Monday, 21 November 2011

Landmark case against Mayban Trustee and Kaf Discounts

This is a very interesting landmark case against an independent adviser and trustee in a bond deal gone wrong, Mayban Trustee and Kaf Discounts are severely punished. Kaf's prospecutus was deemed to be "false and misleading" and "had toyed with the truth", Mayban Trustee had not shown "the required degree of care and diligence".

For some reason, the case has not been highlighted in the local media.

This bags the question, why are independent advisers of deals on the Bursa Malaysia not punished? I have seen so many strange cases with independent advice that was not unbiased at all, leaving out lots of important information and considerations. Some of the independent reports I have written about (the first being by far the worst prospectus I have ever seen):

In the below case regarding the bond deal, the plaintiffs were financial institutions, having a level of knowledge that is much higher than what can be expected (in all reason) from the average minority shareholders. And still they were proven right by the judges that indeed they should be able to rely on the independent advice.

Do minority shareholders really have to go all the way and sue the independent advisers, following the path of the financial institutions? Surely the authorities (most notably the Securities Commission and Bursa Malaysia) should take fast and stern action and minority shareholders should not need to have to go to court.

Unfortunately, I haven't noticed a single case against an independent adviser, related to corporate exercises of companies listed on the Bursa Malaysia.

From The Business Times (Singapore), November 21, 2011

by S. Jayasankaran

Warning for independent advisers in bond deals

Malaysia's appellate court has unanimously affirmed a landmark decision by the High Court that will radically raise the bar on standards governing private debt issues in Malaysia.

Last year, Justice Mary Lim had ruled that the lead arranger and the trustee of a bond deal gone awry were just as liable as the issuer for any losses suffered by bondholders.

To recapitulate, 10 Malaysian financial institutions had filed a RM 149 million lawsuit against prominent defence contractor Rafie Sain in 2005 over bonds issued by his company that had defaulted. The decision took so long because of various actions and counter-claims brought by the warring parties.

But the suit was unprecedented in that it also named the deal's independent advisers as defendants. They included Mayban Trustee, a unit of the country's largest bank, and Kaf Discounts, which acted as the transaction's lead arranger and financial adviser.

The 10 institutions - which included CIMB, Malaysia's largest investment bank - were holders of RM 140 million worth of bonds issued in 2004 by Pesaka Astana, a private company owned by Mr. Rafie. Pesaka defaulted on its debt in September 2005. In 2008, however, Mr. Rafie and his company entered into a consent judgment in favour of the plaintiffs. For their part, Mayban and Kaf opted to go to trial.

Pesaka, a builder of heavy-duty vehicles for the Ministry of Defence, had raised RM 140 million through Islamic debt securities in April 2004. The bonds were wholly taken up by the 10 institutions in varying amounts.

At the core of the plaintiffs' arguments was the notion that they had gone into the deal on the basis of an information memorandum - a prospectus by any other name - prepared by Kaf that was essentially "false and misleading". Among others things, the suit also contended that Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Both Justice Lim and the three appellate judges agreed with this argument, saying that the 10 had depended on the informed information memorandum to "make informed investment decisions".

Indeed, the appellate judgment - released over two weeks ago but unnoticed by the local media - was even more scathing than the High Court's.

Writing for the Court of Appeal, Justice Jeffrey Tan said that the information memorandum "had toyed with the truth" and concluded that Mayban Trustee had not shown "the required degree of care and diligence and so should also answer to the bondholders for those false and misleading statements".

In summary, the appellate court dismissed both Kaf's and Mayban's appeals and ordered them to pay the bondholders RM 149.3 million. To add insult to injury, the court also tacked on compensation of 3 per cent a year dating back to the time the bonds defaulted. Justice Lim had been kinder. The bondholders had sought interest at 8 per cent from the day the bonds defaulted. Justice Lim disagreed saying that "such interest is riba and not allowed by sharia".

The case raises at least two important issues.

One, it underscores a newly found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit are government-linked companies. Maybank and CIMB are both majority state-owned and might have resorted to quiet and state-brokered, mediation in less competitive times.

More importantly, however, the two judgments will have warning overtones for all intermediaries and advisers in future debt transactions.

As Justice Lim had said in her original judgment, it "will send a chilling message to the bond industry". In short, independent advisers will have to be just that - independent and professional.


  1. Interesting! I wouldn't have known about this had I not read your post.

  2. Indeed strange that it is completely ignored by the Malaysian media. I am reading Singaporean newspapers, so sometimes pick up things that are not reported.

    I even looked in the announcements side of Bursa (both for KAF and Maybank), also can't find a thing.

    Would love to read the full transcript of the judgement by the way, if anybody can help with that.

  3. KAF Discounts (now known as KAF Investment Bank Bhd) is not part of the listed company KAF-Seagroatt, and for Malayan Banking the amount would not be material, so there would I think be no requirement to disclose... although the judgment is relevant to the reputation of both groups. If you obtain the transcript of the judgment, do please post it here!

  4. Thanks, for the information!

    I thought KAF Discounts would be part of listed KAF.

    For Maybank it is peanuts, but I thought there might have be a rule that they have to announce rulings against them of this size.

    I have some legal contacts, hope to get the ruling, if so definitely will post it.

  5. MA wind. I have the Court of Appeal Judgement.


  6. Hi Deva,

    I am very interested. Any chance you can put is somewhere on the internet with a link? Or at least copy and paste the most important paragraphs?

  7. apologies for not reverting any sooner. but it looks like you already have got the same.

    its beautiful - though i may not concur with it in totality.

    i mean you cant blame the watchman for what the 'thief' has done and in this case the 'thief' is still around. if the 'thief' was missing than perhaps the blame can be pinned at the IB,Trustee and also CIMB.

    but what frightens me is the standards.

    honestly the standards of professionals today is really poor.

    i had the privilege of reading a legal opinion today from a 'top notch' legal firm - it was signed off by the senior partner but i am very sure he never even read it. it was so shallow and cases were definitely cited even without being read in full.

    anyways back to this case - I am trying to obtain the High Court judgement by Dato Mary Lim - if you do have it - please advice me,



  8. Hi Deva,

    "but what frightens me is the standards. honestly the standards of professionals today is really poor."

    Exactly, in this particular case, it was not that something went wrong in a unfortunate way, parties found out, they tried to rectify, etc.

    It was just all incompetence and horrible attitude. This judgment should therefore be out in the media, as a lesson to be learned, as an example for all involved, to learn, to draw conclusions, to improve systems, knowledge, attitude etc. But strangely enough, nothing. The silence is deafening.

    Dato Mary Lim's judgement, no I don't have it, will try to get.

  9. Hi,

    Can I know the counsels/lawyers representing the plaintiffs/claimants? I might have the same case and wana take up with that bad big wolf, Maybank.

  10. Hi, my legal friend wrote to me:

    "It has been confirmed that the judgement from HC by Mary Lim will not be published in the Law Journal. It is common where not every judgement is obliged to record and publish. For this case, possibly there are some facts that not suit to public. However, the other method will be writing to the lawyer or purchase the judgement from court. Even with the final official copy, HC statement will not include."

    So I guess you can buy it from court. I don't have the judgement, unfortunately.