Malaysia Gets Abu Dhabi's IPIC Into Court Over 1MDB

Malaysia Gets Abu Dhabi's IPIC Into Court Over 1MDB

In a major triumph for Malaysia’s prosecutors the British Court of Appeal today ruled in their favour to overturn an earlier decision by the High Court that would have allowed Abu Dhabi’s IPIC sovereign wealth fund to restrict the battle between the two countries over money stolen from 1MDB to a secret private arbitration process.

Malaysia is demanding the repayment of $3.5 billion that was funnelled out of bonds raised by Goldman Sachs for 1MDB into off-shore alleged subsidiaries of Aabar (a subsidiary of IPIC) set up by Aabar’s two most senior executives in Abu Dhabi. It also wants to challenge an agreement entered into by former Malaysian premier, Najib Razak, in 2017 to pay Abu Dhabi billions more instead.

The money siphoned out via the bogus off-shore Aabar subsidiaries was then stolen by the conspirators which allegedly include Najib and his 1MDB advisor Jho Low as well as the Aabar Chairman, Khadem Al Qubaisi, and its CEO, Mohammed al Husseini, (both now in jail in Abu Dhabi).

The excuse for the payments into these ‘Aabar subsidiaries’ was that they were to furnish guarantees by Aabar for the bonds on behalf of 1MDB as part of the contorted borrowing mechanism set up by the bank Goldman Sachs, which itself made hundreds of millions out of managing the corrupted deal.

However, these offshore companies were not in fact formal subsidiaries of Aabar, despite the signatories being these two senior officals and despite being given names such as ‘Aabar PJS Investments (BVI)’. Countering Malaysia’s demand, IPIC has made its own twist on the situation claiming that in fact the $3.5 billion is owed by 1MDB to them because Aabar itself never received money for those guarantees.

The challenge means that Malaysia, which has already lost $3.5 billion because of the complicity of the IPIC officials in the theft (Khadem Al Qubaisi received a kickback of over half a billion dollars into his Edmund de Rothschild bank account, tens of millions of which he spent on servicing Topaz the super-yacht of his own IPIC boss Sheikh Mansour) now faces a further demand for the same sum, plus other charges from IPIC.

Secret history

When the details of the scandal were first exposed by the US Department of Justice, back in 2016, Najib was still prime minister with a great deal to hide about his own role in the scandal and was attempting to pretend that no money had actually gone missing. As a result he agreed that the dispute between the two parties should be settled by a secret arbitration court in London, where the original bond deal had been drawn up.

Abu Dhabi’s own problem was that senior officials at the highest level in its IPIC/Aabar sovereign wealth funds had also been involved and so IPIC was equally eager, it would seem, to reach a settlement under wraps.

The matter had become fraught, because by this stage Najib had called upon the dubious guarantee to settle 1MDB debt repayments that the cash strapped fund was unable to meet – unsurprisingly given the amount of money stolen by the conspirators.

Earlier, in June 2015, the parties had signed a term sheet for a billion dollar payment by IPIC to 1MDB to meet dues owing in the name of the guarantee. IPIC was also saddled with the future incoming charges thanks to that term sheet drawn up between Najib and the then Aabar CEO, Mohamed Al Husseiny (who had also received sixty millions of dollars in kickbacks) just days before he was sacked and then jailed by Abu Dhabi.

IPIC had not referred to these supposed guarantees made to 1MDB in any of its public documents and nor had it declared any payments for those guarantees (which had not been articulated either in the bond offering presented by Goldman Sachs to prospective customers).

By contrast 1MDB itself had publicly recorded the alleged guarantee payments to the bogus off-shore Aabar entities in its own accounts, in order to explain the siphoning off of the $3.5 billion from its bond issues – money that was to find its way into spending sprees by Jho Low and Najib’s GE13 election slush fund at AmBank.

An angry new management who took over from Khadem al Qubaisi and Mohamed al Husseiny at IPIC in the aftermath of all this skullduggery appears to have driven Najib into arbitration over all these issues and in 2017 the beleagured prime minister agreed to a settlement that was plainly highly disadvantageous to 1MDB.

This settlement, as the Appeal Court described in today’s ruling: “provided for the Malaysian Parties to pay IPIC significant sums, and stated that the Malaysian Parties would indemnify IPIC in respect of all sums which might be paid by IPIC under various guarantees.

See the full Case Summary issued by the British Court of Appeal:

Appeal Ref: A4/2019/1243 Claim No. CL-2018-000704

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES COMMERCIAL COURT (QBD) B E T W E E N:

MINISTER OF FINANCE (INCORPORATED) 1MALAYSIA DEVELOPMENT BERHAD

Claimants/Appellants

and

INTERNATIONAL PETROLEUM INVESTMENT COMPANY AABAR INVESTMENTS PJS

Defendants/Respondents

CASE SUMMARY

Executive Summary
Minister of Finance (Incorporated) of Malaysia (“MoF”) and 1Malaysian Development Berhad

(“1MDB”) successfully appealed the first instance judge’s decision to:

  1. (1)  stay, on case management grounds, a commercial court claim (the “commercial court proceedings”) under a section 67 and 68 of the Arbitration Act 1996 (the “1996 Act”), brought by MoF and 1MDB against International Petroleum Investment Company (“IPIC”) and Aabar Investments PJS (“Aabar PJS”); and
  2. (2)  refuse to injunct, under section 37(1) of the Senior Courts Act 1981, arbitration proceedings that IPIC and Aabar PJS had brought against MoF and 1MDB.

The Court of Appeal held that:

  1. (1)  the judge at first instance had exercised his case management powers to stay the commercial court proceedings on the wrong legal basis;
  2. (2)  there were no compelling reasons to grant a stay of the commercial court proceedings, and therefore that the stay imposed by the judge should be lifted;
  3. (3)  the judge had exercised his discretion to refuse an injunction under section 37(1) of the Senior Courts Act 1981 on the wrong legal basis; and
  4. (4)  it was just and convenient that the arbitration proceedings brought by IPIC and Aabar PJS should not proceed until the commercial court proceedings had been determined, and that those arbitration proceedings should therefore be injuncted to “bring [IPIC and Aabar PJS’s] vexatious conduct to an end”.

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Factual Background

This case involves a dispute between (1) MoF and 1MDB (both investment entities ultimately owned by the Malaysian Government) (the “Malaysian Parties”), and (2) IPIC and Aabar PJS (both investment entities ultimately owned by the Government of Abu Dhabi) (the “Abu Dhabi Parties”) (the Malaysian Parties and the Abu Dhabi Parties together the “parties”), relating to the well-publicised 1MDB scandal whereby billions of dollars were misappropriated from the Malaysian people.

The Malaysian Parties allege that the scandal, which has been described as the largest kleptocracy case in US history by former Attorney General Loretta Lynch, arose from a conspiracy involving Mr Najib Razak, the Prime Minister of Malaysia from 3 April 2009 to 9 May 2018.

The fact of the case are complex, but the key events are summarised below:
28 May 2015: the parties, under the Najib administration, entered into an agreement (the

“BTS”) containing a London seated arbitration clause.

13 June 2016: The Abu Dhabi Parties commenced a London seated arbitration (the “first arbitration”) against the Malaysian Parties for an alleged breach by the Malaysian Parties of the BTS.

22 April 2017: the parties entered into settlement deeds, containing London seated arbitration clauses, which settled the issues raised in the first arbitration (“settlement deeds”). The settlement deeds also provided for the issue of a consent award.

9 May 2017: the arbitral tribunal in the first arbitration made the consent award which, inter alia: (1) terminated the first arbitration, (2) stated that the BTS was valid and binding on the parties until terminated by the settlement deeds, (3) provided for the Malaysian Parties to pay IPIC significant sums, and (4) stated that the Malaysian Parties would indemnify IPIC in respect of all sums which might be paid by IPIC under various guarantees.

The Abu Dhabi Parties contend that, for more than 12 months after May 2017, the Malaysian Parties complied with their obligations under the settlement deeds and the consent award, including the payment of significant sums.

9 May 2018: Mr Najib lost the Malaysian general election, and the new government of Malaysia was, thereafter, able to investigate the misappropriated sums. Further to those investigations, the Malaysian Parties contend that the BTS and the settlement deeds were grossly disadvantageous to them, and that they were, to the Abu Dhabi Parties’ knowledge, procured by Mr Najib to further his own interests and to damage their interests.

30 October 2018: the Malaysian Parties issued the commercial court proceedings, seeking to set aside the consent award on the basis that:

(a) the arbitral tribunal in the first arbitration did not have substantive jurisdiction under section 67 of the 1996 Act to make it because, to the Abu Dhabi Parties’ knowledge,

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Mr Najib was acting in a way which was contrary to the best interests of the

Malaysian Parties and that he therefore lacked authority to request it; and
(b) the consent award was procured by fraud or in a way that was contrary to public policy under section 68 of the 1996 Act since the award formed part of an attempt by Mr Najib to cover up the fraud, and that the Abu Dhabi Parties knew that he was

acting in this way.

21 November 2018: the Abu Dhabi Parties requested the commencement of further arbitration proceedings against the Malaysian Parties (the “second arbitrations”), alleging that, inter alia, the issuing of the commercial court proceedings by the Malaysian Parties was an event of default under the settlement deeds, entitling the Abu Dhabi Parties to demand immediate payment of significant sums of money from the Malaysian Parties.

8 May 2019: the judge at first instance refused: (1) the Abu Dhabi Parties’ application for a stay of the commercial court proceedings under section 9 of the Arbitration Act 1996, and (2) the Malaysian Parties’ application for an injunction to restrain the second arbitrations under section 37(1) of the Senior Courts Act 1981. Instead, the judge granted a stay of the commercial court proceedings on case management grounds whilst the second arbitrations proceeded, since the Malaysian Parties’ commercial court proceedings would otherwise elevate the court’s supervisory jurisdiction under sections 67 and 68 above the concurrent jurisdiction of the tribunal in the second arbitrations. This was the case, the judge found, when the jurisdiction of both the court, and the tribunal in the second arbitrations, were derived from party autonomy.1 According to the judge, “the alternative is duplication in the investigation and decision on whether the Settlement Deeds (with the arbitration agreements within them) are void or not binding. That invites delay, cost, disorder, and uncertainty”2.

29 July 2019: the Malaysian Parties were granted permission to appeal the judge’s decisions to: (i) stay the commercial court proceedings on case management grounds, and (ii) refuse to injunct the second arbitrations.

Court of Appeal’s Reasoning:

1. Judge’s decision to stay the commercial court proceedings on case management grounds

The Court of Appeal held that the judge at first instance had exercised his case management powers to stay the commercial court proceedings on the wrong legal basis because he had failed to recognise, inter alia, that:

  1. (a)  the Malaysian Parties had a right (which the Abu Dhabi Parties had agreed they should have by the arbitration agreements in the BTS, and which had effect notwithstanding any agreement to the contrary) to challenge the consent award under the mandatory provisions of sections 67 and 68 of the 1996 Act, which the parties could not contract out of;
  2. (b)  it is the responsibility of the court to determine challenges under sections 67 and 68, and to do so as promptly as possible;
  3. (c)  the parties’ election to arbitrate in the BTS could not dictate the position in respect of challenges under sections 67 and 68, which were no longer consensual;

1 2

See paragraph 87 of the judgment of Knowles J dated 8 May 2019. See paragraph 95 of the judgment of Knowles J dated 8 May 2019.

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(d) courts exercising their supervisory role under the 1996 Act do so as a branch of the state, not as a mere extension of the consensual arbitration process; and

(e) the court exercising its supervisory jurisdiction under sections 67 and 68 must do so quickly to avoid uncertainty and injustice in the enforcement process.

The court then found that there were no compelling reasons to grant a stay of the commercial court proceedings since, inter alia, the Abu Dhabi Parties had already submitted to the supervisory jurisdiction of the English court in relation to the first arbitration when they entered into the BTS (and before the settlement deeds were themselves entered into), thereby providing the Malaysian Parties with a statutory right to bring those proceedings under the mandatory section 67 and 68 provisions of the 1996 Act. Since the parties could not oust those provisions by contract, the Abu Dhabi Parties could not rely on the arbitration agreements in the settlement deeds to take precedence over the commercial court proceedings.

2. Judge’s decision to refuse to injunct the second arbitrations

The court held that the judge had exercised his discretion to refuse an injunction under section 37(1) of the Senior Courts Act 1981 on the mistaken basis that it had been appropriate to grant a case management stay of the court applications. Accordingly, the court held that the second arbitrations infringed and threatened the Malaysian Parties’ undoubted legal right to pursue the court applications under sections 67 and 68, and were vexatious and oppressive. The only appropriate exercise of discretion, according to the court, was for the court to grant an injunction to restrain the pursuit of the second arbitrations, which would bring the Abu Dhabi Parties’ vexatious conduct to an end.

Case Comment

This decision is significant in confirming the primacy of the court’s powers contained in the mandatory provisions of the 1996 Act (of which sections 67 and 68 are two such provisions), which parties are unable to contract out of. It also clarifies that the court does not have a continuous supervisory power under the 1996 Act to intervene in ongoing arbitration proceedings generally.3

The decision results in the commercial court now having to grapple with the key questions relating to the validity of the BTS and the settlement deeds in an open and transparent forum. The answers to those questions are likely to have significant implications in relation to the overall liability for monies misappropriated as part of the underlying 1MDB scandal, and accordingly, for the Malaysian people.

Richard Little and Michael Armstrong

Eversheds Sutherland (International) LLP Solicitors for the Appellants

26 November 2019

As the case summary issued by the Court of Appeal judges explains, the situation changed dramatically after Najib was ejected from power and the incoming government discovered the punitive terms that he had signed 1MDB up to during the secret arbitration process with IPIC.

Malaysia’s new Attorney General immediately identified that Najib’s 2017 arbitration court agreement did not represent the proper interests of 1MDB and Malaysia. He also pointed out that IPIC was well aware of this fact and knew that Najib was only agreeing to their draconian secret terms to protect himself from being discovered over his role in the thefts from 1MDB.

Therefore, as the Court of Appeal notes, there was evidence of fraud by Najib and IPIC against Malaysia and 1MDB:

“The Malaysian Parties contend that the BTS and the settlement deeds were grossly disadvantageous to them, and that they were, to the Abu Dhabi Parties’ knowledge, procured by Mr Najib to further his own interests and to damage their interests.

For this reason, according to the case summary provided by the Court of Appeal, the new Malaysian government has sought to issue court proceedings against IPIC/Aabar to annul the secret agreement Najib had made:

“30 October 2018: the Malaysian Parties issued the commercial court proceedings, seeking to set aside the consent award on the basis that: a)… to the Abu Dhabi Parties’ knowledge, Mr Najib was acting in a way which was contrary to the best interests of the Malaysian Parties and that he therefore lacked authority to request it; and b) the consent award was procured by fraud or … formed part of an attempt by Mr Najib to cover up the fraud, and that the Abu Dhabi Parties knew that he was acting in this way.

However, in the face of this challenge, Abu Dhabi’s representatives have fought to keep the ongoing wrangle out of the public eye. Thanks to Najib’s earlier secret arbitration settlement, they had a powerful weapon in that 1MDB had signed up to severe penalties in favour of IPIC should Malaysia ever seek to alter the terms or take the matter to court.

Initially, the British High Court judge agreed that in the light of these penalty terms the case ought to remain in secret arbitration. However, today the Appeal Court ruled that the penalties agreed to by Najib “infringed and threatened the Malaysian Parties’ undoubted legal right to pursue the court applications… and were vexatious and oppressive“. They therefore granted Malaysia the right to challenge the terms of the arbitration in a proper open court.

Speaking to Sarawak Report, the Malaysian Attorney General, Tommy Thomas, who is leading this case to reclaim 1MDB’s missing money, pointed out that any further ruling of the arbitration court over their challenge to Najib’s settlement with IPIC could have been later contested anyway in the courts and he questioned Abu Dhabi’s continuing quest for secrecy:

“The advantage of an open hearing is self evident. Justice is better served in an open court rather than a secret hall in a building with no access. Malaysia has nothing to hide and are very surprised IPIC has things to hide and are resisting vigorously open court hearings. These are matters that have been investigated by the US Department of Justice, Switzerland and others so there is very little new to come out so it is very surprising they want proceedings in secret. Finally, there is always a real prospect that either party aggrieved with the outcome would challenge it in the courts, so it will always come back to the courts in any case” [AG Tommy Thomas]

The London Appeal Court has now effectively sided with Tommy Thomas on the matter, ruling that the case should be removed from arbitration into the open court in London without any of the penalties imposed by the original settlement:

“The terms of the settlement deeds represent a clear attempt to fetter the claimants’ [1MDB and MOFI’s] exercise of their statutory right to challenge the consent award in the first arbitration under sections 67 and 68. The pursuit of the second arbitrations seeks in terrorem to impose a large financial penalty on the claimants [Malaysia] for having sought to exercise their agreed legal rights… it is just and convenient that the second arbitrations should not proceed until that has been determined. The injunction will bring the defendants’ vexatious conduct to an end..” [British Appeal Court Judgement].

The result of this judgement is that the full circumstances and background of 1MDB’s dodgy dealings with IPIC will now be fully examined in open court in London, including the conduct of all the principle players who will now be required to take their stand in the dock.

It leaves the British justice system to determine the fairest resolution to the case where there have clearly been sinners on all sides, but where the Malaysian public have been the ones to suffer the consequences of this mutual theft.

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