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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. This article was prepared with the assistance of Desmond Tang Soon Ze, a Trainee Associate at Zaid Ibrahim & Co.

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

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Recent amendments to the Franchise Act 1998 (“FA”) have introduced significant changes to the franchise industry. The Franchise (Amendment) Act 2020 (“Amending Act”), gazetted on 6 March 2020 and which came into force on 28 April 2022, introduces more stringent requirements and provides a leveling field between local and foreign franchisors. In this article, we will discuss three major updates to the franchise system in Malaysia.

Launch of the MyFex 2.0 system

In line with the coming into force of the Amending Act, the Franchise Registry, under the Ministry of Domestic Trade and Costs of Living (“KPDN”), launched a new online portal known as MyFex 2.0 (https://myfexv2.kpdn.gov.my/) on 29 July 2022. The portal replaces the previous MyFex 1.0 system and provides for the registration, maintenance and renewal of franchises in Malaysia. According to the KPDN, the MyFex 2.0 system was introduced so that the various requirements of the Amending Act can be met accordingly, in line with the enforcement of the FA.

It is important to note that the launch of MyFex 2.0 system has also resulted in the expiry of all existing franchise registrations in Malaysia. All existing franchisors (foreign and local) are required to re-register their franchises under the MyFex 2.0 system, with a grace period of three years (starting from 1 August 2022) granted to all existing franchisors to complete the re-registration process.

Key amendments to the Franchise Act 1998

There are a number of key amendments made by the Amending Act to the FA which existing and potential franchisors and franchisees in Malaysia should be aware of. They include the following:

Franchise registration requirement under section 6 of the FA is now applicable to a foreign franchisor

Prior to the Amending Act, a foreign franchisor is only required to obtain the Franchise Registrar’s approval pursuant to section 54 of the FA before it can proceed to execute a franchise agreement with its franchisee in Malaysia. In contrast, a local franchisor is required to register its franchise pursuant to section 6 of the FA before executing a franchise agreement. It is now compulsory for all foreign franchisors to comply with both sections 6 and 54 of the FA. This legislative amendment reinforces the Court of Appeal’s judgment in Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2021] 1 MLJ 549 which affirmed the High Court’s finding that the registration requirement undersection 6 of the FA is applicable to a foreign franchisor and is not limited to a local franchisor only.

There were initial concerns that a foreign franchisor would need to submit two separate applications to comply with the requirements of sections 6 and 54 of the FA. However, in practice, there is no longer any distinction in the online application form for franchise registration in MyFex 2.0 system, unlike the previous MyFex1.0 system where there are different requirements in the online application form that is required to be submitted by a local franchisor and a foreign franchisor. Both local and foreign franchisors are currently required to complete the same online application form and submit the same Franchise Disclosure Document and other documents as required in section 7 of the FA for franchise registration. Other documents to be submitted include the operation manual, training manual, copy of the latest audited accounts and any other additional documents as required by the Franchise Registrar.

It is anticipated that this legislative amendment would result in a level playing field between local and foreign franchisors, considering that in the past, foreign franchisors have an advantage over local franchisors since they are not subjected to the more onerous requirements under section 6 of the FA.

Effective Period of Franchise Registration

The pre-amended section 10 of the FA provides that the registration of a franchise shall continue to be effective unless the Franchise Registrar issues a written order to the franchisor to suspend, terminate or cancel the registration of the franchise. This meant that a franchise registration will last indefinitely with no specified term unless it is suspended, terminated or cancelled by the Franchise Registrar.

The amended section 10 now stipulates that a franchise registration shall continue for a period as may be prescribed by the regulations under the FA. Under the Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022, the period of effectiveness of a franchise registration is now limited to five years and it has to be renewed periodically every five years. The Amending Act also introduces the new provision, section 10A, which governs the renewal of franchise registration. An application to renew a franchise registration must be submitted together with prescribed fees within 30 days from the expiration date of the franchise registration.

Registration of Franchisees

Before commencing business, a franchisee is required to be registered pursuant to sections 6A and 6B of the FA (depending on whether the franchisor is local or foreign).  In the past, there is no consequence prescribed in the FA if the franchisee fails to obtain registration.  

The Amending Act has inserted new provisions into sections 6A and 6B of the FA which makes it a criminal offence if a franchisee fails to obtain registration. The registration of franchisees is no longer a formality. The general penalty provision in section 39 of the FA ^[1] now applies to franchisees that fail to register with the Franchise Registry. The latest amendments show that there is a strong intention on the part of KPDN to strengthen enforcement efforts against unregistered franchisees that operate in Malaysia.

It is pertinent to note that the Franchise Registry has imposed an obligation on all franchisors to submit the online application form on behalf of their franchisees in the MyFex 2.0 system. This is a departure from the previous practice in MyFex 1.0 system where each franchisee is responsible to handle its own registration. Moving forward, franchisees will need to rely on their respective franchisors to obtain franchisee registration under sections 6A and 6B of the FA. This is as the current function and design of MyFex 2.0 system only permits franchisors to open an account. An unintended consequence that could arise, is that a franchisee could be found liable for failing to register itself due to the inaction of its franchisor. Therefore, it is crucial for franchisees to follow up very closely with their respective franchisors to ensure that they are properly registered under sections 6A and 6B of the FA.

Public display of franchise registration

A new section has been created, section 10B, which makes it compulsory for a franchisor and franchisee to display the franchise registration at a conspicuous position in the place of business. Failure to do so is an offence which attracts the general penalty in section 39 of the FA. This is another obligation imposed by the Amending Act to enable easier monitoring of compliance by enforcement officers from the KPDN.

Mandatory elements in a franchise agreement

Section 18(2) of the FA prescribes the mandatory elements that are required to be present in a franchise agreement. Pursuant to section 18(3) of the FA, failure to comply with section 18(2) would render a franchise agreement null and void. Section 18(3) has been removed by the Amending Act. The Amending Act has now made changes to section 18(6) where franchisors and franchisees can potentially be liable for an offence if they fail to comply with section 18 of the FA.

The removal of section 18(3) of the FA suggests that a franchise agreement may still be enforceable notwithstanding that it is non-compliant with section 18 of the FA. Nevertheless, section 39(2)(a) of the FA still permits the Court to declare a franchise agreement to be null and void after sentencing a franchisor that is found guilty of an offence.

Hence, it is crucial that franchisors and franchisees consult their lawyers to review their franchise agreement thoroughly as any non-compliance with section 18 would result in criminal penalties.

Revision of Fees

The KPDN has initiated an overhaul of the Third Schedule of Franchise (Forms and Fees) Regulations 1999 which contains the list of fees that are payable for various franchise matters under the FA. The revision of fees can be found in the Franchise (Forms and Fees) (Amendment) Regulations 2022.

Prior to the amendments, there are only several matters which require payment to be made to the Franchise Registry and they are approval of franchise registration, processing of franchise registration, processing of amendments to disclosure documents and processing of registration of franchise broker.

Payment of fees is now extended to a number of other matters including renewal of franchise registration, registration of franchisee and registration of franchise consultant. There is a distinction in the amount of fees payable by a local franchisor and foreign franchisor for franchise registration.

A summary of selected fees areas follows:

Final Remarks

The Amending Act has certainly brought about some long-awaited revisions to the FA that resolve existing ambiguities within the original legislation. Franchisors and franchisees are now subjected to stricter requirements under the FA due to the new changes that are brought by the Amending Act. The imposition of criminal sanctions for non-compliance of various provisions in the FA signals a strong message from the KPDN to franchisors and franchisees to take their obligations seriously.

The revision of the schedule of fees by the KPDN for franchise matters as well as the need for periodic renewals of franchise registration has resulted in a notable increase in costs that are required to run a franchise business in Malaysia, especially for foreign franchisors and their franchisees. Nevertheless, it seems that KPDN has chosen to impose lower fee rates to local franchisor and their franchisees to encourage more local companies to adopt this mode of business. It remains to be seen whether the overall increase in the costs of registering and maintaining a franchise registration would create barriers to entry or discourage foreign companies from participating in the franchise system in Malaysia.

For further enquiries on franchise matters, you may contact Jonathan Lim Hon Kiat, Stanley Lee Wai Jin, or Nurul Syahirah Azman of Zaid Ibrahim & Co.

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

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[1] A person who commits an offence under the FA for which no penalty is expressly provided shall, on conviction, be liable:

1. if such a person is a body corporate, to a fine of not less than RM 10,000 and not more than RM50,000 and for a second or subsequent offence, to a fine of not less than RM20,000 and not more than RM 100,000
2. if such a person is not a body corporate, to a fine of not less than RM 5,000 and not more than RM 25,000 or to an imprisonment for a term not exceeding 6 months, and for a second or subsequent offence, to a fine of not less than RM 10,000 and not more than RM 50,000 or to imprisonment for a term not exceeding 1 year.

As part of the revised Budget 2023, tabled on 24 February, the Malaysian government revealed its plan to allow the issuance of dual-class shares on Bursa Malaysia. This measure is to encourage the listing of local high-growth technology companies in Malaysia. This move is welcomed by the Securities Commission Malaysia (“SC”) as one of the measures to enable the capital market and its supporting ecosystem to serve the needs of the domestic economy and business.

Contrary to the “one share, one vote” principle, the concept of dual-class shares allows companies to issue to shareholders shares which carries disproportionate voting rights, also known as weighted voting rights. Under this structure, there are at least two classes of shares – one with limited voting power and the other with significantly more voting power. This means that certain individuals or group of shareholders, such as founders, will hold superior voting shares while other shares, offered to the public, have inferior voting rights. This is particularly enticing for founders or entrepreneurs of a company who would be permitted to hold shares with superior voting to retain control over the management of the company while allowing sufficient funding to expand the business.

However, this also raises corporate governance concerns that shareholders with superior voting shares may become deeply rooted in the management of the company or seek to extract excessive personal benefit, to the detriment of the minority shareholders. The current approach adopted by regulators in other jurisdictions allowing dual-class shares, such as Hong Kong and Singapore, is to allow listing of companies with dual-class shares structure coupled with some safeguards or restrictions to protect minority shareholders. For example, by imposing a maximum cap of voting differential ratio and by requiring certain shareholders’ resolutions to be decided on a “one share, one vote basis”.

The SC has not yet indicated its approach on the implementation of dual-class shares as details have not been announced at this juncture. We will continue to monitor developments and provide updates.

If you have any questions or require additional information, please contact Joan Ting or the partner you usually deal with at Zaid Ibrahim & Co.

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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Recently, there has been a shift from traditional regulatory reform (which focuses on reviewing existing legislation and improving them by way of amendments or new laws) towards non-regulatory solutions (such as using behavioural sciences to revise policy framework). This is a global widespread phenomenon where even ASEAN countries are not oblivious to its impact.

In this article, our Partner and Head of the Corporate & Government Advisory practice, Mohamad Izahar Mohamad Izham and Associate Amiza binti Ahmad Murad will uncover among others, the application of Behavioural Insights among the ASEAN countries, and lessons learned from Behavioural Insights projects in select countries.

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.

The Securities Commission Malaysia (“SC”) had on 30 June 2022 launched the Sustainable and Responsible Investment linked (“SRI-linked”) Sukuk Framework (“Framework”).^[1] Introduced as an extension of the initiatives under the Sustainable and Responsible Investment (“SRI”) Roadmap by SC to broaden SRI products offerings, this Framework is intended to facilitate fundraising by companies in addressing sustainability concerns such as climate change or social agenda.^[2] This would enable companies in these as well as other industries to transition into a low-carbon or net zero economy.^[3]

With the introduction of this Framework, private financing for sustainable development would no longer be limited to companies eligible to issue sukuk under the SRI Sukuk Framework but would also be available to a wider pool of eligible companies under the SRI-linked Sukuk Framework. Such introduction is timely for eligible companies to tap into the huge global sustainability financing market. As at 31 December 2021, the global sustainable bonds outstanding exceeded USD1 trillion with sustainability-linked bonds making up USD118.8 billion.^[4]

What is a SRI-linked sukuk?

Under the Framework, a SRI-linked sukuk is a sukuk where the financial and/or structural characteristics vary depending on whether the issuer achieves its predefined sustainability objectives within a predefined timeline.^[5] For example,^[6] a company issues a SRI-linked sukuk with a baseline profit rate of 5% per annum. The key performance indicator (KPI) is reduction in carbon dioxide (CO2) emission to 50 million tonne in Year 3 whereupon if it achieves the KPI, the profit rate will be reduced by 25 basis point (b.p.). In Year 3, the external verifier confirms that the CO2 emission target has been achieved. The profit payment is reduced to 4.75% as incentive for achieving the objective.

Differences between SRI-linked sukuk and SRI sukuk

Such primary feature of a SRI-linked sukuk greatly differs from that of a SRI sukuk where there is no such feature i.e. variation to the financial and/or structural characteristics for SRI Sukuk.^[7]

Further, there is no restriction on the use of the SRI-linked sukuk proceeds. Proceeds raised from a SRI-linked sukuk may be utilised for general purposes, whereas the proceeds from a SRI sukuk issued under the SRI Sukuk Framework must be applied exclusively for funding of any activities or transactions relating to the eligible SRI projects^[8] as set out in Chapter 20 of the Guidelines on Issuance of Corporate Bonds and Sukuk to Retail Investors (“Retail Bonds Guidelines”).

SC has also announced on 23 August 2022 that the SRI Sukuk and Bond Grant Scheme, to facilitate companies raising sukuk to meet sustainable finance needs, will also be extended to the Framework.^[23] This will enable eligible SRI-linked sukuk issuers to apply to the Grant Scheme to offset up to 90% of the external review costs incurred, subject to a maximum of RM300,000 per issuance. The expansion aims to encourage the issuances of SRI-linked sukuk by companies in carbon-intensive industries as they transition to better sustainability practices and low-carbon activities.

Further details of the requirements for the SRI-linked sukuk are set out in Chapter 9 of Part 3 of the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework and Chapter 23 of the Retail Bonds Guidelines.

A set of Frequently Asked Questions issued by the SC on the SRI-linked Framework can be accessed here.

This article was authored by Andreanna Ten. If you have any questions or require any additional information, please contact the Zaid Ibrahim & Co partner you usually deal with.

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

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[1] Securities Commission Malaysia, ‘SC releases new sukuk framework to facilitate companies’ transition to net zero’ (30 June 2022) <https://www.sc.com.my/resources/media/media-release/sc-releases-new-sukuk-framework-to-facilitate-companies-transition-to-net-zero>.

[2] Supra note 1.

[3] Supra note 1.

[4] Securities Commission Malaysia, ‘SC releases new sukuk framework to facilitate companies’ transition to net zero’ (30 June 2022) <https://www.sc.com.my/resources/media/media-release/sc-releases-new-sukuk-framework-to-facilitate-companies-transition-to-net-zero>.

[5] Securities Commission Malaysia, ‘Frequently-Asked Questions Sustainable and Responsible Investment Linked (SRI-Linked Sukuk Framework)’ (30 June 2022) <https://www.sc.com.my/api/documentms/download.ashx?id=d34d6f67-8f41-4e20-a478-b54fbb817389>.

[6] Supra note 5.

[7] Supra note 5.

[8] Supra note 5.

[9] Paragraph 23.08, Retail Bonds Guidelines.

[10] Guidance to Paragraph 23.08, Retail Bonds Guidelines.

[11] Paragraph 23.10, Retail Bonds Guidelines.

[12] Guidance to Paragraph 23.10, Retail Bonds Guidelines.

[13] Paragraph 23.12, Retail Bonds Guidelines.

[14] Guidance to Paragraph 23.12, Retail Bonds Guidelines.

[15] Paragraph 23.13, Retail Bonds Guidelines.

[16] Guidance to Paragraph 23.13, Retail Bonds Guidelines.

[17] Paragraph 23.16, Retail Bonds Guidelines.

[18] Paragraph 23.17, Retail Bonds Guidelines.

[19] Supra note 5.

[20] Supra note 5.

[21] Paragraph 23.19, Retail Bonds Guidelines.

[22] Paragraph 23.20, Retail Bonds Guidelines.

[23] Securities Commission Malaysia, ‘Expansion of SRI Sukuk and Bond Grant Scheme to Facilitate Sustainable Finance’ (23 August 2022) <https://www.sc.com.my/resources/media/media-release/expansion-of-sri-sukuk-and-bond-grant-scheme-to-facilitate-sustainable-finance>.

In a very important and critical change, the First Schedule to the Employment Act 1955 (“EA”) has been amended by way of Ministerial Order on 12 August 2022. The change now means that…

The EA now applies to all

The salary threshold to limit applicability of the EA has been removed. The EA now applies to:

“1. Any person who has entered into a contract of service.”

There are exceptions

However, there are certain provisions that have been carved out from being applicable across the board.

The table below sets out the items that are only applicable to the following (Non-Exempt Employees):

• those who earn a monthly wage of RM4,000 or less per month; or
• those who, regardless of how much they earn, are covered by section 2 of the First Schedule, e.g. employees who are, engaged in or who supervise manual labour; operate or maintain vehicles; engaged to work on Malaysian registered vessels; and domestic employees.

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With these amendments in place slated to be effective from 1 September 2022, alongside the amendments made under the Employment (Amendment) Act 2022, it is certainly critical for employers to take note of the changes and implement policies and procedures to ensure compliance with the requirements of the Act.

Anticipated Changes to the EA

In a previous article, we have touched on the changes that were passed by Parliament earlier this year.

In short, based on the revisions to the First Schedule, employers must be ready to meet the requirements of the EA in areas that include but are not limited to the following:

• maternity leave;
• paternity leave;
• maximum work hours per day/per week (must at least be reflected in the employment contract to be within EA limits even though overtime may not be payable);
• minimum annual leave entitlement;
• minimum sick leave entitlement (with a standalone 60 days leave if hospitalisation is required);
• flexible work arrangements;
• discrimination complaints;
• ensuring conduct does not constitute “forced labour”;
• application to the DGL for approval before hiring foreign employees;
• creating contracts with a 3^rd party if there is an arrangement for the supply of labour to such 3^rd party as a Contractor for Labour; and
• notice to raise awareness on sexual harassment.

Whilst the date for roll out of these changes have been set for 1 September 2022, there still remain areas of uncertainty, such as the types of orders that the Director General of Labour can make in disputes on discrimination, whether there is any test as to when flexible work arrangements ought to be granted or rejected and what circumstances can constitute forced labour.

Certainly a good time for employers to revisit and review their employee handbooks and policies!

If you have any questions or require any additional information, please contact Yong Hon Cheong or the Zaid Ibrahim & Co partner you usually deal with.