A critical factor for investment managers to consider, when weighing the merits of investment abroad in a foreign market, apart from returns, is the integrity of the state’s legal system and the rule of law.

The structure of courts, the legal system, independence of the judiciary, uniformity, clarity and consistency in application of laws of are fundamental factors weighed into any investment decision. They are part of the calculus of risk assessment. International ratings agencies consider these to be paramount to their assessment of sovereign risk.

In 2004 the High Court of Australia in a 6-1 decision radically altered the well settled position of ordinary shareholder’s (and preference shareholders) rights in priority to a return on capital in the winding up of a company. That decision was delivered in the Sons of Gwalia case.  It serves as an example of the vigilance of a mature legal system concerned with protecting rights and preserving the rule of law.

The decision in Sons of Gwalia although watered down since by legislation shook the investment world. It had initially when first delivered created the perception that the decision would put at risk hundreds of billions of dollars’ of investments in Australia.

Inspite of that decision there was no cause to a flight of capital out of Australia. The overall response to that decision is a testament to the strength of Australia’s international reputation for upholding the rule of law. The same can be said of most of Europe, North America , Japan and Singapore.


In stark contrast to their more efficient and law abiding counterparts in the commonwealth, the courts in Malaysia, a common law legal system, acting disharmoniously with each other have become a growing source of concern to foreign investors and investment managers. 

A spate of unpredictable and inconsistent judicial decisions of late and underwritten by questionable jurisprudence is causing considerable disquiet within the investment community at large.

Up until the mid 1990’s Malaysia enjoyed a stoic reputation as a fair and safe destination for foreign investment. It cut red tape, relaxed cumbersome government regulations and encouraged aggressive, some say adventurous deal making in the private sector in furtherance of economic development and trade. The policy worked. The executive branch of government exercised control over the other two branches especially the judiciary. Confidence in the economy and courts then was at an all time high.


Today Malaysia’s courts appear to be indulging in playing favorites.  Judges openly display their bias. Preference for one party’ cause over another is prevalent as a practice shielded by the doctrine of judicial independence.  The powers of courts are sold to the highest bidder at the expense of legal rights of others. The practice appears to be on the rise.  It is a practice that demonstrates a contemptuous disregard for the law and the rule of law.

Aiding and abetting the practice is a maverick, mercenary and dangerously unaccountable legal profession. The Malaysian Bar as a group of lawyers answer to no one except their own self governed self serving professional body. At its core are representatives of the larger and more powerful firms whose interests at the leadership of the Bar appear to  reflect that self serving mentality.

The make up of office bearers and the leadership of the Malaysian Bar and to its various committees appear to be the result of the practice of stacking at elections and a reflection of self serving interests of the businesses of its leadership and their respective firms.


Malaysia’s reputation today as an investment destination looks grim. It has perilously positioned itself amongst the less credible nations in the region at a time of economic uncertainty. A nascent situation within Malaysia’s courts behoves immediate action by government. The call is out to rein in its errant courts, ’rogue’ judges and the Taipans whose influence is indelibly stamped on the opprobrium of judicial conduct through decisions and judgments handed down by their courts.

The danger in Malaysia’s courts is perhaps best exemplified by a contest between two Malaysian companies currently before its courts. The outcome of proceedings in this particular matter has potentially far reaching consequences for the country as an investment destination and for a range of stakeholders in the economy. Not least amongst these are the shareholder community, foreign investors, the law and the Malaysian economy.  


The danger non complying Malaysian companies face from foreign investors is very real. Where a Malaysian company breaches its disclosure obligations under Malaysian law and where that breach is a breach of  a corresponding obligation in legislation of a foreign jurisdiction from where investors on their share register originate, then that breach may be actionable abroad.

It may be actionable either directly by shareholders or through the funds manager controlling the foreign investment in the non compliant company. Alternatively the breach may be actionable directly through shareholder action originating abroad or through local legal representatives in the domicile of the company.

Any action through the courts especially in a more open and compliant regime as Britain or Australia will have dire effects on the non compliant company (in this case either or both Sunway and Metroplex).

Non compliance with disclosure requirements especially by a Malaysian company that has Australian investors, could under Australian laws render the company liable to sanctions by Australia’s corporate watchdog and legal action through its courts.

There is also the very real risk of consequential losses arising out of negligence by directors, bankers and advisors of a non compliant company. All of these situations are actionable if non compliance and negligence can be proved. In the present case it is not difficult to prove and apportion liability to both parties to this contest.

The greater risk to a non compliant company in these circumstances is the prospect of a run on its shares. A run occurs when a mass sell down of  a company’s shares occur. With it comes all the attendant consequences of a run, including suspension from listing and the ultimate penalty of insolvency.


Over the law in Malaysia now hangs that long dark shadow of corruption believed to be fueled by the unwritten doctrine of financial sectarianism. If it is not real, the perception alone  in this regard, especially by locals and their media supported by revelations of legal incompetence is sufficient to support that perception.

Contextually corruption is not only the giving or taking of bribes. It is also the less recognized symptom of incompetence. It is what happens when a virus infects a computer. The net effect is the same. The system is corrupted and unable to function effectively.

Sadly little care or cognizance of this rot in the courts is being recognized by the executive.


The Sunway Group of companies through the Sunway Real Estate Investment Trust (REIT) and its trustee acquired a property comprising a hotel, shopping mall and an office tower (Property) in Kuala Lumpur. The acquisition was made at a mortgagees auction held under the supervision of the High Court of Malaysia.

The Property had previously been owned by Metroplex Bhd (Metroplex) a company which defaulted on loans it had obtained from a consortium of local banks secured against the Property. It was a mortgagees sale.


In these proceedings, the mortgagee’s right at law to enter into possession of the Property for default is not controverted by Metroplex.  A declaration issued by the High Court that Sunway REIT is the owner on title of the Property is not controversial either. Controversial and critical is the issue that at law, Metroplex’s right, title and interest in the Property had been extinguished by the mortgagee sale.

Sale of the Property conducted by auction under the auspices of the High Court was settled earlier this year (2011).The bona fide purchaser for value in this case being Sunway REIT. Save for an application by two individuals who unsuccessfully challenged the validity of the sale and a registered caveat on the title of the hotel forming part of the Property, all right, title and interest passed onto Sunway REIT on registration of the title.

The question of whether a caveatable interest in fact existed in favour of the two individuals is a separate issue and we will not deal with it presently.


Barring any of the known exceptions to indefeasibility of title being raised in their (Metroplex’s) pleadings against Sunway REIT such as fraud or statutory acquisition, Sunway REIT for all intents and purposes had lawfully acquired an indefeasible title to the Property giving it full right to entry, possession and enjoyment of that Property. Well at least in theory that should have been the case. But it is not so in Malaysia  it seems.  

The Property was not sold with vacant possession. And therein lies some of the embarrassment Sunway’s lawyers ought to be reeling under.


Metroplex following the Sunway REIT acquisition of the Property went to the Court of Appeals in Malaysia in an effort to invalidate and overturn the mortgagees sale to Sunway REIT.

There was no valid cause of action pleaded in Metroplex’s appeal to the Court of Appeals and nor was there any known provision of any Act capable of denying Sunway REIT the right  to uninterrupted immediate, occupation, enjoyment and possession of  the Property it seemed. Wrong again it would appear.

The Property was not sold with vacant possession but with tenancies and tenants in occupation. The right of the lessee has not been extinguished with the sale by the High Court. Arises the question, what was Sunway REIT purchasing for hundreds of millions of dollars with its shareholders money?

The record shows that Sunway REIT has been injuncted (our words) by the Court of Appeal from entering into occupation of the Property on an application to the Court of Appeal by Metroplex pleading amongst other things a threat to their ‘rights’ in the Property indicating a plausible situation giving right to a claim in damages.  Those rights arguably are those of the operator of the Hotel which is a part of the Property in question.

Citing as its reason for the injunction designed to deny Sunway REIT the rights of an owner occupier, is the claim that Metroplex is entitled to remain in the business of managing the hotel, a right it enjoyed till the Dewan Bandarya (city hall) undermined that right albeit without first giving notice to the hotel operators providing the hotel operator the right to be heard and to respond accordingly.

The injunction by Metroplex it must be assumed was aimed at preserving the status quo for the business that operates the Hotel in the Property as a going concern. It could not have been designed to preserve Metroplex’s rights as the defaulting mortgagor.

It is alleged that Metroplex’s application for injunctive relief from the Court of Appeal was grounded on ‘creative’ assumptions and not on sound legal principles.  That being said, what provisions for transition from old to new owners had Sunway REIT made in their plans when acquiring such a large asset?


Critically Metroplex may be attempting (a point it has not pleaded) to exercise its right to redemption of its mortgage, as mortgagor. It is a right that Metroplex may still be entitled to at law and in equity though it may have not been properly advised of that right. What legal authority Metroplex now relies on in support of its case is opaque. For a company as big as Metroplex is one wonders why its lawyers never pursued its rights to redeem its mortgage instead of drawing the company down a vortex of unproductive expensive litigation.

Damaging to the reputation of the Court of Appeal is the absence of any known power in the Court of Appeal to grant injunctive relief to a party that has neither standing nor right to claim such relief against the rightful owners of the Property Sunway REIT. Metroplex’s pleadings in its appeal against the decision of the High Court appear devoid of any substantive material  that could justify an appeal to the Court of Appeal against the decision of the High Court of Malaysia.

If the application by Metroplex to the Court of Appeal was purely an exercise to obtain an injunction against Sunway REIT’s occupation and possession of the Property, then the Court of Appeal appears to have acted outside its jurisdiction. The Court of Appeal (save in some exceptional circumstances not applicable here) is not a court cloaked with original jurisdiction in such matters.


When Sunway REIT as new owners of the Property sought to exercise its rights to possession and occupation of the Property by its staff, they were met with physical resistance from management and the staff of Metroplex still in occupation of the Property (the Hotel). The Metroplex occupation of the Property is in the view of legal experts both unlawful and in clear breach of the law. That’s apparently the view held by Malaysian experts on the matter and the law.

Unless the terms of the auction were such that the property was being sold on an as is basis (with the rights of a lessee in occupation), the Property would have been handed over to Sunway REIT as new owner with vacant possession.

If it were sold (as evidence appears to suggest) with a going concern qualification (lessee in occupation of  the Property) on an as is basis, then the rights of the business (lessee) that run the Hotel would continue to be protected and continue to survive even after that sale was concluded. The lease of the Hotel continues as a right in the property to the lessee unless extinguished by law or terminated lawfully by other means.

There appears to be no evidence to support the view that Sunway REIT had any transitional arrangements in place to take over the running of the Hotel, to compensate the existing managers of the Hotel or to renew or terminate their leases and other business arrangements giving the tenants the rights to continue to occupy the premises after sale.

In order to reinforce its position at law, Sunway REIT obtained a High Court declaration that they were the lawful owners of the Property. Not quite an effective legal position it would appear. At least not according to the usurpations of the rights of Sunway REIT by the Court of Appeal. Or is that the true position?

On an application by the former owner Metroplex, the defaulting mortgagor, the Court of Appeal appears to have cloaked itself with extra constitutional powers giving it original jurisdiction in addition to the power to hear appeals from the lower courts. Metroplex sought and the Court of Appeal did entertain their application for an injunction as if it were a court with original jurisdiction (which it does not have) to injunct Sunway REIT from exercising its lawful right to possession and the corollary right to occupation of its Property.  The reasons for such a radical decision are not clear.


Normally and as is prescribed by law and the constitution, the jurisdiction the Court of Appeal would be limited to the Court hearing appeals from decisions of lower courts (in this instance the High Court).

Their findings or decision in appeal will then  be normally be as follows:

a)      To overturn the decision of the lower court

b)      Remit to the lower court the matter on a successful appeal  for either a correcting their erroneous findings, decisions or judgements: or

c)       Requiring the lower court to substitute their original finding, decisions or judgement; or

d)      To amend or to vary offending parts of their original findings, decisions or judgement consistent with the decisions of the Court of Appeals.

This error of law and breach of jurisdiction and practice by the Court of Appeal is a dangerous development. Unfortunately this decision by the Court of Appeal is not without precedent in Malaysia.

Further one must draw the inference that the Court of Appeal acting outside of its jurisdiction is acting mala fides and in clear breach of well established procedure and principles of the civil law.

Operation of the courts and the competence of judicial officers are a major defect in Malaysia’s legal system. Judgements are often delivered in a desultory way and in language that is best described as a form of legal solecism.


It appears from the decision of the Court of Appeal that the long established principles of rights in property now codified in statute has little if not no value in practice in Malaysia. If it does exist then it does so in theory only and its application in practice is not based on legal principles but on unseen imperatives which don’t lend itself to transparency and good corporate or legal governance.

Ironically in this particular case, the license to operate the Hotel within the Property is no longer valid in the hands of the previous owner who is able to exercise all rights of the owner but without good title. City Hall (or Dewan Bandaraya) the issuing authority for Hotel operator’s licenses has not moved against the illegal operator of the Hotel in the Property, the previous owner without title.

In acting arbitrarily City hall or Dewan Bandaraya appears to have not informed itself sufficiently of the full extent of the transaction giving rise to the ownership transition and the law that governs such transaction between Sunway REIT as new owner of the Property and the tenants that remain lawfully in the Property. By revoking or terminating the hotel license they have acted to the detriment of the hotel operators without lawful authority. That of itself raises very serious questions about the security of tenure hotel operators have in a place like Malaysia.


It is tempting to view the agony of these corporate Titans with a degree of amusement and to treat it as a spectator sport.  They are rich, powerful and deserve to pay a price for their wanton ignorance and negligence. But is this really the point?  Is this a matter that can or ought to be ignored when the abuse of the legal process is used to frustrate the enforcement of lawful at the behest of vexatious litigants.

If such legal incompetence is allowed to flourish in courts unchecked, then the following question must be raised:

“in a climate of dwindling fortunes, corporate skulduggery and investment scams, are our courts, governments and judges,  protectors  of investors rights or are they a part of the problem?”

  1. k s wong says:

    What happens if the Asset Manager has taken possession of the property after the Court of Appeal ruled in favoured of the High Court’s decision, but subsequently there’s a “stay of execution” by the Federal Court? What does this means?


  2. Do you mean the REIT as asset manager and owner? If by “the CA has ruled in favour of the HC” you mean the CA has upheld the HC’s position in this matter (HC declaration) then a stay of execution is granted (stay of execution of what? entry into the property and its business???).

    The problem for Sunway REIT lies appears to lie in its failure to deal with the on going business that is not extinguished in the shopping complex and the hotels at least.

    The leases do not appear to have been extinguished and Sunway REIT took their purchase of the property with notice. One must assume the lease of the Hotel by a large operator would have been registered.

    To obtain a stay of execution (who do you suggest would be applying for a stay of execution? and execution of what?). If it is a stay of the registration of title I do not think on the facts available on record that would be possible unless they can prove fraud whcih it appears is what Metroplex is attempting to allege in a round about fashion.


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