Incorporated by the State, Accountable to No One? Rethinking Public Corporation Governance in Malaysia
Introduction: The Crisis of Accountability in Public Corporations
The modern Malaysian state exhibits a deep tension between public administration and commercial enterprise. Public statutory bodies have expanded into sprawling commercial empires, frequently operating in a regulatory vacuum characterized by broad statutory discretion and the absence of private-sector fiduciary duties.
At the federal level, this accountability deficit is acute. The July 2026 declassification of the Royal Commission of Inquiry on Lembaga Tabung Haji reportedly highlighted allegations of systemic creative accounting designed to bypass statutory limits, pointing to an estimated RM4.8 billion deficit to sustain unauthorized payouts.1
Subnationally, a parallel shadow corporate state has emerged through MBI entities. In Faekah bt Hj Husin & Ors v Menteri Besar Selangor (Pemerbadanan)2, the Federal Court affirmed that an MBI is legally established as a corporation sole. Consequently, the Menteri Besar has the authority to approve financial payouts independently, without Board approval, because the governing enactment lacks such mandatory oversight requirements.
Crucially, this governance deficit represents not merely a fiduciary vacuum but a profound enforcement vacuum that is now being remedied through common law torts. Historically, executive actors were insulated from civil liability for financial mismanagement, a position cemented when the Court of Appeal in Tun Dr Mahathir bin Mohamad & Ors v Datuk Seri Mohd Najib bin Tun Haji Abdul Razak3 ruled that ministers were not “public officers” capable of committing misfeasance. However, the Federal Court decisively displaced this conservative stance in Tony Pua Kiam Wee v Government of Malaysia4. The apex court affirmed that the common law tort of misfeasance in public office survives in Malaysia, determining that the term “public officer” must be construed broadly to capture those vested with governmental authority and executive power. The court powerfully reasoned that permitting members of the administration to knowingly or recklessly dissipate public funds and remain immune to civil action is anathema to the doctrine of the rule of law. This substantive accountability is further fortified for the omission limb by the High Court in Indira Gandhi a/p Mutho v Ketua Polis Negara & Ors5, which confirms that the tort of nonfeasance for neglect or default by a public officer is equally actionable under section 5 of the Government Proceedings Act 1956. Together, these developments supply the necessary legal framework to hold officers liable, backed by the normative weight recognized in Sharifuddin Mohamed & Anor v Dato’ Annas Khatib Jaafar6 that the utilization of government funds and abuse of power are inherently serious matters of legitimate public concern and interest. This public-private hybrid creates a constitutional paradox. These corporations exploit commercial markets yet retreat behind public law protections to evade scrutiny. Citizens lacking shareholdings must rely on public law judicial review. Historically, this avenue was stonewalled by the restrictive threshold established in Government of Malaysia v Lim Kit Siang7, where the Supreme Court ruled that plaintiffs must prove interference with a private right or special damage peculiar to themselves to establish standing.
However, the judiciary has recently dismantled this barrier. In Datuk Bandar Kuala Lumpur v Perbadanan Pengurusan Trellises & Ors8, the Federal Court highlighted how unchecked corporation soles can suffer from severe institutional bias, and declared that the restrictive standing approach in Lim Kit Siang is no longer good law for public interest litigation. The court adopted a liberalized test under Order 53 rule 2(4) of the Rules of Court 2012, granting standing to applicants who are “adversely affected” by demonstrating a genuine interest in the matter. This shift was reaffirmed in Attorney General of Malaysia v Sabah Law Society9, emphasizing that standing must be relaxed to allow public-spirited persons to file public law suits. This article analyzes this systemic governance deficit and proposes statutory reforms to bridge the public-corporate divide.
Constitutional Competence: The Legality and Reality of State Corporations
Malaysia’s federal structure centralizes corporate incorporation. Under Article 74 and Item 8(c) of the Federal List, the “incorporation, regulation and winding up of corporations” is an exclusively federal domain, rendering unilateral state incorporations void ab initio. While preserving economic uniformity, this monopoly creates structural tension, as states lack the legislative power to incorporate companies needed for constitutional mandates such as land management and local economic development.10
To resolve this, Parliament enacted the Incorporation (State Legislatures Competency) Act 1962 (Act 380). Operating under Article 76A of the Federal Constitution, Act 380 serves as a statutory bridge, authorizing State Legislatures to pass enactments incorporating specific bodies, such as the office of the Menteri Besar, for essential subnational and developmental roles.
In Gin Poh Holdings Sdn Bhd (in voluntary liquidation) v The Government of the State of Penang & Ors11, the Federal Court affirmed this delegated framework, holding that Act 380 relates “in pith and substance” to the incorporation of persons and bodies within a State under Item 8(c) of the Federal List. The apex court ruled that Parliament validly delegated this power under Article 76A of the Federal Constitution, rendering state enactments like the Chief Minister of Penang (Incorporation) Enactment 2009 as validly delegated laws. Furthermore, the court clarified that the powers granted under sections 4 and 5 of such enactments are properly understood as “ancillary or incidental” to the act of incorporation itself.
However, this delegated capacity is frequently compromised by “mission drift.” Originally conceived to drive socioeconomic development, many state corporations have reoriented toward speculative, profit-driven commercial activities. Because public funds and public policy are inextricably involved in the operations of these statutory bodies, this commercial reorientation triggers strict scrutiny under the doctrine of ultra vires.
As creatures of statute, these bodies must operate strictly within the parameters of their enabling legislation. In Majlis Peguam Malaysia & Ors v Raja Segaran a/1 Krishnan12, the Court of Appeal, relying on the underlying authorities of Malaysia Shipyard & Engineering Sdn Bhd v Bank Kerjasama Rakyat (M) Bhd13 and DP Vijandran v Majlis Peguam14, emphasized that a statutory body “as a creature of statute, possesses only those powers expressly conferred upon it by its enabling legislation, and any act beyond these parameters is ultra vires”. Similarly, in Perbadanan Pengurusan Trellises & Ors v Datuk Bandar Kuala Lumpur & Ors15, the High Court scrutinized the statutory capacity of Management Corporations, ruling that their powers and duties are strictly confined by statute. This limitation applies universally across statutory entities; as the Court of Appeal affirmed in GJH Avenue Sdn. Bhd v Tribunal Tuntutan Pembeli Rumah, Kementerian Kesejahteraan Bandar, Perumahan Dan Kerajaan Tempatan & Ors16, a statutory body or tribunal “could not go beyond the four corners of the Act and Regulations that created it and gave it its powers”.
This boundary is strictly enforced against mission drift, meaning a statutory body cannot do by internal decision what only the legislature can authorize. In Fahri, Azzat & Co (a firm) & Anor v Lembaga Kelayakan Profesion Undang-Undang17, the Court of Appeal ruled that the Board acted ultra vires when it purported to abolish articled clerkship via a 1985 internal board decision, failing to exercise its statutory duty and usurping a power vested solely in Parliament.
This constitutional and administrative boundary is ultimately anchored in the protection of public assets. In Perbadanan Kemajuan Pertanian Selangor v Megafores Nursery Sdn Bhd & Ors18, the High Court ordered the winding up of an illegally incorporated entity operating contrary to a state enactment and section 14(1) of Act 380, explicitly because “public funds and public policy were involved”. The court further held that directors who made unauthorized loans and drew excessive remuneration had “acted ultra vires their powers,” illustrating how mission drift directly jeopardizes public resources.
A necessary nuance to this accountability framework arises when statutory bodies engage in purely commercial transactions. In Majlis Perbandaran Subang Jaya v Laguna De Bay Sdn Bhd19, the Court of Appeal distinguished a local authority’s public functions from its capacity as a separate body corporate under section 13 of the Local Government Act 1976. The court noted that when an entity exercises its commercial liberty as a separate legal entity to enter into private contracts, such decisions are generally governed by private law and may not be amenable to public law judicial review. However, this caveat does not provide blanket immunity for state corporations. The court in Laguna De Bay expressly preserved judicial review for commercial decisions that involve arbitrary exercises of power causing loss to the state exchequer or the public. Because the corporation soles and state entities in question are capitalized by and manage public funds, their commercial misadventures inherently compromise the public purse, keeping them firmly on the public side of the line and subject to strict ultra vires scrutiny. Therefore, when a state-incorporated body prioritizes speculative commercial ventures over its founding developmental mandates, it exercises its powers for an improper purpose, reflecting institutional bias that exposes it to judicial review on illegality grounds.
The Fiduciary Vacuum in Statutory Bodies
Broad Discretionary Powers in Enabling Statutes
Federal enabling statutes like the Tabung Haji Act 1995 (Act 535), Majlis Amanah Rakyat Act 1966 (Act 489), and Land Development Act 1956 (Act 474) vest broad discretionary powers in Ministers.20 Under Act 535, the Minister unilaterally appoints and revokes board members without disclosing reasons. Lacking professional competency criteria, the Act requires only that members be Muslim Malaysian citizens.21 Ministers thus routinely rubber-stamp complex investment proposals from politically appointed boards. The Tabung Haji Royal Commission of Inquiry noted ministerial decisions were frequently mere endorsements, concentrating financial power and insulating decisions from independent oversight.22
Comparison with Private Corporate Governance
Private sector governance under the Companies Act 2016 (CA 2016) contrasts sharply with this structure. Section 213(1) codifies strict fiduciary duties, mandating directors act in good faith and for a proper purpose. Section 214 introduces the business judgment rule, shielding directors from liability for informed, good faith decisions.23 While Government-Linked Companies comply with the CA 2016, public statutory bodies exist in a functional “fiduciary vacuum.” Governed by public enactments, they lack statutory equivalents to Sections 213 and 214. Exempt from strict disclosure protocols or conflict-of-interest prohibitions, politically appointed boards execute high-risk transactions without private law duties of care, skill, and loyalty.
However, the legislature has demonstrated that it can transplant private-law fiduciary standards directly into statutory frameworks. Section 5A of the Development Financial Institutions Act 2002 explicitly mandates that directors must “act in good faith in the best interests of the prescribed institution,” exercise care, skill and diligence, and “only exercise powers conferred on him for the purposes for which such powers are conferred.” Similarly, section 57 of the Financial Services Act 2013 imposes materially identical duties backed by severe penalties, including up to eight years of imprisonment or a RM25 million fine. These provisions serve as an existing legislative template that federal enabling statutes like Act 535, Act 489, and Act 474 conspicuously lack.
When such duties are codified and breached, the judiciary enforces them rigorously. In FGV Holdings Bhd v Mohd Isa bin Abdul Samad & Anor,24 the court scrutinized the misappropriation of company assets by applying the objective Charterbridge test, asking “whether an honest and intelligent man in the position of a director of the company concerned, could in the whole of the existing circumstances have reasonably believed that the transactions were for the benefit of the company”. This established standard is adaptable to public boards funded by public money. Furthermore, where actionable duties exist, the remedial toolkit is highly potent. In cases involving the unauthorized diversion of funds, such as Tiong Joo Trading Sdn Bhd v Lee Shaw Chin@Lee Kim Leng & Ors25 and Eramas Konsortium Sdn Bhd v Ga Yee Furniture Sdn Bhd26, the courts readily deployed tracing mechanisms, constructive trusts, and orders for restitution to recover misappropriated assets. This robust jurisprudence reinforces the argument that the governance gap in public corporations is a remediable statutory omission rather than a conceptual impossibility.
The Efficacy of Internal Checks
The Statutory Bodies (Discipline and Surcharge) Act 2000 (Act 605) empowers boards to impose personal surcharges on employees for financial mismanagement. However, the statutory text itself proves that Act 605 is structurally ineffective against political appointees. First, section 2 applies the Act to all statutory bodies except those listed in the First Schedule, which is repeatedly expanded by executive order to exempt major public funds, such as the Retirement Fund (Incorporated), the Securities Commission, and the MCMC. Second, under sections 14 and 16, the grounds and quantum of a surcharge are triggered only “if it appears to the Board,” vesting the power entirely within the entity’s own board and creating an insurmountable conflict of interest. Third, section 6 delegates disciplinary authority exclusively to the entity’s own Disciplinary Committee. Section 21 offers the only structural safeguard by stating the Board composition “shall not include the Director General” in an action against the Director General, a narrow insulation that fails to address political appointees generally.
The procedural minefield of this framework is perfectly illustrated by the Federal Court in Rokiah bt Mhd Noor v Menteri Perdagangan Dalam Negeri, Koperasi & Kepenggunaan Malaysia & Ors27. The apex court held that the Minister had no power to dismiss the Deputy Chief Executive Officer; under Act 605 and regulation 39, the power of dismissal vested solely in the disciplinary committee, limiting the minister to merely accepting or rejecting the recommendation to revoke the appointment. While this ruling cuts against executive overreach, it exposes how the convoluted separation of disciplinary authority under Act 605 paralyzes actual enforcement against high-ranking elites, leaving public assets highly vulnerable.
The Shield in Accountability: Locus Standi as a Barrier to Judicial Review
The Procedural Hurdle of Order 53
In administrative law, the doctrine of locus standi governs the threshold competence of a litigant to invoke the supervisory jurisdiction of the High Court. The procedural gateway for challenging administrative actions in Malaysia is regulated by Order 53 of the Rules of Court 2012. Under Order 53 rule 2(4), an applicant seeking judicial review must demonstrate that they are “adversely affected” by the decision of a public authority.
The primary function of the initial leave stage is to screen out frivolous or vexatious applications. However, the traditional application of the “adversely affected” test historically operated as an individualistic hurdle, requiring litigants to prove a specific, personal legal injury or “special damage” to establish threshold standing. This insistence on a direct private law nexus within public law disputes created a shield of inaccountability around executive actions, turning a filtering mechanism into a barrier against public interest challenges.28 The specific legal remedies a plaintiff asks for determine how strictly the court will evaluate their right to sue. As established in Jerry WA Dusing & Anor v Majlis Agama Islam Wilayah Persekutuan (MAIWP) & Ors29, if a litigant withdraws requests for specific administrative orders (like certiorari or mandamus) and leaves only a request for general declarations, the lawsuit transforms entirely into public interest litigation. Once this shift occurs, proving threshold standing (locus standi) becomes a critical requirement that must be strictly satisfied.
The Public versus Private Enforcement Divide
This procedural lockout is particularly striking compared to the robust enforcement mechanisms in private corporate law. In a standard private company, if directors mismanage or breach their fiduciary duties, minority shareholders can seek redress under the Companies Act 2016 through statutory derivative actions. This mechanism has been successfully utilized to pierce governance failures, as seen in S. Vigneswaran A/L M. Sanasee v Maju Institute of Educational Development (Mied)30, where the High Court granted leave for a minority derivative action against trustees who controlled the board and refused to sue themselves. The court permitted the action specifically because it would benefit the company by recovering misappropriated funds and improving institutional governance.
In the public corporate sector, ordinary citizens have no equivalent derivative mechanism, even though they are the ultimate financial backers of these entities. In public institutions like Lembaga Tabung Haji, the nominal “shareholder” is the government itself.31 Consequently, if the government is complicit in a statutory body’s financial mismanagement, no independent internal check exists. Ordinary citizens are locked out of private-law derivative redress and depend entirely on the public-law framework of Order 53 to enforce accountability.
Jurisprudential Evolution and Judicial Conservatism
The historical evolution of locus standi reflects a tension between judicial conservatism and progressive liberalization. In Government of Malaysia v Lim Kit Siang32, the Supreme Court imposed a highly restrictive standard. The majority held that asserting a public right required proving the infringement of a private right or suffering “special damage peculiar to himself”. This high threshold effectively insulated statutory bodies’ commercial decisions from public challenge.
A progressive shift began with QSR Brands Bhd v Suruhanjaya Sekuriti & Anor33, holding a flexible spectrum analysis for the “adversely affected” standard under Order 53. Malaysian Trade Union Congress & Ors v Menteri Tenaga, Air dan Komunikasi & Anor34 consolidated this, confirming the Lim Kit Siang test was inapplicable to judicial review. Applicants need only demonstrate a “real and genuine interest” in the dispute, without proving special damage. Datuk Bandar Kuala Lumpur v Perbadanan Pengurusan Trellises & Ors and other appeals35 cemented this, ruling that standing must be construed within the specific legislative matrix, expressly validating public interest litigation against executive actions.
This liberalized approach was recently affirmed by the appellate courts in Attorney General of Malaysia v Sabah Law Society36. The Court of Appeal held that the Sabah Law Society, a statutory body established under the Advocates Ordinance (Sabah), possessed threshold locus standi to bring a public interest judicial review concerning Sabah’s 40% special grant. The court declared that shutting the applicant out at the leave stage on standing grounds “would definitely be a retrograde step and would not be consonant with the recent development of the law”. The Federal Court subsequently refused leave to appeal, reinforcing that substantive locus standi could be thoroughly examined at the merits stage rather than acting as an initial barrier.
However, this progressive liberalization is not limitless; the articulation of a genuine public interest remains essential. In Ahmad Khairudin Abdul Rahim & Ors v Datuk Bandar Kuala Lumpur & Anor37, the applicants failed the public interest litigation test because they were merely “pursuing individual interests as residents and property owners” rather than championing a broader public interest. This imposes a critical limit on the relaxed standing rules: litigants lack standing to challenge administrative actions if they attempt to weaponize public interest standing to advance purely private grievances.
Conclusion and Recommendations
The intersection of broad statutory incorporation powers and historically rigid procedural barriers has created a perfect storm for executive impunity at both the federal and state levels. Through the Incorporation (State Legislatures Competency) Act 1962 (Act 380) and various federal enabling enactments, public corporations are vested with vast discretionary authority, enabling them to operate in a fiduciary vacuum without private-sector oversight mechanisms. However, the judiciary is increasingly piercing this private-law shield by imposing higher transparency standards on state-incorporated bodies. Because public corporations manage public assets, their commercial dealings attract strict public scrutiny. In Taipan Focus Sdn Bhd v Menteri Besar Selangor (Pemerbadanan) & Anor38, the High Court held that the disposal of state land to a private entity required the matter to be tried in open court under the “full light of publicity” to ensure public accountability and transparency. Similarly, in Abd Rahman bin Soltan & Ors v Federal Land Development Authority & Anor and other appeals39, the Court of Appeal refused to stay litigation in favor of arbitration, ruling that the public interest in transparency for a socially benevolent statutory body like FELDA outweighed the private interests of the contracting parties; enforcing the confidentiality of arbitration would unacceptably prevent public scrutiny. This insistence on the rule of law extends to executive overreach as well. In Lembaga Kemajuan Tanah Persekutuan v The Director of Lands and Surveys, Sabah & Anor40, an executive cabinet directive to surrender FELDA land was quashed as ultra vires and in breach of natural justice, firmly establishing that administrative policy decisions cannot contradict matters already adjudicated by the courts.
To restore institutional integrity, the rule of law requires harmonizing public accountability with rigorous corporate governance standards. While recent judicial trends liberalizing standing rules offer a promising avenue for public interest litigation, targeted statutory reforms remain essential. To bridge the public-corporate divide permanently, the legislature must implement four concrete statutory reforms. First, Parliament must transplant the strict fiduciary duties found in sections 213 and 214 of the Companies Act 2016 directly into federal enabling statutes (such as Act 535, Act 489, and Act 474), utilizing section 5A of the Development Financial Institutions Act 2002 and section 57 of the Financial Services Act 2013 as proven legislative templates. Second, the disciplinary loopholes in Act 605 must be closed by removing the blanket exemptions for major public funds in the First Schedule (such as the Employees Provident Fund, Retirement Fund (Incorporated), Inland Revenue Board, and Lembaga Tabung Haji) and eliminating the Board’s self-supervision in surcharge actions beyond the narrow section 21 carve-out. Third, the legislature must statutorily codify the liberalized locus standi test established in Trellises41 and Sabah Law Society42 to prevent judicial regression, while providing clear statutory boundaries to prevent its abuse by litigants pursuing purely private interests, as delineated in Ahmad Khairudin bin Abdul Rahim & Ors v Datuk Bandar Kuala Lumpur & Anor43. Fourth, statutory bodies must be subjected to a codified duty to give reasons for any substantial departures from their founding mandates or gazetted development plans, drawing upon the transparency principles emphasized throughout the Trellises case. Without these critical changes, statutory bodies originally designed for socioeconomic development will inevitably continue to operate as unaccountable commercial vehicles.
1. Ragananthini Vethasamy and Qistina Sallehuddin, ‘High-Risk investments, accounting violations caused billions in losses for Tabung Haji, Dewan Rakyat told’ The Star (11 August 2026) <https://www.thestar.com.my/news/nation/2026/08/11/high-risk-investments-accounting-violations-caused-billions-in-losses-for-tabung-haji-dewan-rakyat-told> accessed 7 September 2026; FMT Reporters, ‘LHDN investigating those identified in Tabung Haji RCI report’ Free Malaysia Today (7 August 2026) <https://www.freemalaysiatoday.com/category/nation/2026/08/07/lhdn-investigating-those-identified-in-tabung-haji-rci-report> accessed 7 September 2026; Cabinet declassifies Tabung Haji RCI report for public release today’ The Edge Malaysia (29 July 2026) https://theedgemalaysia.com/node/812451 accessed 13 September 2026.
2. [2021] 3 MLJ 89.
3. [2017] MLJU 1941.
4. [2019] 12 MLJ 1.
5. [2021] MLJU 2814.
6. [2016] MLJU 1729.
7. [1988] 2 MLJ 12.
8. [2023] 3 MLJ 829.
9. [2024] 6 MLJ 121.
10. Lee Hwok Aun, ‘2023/98 “Insufficient States: Revisiting the Roles and Resources of Malaysia’s Subnational Governments” (2023) ISEAS Perspective 1, 2–4 <https://www.iseas.edu.sg/articles-commentaries/iseas- perspective/2023-98-insufficient-states-revisiting-the-roles-and-resources-of-malaysias-subnational-governments-by-lee-hwok-aun/> accessed 9 September 2026.
11. [2018] 3 MLJ 417.
12. [2005] 1 MLJ 15.
13. [1985] 2 MLJ 359.
14. [1995] 3 MLJ 576.
15. [2018] MLJU 2012.
16. [2019] MLJU 861.
17. [2025] 1 MLJ 671.
18. [2010] MLJU 1572.
19. [2015] 2 MLJ 509.
20. Tabung Haji Act 1995, Section 6(2); Majlis Amanah Rakyat Act 1966 , Section 3(3); Land Development Act 1956, Section 4(2).
21. Tabung Haji Act 1995, Section 6(3).
22. Royal Commission of Inquiry into Tabung Haji, Laporan Suruhanjaya Siasatan Diraja bagi Menyiasat Isu Pengurusan dan Operasi Lembaga Tabung Haji dari Tahun 2014 hingga 2020 (19 July 2022) [declassified 29 July 2026].
23. Tan Wee Chen, Ruzita Azmi and Roslina Abdul-Rahman, ‘Paradigm Shift from a Liquidation Culture to a Corporate Rescue Culture in Malaysia: A Legal Review’ (2020) 29(3) International Insolvency Review 363; Tan Wee Chen, Ruzita Azmi and Roslina Abdul-Rahman, ‘Theories of Corporate Insolvency: A Philosophical Analysis of the Corporate Rescue Mechanisms Under the Companies Act 2016’ (2021) 12(2) UUM Journal of Legal Studies 179.
24. [2024] 12 MLJ 503.
25. [2023] MLJU 2158.
26. [2026] MLJU 3592.
27. [2018] 6 MLJ 1.
28. Ainul Jaria Maidin and others, ‘An Overview on the Public Interest Litigation in Malaysia: Development and Dilemma Under Provision of Remedies for Enforcement’ (2016) 7(2) Mediterranean Journal of Social Sciences 311, 312–315.
29. [2017] 1 MLJ 216.
30. [2010] MLJU 428.
31. Ernest Lim, ‘An Inconvenient Reality: State-Owned Corporations’ (ECGI Blog, 2021) <https://www.ecgi.global/publications/blog/an-inconvenient-reality-state-owned-corporations> accessed 9 September 2026.
32. [1988] 2 MLJ 12.
33. [2006] 3 MLJ 164.
34. [2014] 3 MLJ 145.
35. [2023] 3 MLJ 829.
36. [2024] 4 MLJ 436.
37. [2026] 7 MLJ 188.
38. [2019] MLJU 1895.
39. [2023] 4 MLJ 318.
40. [2026] MLJU1065.
41. [2023] 3 MLJ 829.
42. [2024] 6 MLJ 121.
43. [2026] 7 MLJ 188.
Written by:
Mohd Zam Mustaman (Partner) zam.mustaman@azmilaw.com
Tan Guan You general@azmilaw.com
Corporate Communications, Azmi & Associates – 14 September 2026
