and the Government has taken the first step by an‐nouncing that the Act would be reviewed but the extent of the

review is not known at the time of writing of this article.

As Malaysia is heading towards progression, there is a need to provide liberties and human rights in accordance with the Federal Constitution and our international obligations. In the mean time, the judiciary should adopt a strict construction approach to safe‐guard the rights of a person when dealing with preventive deten‐tion law. Eleanor Roosevelt once said “no one shall be subjected to arbitrary arrest, detention and exile”. The time has come for us to take necessary steps to review the existence of ISA and abolish the Act so that it would not be blatantly abused. To deprive a man of his natural liberty and to deny to him the ordi­nary amenities of life is worse then starving the body; it is starvation of the soul, the dweller in the body ~ Mohandas Gandhi Footnote 1Hardial Singh Khaira, ‘Preventive Detention: Part I Constitutional Rights And The Executive’, [2007] 1 MLJ lxiii; [2007] 1 MLJA 63 2[1988] 1 MLJ 182 3[1989] 1 MLJ 418 4[1976] 2 MLJ 83 5Gan Ching Chuan, ‘ Judicial Review of Preventive Detention in Malay‐sia,’ [1994] 1 MLJ cxiii; [1994] 1 MLJA 113 6 Yang Pei Keng, ‘Preventive Detention under ISA‐ Unlawful for non‐violent peaceful activities ‐ The effect of the recent important Federal Court deci‐sion in Chor Phaik Har v Farlim Properties Sdn. Bhd. on statutory, ‘[1995]1 CLJ cxcv (Mar) 7CC Gan, ‘The implementation of the Internal Security Act of Malaysia: An analysis of the protective measures available and their’, [1995]1 CLJ cxxxvii (Feb) 8Dr Abdul Rani Bin Kamarudin, ‘The Relevancy of Preventive Detention in Malaysia,’ [2005] 6 MLJ xcvii; [2005] 6 MLJA 97

BARVINA PUNNUSAMY Conflict Resolution Department barvina@jhj.com.my

I got to work one morning, to read in the local daily “FIC Guide‐lines deregulated”. WOW!!! Then came the continuous business write ups surrounding the issue of the deregulation of FIC’s guide‐lines. Most people then started to ask, what are the FIC Guidelines? What does this deregulation mean? Before I proceed further I think it best we take a step back. HISTORY Over the years in my practice in corporate commercial law, it has

POST F.I.C. LIBERALIZATION AN OVERVIEW by Ganesheraj Selvarajah

LEGAL CAULDRON 12

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always been a frequently asked question when undertaking an ac‐quisition or merger as to what exactly is the FIC. Well the FIC is an acronym used to describe the “Foreign Investment Committee”.

In its inception, the rational for the creation of the FIC was that for the sake of national interest, it was deemed important the guidelines be set to regulate the acquisition of certain assets or interests, mergers and take‐over’s of companies and businesses in Malaysia. The Government whilst wanting to attract private invest‐ments, including foreign investments, such investments was only allowed as long as it was consistent with the general national eco‐nomic and development policies in place, more commonly come to be known as the NEP.

This was generally due to the general non uniformity of distri‐bution of income, employment, ownership and control in the Ma‐laysia economy, thus the need to create a sort of protectionism policy. Accordingly, any proposed acquisition of assets or any inter‐ests, mergers and take‐over of companies and businesses must be examined in the light of the objectives of the NEP. This was the task afforded to the FIC and as such their approval was required in most if not all mergers, acquisitions and takeovers. Thus, the creation of the FIC Guidelines (described below). However, the FIC guidelines were never enacted into law, maybe due to the sensitivity of the goals which the FIC Guidelines sort to achieve. The FIC was of the view that the conditions imposed under the FIC Guidelines were “for the restructuring the community in order to improve the imbalance in the economic conditions between races. Since the intention is to make Malaysia a country which is always united, peaceful and prosperous, it is believed that all companies which are affected by the conditions will give their full cooperation and will endeavor earnestly to comply with the conditions.” Considering it was never enacted to law, there were really no sig‐nificant penalties or sanctions imposed for non‐compliance the duty then as it was, lay on the proponent of any acquisition, merger or take‐over to submit its applications based on prescribed forms. This in that sense caused some businesses (generally smaller in nature with relatively no specific regulatory supervision) not to be bothered with. However in practice, non‐compliance with the FIC Guidelines may have adverse consequences on the company con‐cerned when it deals with governmental authorities such as the Immigration Department and the Stamp Duty Branch of the Inland Revenue (stamping of transfers of shares).

For historic reasons, I will attempt to briefly set out the Gen‐eral Shareholding Distribution Guideline. The FIC’s general policy for shareholding spread between foreigners, Bumiputras and other Malaysians was about 30% Bumiputra; 30” Malaysians; and 40% Foreign interest. However this is only a general guide for the econ‐omy as a whole and the FIC will determine the shareholding spread required for each company on a case by case basis. The FIC may in some cases allow a foreigner to acquire more than 30% in a company but require the foreign company to sell down its stake to Malaysians after a certain number of years or where the Bumiputra shareholding was above 50% at the time of the restruc‐turing exercise, the FIC may impose that such Bumiputra share

holding must not be diluted at all times. The FIC policy on share‐holding spread is overridden by specific shareholding limits on certain industries such as banking, stock broking and companies having Multimedia Super Corridor status. Export oriented compa‐nies are subject to higher foreign shareholding limit with no re‐quirement to divest locally. FIC’S GENERAL GUIDELINES

The FIC Guidelines previously required the prior permission of

the FIC to be obtained before the following transaction can be ef‐fected: (a) an acquisition of a substantial fixed asset in Malaysia by a for‐

eign interest and a foreign interest includes non‐Malaysian individuals, companies incorporated outside Malaysia, and Malaysian incorporated companies in which foreign interests hold more than 50% of the voting shares or has management control;

(b) an acquisition of an asset or any interest in a Malaysian com‐pany or business which will result in ownership or control passing to foreign interests;

(c) an acquisition of at least 15% of the voting power by any one foreign interest or group (or at least 30% in aggregate by for‐eign interests);

(d) control of Malaysian company or business through a joint ven‐ture agreement, management agreement, technical assistance agreement or other agreement;

(e) a merger or takeover of a Malaysian company or busi ness; (f) an acquisition of assets or interest exceeding in value RM5 million. MANUFACTURING AND EXPORT ORIENTED COMPANIES

All manufacturing companies (except those with shareholders' funds of less than RM2.5 million and engaging less than 75 fulltime employees) are required to apply for a manufacturing license from the Ministry of International Trade and Industry. Such license will usually contain specific conditions and requirements relating to equity and employment structure, export, utilisation of local raw materials, transfer of technology, etc.

The guidelines for foreign shareholding in domestic manufac‐turing companies are as follows: (a) for projects exporting 80% or more of total production, up to

100% will be allowed; (b) for other export oriented projects exporting between 51% to

79% of production, up to 79% may be allowed; (c) for projects exporting between 20% to 50% of production,

between 30% to 51% may be allowed; (d) for projects exporting less than 20%, up to a maximum of 30%. This did hinder investments to a certain extend. THE CHANGE

The new policy repealing the above, “Deregulation/Liberalisation of the FIC” has at no surprise been applauded by certain industries. So what exactly is the new policy? Well simply

put, the Prime Minister had announced the deregulation was to ensure the following:‐ (a) Guidelines on the acquisition of interests, mergers and takeovers: • The FIC guideline on the acquisition of interests, mergers and

takeovers is repealed; • The FIC will, therefore, no longer process such share transac‐

tions, nor impose equity conditions on such transactions; • The equity conditions imposed by the respective sector regula‐

tors will continue to apply; • For strategic sectors, sector regulators are best placed to over‐

see their respective sectors and to tailor equity conditions according to the requirements and strategic nature of each sector; and

• There will no longer be any equity conditions imposed • on sectors not deemed strategic. (b) Treatment of Listed Companies: The conditions imposed on fund raising exercises by listed compa‐nies has also been significantly eased in the context of raising Ma‐laysia’s attractiveness as a listing destination; • The revised guidelines covering the treatment of listed compa‐

nies has been issued by the Securities Commission (SC) and full details can be obtained from the SC website, http://www.sc.com.my/ ;

• The Economic Planning Unit (being the governmental depart‐ment charged with undertaking the task) has stated that the effective date of the above deregulation will be 30th June 2009 and shall be applicable throughout Malaysia. However some ambiguity still surrounds this issue and each sector will have to be dealt with separately. This is because the existing re‐quirement imposed by the sector regulators will still remain.

Therefore companies need to comply with the equity conditions imposed by the sector regulators which are part of their licensing requirements. Currently, other than 30% Bumiputra equity condi‐tions previously stipulated in the FIC guidelines, there are also sec‐tor regulators which imposed equity conditions. This equity condi‐tion is still effective and subjected to the consideration of the rele‐vant sector regulators. Also several changes had been made to the foreign investment policies on property, however I will not in this article delve into such matters and you as the reader will be free to contact our office for further infor‐mation on this topic. Impact of the deregulation of FIC Guidelines on private compa­nies previously imposed with equity Conditions can be sum­marized as follows: 1. Private companies in general The repeal of the FIC Guidelines, equity conditions previously im‐posed on all private companies (saved for those imposed by other sector regulators) are now lifted. These companies are now entitled

LEGAL CAULDRON 13 to write in to the FIC to seek written confirmation that they are no longer required to meet the equity conditions previously imposed. 2. Companies which are under the purview of the Sector Regulators Companies which have been granted wholesale and retail trade licenses by the Ministry of Domestic Trade and Consumer Affairs (MDTCA) for companies involved in any of the 27 services sub‐‐sectors which include health and social services, tourism, transport, business and computer and related services, no equity conditions are imposed with effect from 23 April 2009, For other sub‐sectors under the purview of MIDA (the Malaysian Industrial Development Authority) and Ministry of International Trade and Industry (MITI) whereby equity conditions have been imposed pursuant to licenses issued by MITI previously, such con‐ditions will continue to apply to the respective companies unless such companies have applied for and successfully obtained a waiver from MITI. This does not include the 27 services sub‐sectors (as stated above) where the government had removed the 30% Bumiputra equity requirement in line with the Asean trade liberali‐sation and efforts to boost the services sector. SERVICES SUB­SECTORS FOR LIBERALISATION Computer and related services 1. Consultancy services related to installation of computer hard‐

ware; 2. Software implementation services – systems and software

consulting services; systems analysis ser vices; systems de‐sign services; programming services and systems maintenance services;

3. Data processing services – input preparation services; data processing and tabulation services; time sharing services and other data processing services;

4. Database services; 5. Maintenance and repair services of computers; 6. Other services – data preparation services; training ser

vices; data recovery services; and development of creative content Health and social services 1. All veterinary services; 2. Welfare services delivered through residential institutions to

old person and the handicapped; 3. Welfare services delivered through residential institutions to

children; 4. Child day‐care services including day‐care services for the

handicapped; 5. Vocational rehabilitation services for the handicapped Tourism services 1. Theme park; 2. Convention and exhibition centre;

Travel agencies and tour operator’s services (for inbound

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travel only); 4. Hotel and restaurant services (for 4 and 5 star hotels only); 5. Food serving services (for 4 and 5 star hotels only); 6. Beverage serving services for consumption on the services (for

4 and 5 star hotels only) Transport services 1. Class C freight transportation (Private carrier license – to

transport own goods).

Sporting and other recreational services

1. Sporting services (promotion and organization services) Business services 1. Regional distribution centre; 2. International procurement centre; 3. Technical testing and analysis services – composition and pu‐

rity testing and analysis services, testing and analysis services of physical properties, testing and analysis services of inte‐grated mechanical and electrical systems and technical inspec‐tion services;

4. Management consulting services – general, financial (excluding business tax), marketing, human resources produc‐tion and public relations services

Rental/Leasing services without operators 1. Rental/leasing services of ships that excludes cabotage and

offshore trades; 2. Rental of cargo vessels without crew (Bareboat Charter) for

international shipping

Supporting and Auxiliary Transport Services 1. Maritime agency services; 2. Vessel salvage and refloating services

Conclusion

The Government had concluded in its announcement that,

“The comprehensive deregulation of FIC investment guidelines has been formulated to strengthen Malaysia’s attractiveness as a place to do business and invest, for Malaysians and foreigners alike. A facilitative business and regulatory environment, combined with a more effective and market friendly distribution policy, will benefit all stakeholders. Through these measures, the Government intends to place Malaysia on a high growth trajectory, while at the same time maintaining the philosophy of growth with equity.” I however remain skeptical, the deregulation of FIC, a guideline that really never made it to becoming law coupled with the fact that potential stakeholders still would have to comply with sector regulators on a case to case basis, has made very little change. Whilst the deregula‐tion by the government can be read as step in the right direction, with potentially having the ability to attract foreign and local inter‐est on several fronts, some analysts say (of which I absolutely agree with) the shift in equity compliance and the processes involved is still unclear at this stage. It still remains to be seen how the reforms will be thoroughly executed and implemented.

GANESHERAJ SELVARAJAH Partner Corporate Department ganesh@jhj.com.my

“.. True, we build no bridges. We raise no towers. We construct no engines. We paint no pictures ­ unless as amateurs for our own prin­cipal amusement. There is little of all that we do which the eye of man can see. But we smooth out difficulties; we relieve stress; we correct mistakes; we take up other men's burdens and by our efforts we make possible the peaceful life of men in a peaceful state..”

John W. Davis

14 LEGAL CAULDRON

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JHJ AT WORK

LEGAL CAULDRON 15

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JHJ’S DAY OUT WITH THE CHILDREN OF PRAISE EMMANUEL CHILDREN’s HOME, PETALING JAYA

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