My point of view on the 1MDB story – Tommy Thomas

I read, with interest, the cover story in the March 8 issue of The Edge, which was also published by The Malaysian Insider, of how 1MDB disbursed US$1 billion in 2009 to purchase a 40% stake in a joint venture company called IMDB PetroSaudi Ltd. 

On the assumption that everything stated in the cover story is true and accurate, and there is no reason to assume otherwise, I have some comments to make on the US$700 million loan (RM 2.59 billion) which was part of the US$1 billion which was alleged to have been made to 1MDB PetroSaudi Ltd, which then repaid it.  

I have prepared the following chronology of events on the loan transaction, based on your cover story, as mentioned below:

1) 18/9/2009

PetroSaudi Holdings (Cayman) Ltd, incorporates a company in Cayman Islands called IMDB PetroSaudi Ltd.  PetroSaudi Holdings (Cayman) Ltd is apparently the holding company, owning all its shares.

2) 25/9/2009

A Loan Agreement is entered into between the holding company, PetroSaudi Holdings (Cayman) Ltd and the company that it had incorporated 1 week previously, 1MDB PetroSaudi Ltd, whereby PetroSaudi Holdings (Cayman) Ltd agrees to “lend” US$700 million to 1MDB PetroSaudi Ltd. 

Hence, the lender/creditor in the transaction is PetroSaudi Holdings (Cayman) Ltd, which I shall therefore call the creditor, and the borrower/debtor is 1MDB PetroSaudi Ltd, which I shall call the debtor.

3) 28/9/2009

A Joint Venture Agreement is entered into between PetroSaudi Holdings (Cayman) Ltd and 1Malaysia Development Berhad (“1MDB”) to form a joint venture company, 1MDB PetroSaudi Ltd (that is, the company which had been incorporated 10 days earlier), with a 60:40 share-holding.  1MDB agreed to inject US$1 billion into the joint-venture company representing its 40% stake.  

This means that PetroSaudi (Cayman) Ltd was selling 40% of its shares in the joint-venture company to 1MDB for US$ 1 billion.

4) 29/9/2009

The Creditor demands that the Debtor repay the US$700 million “loan”.

5) 1/10/2009

The Debtor “repays” the “loan” of US$700 million by crediting that money to the account of one “Good Star Limited”.

If this Chronology of Events accurately summarises the dealings that took place in a two-week period between PetroSaudi Holdings (Cayman) Ltd and 1MDB, then the following observations can be made.

In order for a true and genuine “loan” transaction to have taken place on September 25, 2009 (Event No. 2), the Creditor must have actually disbursed/released the sum of US$700 million to the Borrower.  If it did, what happened to that money?  If did not pay out such monies, then it was not a loan,

With respects to the fourth point above, if it had been a genuine loan for which the demand was made for repayment, the loan would only have been for a duration of four days (from September 25 to 29), which defies credibility, particularly for a massive sum of US$700 million.   

What was the rate of interest? (or was it interest free because it was between related companies).  What was the purpose of the 4-day loan?  Because the demand was to “repay”, it presupposes the prior existence of a loan: in other words, the existence of a debtor/creditor relationship.  One does not repay unless there is already a pre-existing loan.

On the other hand, if it were a sham transaction, it was orchestrated and designed to give the impression, at least insofar as documentation is concerned, so as to provide justification for US$700 million to be disbursed by the debtor to the creditor by actually parting with money in that sum.

Bearing in mind that 1MDB is a company incorporated under the laws of Malaysia, it is required to comply with our laws (in addition to the laws of other jurisdictions like Cayman Islands and Seychelles).  Malaysian law imposes stringent conditions to ensure that monies belonging to a company are not siphoned out by its human agencies.

Thus, a company’s money cannot simply be paid out – it must be done in good faith and for a proper purpose. Causing a company to repay a non-existent loan is a serious breach of duty by directors and officers, for which they would be personally liable.

If it indeed was a sham transaction, it was executed blatantly and crudely, evidencing hubris.

* Tommy Thomas specialises in corporate, commercial & insolvency litigation.