Traffic passes a 1Malaysia Development Bhd (1MDB) billboard at the Tun Razak Exchange development in Kuala Lumpur, July 6, 2015. REUTERS/Olivia Harris

Abu Dhabi's state-run fund International Petroleum Investment Co. (IPIC) said Tuesday it was planning to pursue arbitration seeking $6.5 billion from the embattled 1Malaysian Development Berhad fund. The two funds are embroiled in a dispute over repayments on bonds issued by 1MDB leading to a default in April.

“The failure of 1MDB and [Malaysia’s Ministry of Finance] to perform their obligations, cure their defaults or put forward acceptable proposals has left IPIC in the position where it must pursue its claims in arbitration,” the Abu Dhabi sovereign wealth fund said in a statement filed with the London Stock Exchange Tuesday.

The funds, 1MDB and IPIC, are in disagreement over which of the two should make a $50 million bond payment under a deal reached last May. The IPIC guaranteed $3.5 billion of 1MDB’s bonds when issued in 2012. After the Malaysian investment fund fell short of cash, IPIC also agreed to give an emergency billion-dollar loan to 1MDB and make interest payments on the same bonds. In exchange for IPIC taking over the debt, 1MDB agreed to transfer assets to the Abu Dhabi fund. However, earlier this month, IPIC said that the Malaysian fund failed to pay the debts to the Abu Dhabi fund.

The Malaysian fund is also at the center of a corruption scandal involving Najib Razak, the country's prime minister. Najib, who founded 1MDB in 2009 to boost the Southeast Asian nation's economic growth, has been linked to a graft probe at the fund, from which $681 million was allegedly traced to his personal bank accounts. The prime minister has consistently denied the accusations, first made in a July 2015 report by the Wall Street Journal, which said that investigators tracked the money from an account at Falcon Private Bank in Singapore to accounts in Malaysia.