Litigation and Dispute Resolution

In our previous article, we discussed the initiatives implemented by the Government to ease the process of discharge of bankrupts. This included the conditions and procedures for discharging bankrupts with small-scale debts, as well as proposed amendments to the Insolvency Act 1967aimed at enhancing the provisions for discharge of bankrupt and the administration of a bankrupt’s estate. 

The recent enactment of the Insolvency (Amendment) Act 2023 has now come into effect, implementing the proposed amendments.  

Below, we summarize the key amendments to Malaysian insolvency law.

Additional categories of bankrupt individuals eligible for discharge

Prior to the amendment, the discharge of a bankrupt under section 33A was at the discretion of the Director General of Insolvency (DGI), with a minimum waiting period of five years from the bankruptcy order and subject to section 33B, which allowed creditors to object to the discharge. However, the recent amendment expands section 33B(2A) of the Insolvency Act to include two additional categories where creditors are not permitted to object to the discharge, namely:

1. a bankrupt who is incapable of managing himself and his affairs due to any mental disorder, as certified by a psychiatrist from any government hospital;
2. a bankrupt aged seventy years and above and in the opinion of the DGI, is incapable of contributing to the administration of his estate.

Streamlined discharge process & enhanced powers for the DGI

The Amendment Act revises section 33C governing the automatic discharge of bankrupts. Previously, a bankrupt will be automatically discharged after three years if they fulfilled specific criteria, such as reaching the targeted contribution towards their provable debt and complying with obligations related to rendering an account of money and property.

Post-amendment, the financial capability of the bankrupt is taken into consideration, and the conditions for automatic discharge under section 33C are eased. The requirement to achieve the targeted contribution towards the provable debt is replaced with the obligation to pay a sum determined by the DGI for estate administration purposes, provided that the bankrupt has fulfilled his or her obligations under the Act.

In this regard, the Amendment Act introduces the suspension of automatic discharge for up to two years if the bankrupt fails to fulfil his or her obligations. The DGI is granted the power to suspend automatic discharge for a maximum of two years if the debtor does not meet his or her obligations. Additionally, the DGI may request further information regarding the debtor's income, expected income, and properties. The suspension, as per the newly inserted section 33C(1)(b), takes effect when the DGI serves a notice to creditors who filed a proof of debt within six months before the original three-year mark.

Furthermore, in line with the ‘second chance policy’, the amendments to sections 33C and 33B(2A) are applied retrospectively to cover individuals who had been declared bankrupt before the passing of this Amendment Act.

Adoption of remote communication technology and electronic communications

To align with the judiciary's transition to remote hearings, and in line with the insertion of section 15A of Court of Judicature Act 1964, the Act has been amended to accommodate remote communication technology in the administration of bankruptcy in Malaysia.

Communication pertaining to insolvency matters, including service of notices under the amended section 130 of the Insolvency Act, 1967, may now be carried out by electronic means, where consent has been obtained to do so.

It is also pertinent to note that, prior to the amendment, the Act only allowed the DGI to hold a meeting at such a place which the DGI considers to be convenient for the majority of the creditors.  Now, meetings of creditors under amended Schedule A of the Insolvency Act may be conducted through remote communication technology, among others, video link, video conferences, or any other electronic means of communication.

Dispensation of the mandatory requirement of holding the first meeting of creditors

Previously, section 15 of the Act made it mandatory for the first meeting of creditors to be held as soon as may be after a bankruptcy order is made. The meeting is confined to consider proposals for the composition or arrangement and the mode of dealing with the bankrupt’s property.

Post-amendment, the mandatory nature of the first meeting of creditors has been replaced with a discretionary power of the DGI. Nonetheless, the purpose of the section is maintained with the additional scope of any other purpose as prescribed by the Minister. The Amendment Act also replaced all references to the “first meeting of creditors” in the Insolvency Act 1967 with “meeting of creditors”.

Thus, pursuant to the Amendment Act, a meeting of creditors is no longer mandatory and will only take place upon request or when deemed necessary.

Other amendments

In addition to the above, the Amendment Act also introduces changes related to summary administration in cases where the debt is small. To provide greater flexibility in bankruptcy administration, certain monetary amounts specified in the Insolvency Act 1967 have been replaced with amounts to be prescribed by the Minister. This allows for adjustments based on prevailing economic conditions and circumstances without the need for legislative amendments.

For more information, please refer to the Insolvency (Amendment) Act 2023 and Insolvency (Amendment) Rules 2023.

Conclusion

The newly enacted amendments establish a more effective and inclusive bankruptcy administration system, aligning with the government's commitment to help bankrupt individuals secure a fresh financial start. While many are still grappling with their prior financial missteps, the enforcement of these amendments brings some relief. It is hoped that the government’s initiative to fostering bankruptcy administration will ultimately contribute to the nation’s economic development.

If you have any questions or require any additional information, please contact Khoo Kay Ping, Chuah Jo-Shua, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Chong Siau Fong, a Senior Associate at Zaid Ibrahim & Co (in association with KPMG Law).

This alert is for general information only and is not a substitute for legal advice.

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With the passing of a property owner, a grant of representation is required in order to deal with the property. If the property owner is a foreigner and a grant of representation has been obtained in their country of domicile, a letter of representation would first need to be recognised by the Malaysian courts before it can be enforced. This process is known as resealing letters of representation. This article will delve into the process of resealing letters of representation in Malaysia.

The resealing process in Malaysia

The law relating to resealing grant of representation can be found in Part IV of the Probate and Administration Act 1959. Section 52 allows the Malaysian High Courts to reseal both the grant of probate and the letter of administration granted by the court of probate of any Commonwealth country. This means that if the deceased’s family has already obtained a letter of representation in the country of domicile and wishes to deal with the deceased’s assets in Malaysia, they merely need to reseal the representation letter. They do not need to go through the process of applying for a grant of probate or administration in Malaysia, provided that they have already obtained a grant in a Commonwealth country.

It is important to note that in a resealing application the power of the Malaysian courts to reseal a letter of representation is discretionary. The High Court may not allow such application if it appears that the deceased was not, at the time of his death, domiciled within the jurisdiction of the court from which the grant is issued.^[1] In determining whether such seal should be affixed on a grant of probate or letter of administration, the court may require any evidence it thinks fit to determine the domicile of the deceased person.^[2]

In an application to reseal a letter of representation, while it may be common for convenience’s sake to sign a power of attorney to allow the appointed solicitors to deal with the necessary procedures, the petition for the resealing application must be filed in the executor’s name notwithstanding the existence of any power of attorney.^[3] The solicitors appointed may affirm the affidavit verifying the petition on behalf of the executor, but the petitioner must still be the executor.^[4]

In relation to the rights and obligations of the executor, the representative will only acquire the rights and obligations of a lawful executor or administrator on the date when the foreign grant of representation is resealed by the court, not from the date of the original grant.^[5] This is important to determine when the representative shall have the right to institute a suit on behalf of the estate of the deceased.^[6]

Another matter to note is that where a grant of letter of administration is concerned, similar to a fresh application for letter of administration, a security by way of bond for the administration of the estates must be placed with the courts before the court could affix the seal on such letter of administration.^[7]

Letter of representation from non-Commonwealth countries

It is also prudent to note that the Malaysian law does not recognise letters of representation obtained from a non-Commonwealth country. While there are no laws explicitly stating this, it can be inferred from the Probate and Administration Act 1959 which states that the Malaysian High Court will recognise letters of representation made in Commonwealth countries and therefore will reseal them.^[8]

It is more of a general principle as the rationale behind this is due to the reciprocal arrangement with other Commonwealth countries to recognise and enforce their grants of probates. This can also be seen in the UK by way of the Colonial Probates Act Application Order 1965 which lists all Commonwealth countries that are allowed to reseal their grants of probates in the UK.^[9]

In order to administer the deceased’s properties in Malaysia, the representative must apply for a fresh grant of probate or letter of administration in Malaysia. This application is more time consuming than resealing the letter of representation.^[10] However, in such a situation where the letter of representation was obtained in a non-Commonwealth country, a fresh grant or letter of representation will be the only option.

Without a valid grant of probate or letter of administration, it would be legally impossible to deal with any of the deceased’s assets in Malaysia. All relevant authorities require a letter of representation recognized by the Malaysian Court in order to allow a purported representative to deal with the property.

Conclusion

It can be said when resealing letters of representation, there are two processes to follow depending on where the grant of probate and letter of administration were granted. If it were granted by probate courts in Commonwealth countries, then under the Probate and Administration Act 1959, the High Courts have the discretion to reseal the grant of probate and letter of administration. For non-Commonwealth countries, a fresh grant of probate or letter of administration in Malaysia would be needed in order to deal with the deceased’s assets in Malaysia.

If you have any questions or require any additional information, please contact Jeyakuhan Jeyasingam or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law). This article was prepared with the assistance of Nurul Izzah Isa, a Trainee Associate in Zaid Ibrahim & Co.

­This article is for general information only and is not a substitute for legal advice.

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[1] Section 52(a) Probate and Administration Act 1959.

[2] Section 52(b) Probate and Administration Act 1959.

[3] Re Azhar Azizan Harun (As the Absolute Representative of Eleanor Dulcie Robinson) (1998) 7 MLJ 89.

[4] Ibid.

[5] Chung Kok Yeang v Public Prosecutor (1941) 1 MLJ 163.

[6] Issar Singh Son of Bhola Singh & Anor v Samund Singh Son of Mayiah (1941) 1 MLJ 28.

[7] Section 35 Probate and Administration Act 1959.

[8] Section 52 Probate and Administration Act 1959.

[9] Schedule 1 Colonial Probates Act Application Order 1965

[10] Application to reseal a letter of representation takes approximately 2-3 months, while an application for a fresh grant would take an estimated period of 4-6 months.

In recent years, the Malaysian government has taken various initiatives to revamp insolvency laws with the goal of assisting the public to cope with financial difficulties arising from the Covid-19 pandemic.

With the amendment to the Insolvency Act in 2020, the bankruptcy threshold in Malaysia is currently set at RM100,000, which was raised from the original RM50,000. This was the second increase of the bankruptcy threshold within the span of a few years, with the previous increase from RM30,000 to RM50,000 in 2017.

As it stands today, a creditor may not file for bankruptcy action against a debtor if the amount of the debt is less than RM100,000.

Automatic and faster discharge of bankruptcy?

Bankruptcy is a serious matter and has grave implications on the bankrupt individual. A discharge, in essence, is a reset button, releasing the bankrupt from his debts to allow him to start afresh.

During the Budget 2023 Presentation, Prime Minister Datuk Seri Anwar Ibrahim announced that the government is looking to further revamp the Insolvency Act 1967 to ensure that individuals who are bankrupt could be discharged more quickly.

Among the immediate initiatives to be implemented would be individuals, whose bankruptcy cases are of a debt of less than RM50,000 (small-scale debt), could be discharged by the Director General of Insolvency’s Certificate with effect from 1 March 2023.

The Guidelines, issued by the Malaysian Department of Insolvency, for the discharge of bankruptcy with small-scale debts are summarised in the table below:

For more detailed information, please refer to the Malaysia Department of Insolvency.  

The proposed amendments to the Insolvency Act 1967, which is expected to be tabled in the next parliamentary sitting in May-June 2023, if passed, would further ease the process of discharge of bankrupts. Among the amendments proposed are:

1. the setting of time limits for the filing of Proof of Debt Forms by Creditors (section 42 and Schedule C of Insolvency Act 1967) to avoid the issue of late filing which could make it difficult to discharge bankrupt individuals;
2. to make improvements to the automatic discharge provisions under section 33C of Insolvency Act 1967 so that bankrupt individuals can be discharged from bankruptcy in a shorter period or automatically;
3. to make improvements to section 42 and Schedule C of Insolvency Act 1967 by abolishing the obligation to hold the first meeting of creditors so that the bankruptcy administration can continue immediately; and
4. to add category of cases that can be discharged using the Director General of Insolvency’s Certificate, for example, bankrupt individuals aged 70 and above, for bankrupt individuals who are incapacitated because they have been diagnosed as mentally ill under the Mental Health Act 2001.

If you have any questions or require any additional information, please contact Khoo Kay Ping, Chuah Jo-Shua, Chong Siau Fong, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.

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In general, a homebuyer who wishes to file a claim with the Homebuyer Claims Tribunal (“the Tribunal”) can only do so if the award sought does not exceed RM50,000. This is prescribed by section 16M of the Housing Development (Control and Licensing) Act 1966 (“HDA 1966”). Further, section 16Q provides that the claim in the same matter cannot be split for the purpose of meeting the monetary threshold to fall under the jurisdiction of the HDA 1966 and the Tribunal.

In the case of Remeggious Krishnan v SKS Southern Sdn Bhd [2023] 4 CLJ 36, the Federal Court held that the Tribunal is allowed to hear split claims in respect of the same property. The monetary limit of RM50,000 applies for each claim and not a combination of the split claims.

Background facts

In this case, the purchaser bought an apartment unit (“Property”) in a residential project developed by SKS Southern Sdn Bhd. Under the sale and purchase agreement (“SPA”) entered into by both parties, the developer agreed to deliver vacant possession of the Property to the purchaser when the water and electricity supplies are ready for connection to the unit.  However, the Property was delivered with no electricity connection to the Property.

The purchaser filed two separate claims with the Tribunal against the developer:

1. a non-technical claim, grounded on the breach of manner of delivery of the Property with the claim amounting to RM49,832; and
2. a technical claim, grounded on the failure of the respondent to provide adequate ceiling height and protruding beams and pillars with the claim amounting to RM40,000.

The Tribunal only heard the non-technical claim and awarded a sum of RM16,452.05 and costs of RM400 in favour of the purchaser (“award”) for the delay in connection of electricity.

Aggrieved with the award, the developer applied for leave to apply for a judicial review against the Tribunal and the purchaser. In the application for judicial review, the developer sought to declare the impugned decision as invalid, null and void and of no effect and that an order of certiorari be issued to quash the award.

The High Court held that the split claims were for different matters and dismissed the application. The developer appealed to the Court of Appeal, which held that there is no prohibition against filing split claims, provided that the total amount is within the jurisdiction of the Tribunal. Dissatisfied, the purchaser obtained leave to file an appeal with the Federal Court.

Questions of law

Two issues on questions of law were raised:

1. in view of sections 16Q and 16M of the had 1966, whether there was a jurisdiction for the Tribunal to hear two separate claims in respect of the same subject property, where the total amount of dispute of these two claims exceeded the monetary jurisdiction of RM50,000; and
2. whether the developer could be exempted to pay damages to the purchaser when the developer was in breach of the manner of delivery of vacant possession of the property as prescribed in Schedule H of the HDA 1966 so long as the developer was still within the time frame to deliver vacant possession of the property.

Decision by the Federal Court

Question 1: Held in the affirmative.

• The purchaser may file split claims in respect of different and distinct matters. The words “same matter” in section 16Q of the HDA 1966 could only mean the same issue or type of claim and not the same property. There were two different matters in the present case i.e., one was for technical matter and the other was for non-technical matter. As such, section 16Q of the HDA 1966 was inoperative.
• The monetary jurisdiction of the Tribunal of RM50,000 in section 16M of the HDA 1966 only applies to “a claim” and not “all the claims”. Thus, as long as each of the purchaser’s claims in respect of different and distinct matters did not exceed the monetary jurisdiction of the Tribunal, the purchaser was not in violation of section 16M of the HDA 1966.

Question 2: Held in the negative.

• The time frame for delivery of vacant possession was separate from the manner of delivery of vacant possession.
• The purchaser was entitled to claim compensatory damages for breach of clause 27 of the SPA which provides “ready for connection”. This means that the electrical points should be fully functional and supply is available for tapping into the property. The developer breached the manner of the delivery of vacant possession of the property since there was no electrical supply ready for connection at the time.

The Federal Court was of the view that the HDA was enacted as a piece of social legislation to protect house buyers. With that in mind, any term or provision in the statute must be interpreted in a way which ensures maximum protection for the house buyers against the developer. It was therefore imperative that section 16M and section 16Q of the HDA 1966 be interpreted in such a way as to provide protection of house buyers in keeping with the intention of Parliament.

The objective is to protect the aggrieved purchasers of their rights to resort to the Tribunal, which provides for an easier, cheaper and quicker avenue for aggrieved purchasers to claim damages or compensation from the housing developers.

Commentary

Based on this latest Federal Court’s decision especially with regards to the monetary jurisdiction, it is clear that a house buyer can now lodge with the Homebuyer Claims Tribunal separate claims for different matters in respect of the same property, as long as each claim does not exceed the Tribunal’s jurisdiction of RM50,000.

If you have any questions or require any additional information, please contact Chuah Jo-Shua or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law). This article was prepared with the assistance of Desmond Tang Soon Ze, a Trainee Associate at Zaid Ibrahim & Co (in association with KPMG Law).

This article is for general information only and is not a substitute for legal advice.

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Short-Term Accommodation (“STA”) or Short-Term Rental Accommodation (“STRA”) has become a popular option amongst tourists, offering affordably priced accommodation coupled with different choices of lodging. The benefits are also felt by the community, bringing about economic opportunities to the area.

Yet, STA is not without its downside. Public nuisance issues have arisen from the influx of tourists causing noise pollution, traffic congestion and other manners of disturbance. Residents of stratified buildings (i.e., apartments and condominiums) have also raised concerns regarding the adequacy of the safety and protection of their homes. They believe that their safety has been compromised by unregistered guests, giving rise to increased risk of break-ins, theft, drug abuse, sex crimes, illegal gambling, money laundering, vandalism as well as increased risk of COVID-19 transmission amongst the tenants.

To address these problems, the Penang State Government intends to issue guidelines to regulate STA through by-laws set down by the Joint Management Bodies (“JMB”) and Management Corporations (“MC”) of each of the stratified buildings (“Proposed Guidelines”).

Under the Proposed Guidelines, STA will be regulated in the following manner:

• owners or operators of stratified premises/units will be required to register with the local authorities after obtaining approval from the JMB/MC through a special resolution which is supported by no less than ¾ valid votes which are counted at the AGM or EGM or any special meetings under section 70(2) of the Strata Management Act 2013 (“SMA”);[1]
• the maximum annual rental period is 30 days (except for service apartments). The operational days for every rental transaction are limited to three days. Any additional days requires approval from the relevant JMB/MC.[2] This would mean that each rental transaction can only be for a period of three days subject to further approval from JMB/MC, but any such period shall be subject to the maximum annual cap of 30 days;
• body temperature scanning and MySejahtera verification is mandatory;[3]
• the number of tenants in one premise/unit is controlled according to the size of the particular premise – a maximum of two people are allowed for each room;[4] and
• the owner or operator of the premises/units is required to produce annual statements and a STA operation report to the JMB/MC. The JMB/MC will then submit the reports to the Commissioner of Buildings (COB) with the Yearly Meeting Report.[5]

Current interpretation of section 70(2) Strata Management Act 2013 – are the Proposed Guidelines in line with it?

Pursuant to section 70(2) of the SMA, MC may, by special resolution, make additional by-laws to regulate the control, management, administration, use and enjoyment of the subdivided building or land and the common property, which includes for safety and security measures.

Furthermore, the ability of MC to create by-laws restricting the engagement in short-term rentals have been clarified by the Federal Court in Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation [2020] 12 MLJ 16 (“Innab”). In Innab, the Federal Court held that management bodies may pass additional by-laws to restrict the use of parcels for short-term rentals. The Federal Court suggested that the defendants intended their premises to be utilised like a hotel or lodging facility, which amounted to the grant of a license instead of a tenancy.

Section 70(5) of the SMA states that no additional by-law shall be capable of operating:

1. to prohibit or restrict the transfer, lease or charge of, or any other dealing with any parcel of a subdivided building or land; and
2. to destroy or modify any easement expressly or impliedly created by or under the Strata Titles Act 1985 (“1985 Act”).

While “dealing” is not a defined term under the SMA, section 3 of the SMA provides that the SMA 2013 will need to be read with the 1985 Act as long as the provisions are not inconsistent. Within the 1985 Act, section 5 provides that it shall be read and construed as part of the National Land Code (“NLC”). Naturally, moving to section 5 of the NLC, dealing is defined as “any transaction with respect to alienated land effected under the powers conferred by Division IV, and any like transaction effected under the provisions of any previous land law, but does not include any caveat or prohibitory order”. Section 213 of the NLC (which is contained in Division IV), states that a “tenancy exempt from registration” is a dealing. In this case, the defendants argued that their transactions were “dealings” as short-term rental constitutes “tenancies exempt from registration” under section 213 of the NLC, and therefore the house rule prohibiting the use of parcels for short-term rentals was ultra vires. On this issue, the court held that when there is no proof of exclusive possession on the part of short-term renters and there is no evidence to suggest that occupancy of the renters is intended to be a tenancy, the said arrangements are nothing more than mere licenses and do not amount in law to ‘dealings’ within the ambit of section 70(5) of the SMA.

Guidelines passed by the JMB/MC will be considered as additional by-laws under section 70(2) of the SMA. The ratified by-laws will regulate the administration of the property on matters stated in section 70(2) of the SMA, to the extent that it is not inconsistent with the prescribed regulations under section 150 of the SMA (namely the Strata Management (Maintenance and Management) Regulations 2015) (“Strata Management Regulations”). They will be treated as additional conditions for purposes of regulation. The Strata Management Regulations covers the duties and powers of the JMB/MC, including regulations on matters such as inter-floor leakages, damage to party walls and requirements for the first annual general meeting held by the JMB/MC. Any by-laws passed under section 70(2) of the SMA must not be inconsistent with these regulations to be effective.

Premised on the above, the Proposed Guidelines are in line with the current interpretation of section 70(2) of the SMA.

Do the Proposed Guidelines have any force of law?

It should however be noted that without anything further, the Proposed Guidelines do not have any force of law. The issuance of the Proposed Guidelines alone is insufficient for the Penang State Government to compel MC to pass them.

The method and basis under which the Penang State Government intends to bring the Proposed Guidelines currently remains unclear. It therefore remains to be seen whether the Proposed Guidelines will have any legal force.

A considerable possibility of implementing the Proposed Guidelines would be through the implementation of a license requirement by the Penang State Government. Pursuant to section 102 of the Local Government Act 1976 (“LGA”), every local authority may from time to time make, amend and revoke by-laws for matters that are necessary or desirable for the maintenance of the health, safety and well-being of the inhabitants or for the good order and government of the local authority area and in particular for purposes specified under the section. Notably, under section 102(s) of the LGA, local authorities are allowed to make by-laws to control and supervise, by registration, licensing or otherwise, including in proper cases by prohibition, a trade, business or industry which is of an obnoxious nature or which could be a source of nuisance to the public or a class of the public.

As an illustration, the city council of Kuala Lumpur – Dewan Bandaraya Kuala Lumpur (Kuala Lumpur City Hall, “DBKL”), under its authority under section 102(s) of the LGA, implemented the Licensing of Trades, Businesses and Industries (Federal Territory of Kuala Lumpur) By-Laws 2016 (“2016 By-Laws”), which brought into effect the requirement of a business premises license. Pursuant to paragraph 3 of the 2016 By-Laws, any person who utilises a premise to carry out a business activity, as defined in the Schedule to the 2016 By-Laws, is required to obtain a business premise license from DBKL. Failure to comply attracts a fine not exceeding RM2,000 or imprisonment for a term not exceeding one year or both. If the offence continues, a fine not exceeding RM200 for each day during which the offence is continued after conviction.

As the operation of STA may be considered as an industry of its own, it is possible for the Penang State Government to pass a by-law requiring STA operators to register with the Penang State Government to operate as STA. The requirements for license registration could mirror the Proposed Guidelines, thereby bringing the Proposed Guidelines into effect.

Parallels to New South Wales STRA Code

In Australia, the New South Wales (“NSW”) government, in particular the NSW Fair Trading Department of Customer Service, has implemented the Code of Conduct for the Short-term Rental Accommodation Industry (“Code”). The Code lays down the rights and obligations of STRA industry participants and facilitates the oversight of the STRA industry as a whole.

The Code implements the requirement of a premises register, whereby premises used as STA must be registered on a premises register. Notably, hosts are required to take reasonable steps to ensure that guests comply with their obligations in the Code, which include not to:

• create noise that because of its level, nature, character, or quality, or the time it is made, is likely to harm, offend, or unreasonably disrupt or interfere with the peace and comfort of neighbours and other occupants of the premises;
• act in a violent or threatening manner towards neighbours or other occupants of the premises;
• act in a manner that could reasonably be expected to cause alarm or distress to neighbours and other occupants of the premises;
• use or enjoy the premises in a manner, or for a purpose, which interferes unreasonably with the use or enjoyment of common property by neighbours and other occupants of the premises;
• intentionally, recklessly or negligently cause damage to premises, any common property or any other communal facilities within the immediate vicinity of the premises, or any public property in the vicinity of the premises; or
• intentionally, recklessly or negligently damage the personal property of neighbours of the premises or other occupants of a strata or community scheme.

Guests are also responsible for the actions of visitors that they invite onto the premises during the occupancy period. They must ensure that visitors to the premises comply with the same obligations as if they were guests on the premises.

A notable difference between the Code and the Proposed Guidelines is that in addition to the hosts, obligations are placed on booking platforms and letting agents as well. The Code represents a comprehensive guideline that regulates the STRA industry in NSW.  We believe that the Code may serve as a suitable reference point for the Proposed Guidelines moving forward.

Treatment from stakeholders

Hotels, represented by the Malaysia Budget and Business Hotel Association (MyBHA), have refuted Airbnb’s claim that the Proposed Guidelines may affect Malaysia’s tourism industry and Penang’s economic growth. They have stated that they “do not agree [with] and refute the claim as … an accommodation through STRA is a business that does not have laws or regulations to regulate the business, and an unlicensed business is an illegal business”.[6] Based on public news sources, the hotel industry generally welcomes the Proposed Guidelines, stating that it will directly help to restore the hotel and tourism industry in Penang.

Airbnb has urged the Penang State Government to reconsider the Proposed Guidelines, noting that the Proposed Guidelines will affect the recovery of the tourism industry as well as the Penang economy.[7] The Malaysian Association of Homestay (Short-Term Rental) Practitioners has also joined the call, urging the Penang State Government to reconsider the Proposed Guidelines in high-rise buildings.[8] They have pointed out that this would make it harder for owners who rely on STA to pay off their housing loans.

Commentary

The Proposed Guidelines introduced by the Penang State Government will significantly alter the STA industry as it will change the landscape of the STA industry in Penang. Penang stratified homeowners may expect an improvement in the quality of living through the increased protection offered by the Proposed Guidelines.

In contrast, the effect of the Proposed Guidelines on STA platforms such as Airbnb, Agoda Homes, and Booking.com remains to be seen. In complying with the Proposed Guidelines, these STA platforms would need to adapt, through creative methods, to remain relevant in the tourist accommodation industry.

We believe that the introduction of the guidelines will improve competition in the hotel industry. STA homeowners and platforms will now be required to innovate to remain competitive with hotels.

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the Zaid Ibrahim & Co. partner you usually deal with. This article was prepared with the assistance of Tee Kai Yan, a Trainee Associate in Zaid Ibrahim & Co.

This article is for general information only and is not a substitute for legal advice

[1] Article 17 of the Guidelines.

[2] Article 18 of the Guidelines.

[3] Article 19 of the Guidelines.

[4] Article 19 of the Guidelines.

[5] Article 20 of the Guidelines.

[6] https://www.theedgemarkets.com/article/malaysian-hoteliers-refute-airbnbs-claim-shortterm-rental-accommodation accessed 29 September 2022

[7] https://www.theedgemarkets.com/article/airbnb-urges-penang-govt-reconsider-draft-proposal-shortterm-rental-accommodation accessed 29 September 2022

[8] https://www.penangpropertytalk.com/2022/09/high-rise-owners-urge-penang-govt-to-review-homestay-restrictions/ accessed 29 September 2022

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Introduction

It is trite that when the subject matter of a contract is illegal, it is void for illegality. But what if the contract had already been performed or partially performed? This article examines the case of Patel v Mirza [2016] UKSC 42 and the Malaysian courts’ approach in light of this case.

The case of Patel v Mirza

Using advance insider information, which Mirza expected to obtain from Royal Bank of Scotland (“RBS”) contacts regarding an anticipated government announcement that would affect the price of RBS shares, Patel paid Mirza £620,000 in an agreement to bet on the price of the RBS shares. Such betting amounts to a conspiracy to commit insider dealing, an offence under section 52 of the Criminal Justice Act 1993. The scheme ultimately fell through and as a result, the intended betting did not take place. Mirza subsequently made promises to repay the money to Patel, but failed to do so. Consequently, Patel brought a claim against Mirza for recovery of the sums paid.

The crucial issue in this case is that, by allowing Patel’s claim, the court could be condoning a cause of action which was made on an illegal basis. As explained by Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341, 343 “no court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act”. The essential rationale of this illegality doctrine, as explained by the Supreme Court of Canada in Hall v Hebert [1993] 3 RCS 159, is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system.

The judge in the High Court, applying the “reliance principle” from Tinsley v Milligan [1994] 1 AC 340, held that Patel’s claim to recover the sum paid was unenforceable because he had to rely on his own illegality to establish his claim.  He also could not establish that his circumstances fell within the policy exception to the reliance principle known as the doctrine of locus poenitentiae, since he had not voluntarily withdrawn from the illegal scheme.

At the Court of Appeal, the majority agreed with the judge on the reliance issue, but disagreed with him on the application of the locus poenitentiae exception. They held that it was enough for the claim to succeed as the scheme had not been executed. It should also be noted that Gloster LJ agreed with the majority that Patel’s claim should succeed, but took a different approach in reaching the conclusion.

In the subsequent and final appeal, the UK Supreme Court unanimously dismissed Mirza’s appeal, holding that Patel could recover the money he had paid to Mirza. Further, the court held that the formal test in Tinsley v Milligan was no longer representative of the law, as it is inconsistent with the coherence and integrity of the legal system.

In his leading speech in Tinsley v Milligan, Lord Browne-Wilkinson held, as his starting point that title to property can pass under an unlawful transaction. However, the court would not assist an owner to recover the property if he had to rely on his own illegality to prove his title. In his judgment, Lord Toulson of the UK Supreme Court in Patel v Mirza noted that the case of Tinsley v Milligan has been subject to much criticism over the years.

Lord Toulson further held that a claimant, such as Patel, who satisfies the ordinary requirements of a claim for unjust enrichment, should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose. Instead, the court should consider whether it would be contrary to the public interest to enforce the claim, if to do so would be harmful to the integrity of the legal system.

In assessing whether the public interest would be harmed in that way, it is necessary:

• to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;
• to consider any other relevant public policy on which the denial of the claim may have an impact; and
• to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.

Application of the principles generally in Malaysian Law

The case of Patel v Mirza has been heralded as “a significant development in the law relating to illegality at common law” in the case of Stoffel & Co v Grondona [2020] UKSC 42. In Stoffel & Co, the Supreme Court applied the trio of considerations in Patel and held that Grondona’s claim is not barred by the illegality defence. In light of Patel v Mirza, the Malaysian approach to contract illegality should be considered.

Illegality in Malaysian legislation

A notable difference between the contract laws of the UK and Malaysia is that in Malaysia, contract principles are enshrined in legislation (the Contracts Act 1950) as well as common law.

Section 10(1) of the Contracts Act 1950 provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void (emphasis added).

Section 24 of the Contracts Act 1950 defines lawful considerations and objects in the negative, where the consideration or object of an agreement is lawful unless:

• it is forbidden by a law;
• it is of such a nature that, if permitted, it would defeat any law;
• it is fraudulent;
• it involves or implies injury to the person or property of another; or
• the court regards it as immoral, or opposed to public policy.

In essence, any agreement which consideration or object falls within the five categories above is void.

The effect of a void contract (whether the agreement is discovered as void or eventually becomes void), as described in section 66 of the Contracts Act 1950, is such that any person who has received any advantage under the agreement or contract is bound to restore or make compensation for it, to the person from whom he received it.

Specific application of the Patel v Mirza principles in Malaysian case law

Generally, Malaysian courts welcomed and adopted the considerations and principles in Patel v Mirza.

In Tan Keen Keong v Tan Eng Hong Paper & Stationery Sdn Bhd & Ors and Other Appeals [2021] 2 CLJ 318 Tan Keen Keong (“TKK”) moved three separate petitions to wind-up three companies, i.e. the respondents. TKK petitioned to wind up these companies on the grounds that it was just and equitable to do so under section 218(1)(f) of the Companies Act 1965 (now section 465(1)(h) of the Companies Act 2016) because the affairs of the companies had been conducted in an unfair, unjust and inequitable manner by the persons in control of the companies. Amongst the allegations, it was alleged that there was illegality involved by claiming the existence of a ‘family fund’, where monies were siphoned from the companies and its subsidiaries due to illicit activities. At the High Court, the judge identified breaches of the Income Tax Act 1967 pertaining to the ‘family fund and under-counter activities’. The court agreed with the considerations set out in Patel v Mirza. It is necessary for the court to consider the purpose of the statute as well as to whether any other policy will be undermined or affected before striking down contracts or in this instance, winding-up corporations on the ground of illegality even if there are criminal penalties involved in the contraventions.

In particular, the Court of Appeal in Public Bank Bhd v Ria Realiti Sdn Bhd & Ors [2021] 4 MLJ 537 extensively explored the application of the Patel trio of considerations. The appellant brought a claim for the repayment of a loan against the respondent. The High Court had earlier dismissed the plaintiff’s claims on the grounds that the loan was to finance the purchase of native lands by non-natives (in contravention of section 17 of the Sabah Land Ordinance). The Court of Appeal, in allowing the appeal, held that the appellant was entitled to repayment of the loan. In reaching this decision, the learned judge Ravinthran JCA elaborated on each limb of the Patel considerations as follows:

(a) Consider the underlying purpose of the transgressed prohibition

On this issue, His Lordship began by analysing the purpose of the Sabah Land Ordinance (Cap 68) (“Ordinance”), specifically sections 17 and 64. His Lordship observed that the purpose of the prohibition in sections 17 and 64 of the Ordinance is to protect native ownership of the land held under native title and customary tenure. As the appellant is only seeking to enforce remedies under the loan and guarantee agreement, this would not have any impact on native ownership land nor amount to recognition of the first respondent (i.e. Ria Realiti Sdn. Bhd.) as the actual owner or recognition of the second respondent as a native nominee. The judge concluded that the purpose of the prohibition contravened will not be enhanced if the appellant is denied relief.

(b) Consider whether any other public policy would be affected by denial of the claim

On this limb, the Court of Appeal took into consideration that if the appellant was denied relief, a heavy burden would be placed on banks to investigate the purpose of loans and details of transactions involving nominees and actual purchasers. As observed by Zulkefli Makinudin FCJ in the case of Chang Yun Tai & Ors v HSBC Bank (M) Bhd and other appeals [2011] 7 CLJ 909, the courts should not impose requirements that would impede the flow of commerce or on the particular facts, render banking business impracticable or burdensome. Consequently, this favours the granting of relief to the appellant.

(c) Would denying the claim be a proportionate response to the illegality?

In considering proportionality, the Court of Appeal weighed the fact that there was a lack of intention on the part of the appellant, who is a mere financier. This was in contrast to the culpability of the respondents, whose, as described by His Lordship, “blatant and unmitigated illegality runs like a thread throughout the transaction…” His Lordship also observed that the prohibitions against dealings in native land by non-natives under the Ordinance is only directed at the immediate parties to a sale transaction, with no provisions outlawing a bank from financing such a transaction.

The judge also pointed out that the respondents are guilty of approbating and reprobating, as well as guilty of bad faith. He observed that none of the respondents contested the illegality argument during the winding up proceedings of the first respondent. Additionally, in this action, the second and fifth respondents are claiming that the appellant cannot rely on the loan agreements and related documents, yet, they are seeking the court’s aid for the return of the lands which were charged in the same transaction (by way of counterclaim).

Premised on the above, the court concluded that “the second to fifth respondents are unjustly using their own illegal actions to seek to reap a multi-million dollar windfall from a financial institution”. Consequently, denying the appellant relief would be an “unconscionable and totally disproportionate response”.

Applying the trio of considerations, the court concluded that the appellant is entitled to seek relief.

Commentary

As described by Harmindar Singh Dhaliwal JCA in Pang Mun Chung & Anor v Cheong Huey Charn [2018] 8 CLJ 663, the Patel approach is “consistent with upholding the integrity and harmony of the law by achieving an equitable result based on the facts of the case”. The landmark change in approach brought about by Patel v Mirza towards restitution of illegal contracts marks a welcomed change in the right direction, as the courts now may apply the necessary considerations to arrive at an equitable outcome. An example of one such consideration is where the person who had breached the contract had been unjustly enriched and should therefore make restitution to the other party.

The courts have gone to great lengths to point out that restitution may only be justified where the unlawful act, which is the subject matter of the illegal contract, has not been performed. In such circumstances, not permitting restitution to the aggrieved party would unjustly enrich the party who committed the breach of contract.

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the Zaid Ibrahim & Co. partner you usually deal with. This article was prepared with the assistance of Tee Kai Yan, a Trainee Associate in Zaid Ibrahim & Co.