FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Malaysian Airline System Berhad [2010] FCA 757

THE COURT ORDERS THAT:

1.                  Motion dismissed.

2.                  The Respondents to pay the Applicant’s costs of the motion.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

Introduction and Overview

1                     In April 2010, the Australian Competition and Consumer Commission (“the ACCC”) filed a proceeding in this Court alleging that the respondents (“MAS” and “MAS Cargo”), and other international airlines, entered into price fixing arrangements in relation to fuel surcharges and other charges in contravention of the Trade Practices Act 1974 (Cth).

2                     MAS and MAS Cargo claim to be agencies or instrumentalities of the Government of Malaysia, and, as such, to be immune from the jurisdiction of the Court in this proceeding under ss 9 and 22 of the Foreign States Immunities Act 1985 (Cth) (“the Act”).  Accordingly, the respondents move under s 38 of the Act for the proceeding to be set aside.

3                     The issues which arise on the respondents’ motion are essentially the same as the issues which I determined in Australian Competition and Consumer Commission v P.T. Garuda Indonesia Ltd [2010] FCA 551 (“Garuda”).  The parties have therefore agreed that it is appropriate for me to determine this motion upon the basis of the principles I applied in Garuda.  However, both the respondents and the ACCC reserve their right to argue, on any appeal, that some of the principles I applied in Garuda are incorrect as a matter of law.

4                     The essential issue which arises on the motion is whether each of MAS and MAS Cargo is, or was at the relevant time, a “separate entity” under s 3(1) of the Act.  This turns on whether each of them is an agency or instrumentality of the Government of Malaysia.  In Garuda, I held at [63] that an agency or instrumentality of the State is one which is subject to the necessary degree of control and which performs governmental functions.

5                     Mr Wood, who appears with Mr Rich for the respondents, relies upon a large volume of documentary evidence to make good the proposition that the respondents are subject to the requisite control and that they carry out governmental functions.

6                     Mr Howe QC, who appears with Mr Moore and Mr Roche for the ACCC, submits that, notwithstanding the volume of the material, it fails to satisfy both elements of the definition, that is to say the “control” test and the “governmental functions” test.

7                     Mr Howe describes the evidence on which the respondents rely as falling into two categories.  The first is evidence as to the overarching framework into which the respondents, and certain other government linked corporations to which I will refer later, operate in Malaysia.

8                     The second is what Mr Howe calls a series of vignettes or examples of acts or activities which are said to make up an overall mosaic of governmental control and governmental functions.

9                     The effect of Mr Howe’s submissions is that no clear picture emerges of either actual control, or the exercise of any power that the Government of Malaysia may have to control the operations of the respondents.  Nor, in his submission, do the vignettes establish that the respondents perform the functions of government.

10                  The second issue upon which the respondents need to succeed in order to claim immunity is that the proceeding brought by the ACCC does not concern a “commercial transaction” as defined in s 11 of the Act.  I determined that issue favourably to the respondents in Garuda.  Whilst reserving its position on an appeal, the ACCC accepts that if I were to determine the “separate entity” question favourably to MAS and MAS Cargo, the respondents would succeed on their motion.

11                  The third issue is the time at which the respondents are required to establish that they are or were separate entities.  This issue was not raised in Garuda.  It is one of statutory interpretation.

12                  Mr Wood submits that the relevant time is the date on which the proceeding was commenced.  Mr Howe submits that it is the period during which the acts that are the subject matter of the proceeding were carried out.

13                  In my opinion, Mr Wood is correct for reasons set out below.  However, for abundant precaution, I will determine the question of whether each of the respondents was a separate entity at the date of commencement of the proceeding, and during the period in which the alleged price fixing arrangements were entered into or carried out.  That period is from early 2002 to late 2006.

The relevant date

14                  The question of the relevant date at which an entity must be a separate entity in order to claim immunity under ss 9 and 22 of the Act is not an easy one.  It seems to me that the better view is that the relevant date is the date on which the proceeding is commenced.  There are five reasons for this.

15                  First, the time at which the immunity is to be determined must apply equally to a “foreign State” and a “separate entity”.  This is because the immunity which is conferred upon a foreign State under s 9 of the Act applies under s 22 in relation to a separate entity in the same way as it applies to the foreign State.

16                  The immunity which is conferred by s 9 is an immunity from the jurisdiction of the local courts in a proceeding.  Thus, the subject matter of the immunity is the exercise of jurisdiction by an Australian court over a foreign State, or a separate entity, in the proceeding.  This is reinforced by the definition of “court” and “proceeding” in s 3(1).

17                  It seems to me to follow from this, that an entity which is no longer a separate entity when the proceeding is commenced is not entitled to rely upon the subject matter of the immunity conferred by s 9.  This is borne out, in particular, by what I have said under the second and third reasons below.

18                  Second, the definition of “separate entity” in s 3(1) of the Act speaks in the present tense, the person or body corporate must be one that “is” an agency or instrumentality of the relevant foreign State.  Moreover, it must be one that “is not” a department or organ of the government of that State.

19                  Support for this view may be obtained from a decision of the Supreme Court of the United States in Dole Food Co v Patrickson 538 US 468 (2003).  Although the statute in that case was expressed in different terms, the plurality judgment, delivered by Kennedy J, emphasised at [12], that the plain text required instrumentality status to be determined at the time when the suit was filed because it was expressed in the present tense.

20                  Kennedy J at [13] – [14] also pointed to the difference between the immunity which is granted under the United States’ equivalent of the Act, and the immunity accorded to a State actor that is based on the status of that person at the time of the conduct giving rise to the suit.    His Honour continued by saying:

Foreign sovereign immunity, by contrast, is not meant to avoid chilling foreign states or their instrumentalities in the conduct of their business but to give foreign states and their instrumentalities some protection from the inconvenience of suit as a gesture of comity …

21                  The same reasoning seems to me to apply to the immunity conferred on foreign States and their instrumentalities by ss 9 and 22 of the Act.

22                  Third, the conferral of general immunity under s 9 should be considered in its historical context.  What underlies it is the principle that:

… the courts of a country will not implead a foreign sovereign, that is, they will not by their process make him against his will a party to legal proceedings … 

See Compania Naviera Vascongado v The Cristina [1938] AC 485 at 490 per Lord Atkin.

23                  It is true that Lord Atkin’s remarks dealt with the doctrine of absolute immunity but the modern expression of sovereign immunity in Part II of the Act states the circumstances in which the court will apply that principle.

24                  Importantly, what this demonstrates is that the entitlement to immunity from the exercise of jurisdiction is that of the foreign sovereign or its instrumentalities.  I do not see how, upon the proper construction of the Act, a corporation that is not an agency or instrumentality of the foreign State at the time when the process is commenced could make a claim of immunity under ss 9 and 22 of the Act.

25                  Fourth, whilst the exceptions to the general immunity conferred by s 9 direct attention to the time at which the relevant events occurred, that is a different question from that which is raised by s 9.

26                  This is illustrated in the present case by a consideration of the commercial transactions exception in s 11.  If the claim under ss 9 and 22 is made by an agency or instrumentality of the foreign State, the court’s attention is then directed to whether the proceeding concerns a commercial transaction as defined in s 11(3).

27                  Plainly, the question of whether the proceeding concerns a commercial transaction involves a consideration of the facts which are the subject matter of the proceeding at the time when these facts took place.  But that enquiry is made only to determine whether an exception is enlivened to the immunity which would otherwise apply under ss 9 and 22.

28                  Fifth, there is nothing in Australian Law Reform Commission Report No 24 “Foreign State Immunity” that bears directly on the question.  Paragraph 71 of the Report, which deals with agencies and instrumentalities, is silent on the question of the time at which an entity is to satisfy the definition of a separate entity.

29                  To the extent that the Report gives any guidance on this question, it suggests that the relevant time is the date when the process is filed, or at least, when the claim for immunity is made.  This is because para 67 of the Report states that a basic element in any claim to foreign State immunity is whether the entity making the claim, or on whose behalf the claim is made, is in fact a foreign State.

EVIDENCE

Structure of Judgment and Evidence

30                  The respondents ask me to draw inferences of control and governmental functions from a large body of evidence.  Most of the evidence is in documentary form and consists of exhibits to the affidavits of Ms Shahjanaz Kamaruddin and Mr Germal Singh Khera Pertap Singh.

31                  Ms Kamaruddi is the Company Secretary of MAS and Mr Singh is the General Manager, Government and Industry Relations.

32                  The evidence falls into six main categories which I will consider in some detail in my reasons.

33                  The first category is the shareholding in MAS. 

34                  The second category is the existence of a “Special Share” in MAS, and the powers attached to it.

35                  The third category is the directorships of MAS and those of its shareholder companies.

36                  The fourth category is the designation of MAS as a Government Linked Company (“GLC”), and the designation of the shareholders of MAS as Government Linked Investment Companies (“GLICs”).

37                  The fifth category consists of specified examples of government “involvement” in the conduct of the business of MAS.  This comprises a large part of the documentary material and contains many of the examples or “vignettes”, as Mr Howe described them.

38                  The sixth category is MAS’s tax free status in Malaysia.

History of MAS

39                  From about 1966 to 1971 the Governments of Malaysia and Singapore jointly owned a company which carried on business as an international and domestic airline trading as “Malaysia – Singapore Airlines”.  In about 1971 the two Governments decided to split the assets of the company and to operate separate airlines. 

40                  MAS was incorporated on 3 March 1971 as a private limited company.  At that time all of the issued shares in MAS were vested in the Ministry of Finance (Incorporated) (“MOF”) which I will describe in more detail below. 

41                  On or about 16 December 1985, MAS was listed on the Kuala Lumpur Stock Exchange, which is now known as Bursa Malaysia.  MAS is a publicly traded company listed on the main board of the Bursa Malaysia. 

42                  At, or around, the time of listing, 70 million ordinary shares in MAS were converted to stock for public sale.  Ms Kamaruddin states that at all times since December 1985, MOF has retained, directly or indirectly, at least 55% of the ordinary shares of MAS.  I will set out later a table which records the Government, or Government-related, shareholding in MAS from 2001 to date.

43                  Since September 2001, MAS, and no doubt other international airlines, have faced a series of challenges affecting their commercial viability.  In the case of MAS, this has led to a number of financial initiatives, which have involved government assistance, and which have some bearing on the issue of whether MAS is subject to governmental control.

44                  The first of these programs was the Widespread Asset Unbundling (“WAU”) Scheme in 2002.  I will describe this and the other relevant programs in more detail later.

45                  In May 2004, the then Prime Minister launched the Government Linked Company Transformation (“GLCT”) Program which was followed in January 2005 by the formation of the Putrajaya Committee.  That Committee was formed to facilitate the transformation of GLCs, including MAS, into high performance companies.

46                  In February 2006, MAS introduced the Business Turnaround Plan with a view to achieving profitability and growth.

47                  Mr Singh states in his affidavit that since the time of listing of MAS on the Stock Exchange, and especially after the Business Turnaround Plan in 2006, the Government’s role and influence over commercial decision making within MAS has been reduced.  He continues by saying that:

(h)owever, the Government remains involved to a significant degree in key strategy and decisions taken within MAS … 

48                  I admitted that sentence subject to a limitation under s 136 of the Evidence Act 1995 (Cth) that the evidence is to rise no higher than the content of other paragraphs of the affidavit which address the subject matter of certain meetings described as “post-Cabinet” Meetings (in the affidavit).

Shareholding

49                  As I said earlier, the relevant date at which to consider the question of control is the time of the filing of the proceeding in April 2010.  Apart from the Special Share, to which I will refer later, the evidence shows that as at 2010 the Government did not own directly any shares in MAS.

50                  Rather, the Government’s shareholding was indirect, and was held through three GLICs, namely Khazanah Nasional Berhad (“KNB”), Penerbangan Malaysia Berhad (“PMB”) and Employees Provident Fund Board (“EPFB”).

51                  The ACCC prepared a table which I reproduce below.  Subject to two minor corrections, the table accurately sets out the shareholding of MOF and the other entities referred to above, in MAS during the period from 2001 to 2010. 

52                  The table is below:

53                  The omissions to which Mr Wood referred relate to the years 2001 and 2002.  He noted that in each of those two years another GLIC known as Kumpulan Wang Amanah Pencen (“KWAP”) owned approximately 20% of the shares in MAS.

54                  The effect of the figures set out in the table is that as at 2010, the three relevant GLICs, namely PMB, KNB and EPFB, owned nearly 80% of MAS.  In 2002 MOF owned approximately 29% of MAS with a further shareholding, apparently in the order of 33% being owned by two GLICs, namely KWAP and EPFB.  From 2003 to 2007, two GLICs, namely PMB and EPFB owned approximately 80% of MAS.

PMB

55                  PMB is a wholly owned subsidiary of KNB.  The current directors of PMB include the Deputy Secretary General of the Ministry of Finance, the Chief Financial Officer of KNB and an Executive Director of KNB.

KNB

56                  All of the issued shares in KNB are held by MOF.  The current directors of KNB include the Prime Minister of Malaysia (who also serves as Finance Minister), the Deputy Finance Minister and the Minister in the Prime Minister’s Department.

57                  The Articles of Association of KNB provide that KNB must at all times be a fully owned subsidiary of MOF.  Provision is made for an agent of MOF to hold shares on its behalf in certain circumstances.

EPFB

58                  EPFB was established by the Employees Provident Fund Act 1991 (Malaysia) (“the EPF Act”). 

59                  In addition to establishing the EPFB, the EPF Act established a fund called the Employees Provident Fund (“the Fund”) into which employer and employee contributions are required to be paid.

60                  The EPFB is a corporation, established for the purposes of managing the Fund:  see
s 3 of the EPF Act.

61                  Members of the EPFB are appointed by the responsible Minister and hold office for such term as the Minister determines:  see s 4(3).

62                  The responsible Minister may give the EPFB directions of a general nature, not inconsistent with the provisions of the Act, as to the exercise of the functions and powers of the EPFB, and the EPFB is required to give effect to those directions:  see s 11.

63                  There is an Investment Panel responsible for matters pertaining to the investments of the Fund.  The Minister appoints persons to the Investment Panel which must also include a representative of the Ministry of Finance.  The Investment Panel is subject to directions issued to the EPFB that have been approved by the Minister:  see s 18 of the EPF Act.

The Special Share

64                  Articles 4 and 5 of the Articles of Association of MAS provide for the creation of one Special Share to be held by MOF or a Minister or representative of the Government of Malaysia. 

65                  The Special Share carries the right to appoint or nominate three Government Appointed Directors and to appoint one of them as Chairman:  see Article 5(2).

66                  The Special Shareholder is entitled to receive notice of, and to attend and speak at general meetings, but the Special Share carries no right to vote at general meetings of MAS: Article 5(3).

67                  MAS is precluded from undertaking certain activities without the consent of the Special Shareholder.  These include:

·                    any disposal which, because of its size, is required by the Bursa Malaysia to be approved by the company in general meeting.  This applies to transactions in which the value of the assets is more than 25% of the net assets of MAS: see article 5(6)(c) and Listing Requirements, para 10.07(1); and 

·                    any acquisition, takeover, amalgamation, merger or change of operations which due to its significance is required by the Bursa Malaysia to be approved by the company in general meeting.  The 25% rule referred to above is applicable: see Article 5(6)(d) and Kamaruddin [14(d)].

68                  The Special Shareholder has the right to remove a director it has appointed: see Article 119(1).

69                  The Articles of Association also provide that if a director appointed by the Special Shareholder ceases to hold office, the vacancy may only be filled by an appointee of the Special Shareholder:  see Article 119(3)(b).

70                  MOF was established by the Minister of Finance (Incorporation) Act 1957 (Malaysia).  The effect of s 3 of that Act was to provide for the incorporation of the Minister of Finance as a corporation sole under Malaysian law.

Directors of MAS

71                  There are currently ten directors of MAS. The Chairman and two other directors were appointed by MOF.  It was not suggested that at any of the relevant dates the appointees of MOF comprised more than three of then ten members of the Board.

72                  The current directors of MOF included a retired civil servant from the State of Sabah and the CEO of an agency of the State of Sarawak.  Although the Articles do not mandate that the States of Sabah and Sarawak be represented on the Board of MAS, there has been a representative on each of those States on the Board of MAS since 1986. 

73                  Article 154 of MAS’s Articles of Association contains the provision, commonly found in the constitutions of Australian companies, that the business of the company is to be managed by the directors. 

74                  Questions arising at meetings of directors are to be decided by a majority of votes, each director having one vote, with the Chairman to have a casting vote in case of an equality of votes:  see Article 146.

75                  The provisions of the Articles apply equally to Government Appointed Directors as to other directors:  see Article 119(2).

76                  The Directors of MAS may provide for the management of the affairs of the company in any specified locality in the world:  see Article 187.  There was no evidence that this power has been exercised.  Nor was there evidence of the appointment of a principal executive officer: Article 131A.

GLCs

77                  The Putrajaya Committee has published a definition of GLCs as follows:

GLCs are defined as companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake.

Apart from percentage ownership, controlling stake also refers to the Government’s ability to appoint Board members, senior management and make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc) for GLCs either directly or through GLICs.

This definition includes companies where GLCs themselves have a controlling stake, i.e. subsidiaries and affiliates of GLCs.

GLICs

78                  The Putrajaya Commiteee’s definition of GLICs is:

GLICs are defined as Federal Government-Linked Investment Companies that allocate some or all of their funds to GLC investments.

Defined by the influence of the Federal Government in appointing/approving Board members and senior management, and having these individuals report directly to the Government, as well as in providing funds for operations and/or guaranteeing capital (and some income) placed by unit holders.

79                  There are seven companies on the Putrajaya Committee’s list of GLICs.  They include KNB, the Fund (which is presumably a reference to EPFB) and KWAP.

80                  PMB is not included in the Putrajaya Committee’s list of GLICs exhibited to Mr Singh’s affidavit.  However, as a wholly owned subsidiary of KNB, it follows from the definition, that PMB is itself a GLIC.

81                  A document entitled “Initiative 3, Government-Linked Investment Company, Monitoring and Management Framework” describes GLICs as professional shareholders which play a critical role in guiding and influencing GLCs. 

82                  The document goes on to say that “management” of a GLIC does not mean getting involved in the day-to-day running of the company; it means governing the company through a range of influence levers.  For portfolio investment, the main influence lever is said to be voting at AGMs/EGMs and:

where GLICs have Board representation, influence will be exercised mainly through their Nominee Directors on the Board.

The WAU Scheme

83                  The WAU Scheme is described in the Annual Report of MAS for 2002-2003.  The Chairman’s message described it as “innovative” and explained that it came about because Malaysian Airlines was encumbered by a huge debt.  The situation was said to be “hardly tenable” and the airline needed restructuring to put it on a firmer footing with a healthier balance sheet.

84                  The WAU was effected by several agreements dated 30 July 2002 made between MAS and PMB which are described on pages 28-29 of the 2002-2003 Annual Report of MAS.

85                  The agreement provided for the “unbundling” and transfer of 73 aircraft on the balance sheet of MAS at an ascribed value of RM5.109 billion, together with associated liabilities amounting to nearly RM7 billion, to PMB.  Upon completion of the exercise, PMB:

… became the designated Government holding company of Malaysia Airlines.  The transferred aircraft fleet was simultaneously leased back to Malaysia Airlines.

The GLCT Program

86                  The GLCT Program is described in a document entitled “GLC Transformation Programme: Mid-Term Progress Review”.  It is described as a 10 year effort with a long term aspiration in 2015 of raising the performance of GLCs to at least be on par with domestic peers, and with several:

… transforming into regional or global champions.

87                  The GLCT Program is part of the Malaysian Government’s “Vision 2020” which is described in the Mid-Term Review as follows:

1.         Vision 2020 requires Malaysia to be a comprehensively developed country and to achieve this, greater urgency and impetus is needed going forward, in view of the tough financial and economic challenges posed by the current global economic crisis.

2.         GLCs form the backbone of the structure of the Malaysian economy and must deliver high performance to drive the country towards achieving a developed nation status, maintaining Malaysia’s economic sovereignty and achieving Programme goals of becoming regional or global champions by 2015.

 3.        GLCT Programme is a long-term programme, to be fully implemented in 10 years with full benefits for the nation to be realised by 2015.  The Programme is designed around three key underlying principles and based on 5 policy thrusts.

88                  The importance of the GLCT Program is described in a Question and Answer document published by KNB.  The document states that GLCs and GLICs constitute a significant part of the economic structure of the nation.  The document goes on to say that GLCs employ an estimated 5% of the national workforce and account for approximately 36% of the market capitalisation of Bursa Malaysia.  The document also states:

GLCs remain the main service providers to the nation in key strategic utilities and services including electricity, telecommunications, postal services, airlines, airports, public transport, water and sewerage, banking and financial services.

89                  The abovementioned document describes the GLCT Program as the transformation of GLCs into high performing entities.  This is said to be critical to the future prosperity of Malaysia.

90                  The document describes the key principles of the GLCT Program as including the following:

Governance, shareholder value and stakeholder management – the GLC Transformation Programme, while being led by the Government, fully observes the rights and governance of shareholders and other stakeholders.  Hence, the policy measures to be implemented come in the form of policy guidelines rather than rules that GLCs are expected to implement through their Board of Directors in line with good governance.  In addition, and within the context prescribed above, GLCs are expected to engage in managing other valid stakeholder interests, in particular those of employees, customers, suppliers and the Government itself as regulators and policy makers. (Bold in original).

91                  The document also contains a description of KNB’s investment holdings.  The portfolio of investments is grouped into a wide variety of areas including companies operating in the fields of automotive, healthcare, infrastructure and construction, transportation and logistics.  The last mentioned describes a number of companies including MAS as follows:

MAS, Malaysia’s national carrier, started its services in 1947 with just one twin engine Air Consul that sat only five.  Since then, however, Malaysian Airlines has become an award-winning airline with a fleet of more than 100 aircraft, spreading its wings across six continents and servicing more than 100 different destinations.

92                  Another category referred to in KNB’s investment portfolio is “others”.  The companies include one which manufactures and distributes automobiles and another which conducts department stores in the People’s Republic of China.

The Putrajaya Committee

93                  The Putrajaya Committee meets regularly to monitor progress of the GLCT.

94                  A media statement dated 13 March 2009 was in evidence.  It described the 19^th Committee meeting and reported on the G-20 which is a selection of twenty large GLCs including MAS.

The Prime Minister’s Speech

95                  In a speech given on 29 July 2005, the then Prime Minister of Malaysia described the GLCT Program and the establishment of the Putrajaya Committee.

96                  The Prime Minister said that the Government was seeking to transform and enhance the public service delivery system through the GLCs.  He also said that he established the Putrajaya Committee to “follow through and catalyse” the GLCT Program.  In this respect, the Prime Minister said he had asked the Deputy Finance Minister along with heads of the GLICs to work together to monitor developments.

97                  The Prime Minister described the key principles running through the GLCT Program as:

i.          First, that the program is part of the larger national development strategies;

ii.         Second, that the program is focused on enhancing performance at the G.L.C.s; and

iii.                  Third, that the program takes full cognisance of matters relating to governance, shareholder value and stakeholder management.

The Business Turnaround Plan

98                  The Business Turnaround Plan was announced under cover of a letter from the Managing Director of Malaysia Airlines dated 27 February 2006.

99                  The letter included the following statement:

I am fully aware that our stakeholders particularly in Malaysia are very interested in the affairs of MAS.  Whilst this document is aimed primarily at communicating the Business Turnaround Plan to our staff, we felt that it should be made available to selected external stakeholders.  My team and I have decided to be as transparent as possible about our problems and how we intend to address them, without disclosing confidential and competitive information.  What we are definitely NOT disclosing is how precisely we are going to implement the plan.  The key to success is indeed in the execution of this plan and that is our secret.

100               The document describing the Plan states that it has been developed using the GLCT Manual as a “guide” and that it “takes into account” the recommendations made in the manual and “adapts” them for implementation by MAS.

101               The document states that the Plan was sequenced over a three year period “to deliver cash, profitability and growth.”

102               The document contains the following lengthy paragraph under the heading “There are significant social and political obligations”:

The pundits are of the view that political and social obligations present the most overwhelming and significant constraints to our ability to transform the business.  As a largely state-controlled airline in a regulated industry, it is argued that MAS does not always have the freedom to act according to pure market principles.  MAS is constrained from freely changing destinations, routes and pricing within its domestic sector.  And even though there are no explicit constraints on the international routes, MAS might not have full flexibility to make changes to destinations, schedules or pricing.  For example, flying to Vienna costs MAS approximately RM30 million per annum in losses and it is unclear if MAS can simply exit this route.  We are committed to serving the nation and enhancing the country’s economic prosperity, and serving the market as we do today certainly meets the national interest, but it does not necessarily fulfil our commercial interests.  In moving forward, both the Government and MAS need to establish a workable mechanism to ensure that both the social objectives of the Government and the commercial objectives of MAS are catered for.  To this end, the interests of MAS and the Government will be guided by the principles laid out in the GLC Transformation Manual issued by the Putrajaya Committee for GLC High Performance.

103               There are a number of other statements made in the document, to which reference was made in the proceeding.  They include:

·                    the Prime Minister has said the Government is committed to MAS but “will not bail MAS out”;

·                    decisions must be anchored on the company’s profit – not political favour;

·                    MAS needs the support of its partners, government, employees, managers, customers, suppliers, agents and investors;

·                    MAS will “proactively engage” with all its stakeholders about its results and plans:

… and about what we do and why.  We will also demand that all our stakeholders do the same for us.

104               There are other statements in the document which refer to meeting a variety of needs including national and community.  Actions are said to include efforts to redesign the domestic aviation policy:

with a goal of either fully compensating MAS for loss-making routes or sharing or transferring the responsibility to others in the market …

105               The proposed restructure of the domestic sector is described in some detail in the document.  According to the document, MAS operates the sector on behalf of PMB and PMB and MAS agreed “upfront” on an annual budget.  The document also states that for MAS to take over the profit and loss responsibility for the domestic sector from PMB, MAS would require the prior agreement of the Government to a number of conditions.

106               The document also states that in 2006, with the consent of the Government, MAS:

will increase domestic prices for the first time in 13 years …

107               The document concludes with a description of MAS’s stakeholders.  The following appears under the heading “The Government”, which is one of seven named stakeholders:

MAS will continue to carry the flag for Malaysia.  The aviation sector has a high economic multiplier effect – based on preliminary analysis, the economic multiplier effect in Malaysia is 12.  For every ringgit invested in the aviation sector, there is a positive spin-off of 12 ringgit to the Malaysian economy in terms of tourism, infrastructure and logistics development.  Furthermore, we will do our part to deliver on the Government’s GLC Transformation Program.

Given this, we expect Malaysia to develop with MAS’s success.  To succeed, we ask that we are given a fair regulatory framework, the freedom to act as a business and be compensated for any social obligations we must fulfil.

108               On 24 April 2006 the Managing Director of Malaysia Airlines wrote to the Government stating that in accordance with the Business Turnaround Plan, the airline proposed to terminate a number of unprofitable routes.  The letter states:

We would like to meet and discuss these proposals with you.  As we have discussed previously, should the Government for strategic or other reasons require Malaysia Airlines to continue operating any of these services that are proposed to be withdrawn under Phase 3, the Government has suggested proudly financial compensation for the losses incurred.  We would like to discuss this with you when we meet.

109               The unprofitable routes included flights from Kuala Lumpur to New York and Los Angeles.  I will deal with that topic later.

110               MAS achieved “highly commendable profits” under the Business Turnaround Plan in 2007, compared with the losses recorded in the previous year.

Post-Cabinet Meetings

111               For many years, the Managing Director of MAS, or his delegate, has attended a weekly post-Cabinet meeting with the Minister of Transport and other senior persons in the Department of Transport and the Heads of other agencies in Malaysia that report to the Department of Transport.

112               Mr Singh has attended these meetings during the last nine years.  He sets out in paragraph 10 of his affidavit some of the topics that were discussed.  They include whether MAS should continue to fly to New York and Los Angeles, whether it should fly to other destinations, ticketing and reservation issues, in-flight food and aircraft purchases.

113               From time to time Mr Singh also attends pre-Cabinet meetings with the Minister of Transport, usually to assist the Minister in finalising Cabinet Briefing Papers relating to MAS.  Pre-Cabinet meetings are held once a week but MAS is only required to attend if a particular issue relating to MAS is likely to be discussed at the Cabinet meeting.

114               MAS submits an “Annual Budget Business Operating Plan” to the Ministry of Transport each year.  If the Government does not approve of any part of the Plan, it raises this in post-Cabinet meetings, or sometimes in correspondence.  An example of this occurred in 2006 when MAS proposed to reduce the number of weekly flights from Kuala Lumpur to London.

Flights to New York and Los Angeles

115               Following upon the letter of 24 April 2006 referred to at [108] above, Mr Singh attended post-Cabinet meetings at which he was told that Cabinet wanted MAS to continue flights to New York and Los Angeles to see if MAS could improve “returns from those services”.  Mr Singh reported this to his Managing Director and MAS continued to operate the flights.

116               Mr Singh’s evidence on this topic continued as follows:

On 11 October 2006, I attended a post-Cabinet meeting at which the issue of whether MAS could cease flights to New York and Los Angeles was once again discussed.  At this meeting, I stated that MAS wanted to cease flights to New York and Los Angeles because of the heavy losses being incurred.  However, I was told words to the effect that Cabinet wanted MAS to reconsider its position and maintain flights to New York and Los Angeles.  The meeting was chaired by the Minister of Transport.  I reported what I had been told at the post-Cabinet meeting to the then Managing Director.  Thereafter, MAS continued to operate the New York and Los Angeles services.  I am aware that MAS made a number of presentations and provided financial data to the Government between 2006 and 2009 in support of its request that the Government agree MAS could discontinue flights to New York and Los Angeles.

In July 2009, during a post-Cabinet meeting, I was told words to the effect that the Government had approved MAS ceasing to fly to one of the destinations (ie, Los Angeles or New York).  MAS decided to cease flights to New York and those flights in fact ceased in October 2009.  MAS currently flies to Los Angeles 3 times per week.

Meetings Between the Managing Director and Ministers

117               Mr Singh and the Managing Director of MAS meet regularly with the Minister of Transport to brief him and keep him informed of developments at MAS.  Mr Singh also prepares briefing papers for the Managing Director when the Managing Director of MAS meets with the Prime Minister (who is also the Minister of Finance, the Chairman of KNB and the Head of the Economic Council).

Minutes of MAS Board Meetings

118               Ms Kamaruddin’s affidavit exhibits extracts of minutes of meetings of directors of MAS during the period from 22 August 2005 to 15 March 2010.  Sixteen extracts are exhibited.  They cover a range of topics relating to communications with the Government about the business of MAS.

119               It is unnecessary to set out all of the extracts to which I was taken.  The following examples are sufficiently illustrative of the matters discussed:

29/3/06                         1.1.1     Dato Chairman informed the Board that this Special Board Meeting was called in order for Management to brief the Board on the outcome of the negotiations which the Company had with the Government.  The Board was thereby requested to consider the consequences of the decision of the Government on the rationalization of the domestic operations to the Company.

29/3/06                         1.1.6     …

                                    The Government, however, has decided that the Company should not implement tactical pricing.   …

`                                   On this note, the Board was of the view that the imposition of the price ‘floor’ was detrimental to the interest of the Company and that it must register its disagreement to enable this issue to be escalated to the Prime Minister.  It was agreed that the Chairman would send a letter to this effect.

24/7/06                         5.1        Airbus A380 Delivery Options

5.1.8          The Board decided that the matter should be referred to the Government for guidance.  The Company should put up its recommendation to the Government on the options that the Company would be taking ie option 3 with the view of option 2.  The Board indicated that the parties in the Government that should be referred to are the Prime Minister, the Deputy Prime Minister, the Minister of Transport and the Second Finance Minister.

6/8/09                          4.2.1.1   Tan Sri Chairman informed the Board that the Nomination Committee had met earlier that day to consider the request received from EPF to nominate its chairman as a Director on the MAS Board.  It was agreed that it would consult with Khazanah given that under the GLC transformation program the number of Board members is not to exceed ten in total.

19/10/09                         2.2      Funding from Ministry of Tourism

2.2.1          In response to a query from Dato` Sadasivan, Tengku Dato’ Azmil clarified that an amount of RM50 million had been approved by the Ministry of Tourism, which will be spent jointly with the Company this year and during the early part of next year.  A MAS employee had been seconded to the said Ministry to assist in this endeavour.

Domestic Route Rationalisation

120               The following statement was made under this sub-heading in MAS’s 2005 Annual Report:

Malaysia Airlines, as the national flag carrier, has a social responsibility to the people of Malaysia, which it has discharged over many decades.  We provide service to all the major airports and secondary airstrips in Malaysia.  Some of these locations with the secondary airstrips would have not been accessible by any other means of travel if not serviced by the national airline.  As such, our domestic operations have not been operated with an exclusive commercial profit-making mentality.  There was an important emphasis on our social responsibility to the people of Malaysia.  Unfortunately, the running of the domestic business is a “zero sum game”.  In order for the people of Malaysia to benefit to the extent they were served, Malaysia Airlines had to lose because of uneconomic routes and as a result of the subsidy to those who travel with it.  To keep the fares affordable, the Government has maintained the ticket price on some of these routes for the last 13 years without the airline having recourse to adjust prices in line with inflation and rising costs.  These are the main reasons why, of the 118 domestic routes flown in 2005, only 4 were profitable.

121               On 3 July 2008 the Government of Malaysia entered into an agreement with MASwings SDN BHD (“MASwings”), a wholly owned subsidiary of MAS.  The agreement provides for Rural Air Services (namely, non-economic air services carried out in remote and sparsely populated areas in Sabah and Sarawak) to be conducted by MASwings.

122               The recitals to the agreement include the following:

As part of the Government’s effort to continue to provide the Rural Air Services, the Government has agreed to make available the sum of Ringgit Malaysia … only for the benefit of MASwings to establish its operation of the Rural Air Services …

123               There is a reference to MASwings in MAS’s 2008 Annual Report under the heading of Corporate Social Responsibility.  The Report recognises MAS’s social responsibility, as the national carrier, to provide air services in isolated locations and states that this is carried out through MASwings.

Statement of Corporate Governance

124               MAS’s 2008 Annual Report contains a Statement of Corporate Governance which emphasises the fiduciary duties and responsibilities of the directors and goes on to say:

First and foremost, the Board is responsible for determining the Company’s long term direction, business objectives and strategy …

Tax Free Status

125               The Ministry of Finance has granted MAS an exemption from income tax on all sources of income up to 2015.  The exemption was granted in a letter dated 27 December 2006. 

MAS Cargo

126               MAS Cargo is a wholly owned subsidiary of MAS.  It conducts air cargo operations, charter freight and warehousing activities relating to air cargo operations.

127               As a wholly owned subsidiary, MAS Cargo is an entity over which the MAS Group of companies has the ability to control the financial and operating policies.

DISCUSSION

Is the Control Test Satisfied?

128               Consistent with the approach I took in Garuda, the first question which I have to answer in order to determine whether MAS is a “separate entity” is, does it satisfy the control test.  A power of control is not sufficient.  What is required is that the foreign State exercises actual, day-to-day management control:  see Garuda at [88].

129               It is clear in my view that as at the relevant date in April 2010, the Government of Malaysia had a power to exercise control over MAS.  The Government’s power was not direct, because it did not hold shares in MAS directly.  Rather, it had the power to control MAS indirectly, through its ownership of all of the shares in PMB’s parent company, KNB and its direct power of control over EPFB, these three companies holding the shares in MAS in 2010.

130               The same power of control existed in the period from 2003 to 2006.  The position was different, at least so far as a power to control existed in 2002 through MOF’s direct shareholding in MAS, coupled with the Government’s powers exercisable through its control of KWAP and EPFB.

131               In a different statutory context from the present, a person who is in a position to exercise control of a company may be treated as though the person were in control:  see Re Application of The News Corp Limited (1987) 15 FCR 227 (“News Corp”) at 242-244 per Bowen CJ.

132               But in my view, the concept of control in the context of statutes which deal with matters such as broadcasting and television does not inform the present question, which is the degree of control necessary for a corporation to be an agency or instrumentality of a foreign State.

133               Indeed, the authorities to which Mr Wood referred seem to me to support the proposition that what is required is actual control, in a real and practical sense.

134               Thus, in State Bank of New South Wales v Commonwealth Savings Bank of Australia (1986) 161 CLR 639, there were a number of factors in combination which supported the conclusion that the State Bank was a State for the purposes of s 75(iii) of the Constitution.  The power of the Governor to appoint six of the seven members of the Board was only one of those factors.  The discussion of that factor in the judgment of the Court at 650-651 is to be seen in that light.

135               Also in State Government Insurance Corporation v Government Insurance Office (New South Wales) (1991) 101 ALR 259, the observations of French J (as his Honour then was) at 308 about the position of two subsidiary companies, focuses upon their control by the Government Insurance Office (“GIO”) of New South Wales, as a State instrumentality, which was in turn subject to ultimate Ministerial direction.  It was the control of the subsidiaries by the board of the GIO of NSW, which was itself an instrumentality of the Crown, that gave rise to the argument, which his Honour regarded as a respectable one, that the subsidiaries were themselves instrumentalities of the Crown.

136               In my view, the necessary degree of control did not exist in the present case, either as at April 2010, or during the period from 2002 to 2006 for a number of reasons.

137               First, as I have said, although the Government had a power of control over MAS through its ability to exercise control at a general meeting, that is not sufficient to satisfy the test which I have stated.

138               MAS is a listed public company whose shares are quoted on the Bursa Malaysia.  The proposition that the Government’s indirect power (never in fact exercised) to exercise the degree of control required to establish that MAS is an agency or instrumentality of the State is one that I cannot accept.

139               Second, this conclusion is not affected by the existence of the Special Share held by MOF.  Rather, the existence of the Special Share, and the rights attached to it, reinforce the view that the Government does not, and did not at any of the possible relevant dates, control MAS.

140               What the Special Share does is to give the MOF a position of influence in the day-to-day control and management of the business of MAS.  It does so through the right to appoint three directors to the Board, one of whom is to be the Chairman.

141               Plainly, the power to appoint three directors to a Board of ten does not give actual control.  The power to appoint the directors has been exercised but at all relevant times the three nominees of the MOF have comprised a minority in number of the Board. 

142                The matters over which MOF has a power of veto (see [67] above) do not concern day-to-day control.  They relate to large transactions such as takeovers, which may affect the nature of the business conducted by MAS.

143               Third, the Articles of Association provide for the business of MAS to be managed by the directors but the evidence indicates that the Government nominees constitute a minority of the Board.  In particular, there is no evidence to suggest that the Government controls the composition of the Board or that it is accustomed to act in accordance with the Government’s directions.

144               Nor is there anything in any of the various programs to which I have referred, or in the extracts from Board minutes, that supports an inference that the management of MAS is under government control.

145               The overall impact of the evidence is that the Government has a considerable degree of influence over the operations of MAS.  The Government has provided much needed financial support and sees the success of MAS as an essential plank in the development of the economy.  There is a substantial degree of cooperation, consultation and engagement between MAS and the Government in the carrying out of MAS’s business.  This is no doubt explained by the Government’s investment in the airline.

146               I accept that influences from the highest level of Government are a relevant consideration in the present exercise.  I also accept that the subtleties of high level influence should not be underestimated.  But ultimately the documentary material makes it plain that the Board is independent of the Government and is an autonomous entity, not under government control.

147               This is best illustrated in the Statement of Corporate Governance in MAS’s 2008 Report to which I referred above.  The Board is responsible for determining MAS’s direction, business objectives and strategy.  The Board reviews and considers government initiatives consistently with the fiduciary duties of the directors to the company.

148               It is true, as Mr Wood submitted, that nominee directors, may be expected to act generally in the interests of the body that appointed them.  But here the Government has only three nominees and it is not to be inferred that the directors would act in the interests of their nominator even if they were of the view that their acts were not in the best interests of the company:  News Corp at 244-245, citing Re Broadcasting Station 2GB Pty Limited [1964-65] NSWR 1648 at 1663 per Jacobs J.

149               Fourth, the observations which I have made about the directors apply equally to the status of MAS as a GLC, and to the designation of PMB, KNB and EPFB as GLICs, as well as to the large number of vignettes, or examples, of government involvement.

150               The status of each of the abovementioned entities is part of what Mr Howe called the overarching framework in which government-linked entities conduct business in Malaysia and overseas.  The status does not of itself determine the ultimate question of whether there is a sufficient degree of control to make the entity an agency or instrumentality of the Government of Malaysia.

151               In any event, the evidence establishes that the company or companies which had shareholding control of MAS in April 2010, and from 2003 to 2006, were GLICs.  The definition  of a GLIC provides in express terms that the status is defined by the influence of the Government.  It is true that the definition contemplates that the Board members and senior management will report directly to the Government.  But this reinforces the notion of influence, rather than control.

152               The position is no different in 2002, if that should be a relevant date.  MOF held approximately 29% of the shares in MAS and, to the extent that government-linked shareholding took it over 50%, that was achieved through the shares held by two GLICs, KWAP and EPFB.

153               The vignettes, including the extracts from the Board minutes do not show government control.  They indicate, as I have already said, government influence and cooperation, but they do not give rise to a necessary inference of government control of MAS.

154               Fifth, tax free status cannot of itself give rise to an inference of government control.  There may be many reasons why tax free status is granted.  Much more would be required to establish the inference relied upon by MAS.

155               Sixth, as Mr Howe submitted, there is no evidence from a State official of the exertion of actual control.

156               The authorities do not suggest that evidence from such a person is a necessary pre-requisite to a claim of foreign State immunity but they show that evidence of this type will play a significant, but not conclusive, role in determining the question: see Aziz v Yemen [2005] ICR 1391 at 1403-1405 per Pill LJ; Trendtex Trading Corporation v Central Bank of Nigeria [1977] QB 529 (“Trendtex”) at 560.

157               Finally, I should add that the Government’s involvement in MAS’s decision on the maintenance of flights to New York and Los Angeles is not indicative of government control.  No doubt, the Government exercised its influence on that matter in the interests of the Malaysian public but ultimately the decision was one that was taken by MAS for its own commercial considerations. 

Governmental Functions

158               Since I have come to the view that MAS does not satisfy the “control” test, I do not need to consider whether it satisfies the test of performance of governmental functions.  However, I will deal with that question briefly.

159               In Garuda, I came to the view that, whilst the ambit of governmental functions may be difficult to define, governmental functions have a public character and depend upon their characterisation as part of the machinery of the State:  Garuda at [91] – [95].

160               I expressed the view in Garuda at [98] that the mere conduct of a commercial airline is not sufficient to constitute the performance of governmental functions.

161               Mr Wood sought to distinguish that view from the present case in two ways.  First, he relied on High Court authority as to the scope of governmental functions.  Second, he pointed to factual considerations.

162               I accept that it would be erroneous to approach the issue upon the basis that, so far as the law is concerned, there is a fixed class of activities properly classified as governmental.

163               As Windeyer J said in Ex parte The Association of Professional Engineers Australia  (1959) 107 CLR 208 at 275-276, there is no ground in law for saying that any one activity which government undertakes is any more than any other, governmental.  His Honour was of course speaking in 1959 when he said that governments directly, or by their corporate agencies have, in modern times, undertaken much that was previously left to private enterprise.  But what this demonstrates is that the content of governmental functions is not static.

164               More recently in Bropho v State of Western Australia (1990) 171 CLR 1 at 19, Mason CJ, Deane, Dawson, Toohey, Gaudron and McHugh JJ said that in Australia the activities of the executive government reach into almost all aspects of commercial, industrial and developmental endeavour.

165               So much may be accepted, but the question which arises is whether the Government of Malaysia has extended its reach to the conduct of the business of MAS so as to constitute the performance by MAS of governmental functions.

166               The question of whether a corporation performs governmental functions is to be determined according to Australian law, but an Australian court may have regard to the position under the law where the body is incorporated and take account of the view of the foreign government:  Kensington International Limited v Republic of the Congo (formerly People’s Republic of the Congo) [2005] EWITC 2684 (Comm) (“Kensington”) at [53] per Cooke J; Trendtex at 560 per Lord Denning.

167               Cases such as Adeang v The Nauru Phosphate Royalties Trust (unreported, Sup Ct, Vic, Hayne J, 6571 of 1992, 8 July 1992) and Kensington establish that the performance of governmental functions involves the administration or exploitation of public assets on behalf of the State.  Thus, in Kensington at [55] Cooke J said that the company was part of the State and had no existence separate from it. He continued:

The Congolese legislation and SNPC’s byelaws do demonstrate “that its purposes are to undertake the exploitation of Congo’s oil reserve on behalf of the Congo, to hold that State’s oil related assets on its behalf and to represent the State on oil related matters.  It is financed by the State, its function is to act on behalf of the State and it is under the financial and economic control of the State with its officers being government appointees.”

168               The necessary factual underpinnings for such a conclusion have not been established in the present case.  There is nothing in MAS’s Memorandum of Association to suggest that its business is conducted on behalf of the Government or in the exercise of governmental purposes or functions.  The objects are widely drawn in a way that is typical of any commercial enterprise.

169               The only possible exception seems to be a clause which permits MAS to conduct business in the prosecution of hostilities. This of course has no application. 

170               Nor do the various programs to which reference has been made advance the matter.  It is true that the Malaysian Government sees GLCs, including MAS, as an engine of growth of the economy.  But this is true of all large corporations, including those which engage in public/private enterprises in cooperation with government.

171               It seems to me that there is nothing in the factual material to distinguish the case from Garuda in a relevant way.  What has been established is that MAS conducts the business of a commercial airline with, as I have said, the cooperation and support of the Government.  But it is conducted for the commercial interests of its shareholders.  This is made clear throughout the evidence and is best illustrated in the most recent Annual Report which was in evidence.  That was the 2008 Annual Report which refers quite plainly to the pursuit of profits for its shareholders.

172               A contrary view seems to me to be inconsistent with the listing and quotation of the shares of MAS on the Bursa Malaysia.

173               The position is different from that which existed in Mellenger v New Brunswick Development Corporation [1971] 1 WLR 604 (“Mellenger”).  There, the company was constituted by statute on behalf of the province.  It had never pursued any ordinary trade or commerce; all it had done was to promote the industrial development of the province in the way that a government department would do:  see Mellenger at 609.

174               It appears from documents in evidence in the present case that airline traffic to Malaysia has a very large multiplier effect on the local economy.  That is in the public interest of the people of Malaysia.  But MAS’s wide ranging airline business, pursued for commercial gain, is quite different from the governmental functions identified in Mellenger.

175               Nor do the various social obligations performed by MAS in the interests of the public of Malaysia point to the exercise of governmental functions.  Most large companies adhere to principles of corporate social responsibility.  Telecommunication companies such as Telstra are forced by governmental regulation to supply services to remote areas.  This does not mean that they perform governmental functions.  The grant of government subsidies or financial support to carry out those services is not sufficient to make them governmental functions.  More would be required to establish that they are.

MAS Cargo Fails the Control Test

176               Since MAS Cargo is a wholly owned subsidiary of MAS, it too fails the control test.  It also fails the governmental functions test for the same reasons as those which I have given for MAS.

Conclusion

177               The motion must be dismissed with costs.

Associate:

Dated:         21 July 2010