The Tea Tiff

La Kaffa International Co Ltd v Loob Holdings Sdn Bhd and Another

chatime.jpg

Franchise Law

Franchising is simply defined as a tit for tat strategy where on one side it helps smaller companies to develop and prosper under the guidance of a bigger company while simultaneously allowing the bigger company to increase and expand their distribution. Guidance in this scenario encompasses being bound by rules of the franchise agreement.

Franchising in Malaysia is governed by the Franchise Act 1998 (Franchise Act), as amended by the Franchise (Amendment) Act 2012 which came into force on 1 January 2013, and the Franchise Regulations 1999 (amended by the Franchise (Forms and Fees) (Amendment) Regulations 2007).

Loob Holding Sdn Bhd (“Loob Holding”) was appointed as a Chatime franchisee in 2011 by La Kaffa International Co. Ltd (“La Kaffa”) and entered into a franchise agreement called Regional Exclusive Representation Agreement (RERA). Chatime outlets mushroomed across Malaysia with 165 outlets being owned and operated by Loob Holdings. Loob Holdings is the master franchisee with the outlets being either directly owned, sub-franchised or a joint venture with sub-franchisee.

“Due to disagreements with Loob Holdings, we have no choice but to make this painful decision”

Teresa Wang

Executive Vice President, La Kaffa

On 5th January 2017, despite having 24 more years to go, La Kaffa terminated RERA with Loob Holdings. Among others La Kaffa alleged that :

  1. Loob Holdings has violated Article 7 of RERA which states that Loob Holding can only purchase raw materials from La Kaffa.
  2. Loob Holdings has violated Article 10 of RERA by delaying and denying La Kaffa’s request to exercise its rights to inspect and audit.
  3. Despite repeated demands, Loob Holding has failed to comply with the terms of RERA and/or failed to make payment of, amongst others, the purchase of raw materials from the Plaintiff.

The dispute between the parties was to be resolved through arbitration in Singapore. This is due to Article 18 of the RERA which states that the RERA is governed by Singapore laws and any disputes regarding the RERA shall be arbitrated at the Singapore International Arbitration Centre.

“The three franchisees with four stores will maintain the Chatime name. The rest will be rebranded into Tealive from Feb 18 onwards”

Bryan Loo

CEO, Loob Holdings

Following the termination of RERA, in what appeared to be a well calculated and well maneuvered move, Loob Holdings was able to convince 95% of existing Chatime outlets to join them in new venture under the Tealive brand. At the time of the takeover, Chatime Malaysia accounted for 20% of La Kaffa’s total revenue. La Kaffa therefore commenced proceeding in the Malaysian High Court to obtain injunction (prohibitory and mandatory) against Loob Holdings pursuant to section 26(1) and 27(1) of the Franchise Act 1998. The interlocutory proceeding was issued pending the disposal of the Singapore Arbitral Proceedings under provision relating to application for interim injunction under section 11 of the Malaysian Arbitration Act 2005. As La Kaffa did not seek a perpetual injunction, if the Court grants interim injunction, it would last until the disposal of the Singapore Arbitral Proceeding.

The High Court held that it could not close Tealive down because provision s. 27 of the FA 1998 was not incorporated into the RERA and Loob Holdings and its related parties did not give a written undertaking to cease business for two years. The High Court was of the view that Tealive does not need to close down because Loob Holdings did not promise to close down after the termination of the RERA. The High Court Judicial Commissioner Wong Kian Kheong (as then he was) was of the view that the issue before the Court was whether La Kaffa is entitled to an interim injunction so that it can be used to support, assist, aid or facilitate the Singapore Arbitral Proceedings. Further, the high court found that the balance of convenience lies against the granting of the interim injunction in view that it carries a higher risk of injustice than a refusal of the interim injunction. As such, La Kaffa’s claim was refused.

“the following third parties will be adversely affected by interim restraining injunctions awarded against Loob

(iia)  161 Tealive Franchisees have to close shop immediately;

(iib)  the livelihood of about 800 employees of Loob and 161 Tealive Franchisees (Tealive Employees) will be jeopardised;

iic)  the families and dependants of Tealive Employees; (iid)  the suppliers and contractors of Loob and 161 Tealive Franchisees;

(iie)  the bankers and creditors of Loob and 161 Tealive Franchisees; and

(iif)  the landlords of the office and business premises of Loob and 161 Tealive Franchisees”

WONG KIAN KHEONG

Judicial Commissioner High Court (Commercial Division)

 

La Kaffa appealed to the Court of Appeal next and in granting the prohibitory injunction, overturned the High Court’s decision. The Court of Appeal held that firstly, a simple construction of Article 15 of the RERA as well as s. 27 of FA 1998 will demonstrate that there is an obligation for Loob not to compete with La Kaffa’s business even after the termination of the RERA. In simple terms, The Court of Appeal said that the franchise agreement and the Franchise Act both state that the franchisee (Tealive) cannot carry on a competing business after terminating the franchise agreement. The creation of Tealive was, on the face of it, in contravention of the prohibition (doing something despite not being allowed to do it) under the franchise agreement and the Franchise Act. Secondly, In light of Article 15 of the RERA and s. 27 of FA 1998, the High Court ought not to have refused the prohibitory injunction. When parties have agreed not to do certain acts and a statute also provides for such protection, the court is obliged to give effect to ensure the salient terms of the agreement as well as the statute is not breached. The Court of Appeal held that the court should not allow someone to continue doing something that they aren’t legally allowed to do in the first place. Moreover, The Court of Appeal found it unjustifiable for the High Court to rely that the Tealive bubble tea business consisting of 161 outlets and the livelihood of 800 employees will be affected.

“Courts should not lend its hand to persons who on the face of records are seen to be cheats”

Hamid Sultan Bin Abu Backer, JCA

(Majority Decision)

Court of Appeal

 

Fortunately for Loob Holdings, despite being dismissed on a majority of 2-1, the stay of execution was granted by the Federal Court. Nevertheless, Tealive will be forced to close down until the disposal of the Singapore Arbitral Proceedings if the Federal Court were to refuse leave for Loob Holdings to appeal to the Federal Court.

[UPDATE] 

In a joint statement released on the 30th August 2018, Loob Holding Sdn Bhd (Tealive) and La Kaffa International Co Ltd (Chatime) announced that both companies have reached an out- of court settlement to amicably resolve all disputes arising from their one time franchise relationship of the Chatime bubble tea brand.

In light of the amicable resolution, both parties have agreed to withdraw all ongoing proceedings in Malaysian courts as well as arbitration in Singapore.


Case comment: Of con men and chargees

The author discusses the case of CIMB Bank Berhad v AmBank Berhad & 2 Ors [2017] 5 MLJ 142. It is a Malaysian land law case on deferred indefeasibility, the position of chargees and the meaning of ‘purchaser’ in the National Land Code 1965 (‘NLC’). To appreciate this article, the reader must have a basic understanding of how to interpret section 340 of the NLC.

Many candidates who sat for the Certificate In Legal Practice must have collectively groaned (inaudibly, of course) when they laid their eyes on the Professional Practice paper last month. One of the questions bore some similarity to the case of CIMB v AmBank where the Federal Court made significant statements in its majority judgment and Jeffrey Tan FCJ delivered a dissenting judgment that, I believe, piques the interest of land law enthusiasts.

I thought that CIMB v AmBank was interesting because, unlike most other significant decisions on indefeasibility, this one involved two titans going head-to-head with one another in a decision that concerned many banks and financial institutions.

In this post, I will briefly outline the case facts. Then, I will summarize the decisions of the High Court, Court of Appeal and Federal Court here and offer my thoughts on the case here.

The brief facts

Diagram 2

On 17 March 2006, as security for a loan, a charge was granted over a piece of land owned by Ching Ting Seng and Ching Chong Lup (‘the Chings’) in favour of Southern Bank Berhad (‘SBB’). Soon after, CIMB Group Holdings Bhd acquired SBB, thus CIMB Berhad took over SBB’s assets. On 14 November 2008, Wong Chee Keong (‘Wong’) applied for a loan from AmBank to finance the purchase of said land from the Chings. Wong created a charge over the land in favour of AmBank as security for said loan.

Both Wong and AmBank appointed solicitors who dealt with each other extensively. Eventually, AmBank’s solicitors received the purported document of title, the duly stamped Memorandum of Transfer (‘MoT’), the purported Discharge of Charge executed by CIMB and the duplicate of the charge from Wong’s solicitors. It is undisputed that the purported document of title was not issued by the registering authority and that the purported Discharge of Charge was forged.

Following one failed registration attempt, AmBank’s solicitors tried again. They presented the purported Discharge of Charge, the MoT and the charge in favour of AmBank (‘the AmBank Charge’) for registration. The authorities registered the purported Discharge of Charge, the transfer to Wong, and the AmBank Charge.

Judging from the above, it appears that Wong had masterminded the transfer of title and discharge of charge of land in one fell swoop. Strangely, there may be a positive side to this story.

If the documents were in fact legitimate, the successful registration of title and charge would have been lauded as a testament to the system’s efficiency. However, it was this same efficiency that allowed Wong to hoodwink CIMB of its registered interest.

The decisions of the High Court and the Court of Appeal

The sole issue for determination in both the High Court and the Court of Appeal was whether AmBank was an immediate or subsequent purchaser.

The High Court found AmBank to be an immediate purchaser. The Court of Appeal found AmBank to be a subsequent purchaser and stated that the High Court failed to appreciate the two-stage nature of the transaction:

  1. First, CIMB’s charge was discharged and the transfer occurred from the Chings to Wong, resulting in Wong becoming the immediate purchaser.
  2. Then, AmBank derived their interest in the property from Wong, making AmBank the subsequent purchaser.
12333.PNG
The blue arrow represents the High Court’s line of thinking and the red arrows represent the Court of Appeal’s argument that there was a two-stage transaction.

Now, what is an article on section 340 of the NLC without an excerpt of it?

340. Registration to confer indefeasible title or interest, except in certain circumstances
(1) The title or interest of any person or body for the time being registered as proprietor of any land, or in whose name, any lease, charge or easement is for the time being registered, shall, subject to the following provisions of this section, be indefeasible
(2) The title or interest of any such person or body shall not be indefeasible:
(a) in any case of fraud or misrepresentation to which the person or body, or any agent of the person or body, was a party or privy;
(b) where the registration was obtained by forgery, or by means of an insufficient or void instrument; or
(c) where the title or interest was unlawfully acquired by the person or body in the purported exercise of any power or authority conferred by any written law.
(3) Where the title or interest of any person or body is defeasible by reason of any of the circumstances specified in subsection 2:
(a) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and
(b) any interest subsequently granted there out shall be liable to be set aside in the hands of any person or body in whom it is for the time being vested:
Provided that nothing in this subsection shall effect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser.

Section 340(1) sets out the general rule that any registered title or interest is indefeasible. The exceptions to this is where one of the situations under section 340(2) applies. Holding AmBank to be an immediate purchaser has the effect of placing it under section 340(2). It is now trite law that section 340(2) cannot be read with the proviso under section 340(3). Following the High Court decision, AmBank was found to be an immediate purchaser and therefore its interest was defeasible.

The corollary to this is that holding AmBank to be a subsequent purchaser will enable the operation of section 340(3) and allows AmBank to rely on the protection under the proviso, which can only be read together with section 340(3).

Federal Court

At this point, you might be thinking that AmBank and its counsel thought to themselves “aiyah, no sweat” after receiving the Court of Appeal ruling. That is, until you learn that CIMB obtained leave to appeal to the Federal Court on the following question of law:

Whether a chargee comes within the meaning of ‘purchaser’ under the proviso to section 340(3) of the National Land Code?

But once again, AmBank’s counsel was victorious and CIMB’s appeal was dismissed by a majority of 4 to 1.

Md Raus Sharif CJ (as he then was) delivered the majority decision and concurred with the Court of Appeal in that AmBank was a subsequent purchaser, thus protected by the proviso. In answering the leave question, the majority judges referred to the definition of the word “purchaser” in section 5 of the NLC. The majority judgment agreed with the Court of Appeal that the transaction was done in two stages.

In his dissenting judgment, Jeffrey Tan FCJ held that both immediate and subsequent purchasers must be purchasers in good faith and for valuable consideration. His Lordship held that, since Wong was not an immediate purchaser in good faith, AmBank could not have been a subsequent purchaser. Thus, AmBank was an immediate purchaser and therefore its interest was defeasible.

Comments

1) On terminology

In the majority judgment, the former Chief Justice stated the following at Paragraph 14:

Thus, if a chargee does not come under the meaning of purchaser, then AmBank was an immediate purchaser and in such a situation AmBank’s interest as chargee was not protected by the principle of deferred indefeasibility. However, if a chargee comes within the meaning of purchaser, then AmBank was a subsequent purchaser, and thus was protected by s 340(3) of the NLC. (emphasis added)

This is confusing.

At face value, it looks like his Lordship suggested the following:

If a chargee WAS NOT a purchaser, then AmBank WAS an immediate purchaser;

If a chargee WAS a purchaser, then AmBank WAS a subsequent purchaser.

What his Lordship actually meant was:

If a chargee WAS NOT a purchaser within the meaning of the proviso, then AmBank was an immediate purchaser;

If a chargee WAS a purchaser within the meaning of the proviso, then AmBank WAS a subsequent purchaser.

I would like to humbly suggest that the use of the term “immediate purchaser” has the potential to bring about some confusion. This is because in section 340 the word “purchaser” only appears in the proviso and nowhere else. Perhaps a better term is “immediate transferee”.

My concerns are not imagined. In Paragraph 71, Jeffrey Tan FCJ stated,

With respect, the issue was not ‘whether a chargee comes within the meaning of s 340(3) of the NLC’ as proposed by the leave question. As rightly said by the Court of Appeal and agreed to by the first respondent before us, the issue was whether the first respondent was an immediate or subsequent purchaser. For if the first respondent, though purchaser, were not a subsequent purchaser, then the first respondent only acquired a defeasible interest. But of course, if the answer to the leave question were that a chargee does not come within the meaning of ‘purchaser’ under the proviso, then this appeal should be decided against the first respondent. (emphasis added)

In the highlighted text, Jeffrey Tan FCJ seems to have suggested that, following the leave question, if the respondent, though purchaser within the meaning of the proviso, were not a subsequent purchaser, then the first respondent only acquired a defeasible interest.

It is submitted that if the respondent is a purchaser within the meaning of the proviso, it must follow that it is a subsequent purchaser. In other words, it is impossible for a chargee to be protected by the proviso *and* be an immediate purchaser.

Aside from the highlighted text, I agree with his Lordship in that the true question was whether AmBank was an immediate purchaser or subsequent purchaser. His Lordship also expressed his disapproval over the framing of the leave question, which was “whether a chargee comes within the meaning of ‘purchaser’ under the proviso to s 340(3) of the National Land Code.” If answered in the negative, then it follows that chargees will never be able to benefit from the proviso. As Jeffrey Tan FCJ put it,

It would have far reaching consequences if financial institutions were excluded as purchasers.

His Lordship cited numerous authorities in support of the fact that a chargee comes within the ambit of “purchaser” within the meaning of the proviso. At one point, he even answered the leave question in the affirmative at Paragraph 90 even though he ultimately found in favour of CIMB.

I would like to propose that even though this case was a ruling on the meaning of “purchaser” within the meaning of the proviso, the most noteworthy comments were related to whether AmBank was protected by the proviso or not (i.e. “immediate purchaser” or “subsequent purchaser”) because it appears to conflict with OCBC Bank (M) Bhd v Pendaftar Hakmilik, Negeri Johor Darul Takzim [1999] 2 MLJ 511 (‘the OCBC case’).

2) Is the OCBC case still relevant?

CIMB’s counsel cited the OCBC case in support of its case. On the facts, Ng Kim Hwa (‘NKH’) alleged that Ng See Chow (‘NSC’) had forged a transfer of a piece of land and subsequently charged the land to OCBC. NKH only discovered the fraud when he was notified of an entry of a Registrar’s Caveat over the land.

Diagram 3

The title to NSC was defeated, but OCBC wanted to remain as chargee. The Court of Appeal held that OCBC could not rely on the proviso within the meaning of section 340(3) because section 340(3) had not been ‘activated’ to begin with. The late NH Chan JCA also stated the following:

A person who has no right or title to the land has no right to charge it because the land is not his, in the first place, for him to grant any interest (like a charge or a lease) in the land to someone else (such as a chargee or a lessee).

In light of CIMB v AmBank, it is clear that the above statement cannot stand. It is now clear that a charge (in favour of AmBank) will subsist even though the person who made the charge was not entitled to the ownership of the property in question (Wong). The majority reasoning may have been a long time coming, considering that the Federal Court at Paragraph 26 of Tan Ying Hong v Tan Sian San & Ors [2010] 2 MLJ 1 disapproved of the OCBC decision in obiter.

It was unfortunate that the majority judgment did not comment on the OCBC case. I believe that it would have been beneficial to do so, considering that the OCBC case also related to a two-stage transaction (i.e. of transfer and charge), yet OCBC’s interest was defeated. Since it was not overruled, we may still see counsel distinguishing CIMB v AmBank on the facts and preferring the OCBC case to defeat a registered charge.

Concluding remarks

All in all, I agree with the outcome of this decision. Surely, it is not feasible to deprive innocent chargees of protection in the absence of any principal-agent relationship (see: Abu Bakar Ismail v Ismail Husin [2007] 3 CLJ 97). Thus, the answer to the leave question could have only been ‘no’. Also, I prefer the majority decision’s ruling that there was a two-stage transaction.

It is clear from CIMB v AmBank that the concept of deferred indefeasibility reigns supreme and that there is still much room to expand on the jurisprudence relating to indefeasibility, particularly with regard to charges. I look forward to witnessing the continued maturity of this area of law.

Protecting shareholders’ rights

In light of recent events, this would be a good time to refresh and get relevant about Company Law and as the title suggests, shareholders’ rights in a company. Shareholders, being investors of the company, pour their money into a company in hopes to get a return on investment from the company so what can they do if they find RM2.6 billion appear in one of the directors’ bank account?

At its most fundamental level, the determination of shareholders’ rights depends on the types of shares they hold but this needs to be spelt out in the constitution. The type of shares they hold may confer preferential rights to distributions of capital or income, confer special, limited or conditional voting rights and also not confer voting rights (known as preferential shares).

Section 71 of the Companies Act 2016 provides that a company share, other than preference shares, confers on the shareholder the following rights:

(a) the right to attend, participate and speak at a meeting

(b) the right to vote on a show of hands on any resolution of the company

(c) the right to one vote for each share on a poll on any resolution of the company

(d) the right to an equal share in the distribution of the surplus assets of the company, or

(e) the right to an equal share in dividends.

  1. The right to vote at the AGM

By law, all public companies are required to have an Annual General Meeting once a year and failure to do so is a contravention to the law (s340). The change to the Companies Act 2016 has done away with the compulsory need for private companies to have one.

This is perhaps the most fundamental and powerful right of a shareholder– the power to influence the decisions of the company (#GE14). No shareholders should be denied the right to vote unless the share held doesn’t give the right to do so or other extraordinary reasons.

A key case dates back to the 19th century in Pender v Lushington wherein the Articles of Association, no one is allowed to vote on more than 100 shares in any meeting. Mr Pender who held 1000 shares split his votes and registered them under the names of a number of nominees. The Directors refused to have his votes counted. The court allowed an injunction for the votes to be counted. In a meeting, the company cannot look behind the ownership. A right to vote is a property right and an individual right in respect of which the member can sue. (Ps, this also allows a personal claim against the Directors for refusing to let the shareholders to vote).

(2) Statutory derivative action

A derivative action is made by a member of the company in respect of a cause of action vested in the company and in which relief is sought on behalf of the company. This is because the company is incapable of taking action against the directors who are controlling the actions of the company hence an action is brought by the concerned shareholders. As with the rule under Foss v Harbottle, the proper plaintiff in the action is the company and not individual shareholders.

Of course, the courts have been creating exceptions to the Foss v Harbottle rule where it assumes the appropriate body to decide whether litigation should be brought is the shareholders in a general meeting and leaves minimal scope for shareholders to commence derivative litigation (Kershaw). However, the new Company Act 2016 has done away with Common Law Derivative action and we only have the Statutory Derivative Action under the Act under section 347.

Therefore, Derivative proceedings can only be brought with leave of court and it will consider if (a) the complainant is acting in good faith; and (b) it appears prima facie to be in the best interest of the company that the application for leave is granted. Complainant is defined under s345.

It appears to give wide discretion to the courts whether leave will be granted. In Mohd Shuaib Ishak v Celcom (Malaysia) Berhad (the first reported case under S181A Companies Act 1965 which was the statutory derivative action then) Indeed there was no need to prove ‘wrongdoer control’, doesn’t exclude negligence and no set bar to the claim. This case serves as a wake-up call for directors to carefully consider how they handle a company’s affairs as their decisions can be subject to scrutiny by minority shareholders who have a statutory right to challenge the same in court if the requirements under section 181A of the Act are satisfied.

However, as seen in the Federal Court case of Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd & Ors, Section 347 have since abrogated the common law derivative action. Any derivative actions can now only be done by way of statutory derivative action as canvassed under Section 347. However, the case was useful in highlighting that even where there are no minority shareholders, a case of derivative action can still be brought i.e. 50/50 in this case.

(3) Oppressive action

The difference between Oppressive action and Derivative action is that for the latter, any damages reaped after litigation will go to the company instead of the member of the company. In other words, a derivative action is brought when the member does it (out of the goodness/ anger/ dissatisfaction of his heart OR) when the company is unable to sue for any wrongdoings done against itself.

An oppressive action is where the rights and interests of a shareholder are affected and hence the aggrieved shareholder would want to bring an action to protect those rights. An action of this nature is that the shareholder would bring a claim in its own name and any damages goes to the shareholder directly.

This means that the shareholder can bring an action against the directors of the company (or whoever is exerting the oppressive force). First, the shareholder would be required to prove 2 things to the court: that there was an element of unfairness and that it has affected interests as members, shareholders or debenture holders of the company.

This is a remedy that allows shareholders to bring an action when they had suffered a personal wrong. The courts will also scrutinize at any agreements between the shareholders and the directors to see if there had been any understandings or legitimate expectations. If there are any, the shareholders would have a stronger case for proving oppression.

Whilst there is no one rule for all test as to what amounts to oppression, Kumagai Gumi Co Ltd v Zenecon-Kumagai Sdn Bhd [1994] 2 MLJ 789 has the following to say: “With the wide wording employed in the statute, it is clear that the categories or examples of actions which would constitute oppression are not closed or limited. Having said that, oppression of minority shareholders usually occurs when an act of the majority infringes upon the rights of the minority shareholders. Usually, this involves actions which are unfair or actions which depart from standards of fair dealing“.

Simply put, it is where the directors (or similar) was aware of the complainant’s rights and interests but had deliberately chosen to ignore or act against those interests. Examples include where the director has breached its obligations under the company constitution to call an AGM, to allow a shareholder to vote or non-disclosure of company affairs and even non-payment of dividends.

Just note the case of Ng King Chong & Anor Nation Park Sdn Bhd & 2ors that the name of the oppressors must be named as a party to the action as the court finds that it gives them an opportunity to defend themselves.

Brady Part: 113280 | STOP Sign | BradyID.com

(4) Statutory Injunction

The Companies Act 2016 now has inherited Section 368A of the Companies Act 1965 under Section 351 which allows for statutory injunction relief.

An injunction relief carries traits of an equitable relief hence parties claiming injunction must come with clean hands, must contravention or attempts to contravene of the law and that the Honourable Court is of the opinion that such relief is in the interest of justice.

Winding up of a Company - Meaning, Modes and Effect - Free BCom Notes

(5) Winding up

If all attempts to properly settle the matter had failed, a shareholder may apply to the court for just and equitable winding up.

A just and equitable winding-up situation is not a primary remedy given by the Courts as the general approach is that the majority shareholders should buy out the minority shareholders for sustainability of the business. Actions of this nature often connote elements of legitimate expectation, shareholders’ deadlock, breakdown of mutual trust and confidence among the shareholders and/or management of the company which may justify the request to wind up the company.

Being an equitable relief, Lord Wilberforce explained in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. that through the just and equitable clause, certain obligations common to partnership relations may come in; the analogy to partnership is convenient because the concepts of probity, good faith, and mutual confidence, developed in partnership law, become relevant considerations once the elements stated above are found to exist

Conclusion

The Companies Act 2016 has provided for vast improvements in protecting minority shareholder rights such as lower thresholds to amend the Articles of Association and shareholders meeting and gained the right, inter alia, for management review.

In conclusion, the law does give shareholders remedies for when their rights are being infringed and those rights were illegally exercised. It will be also useful to know about what director’s duties are such as promoting the success of the company, duty to exercise independent judgment and duty to exercise reasonable care, skill and diligence are amongst the core duties of company directors. Active participation on the part of shareholders will ensure that directors are held accountable and will not accumulate RM38 billion debt. (Illustrations are inspired by real-life stories hence any similarities may be coincidental).

 

Withholding tax 101

My Civil Procedure lecturer would always say this: There are 2 things that are certain in this world– death and tax, even when you die, you still need to pay tax. Now, most of us would know that there are certain types of taxes we need to pay to the country i.e. Income tax, Goods and Services Tax (GST), Capital Gains Tax (CGT) but the lesser few know about Withholding tax (WHT). Withholding tax isn’t one of those tax you might incur on a daily basis but it’s good to know about it to determine whether it applies to you (or risk IRB penalties)

  1. What is withholding tax

Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the IRB. For example, A engages B who is a foreign consultant to give consultation on a project and pays $100,000. Under the S109B Income Tax Act 1967, A would need to withhold 10% of that amount as withholding tax, paying B only $90,000. (unless otherwise agreed)

Failure to withhold by the payer would have to pay an increase in tax of a sum equal to ten percent of the amount and no deduction is given for the payment made to a non-resident payee against business income in the income tax computation of the payer

WHT only applies to services/ income and not goods. Goods would incur import duty or GST instead. Under the Income Tax Act, the various types of services that would incur withholding tax and their respective rates are (accurate at the time of writing)

Screen Shot 2018-03-27 at 21.36.20.png

Full list can be found here

2. How do I determine if I need to pay withholding tax

I’ll explain this via examples of some types of payments taxable.

i) Contract Payments

Under the Income Tax Act, it reads 107A.

(1) Where any person (in this section referred to as “the payer”) is liable to make contract payment to a non-resident contractor in respect of services under a contract, he shall upon paying or crediting such contract payment deduct therefrom tax at the rate of—

(a) 10% of the contract payment on account of tax which is or may be payable by that non-resident contractor for any year of assessment; and

(b) 3% of the contract payment on account of tax which is or may be payable by employees of that non-resident contractor for any year of assessment,

This provision was included to allow the collection at the source of tax due by non-resident contractors and professional firms engaged in services under a contract. This tax is not a final tax and will be refunded to the contractor upon finalization by the tax authorities.Payments made by Malaysian residents to non-resident contractors for services under a contract carried out and performed in Malaysia are subject to withholding tax of 13% (10% + 3%) on the service portion of the contract.

This would be akin to the example I gave above where A engages B, a foreign consultant for consultation services.

ii) Royalties and interest

Both come from the same statutory provision which is s109A of the Act.

However, the Finance Act 2017 has expanded the definition of Royalties. General understanding of the word “royalty” would encompass from common copyrights and trademarks i.e. payment to McDonald HQ for carrying out business in Malaysia using the brand “McDonald”.

Now, the definition includes any consideration for the right to use software, the reception of or the right to receive visual images or sounds transmitted to the public by satellite, cable, fibre optic or similar technology or in connection with television or radio broadcasting. Further, royalties paid for the use of or the right to use radio frequency spectrums. This is a much more comprehensive list and to my mind, would include everything and anything related to the use of others’ assets.

iii) Technical services

Amount paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme is subjected to WHT. However, day to day administrative work, such as bookkeeping and other routine services (no specialized knowledge, skills or expertise are needed) does not fall under the category “administration”; those amounts are not subject to WHT.

The definition of what amounts to “technical services” has also been enlarged and increased by the Finance Act 2017. Previously, the WHT provisions for service fees, WHT would only be applicable to service fees falling within Sections 4A(i) and (ii) where the services are rendered in Malaysia. From the enactment of the Act onwards, all payments made by a Malaysian resident taxpayer to a non-resident taxpayer for technical services are subject to 10 % WHT regardless where the services are physically performed.

For example, A UK based consulting firm provides consulting services to a Malaysian taxpayer, the services have been wholly performed in Singapore. Previously, the service fee paid to the legal firm was not subject to WHT. Under the new rules, the Malaysian service recipient has to withhold 10 % WHT on the whole amount.

3) Additional:

Now, you might be thinking why I said “unless otherwise agreed” in para 1 (and if you did, Good Job!!) and no, you cannot contract out of the Income Tax Act. This is because sometimes, especially with online advertising platforms, they ask that whatever price they name is the price you’ll pay them, and you’ll have to top up that amount as withholding tax.

As stated in Google’s Advertising Program Terms:

7. Payment. Customer will pay all charges incurred in connection with the Program… Charges are exclusive of taxes… Customer will pay (i) all taxes and other government charges ….

The formula works like this: if the advertising cost was $100,000, you would need to divide it by 0.9 and then multiply it by 0.1 and the withholding tax payable to the IRB would be $11,111. Hence, you are not entitled to say that from the $100,000, you would withhold 10% making it $10,000 but you would need to spend additional resources for the payment, making an additional burden because you’ve agreed to take on the supplemental cost.

If you’re interested more about taxing on online advertisement, you can read more here and here which talks more about Facebook and Google adverts where it is unclear whether the WHT is under royalties or technical services.

 

Teaser: next week I’ll be writing on the largest fine the EU Competition Commission has ever imposed on a single entity so stay tune!

Resources:

  1. HLB Malaysia, Malaysia Understanding Withholding Taxes
  2. Techmonitor, Understanding Withholding Tax
  3. Azmi & Associates, Withholding tax in Malaysia
  4. Deloitte, International Tax Malaysia Highlights 2017
  5. Malaysia Luther News, Malaysia Enacts Finance Act 2017 – Expanded Scope of Withholding Tax
  6. KPMG: Malaysia: Withholding tax, royalty and service fee payments to non-residents

Life at LSE

London has always been one of my dream cities to live in. I’ve previously had the privilege to live in one of the most interesting city in the world (Dubai) but still, nothing compared to the excitement when I knew I was going to London to the school of my dreams– LSE. LSE was also my dream university since IGCSE hence it is exhilarating to be educated in one of the top political science institutions in the world

LSE is amazing. No question about that. In the 3 years of law school, I was there, there was so much to learn and so much LSE could give. It was pretty much like a pot of gold on the end of the rainbow which wouldn’t stop giving. However, there were nights that I would just hide under my blankets to sleep off the stress and demotivating that is LSE. So what was it like studying in LSE and how is it different from studying locally? I’ve listed quite a few points below as well as my life in London in general.

 

1. Why LSE for Law? Isn’t it like, for economics?

That is very much not true. To be honest, I wanted to do economics when I doing my IGCSE. I did economics then and in A-Levels and thoroughly enjoyed every part of it. Well, it didn’t go as plan and I had to do another discipline. In college, I was very involved in MUN and since then I did develop the interest in international debates, pointing fingers and pressing liability as well as making alliance whilst destroying others. It definitely helped in building my confidence and even more my passion for talking very loudly argumentatively. Therefore, I chose law.

2. What was law school in LSE like?

Unlike the CLP I’m doing now, we only had at max 15 hours of lectures and tutorial (here, it can as many as 30 hours a week) and even then if we ever had 2 hours back-to-back, we’ll start groaning. Throughout all 3 years of university, we were needed to take 4 full modules each year. In my first year, they were all compulsory modules: Criminal Law, Introduction to Legal System (0.5), Property I (0.5), Contract Law (0.5), Tort Law (0.5) and Public Law. The (0.5) meant you’ll do one each semester. By the end of the school year, there will be a final exam.

Second year is when life gets more interesting. All the modules are free to choose so I chose: EU Law, Taxation Law, Commercial Contracts and Property II (Land and Trust). I loved every module of it and in it was so much to learn.

In my third year, all but one was free to choose. The compulsory module was Jurisprudence whilst for elective modules, I chose Elements of Accounting and Finance, Competition law and Company Law. Final year started with like a chocolate, it was bittersweet. It was the last 22 weeks in LSE of my university life and then it was adulthood. I chose the first because I wanted some knowledge on accounting whilst Competition Law was a module I was determined to take since the summer of 1st year (it was the closest I could get to anything Economics related).

© the BLSAdvocate

3. Why do you have so few hours of lectures?

12 hours of lecture is certainly not as it amounts to about 2-3 hours a day or classes. Most of my days start at 10am with the first lecture, a 2-hour break then a class at 2pm followed by another 1-hour window and then another class. You’re given this amount of free time to ideally spend it in the library doing extended and extra readings. After all, LSE isn’t called to have one of the largest libraries in the UK devoted to the social sciences for nothing.

Extended readings and reading list are mandatory for Law School students to compensate the short lecture hours you have. Lecturers just can’t afford to go at length about everything from A-Z about a case so well you’re just going to need to find that out yourself: from facts to court judgment and even read the judgment at length. For example, a chapter in Company Law was concerning “Piercing the corporate veil” where the reading was about 80 pages of pure court language and this is normal. Average individual reading time per chapter is about 4 hours for me. Unfortunately, reading lists are barely in existence here.

You’re also required to be very prepared during tutorial classes to get the full advantage. They’re much smaller in size, normally about 20 people at max. The teacher will just go in and start asking “what does the judge mean when it means “by object” doesn’t create any economic efficiencies?” “In what circumstances can an agent be made liable to the principal despite having done so outside the scope of his job?” “Why do you think the court was wrong in dissenting that the director did not breach his duties?” It’s not meant to be a mini and summary lecture but an avenue for you to demonstrate your understanding and test yourself as to how much you actually understand the subject matter. And indeed, you’ll feel small and tiny if you do not speak up.

I might sound like a total nerd but I LOVED my reading list. What I’ll often do to get different perspective is after having done the core reading, I’ll do the reading on the same chapter but from another book with another author. For any module, there are many textbooks available out there and each provides a different commentary on the matter concerned. Unfortunately, I now couldn’t afford the time due to the increase in lecture hours.

© lse.ac.uk

4. Do you get time off studies to do something else?

With 12 hours of lecture and at least 16 hours of reading time and 10 hours of homework time each week, it can average to about 8 hours of work time each day. 8 hours to sleep, 8 hours to work, the remaining 8 hours can be put into areas to gain experience and knowledge beyond the walls of your classroom. In my uni days (wow I feel so old now) I participated in quite a few student societies but the two societies where I was more involved in were International Council of Malaysian Scholars and Associates (ICMS) and the Kesatuan Penuntut Undang-Undang Malaysia (KPUM).

ICMS is a cross-border student society with an establishment in 6 different countries. It’s a very engaging and interesting society and knowing people of different backgrounds in different cities gives an interesting outlook on things. I was part of the Malaysian Public Policy Competition committee back then and it is one of the most memorable experiences of my student years.

On the other hand, KPUM is a law society but it was in the process of reforming then so there was a lot going on and a shortage of manpower too. I helped in 2 events which were dated back to back so my days were filled with 10pm meetings, Skype calls before going to school and running errands throughout the City of London. There is also much more to do such as debating society, music society, MUN and netball for example. Life at the LSE, and London, in general, is very fast paced and it only depends how much time you’re willing to invest in it.

5. What did you enjoy most and disliked the most?

Wow, how do I start? I loved

  • The amount of independence you get for your studies
  • The lecturers in LSE are so helpful and emphatic
  • Classmates and friends are helpful
  • The accessibility of public lectures and lots of them too.
  • The busy and lively life of London
  • Student society activities taught me a lot
  • LSE taught me a lot
  • Public transport is just amazing
  • Traveling is accessible and affordable
  • All those Tumblr posts you’ve seen

What I did not enjoy so much?

  • The stress.
  • The school fees and cost of living (£17000 a year and £1200 a month, yikes)

Conclusion:

Looking back at the wonderful 3 years I had in London, I truly would not have it any other way. It taught me a lot from the independence of how to fix a light bulb to moving houses by myself, from zero knowledge about cases and statutes to flipping 200 pages of judgment in 2 hours. It taught me about resilience and most importantly, about how strong you can be once you put your mind to it.

I had my nights just asking “why I did law school?” but I never regretted taking a law degree. There were times when I look at my parents and how I felt “if only I knew the law, I could help” or “if only I could be a qualified lawyer, I could help my parents on X and Y”. Instead of saying the law is to give justice, I think it’s more about fairness and equality.

My advice to all law students, chin up and be strong. Take your time in university to explore the world much more and find what you enjoy most. Go do some volunteering or helping to organise an event. If there isn’t a committee you can join, make one! It’s going to be all worth it and you’ll make it through this.

The “right” in copyright

null

(I hope you’ve understood the pun)

Foreword: During the summer after my first year of law school, I did 2 internships in 2 different law firms. One of the law firms gave us a training session every week which was very interesting and something my first internship did not have. The IP partner then told us about this story and this is THE CASE that got me interested in IP law. It’s an old case but nevertheless an interesting one. Enjoy 🙂

Maxis Sdn Bhd v Suruhanjaya Syarikat Malaysia [2004] 2 MLJ 84

Maxis is one of the strongest names in Malaysia and I’m sure that whenever someone says the word “Maxis”, a distinct green squiggly line will appear in your head. What if, Maxis was not the Maxis you knew?

The two parties in the case are Maxis Sdn Bhd on one side and the Registrar of Companies along with Maxis Group of Companies on the other (the latter is the one that we are well versed with). Maxis Sdn Bhd was incorporated in 1992 and was engaged in the business of information and system services provider in 1993. Then after, it ceased operations and became dormant. On the other hand, the principal companies in the Maxis Group of Companies do not previously carry the forename ‘Maxis’. They were formerly known by their principal name: ‘Binariang’. With subsequent changes made to their names, all the companies in the Maxis Group of Companies have the word ‘Maxis’ as its leading character. The latter was established in 1995 and was one of the first mobile communications providers in Malaysia.

Maxis Sdn Bhd sought a declaration that the Registrar was wrong in approving the use of the name “Maxis” by Maxis Group Companies and therefore, should be canceled. Maxis Group Companies counterclaimed for an interim injunction and several others for passing off. This case concerns the counterclaim.

Maxis Group of Companies now allege the defendants of passing off or assist in passing off the defendants’ business as and for that of the Maxis Group of Companies. Some of the instances are as follows:

  1. Saw and Yeoh had acquired Maxis Sdn Bhd in 2001, a then inactive company with the intention to revive it.
  2. They have incorporated Maxis Capital Sdn Bhd in 2001 by using the name Maxis as the lead name.
  3. They have caused a name change in Maxis Biotech Sdn Bhd which previously does not carry the word Maxis.
  4. Maxis Sdn Bhd, Maxis Capital Sdn Bhd and Maxis Biotech Sdn Bhd took premises in Menara Maxis that housed most of the offices of the Maxis Group of Companies.
  5. Printing letterheads and distributing name cards which carry the name Maxis in similar fashion and style as the brand name used by Maxis Group of Companies.

Defendant’s defence:

The Defendants deny that they had in any way “passing off” business as being part of Maxis Group of Companies because Maxis Sdn Bhd existed before Maxis Group of Companies did. They also stressed the fact that although they had at one point rented an office in Menara Maxis, they said it was due to the advantage of the location. Also, Maxis’s business activities are only confined to telecommunication; they have not acquired goodwill for goods or services outside this area.

*pause and drink a sip of coffee*

First things first, what is “passing off”?

Passing off occurs when someone uses very similar traits of a product/ service/ brand to create some false representation likely to induce a person to believe that the goods or services are those of another. Example:

 

It occurs when the following are satisfied in the landmark case of Reckitt & Colman Products Ltd v Borden Inc

  • The trader must establish goodwill or reputation attached to the goods/ services
  • The trader must demonstrate that the defendant made a misrepresentation
  • The trader must demonstrate that he will suffer damage by reason of erroneous belief

Each will be discussed below.

 

  1. Goodwill/ reputation

Unlike above, goodwill is easy to describe, difficult to define. It is the one thing which distinguishes an old established business from a new business at its first start. In other words, it is the business interest that the claimant is trying to protect.

Whether the claimant has the reputation (or goodwill) is a question of fact and entirely dependent on evidence showing that consumers recognize the sign as indicating origin. In simpler terms, it is the attractive force which brings in custom and that which distinguishes old business from a new. (Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd)

Adding up the above, a passing off action is a remedy for the invasion of the right of property, not in the mark, name or get-up improperly used, but in the business or goodwill in which it has been used.

An argument tender by the defendant is that passing over should only exist in the line of business or services that the applicant was in. They are of the view that the applicants’ business activities are only confined to telecommunication; they have not acquired goodwill for goods or services outside this area, namely for their company Maxis Capital Sdn Bhd and Maxis Biotech Sdn Bhd.

However, case law has suggested that this is insufficient to protect the goodwill of businessman from appropriation and misuse by another businessman. It may very well extend to any business that may mislead anyone into thinking that the products or services were the goods and services of the plaintiff. This is especially where a business is a conglomerate.

Example: AirAsia also owns Tunehotel and Tunetalk. If TuneTaxi pops up, I would think 70% Malaysians (modest estimation) would think it relates to Tune Group.

This is the case EVEN IF the defendant promises that he would never enter into the same business line as the applicant. Where there is an invasion or likelihood of invasion into the rights of the property of the applicants, the cause of action is a well-founded one. Maxis has expended huge sums of money to promote and market the name ‘Maxis’ aggressively throughout this country in the field of telecommunication, which they are primarily engaged in but also to other fields of business the Group owns. It doesn’t take a lot for one to think it’s unfair that someone else should usurp the benefit when another has spent millions to develop the name.

For now, Maxis Group 1 – 0 Maxis Sdn Bhd

*Pause and eats a chocolate*

2. Misrepresentation

What is funnier than having a Maxis-named non-Maxis company breathing existence in Maxis Tower. *facepalm*

The D’s argument was that they mistook that this building is within the Multimedia Super Corridor and since such setup taking up premises there would be advantageous when it wasn’t. They even declared that they would not move into this building and reiterated that they will never set up an office there, even if they are successful in this suit.

(still, the thought of it is already baffling)

I don’t think anyone would be convinced and the judge was certainly not amused. The judge considered them to have an intention to deceive and where Kuala Lumpur being so vast and wide, and filled with available office space could have easily accommodated the defendants’ companies, they had to choose Menara Maxis. The judge notes the similarity of the name made the slip-up of by the building management into allowing them to penetrate this fortress of the Maxis Group of Companies.

On the point of Maxis using the word “Maxis”. Maxis Sdn Bhd was incorporated before Maxis Group of Companies used the name “Maxis” and as such, they had every right to use the name. They stressed that at no time they had represented themselves to be part of Maxis Group of Companies.

(Perhaps Maxis Group of Companies knew this because all the companies under the parent are named Maxis XXX Sdn Bhd)

They claimed that and yet the judge found the use of the shape, style, and character of the word ‘Maxis’ printed on these documents are almost identical to that trade name which the applicants are promoting. (I couldn’t find the exact logo of Maxis Sdn Bhd which is regrettable) Similar to the above, there are about 69 fonts in Microsoft word so why choose the one that Maxis uses and in such a form and fashion so similar to that of the applicants’ unless they did it with some sinister intentions. The crucial issue is what effect the false statement has on the minds of the claimant’s customer and make them think that this was ‘something for which the (claimant) was responsible’

On the contrary, if the consumer is not confused and does not mistaken, then there can be no misrepresentation and no liability for passing off. Looking at the above, it is difficult for this court to accept the defendants’ explanation that their actions as being reasonable and are devoid of any intention to deceive and mislead.

Maxis Group of Companies 2 – 0 Maxis Sdn Bhd

3. Likelihood of damages suffered by reason of erroneous belief

The applicant must now show that they have suffered or likely to suffer losses and must affect the goodwill of the company. The test is that the applicants need not prove “actual damage in order to succeed. Likelihood of damage is sufficient. One of the ways in which a business reputation may be injured is by the appropriation of that reputation or part of it by a third party. Such appropriation may be brought about by the adoption of a name which suggests that the person or company adopting it is in some way connected or associated with the person or company enjoying the reputation.

It is quite obvious that Maxis Group of Companies would be adversely affected by the use of the word “Maxis” by another. If any undertakings that go by the name “Maxis” were to conduct illegal dealings or be bankrupt, the general public would understand it to be somehow related to the applicant instead of being distinct.

Owing to the above reasons, Maxis Group of Companies obtained interim injunction and Maxis Sdn Bhd was precluded from conducting business using the word ‘Maxis’. An intriguing point to add is according to Bloomberg, as of January 18, 2006, Maxis Sdn Bhd operates as a subsidiary of Maxis Communications Bhd.

Comment:

Whilst reading the facts of the case and the judgment therein, I can’t help but think about the prominent staircase shot widely shared on Instagram in APW Bangsar. Before going to APW Bangsar myself, I’ve always thought that the staircase was within the property/ vicinity of BT. Little did I know when I went there, it was directly below a sushi burrito shop and NOT on the same structure as where BT was located and most commonly tagged on Instagram. The sushi burrito shop owns the stairs (or at least the landlord I presume) and not BT but since the latter popularise it so hypothetically, does it justify that BT should be allowed to call it their stairs?

I do acknowledge that Maxis Sdn Bhd had overstepped the line and became from dormant to active very shortly after Maxis was listed to be very suspicious indeed. However, where does one draw the line where a product came first but some other undertaking popularised it? The staircase (I would consider) was part of the structure of the sushi burrito shop but Breakfast Thieves was the one who popularised it so does that mean the staircase belonged to Breakfast Thieves instead?

Maxis Sdn Bhd was registered prior to Maxis Group of Companies changing their name so was it right that Maxis Sdn Bhd should be allowed to continue trading in its name? Even the judge acknowledged that this legal issue is debatable. The basic rule is that reputation and goodwill should be exclusive to the claimant but sometimes there may be a sharing of reputation such as where two companies, by coincidence, acquire a separate reputation and neither can stop the other from using the name. An example is Anheuser-Busch Inc v Budejovicky Budvar NP where BUDWEISER was the trademark of both and the net outcome was that they were forced to co-exist, neither having a right of priority over the other.

Personally, I do think it’s unfair if, by market power, one were to be allowed to dominate (and steal) another’s business because they have better resources for marketing and investing. Perhaps the truth is, the bigger company knew about the smaller company but figured it could overpower it (not suggesting this was the case in Maxis). However, market power also isn’t everything. In 2009, McCurry (short for Malaysia Chicken Curry) won it’s lawsuit against McDonald when the latter sought an injunction to prevent the former from using the prefix “Mc” in its business. The Court of Appeal stated that there were several distinguishable grounds such as the business logo was noticeably different, none of McCurry’s menu had used the prefix “Mc” and the menu was very different in that it only sold Indian food. What amounts to a “passing off” seems to me to vary quite acutely depending on the parties in the case and many other factors.

In the end, it’s up to the courts to weigh on where the balance of convenience lies and the degree of damage that would cause one an undertaking should the application be refused based on reasonable judicial principles.

Resources:

  1. Compagnie Generale Des Eaux v Compagnie Generale Des Eaux Sdn Bhd
  2. Bulmer v Bollinger
  3. Commissioners of Inland Revenue v Muller and Co Margarine
  4. https://asia.nikkei.com/Company/00C8GY-E
  5. Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd
  6. Anheuser-Busch Inc v Budejovicky Budvar NP
  7. Reckitt & Colman Products Ltd v Borden Inc
  8. Helen E Norman, Intellectual Property Law