Court Can Grant Interim Measures against Non-Parties to Arbitration

The High Court in Padda Gurtaj Singh and others v Axiata Group Berhad and others (grounds of judgment dated 29 March 2022) granted an interim measure in the form of an injunction against Axiata Group Berhad, a non-party to an arbitration agreement. This was pending the arbitration between the parties to an arbitration agreement.

Summary of the Decision and Significance
Grounds by: Ong Chee Kwan JC

The arbitration dispute was between certain shareholders in Tune Talk and they were parties to a Shareholders Agreement.

The Plaintiff-shareholders were arbitrating against Celcom Mobile (the shareholder of 35% shareholding in Tune Talk) and Celcom Axiata (which owned 100% shares of Celcom Mobile). In turn, Axiata Group Berhad (Axiata) owned 100% shares of Celcom Axiata. Axiata was not a party to the Shareholders Agreement involving Tune Talk and was not a party to the arbitration.

The Plaintiffs obtained an interim measure from the Court to restrain Axiata from allowing the 35% shareholding in Tune Talk to be part of the Axiata sale to Digi.

The Court held that section 11 of the Arbitration Act 2005 (AA 2005) was limited to only the parties to the arbitration agreement. However, section 19J of the AA 2005 was wider and could extend to non-parties to the arbitration agreement. The Court could grant the interim measures against non-parties as long as the interim measures are “in relation to arbitration proceedings“.

Further, the Court viewed that it may not be appropriate to apply the strict American Cyanamid test for the grant of an interim measure injunction under the AA 2005. In determining whether there is a serious issue to be tried, the Court may be overstepping into the domain of the arbitral tribunal’s decision-making process.

Background Facts

Introduction to the Parties

The dispute centred on the shareholders and shares of Tune Talk Sdn Bhd. Tune Talk is a Mobile Virtual Network Operator using the Celcom mobile network.

Tune Talk was incorporated in 2006. It is regulated by both its Articles of Association and a Shareholders Agreement dated 23 December 2008.

At the time, Celcom Axiata Berhad (Celcom Axiata), held a 35% block of shares in Tune Talk. As will be explained shortly, Celcom Mobile Sdn Bhd (Celcom Mobile) is a wholly-owned subsidiary of Celcom Axiata. In turn, Celcom Axiata is a wholly-owned subsidiary of Axiata Group Berhad (Axiata).

The Plaintifs in this action are Padda Gurtaj Singh, East Pacific Capital Pte Ltd, and Tune Strategic Investments Ltd (Plaintiffs). They collectively hold around 30.02% of shares in Tune Talk.

Digi.com Berhad (Digi) is a listed company and a director competitor to Celcom and Tune Talk in the provision of mobile telecommunications. Digi is specifically listed as a “Competitor” under Tune Talk’s Articles of Association and Shareholders Agreement.

Arbitration Dispute on Axiata’s Sale of Celcom to Digi

The Shareholders Agreement had some key terms. One of the terms is that no shareholder can transfer its shares in Tune Talk to any third party without ensuring the third party makes a tag-along offer to all other shareholders. Another term was a blanket prohibition on a sale of Tune Talk shares to a Competitor or to a Competitor holding shares directly or indirectly in any Shareholder.

Up until 18 June 2021, Celcom Axiata was the registered owner of the 35% block of shares in Tune Talk.

On 18 June 2021, Celcom Axiata exercised its rights under the Shareholders Agreement to transfer the 35% block of shares to its wholly-owned subsidiary, Celcom Mobile.

On 21 June 2021, Axiata announced a proposed sale of its entire shareholding in Celcom Axiata to Digi. In the announcement, the 35% block of shares in Tune Talk (now held by Celcom Mobile) is mentioned as being part of the intended sale.

The Plaintiffs’ contended that Axiata’s actions have resulted in a breach of the Shareholders Agreement by Axiata’s ultimate subsidiary, Celcom Mobile. This is where there was a “proposed transfer of shares or other interests” resulting in a “change of control” of Celcom Axiata and Celcom Mobile.

The Plaintiffs issued a Notice of Material Breach alleging that the proposed merger between Celcom Axiata and Digi constituted a breach. If the Material Breach was not remedied, under the terms of the Shareholders Agreement, a Compulsory Transfer Notice would be deemed to have been issued in respect of the 35% block of shares.

The Shareholders Agreement had an arbitration clause. The dispute is now pending determination in arbitration. The Plaintiffs are the claimants and the respondents being Celcom Axiata and Celcom Mobile.

High Court Interim Measures in Support of Arbitration

On 28 September 2021, the Plaintiffs filed an application for interim measures from the Court. The Plaintiffs named, among others, Axiata, Celcom Axiata and Celcom Mobile as the Defendants in the action.

The most critical relief, and the one considered in depth by the Court, was the Plaintiff’s relief that Axiata be prohibited by an injunction from including the 35% block of shares in Tune Talk (registered in the name of Celcom Mobile) in Axiata’s proposed sale to Digi.

Axiata is not a party to the ongoing arbitration.

The Plaintiffs’ application was premised on section 11 and section 19J of the Arbitration Act 2005 (AA 2005) where the Court may grant interim measures in aid of arbitration.

Decision

The Court considered the relevant wordings of section 11 and section 19J of the AA 2005.

Section 11. Arbitration agreement and interim measures by High Court

(1) A party may, before or during arbitral proceedings, apply to a High Court for any interim measure and the High Court may make the following orders for the party to …

(a) maintain or restore the status quo pending the determination of the dispute

…

 

Section 19J. Court-ordered interim measures

(1) The High Court has the power to issue an interim measure in relation to arbitration proceedings, irrespective of whether the seat of arbitration is in Malaysia.

(2) The High Court shall exercise the power referred to in subsection (1) in accordance with its own procedures in consideration of the specific features of international arbitration.

 

Section 11 Cannot Apply to Axiata, a Non-Party to the Arbitration Agreement

First, the Court found that it is obvious that section 11(1) of the AA 2005 is applicable only when an application is made by a party to the arbitration agreement seeking from the High Court interim measures against another party to the arbitration agreement. This is clear from the definition of ‘party’ in section 2(1) of the AA 2005 being “a party to an arbitration agreement or, in any case where an arbitration does not involve all the parties to the arbitration agreement, means a party to the arbitration“.

Section 19J Can Apply to a Non-Party

Second, while section 11(1) is applicable only to parties to the arbitration agreement, section 19J of the AA 2005 contains no such restrictions at all.

Section 19J(1) of the AA 2005 gives the High Court the powers to grant interim measures as long as the interim measures are “in relation to arbitration proceedings“. Further, the granting of section 19J interim measures is not subject to the conditions stipulated in section 19A of the AA 2005.

Third, section 19J(1) of the AA 2005 must be read in light of section 8 of the AA 2005. Section 8 provides that “[n]o court shall intervene in matters governed by this Act, except where so provided in this Act“. The Court can intervene only in the limited circumstances where the curial intervention is intended to support the arbitration proceedings. The Court must be careful not to determine or prejudge the disputes that are before the arbitrator.

The above is consistent with the intention of Parliament. The Arbitration Amendment (No. 2) Act 2018 had amended the AA 2005 to include the new section 19J which is identical to Article 17J of the UNCITRAL Model Law. This brought the Malaysian arbitration framework in line with the latest revision of the UNCITRAL Model Law.

The Court also cited the commentary on Article 9 of the Model Law (being the equivalent of section 11 of the AA 2005) in the Digest of Case Law on the UNCITRAL Model Law at page 53 paragraph 5. The commentary stated that one of the reasons it may be appropriate for a Court to be given powers to grant interim measures is “where a measure needs to be granted against a third party over which the arbitral tribunal has no jurisdiction“.

Applying the Principles

The Court held as follows. Axiata’s sale announcement specifically mentioned the Tune Talk shares in the name of Celcom Mobile as being part of the intended sale to Digi.

By Celcom Axiata’s transfer of the Tune Talk Shares to Celcom Mobile, Celcom Axiata has introduced an additional layer to the shareholder of the 35% shareholding in Tune Talk.

On the one hand, there is effectively no “proposed transfer of shares or other interests” in Celcom Mobile “which results in a change in Control” of Celcom Mobile. This is since it is the shares in Celcom Axiata and not Celcom Mobile that are intended to be sold. Even then, it is to be sold by Axiata who is not a party to the Shareholders Agreement at all.

Yet, with the sale of the entire shareholding of Celcom Axiata to Digi, Digi would, in theory at least, have total direct control of Celcom Axiata and indirect control over the 35% shareholding in Tune Talk and Celcom Mobile.

Ultimately, whether Axiata’s intended sale of the shares in the above manner amounts to a breach of the Shareholders Agreement is a matter for the arbitral tribunal to determine.

Digi, being a Competitor, would now assume direct control of Celcom Axiata as well as indirect control of the 35% of Tune Talk shares and Celcom Mobile. There is no denying that this can give rise to concerns to the existing shareholders of Tune Talk. This is also with Celcom Axiata providing Tune Talk with its network services, and Celcom Mobile having its nominated directors and nominated CEO at Tune Talk.

The Court held that the facts presented above are precisely why the amendments were made to the AA 2005 in 2018. This was to give the Court the wider powers to issue interim measures even against a non-party to the arbitration agreement and where the arbitral tribunal itself would not have been able to do as the interim measure is targeted at a third party.

The interim measure against Axiata is seeking only to prohibit Axiata from including the 35% shareholding in Tune Talk in the intended sale of its entire shareholding in Celcom Axiata to Digi. This is clearly related to the arbitration proceedings. The final arbitration reliefs contemplated by the Plaintiffs include an order for Celcom Axiata/Celcom Mobile to sell the 35% shareholding in Tune Talk to the shareholders in accordance with the terms of the Shareholders Agreement in the event of a ‘Material Breach’.

The purpose of the Court intervening is to purely ensure that the arbitration does not become academic or nugatory.

May Not be Appropriate to Apply American Cyanamid Test for Grant of Interim Measure

The Court further held that the application of the American Cyanamid test may not be appropriate when the Court grants an interim measure.

It may not be necessary to determine the question of whether there is a serious issue to be tried. The fact that the matter has been brought before the arbitral tribunal in itself is premised on the existence of a ‘dispute’. If the existence of this ‘dispute’ is challenged, it would be for the arbitral tribunal to determine.

If the Court were to make a finding that there is a serious issue to be tried in respect of the dispute, the Court would have prejudged the matter.

Instead, the Court adopted the approach of Lord Mustill in his dissenting judgment in the House of Lords decision in Coppée-Lavalin SA/NV v Ken-Ren Chemicals and Fertilizers Ltd (in liq); Voest-Alpine AG v Ken-Ren Chemicals and Fertilizers Ltd (in liq) [1995] 1 AC 38.

Essentially, the Court must be careful to not intrude into the arbitral tribunal’s functions and not take away the decision-making process of the arbitrator. Some intrusions may be called for or even unavoidable, for example, in determining whether the status quo has been changed. But not more than is absolutely necessary to come to a view as to whether an interim measure ought to be issued.

Where the necessity and urgency of the interim measures outweigh the intrusions, an order for the interim measures ought to be given in the wider interest of preventing harm to the effectiveness of the final award. Where the arbitral tribunal has no jurisdiction to grant such interim measures, the case is all the more compelling.

Counsel for Axiata, Celcom Axiata and Celcom Mobile contended that the injunction against Axiata was in the nature of a mandatory injunction. This is where the 35% shareholding could only be excluded by transferring the same to a third party that is not part of the proposed merger. A mandatory injunction must meet the test of an unusually sharp and clear case.

The Court disagreed. The terms of the injunctive order against Axiata was merely to require Axiata to refrain from including the 35% shareholding in Tune Talk from the sale of its entire shareholdings in Celcom Axiata to Digi. This is nothing more than preserving the status quo.

For the Court to apply the higher standard of demonstrating an unusually sharp and clear case for a mandatory injunction would also unnecessarily make a greater intrusion into the arbitral tribunal’s decision-making process in this case.

In any event, the Court also referred to the Court of Appeal case in KNM Process Systems Sdn Bhd v Lukoil Uzbekistan Lubricating Company LLC [2020] MLJU 85 for the grant of interim measures under section 11 of the AA 2005. The Court of Appeal had still applied the Keet Gerald Francis test (i.e. the American Cyanamid test) in the grant of the interim injunctive relief pending arbitration.

Even where the Court applied the Keet Gerald Francis test, the Court continued to hold that there were serious issues to be tried, damages were not adequate and the balance of convenience was in favour of the grant of the injunction.

Hence, the Court granted the interim measure through an injunctive order restraining Axiata from selling the 35% shareholding in Tune Talk to Digi. The Court found no necessity to grant the other interim measures sought against the other parties.

Comments

I make two brief comments.

First, it is interesting to see the grant of an interim measure against a non-party to the arbitration agreement and to the arbitration. Litigants should then always include the wider wording of section 19J of the AA 2005 as part of their arsenal in applying for interim measures from the Court.

There is also precedent for this in the Hong Kong Court of First Instance decision in Company A and others v Company D and others [2018] HKCFI 2240.

The Court there held that there is jurisdiction under section 45 of the Hong Kong Arbitration Ordinance to make a Court-ordered interim measure against a third party to the arbitration. The aim of the interim measure is for the purpose of facilitating the process of the arbitral tribunal. However, the wording of section 45 of the Ordinance does not adopt Article 17J of the Model Law and is more of a blend in the wording similar to section 11 and section 19J of the AA 2005.

In England, the wording of the English Arbitration Act is also different from the Model Law and from the AA 2005. The English High Court decisions in Cruz City 1 Mauritius Holdings v Unitech Ltd [2014] EWHC 3704 (Comm) and DTEK Trading SA v Morozov[2017] EWHC 1704 (Comm) held that Court powers exercisable in support of arbitrations cannot be made against non-parties to the arbitration agreement.

Second, it may be open to further clarification and discussion whether the usual injunction tests should indeed apply when granting an interim measure injunction in aid of arbitration.

Say for example in the case of applying for a Mareva freezing injunction under sections 11 and 19J of the AA 2005 in aid of arbitration. E.g. a case such as Bumi Armada Navigation Sdn Bhd v Mirza Marine Sdn Bhd [2015] 5 CLJ 652  involving a grant of a Mareva injunction in aid of arbitration.

Applying this Padda Gurtaj Singh decision involving Axiata, the applicant may apply under section 19J of the AA 2005 for a Mareva freezing injunction against a non-party to an arbitration. The applicant need not satisfy the “good arguable case” element for a Mareva freezing injunction. The applicant would instead argue that the interim Mareva freezing injunction interim measure ought to be given in the wider interest of preventing harm to the effectiveness of the final award. Additionally, that since the arbitral tribunal has no jurisdiction to grant such a Mareva injunction against a non-party, the case would be more compelling.

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