KUALA LUMPUR (REUTERS) - Malaysia will file a legal challenge to a settlement agreement between scandal-plagued state fund 1MDB and Abu Dhabi sovereign fund IPIC negotiated during the premiership of former leader Najib Razak, the country's Attorney-General said on Tuesday (Oct 30).

International Petroleum Investment Co, known as IPIC, and 1Malaysia Development Berhad (1MDB) had reached an agreement last year in a payment dispute over 1MDB bonds that IPIC had guaranteed.

The Malaysian fund had agreed to pay US$1.2 billion (S$1.7 billion) to IPIC and assumed responsibility for future principal and interest payments for the bonds.

Najib was prime minister then, but he lost an election earlier this year to Tun Dr Mahathir Mohamad and has since been charged with corruption in 1MDB-related probes. Najib has pleaded not guilty and consistently denied any wrongdoing.

"The base of Malaysia's legal challenge in the High Court in London is that the consent award was procured by fraud or in a manner contrary to public policy," Attorney-General Tommy Thomas said in a statement.

He said Malaysia was obliged to pay US$5.78 billion to IPIC and the bond trustee over five years under the 2017 award, but it will now seek relief from future obligations and also seek to recover the US$1.46 billion already paid.

"Fraud is an established ground to challenge the consent award for public policy reasons," Mr Thomas said, adding that the application to challenge the agreement was to be filed on Tuesday.

Abu Dhabi state fund Mubadala, which merged with IPIC last year, said it was not aware of any legal action challenging the outcome of the arbitration.

"There remains in place a legally-binding settlement agreement that was agreed to by the arbitrating parties," Mubadala said in an emailed statement to Reuters.

It said 1MDB did not currently owe any debt to IPIC or Mubadala.

"The 1MDB group issued US$3.5 billion of notes to various noteholders for which IPIC has given guarantees to those noteholders. As issuer, the 1MDB group has the primary liability to pay the noteholders regular interest coupons and to repay the principal amount at maturity," it said.

1MDB is the subject of money-laundering and corruption investigations in at least six countries, including the United States.