CNLT, where is the enforcement?

From kehakiman's website regarding CNLT (Far East) Bhd, a company formerly listed on Bursa:


11. The Employees’ complaint of fraudulent trading straddled 8 allegations of fact that allegedly occurred between 2006 and 2008.  They were as follows:

(a) CNLT, primarily through its managing director, the Appellant, prepared or issued fictitious invoices in 2007 to an entity known as MTI (Far East) Sdn Bhd amounting to RM4,271,745.06 with a view to inflating or overstating its revenue, such that CNLT would appear to be a ‘going concern’, or at the very least, not as insolvent as it actually was;

(b) Overstating the value of the plant and machinery of CNLT;

(c) Siphoning of CNLT’s funds by way of payment of rental to Golden Privilege Sdn Bhd when there was no such tenancy agreement.  This company was controlled by the Appellant and the 7th defendant;

(d) CNLT’s assets in the sum of USD1,250,000 were dissipated or channelled to CNLT’s largest shareholder, JCT Limited, the 8th defendant after CNLT had been listed as a PN17 company;

(e)  CNLT, through inter alia, the Appellant caused 3 cheques in the sum of RM160,000.00 to be issued on 11 September 2007.  These cheques were encashed on 12 September 2007;

(f) Failure to cause CNLT to remit contribution to Employees Provident Fund (“EPF”) and Social Security Organization (SOCSO), both employer and employee despite deducting the requisite employee contribution since August 2007.  Neither was income tax paid, despite the requisite deductions having been made;

(g) The Appellant’s action in dissipating assets out of the reach of provisional liquidators in May 2008; and

(h) Payments were made out to preferred unsecured creditors, as well as some shareholders in the sum of not less than RM2,841,696.00 without validation at the time the restraining order dated 26.10.2007 was in force.
 

12. It was the Employees’ case that by reason of the foregoing matters the business of CNLT was carried on from 2006 onwards until it was wound up in January 2009 with intent to defraud creditors of the company, or for a fraudulent purpose.  For the purpose of the application of section 304 of the Act in this suit the creditors contemplated here were the Employees.
 

13. By this action, the Employees sought inter alia the following orders:

(a) a declaration that the business of CNLT had been carried on by the defendants with intent to defraud creditors of CNLT, in particular the Employees pursuant to section 304 of the Act;

(b) a declaration that the defendants shall be jointly and/or severally liable and personally responsible, without any limitation of liability for all of the debts or other liabilities of CNLT; and

(c) an order that the defendants, jointly and/or severally do pay the outstanding debt due and owing to the Employees by CNLT.


Very heavy accusations, and what did the judge decide?


18. At the end of the trial, the learned trial judge held that the Employees had proved 7 out of 8 allegations.  It was held that allegation (c), the siphoning of  CNLT’s funds by way of payment of rental to Golden Privelege Sdn Bhd, was not made out.  The learned trial judge found that payments to JCT limited were void as they were against the law prohibiting undue preference.

19. The learned trial judge accordingly held that the business of CNLT was carried on by the Appellant with intent to defraud the creditors of CNLT including the Employees pursuant to section 304 of the Act.  A declaration was made to that effect by the court.  There was however no such declaration granted in respect of the other directors of CNLT.  The court also held that the Appellant was personally liable to the Employees, to pay the Employees the sum of RM2,910,201.78 as claimed with interest.


Most of the proven allegations happened more than ten years ago.

A forensic report was made, with many observations similar to the above. The company however denied all in an announcement to Bursa. Since the judge held that seven allegations have been proved, the truthfulness of the contents of that announcement should be reviewed.

The above court case was a private affair by the employees who were disadvantaged. It seems they are winning their case, good for them, it must have been a quite costly and lengthy affair.

But what have the authorities done so far, for instance in regards to the minority investors who have been disadvantaged? From what I could find, not much.

Bursa reprimanded the company (I don't think anybody will be bothered by that) and delisted it (basically disadvantaging the minority investors by depriving them an opportunity to trade their shares). No action whatsoever was taken against any individual.

SSM obtained a conviction: "The Kuala Lumpur Sessions court today convicted Dato’ Prem Krishna Sahgal (‘Dato’ Prem’) for committing an offence under section 364 (2) of the Companies Act 1965. Dato’ Prem was sentenced to pay a fine of RM40,000.00 in default 6 months imprisonment."

It continues "SSM hopes the above decision will send out a clear message". I doubt that, I find the punishment very light, especially given the small chance of getting caught.

Where is the enforcement for any of the other (very serious) allegations, why have Bursa and/or SC still not taken any action in this matter?

Justice delayed is justice denied.

Hitting corporate crooks where it hurts

 

"A Question of Business" by P. GUNASEGARAM

The Star, July 3 2010

http://biz.thestar.com.my/news/story.asp?file=/2010/7/3/business/6598973&sec=business

"This year (2010) has been a rough, tough one for corporate governance. Issues have arisen which raise questions anew as to the role of management, directors and shareholders in the running of companies, particularly listed companies, and the role of auditors and regulators.

For some companies, directors and key shareholders have colluded to cause prices of shares to fluctuate wildly, leading to losses and gains. Insiders gained and those who had no information lost, wondering what caused the winds that sent share prices tumbling, flying and then tumbling again.

In other companies, fraud and/or incompetence of management caused huge losses to even some of our best companies raising questions as to how such losses could arise and why boards, internal auditors and external auditors and others who should know were unable to pick them up.

In theory, the management, board and major shareholders are often considered to be separate entities, each with their own rights, responsibilities and interests. But in practice, they often overlap and produce peculiar problems of conflicts of interest. Often management, the board and major shareholder are virtually the same person.

In Malaysia, it is common for a single shareholder or for a few shareholders to have majority control of a listed company. Thus, these shareholders control the composition of the board and through the board the management.

That gives major shareholders complete control over the listed company. This has often resulted in the companies doing things which are not beneficial to all shareholders of the listed company although the law, especially the Companies Act, requires the board to act in the interest of the company and all shareholders.
But, despite all the anecdotal evidence over the years of boards and management acting against the interests of companies, there has been hardly any prosecution by the Companies Commission of Malaysia which administers the Companies Act (please see our cover story this issue).

Thus, it is that many miscreants get away with not quite blue murder but quite a bit and Corporate Malaysia’s crooks still not only remain outside the bars but continue on their own merry way of lining their own pockets at the expense of their companies and ultimately the investment community.

Apart from the direct loss that such crime inflicts on companies, the risk premium that investors demand for investing in our capital markets may mean that many billions more in valuation is lost as well. In other words, our companies will be worth a lot more if the risk of loss was minimised.

While the Securities Commission (SC) has maintained that it is not quite possible to legislate completely good corporate governance and ethical behaviour, it nevertheless stands to reason that proper enforcement of existing laws and rules will be a major deterrent to wrongful behaviour and will be one of the pillars of good corporate governance.

In this respect, one must lament the lack of a unified body that can handle all corporate crime by perhaps incorporating all the relevant legislation under one all-encompassing one and putting a single regulator in charge of this.

The long-mooted idea of merging the Companies Commission and the SC still continues to be an idea despite being proposed as a measure under the mid-term review of the Ninth Malaysia Plan several years ago. That would have brought the securities and companies laws under one roof and made enforcement of overlapping and related offences that much easier. But it was not to be.

But still, one can take comfort in the passing of Section 317A of the Capital Markets and Services Act which came into force on April 1 (2010). This enables the SC to take action against a director or officer of a listed company when his actions cause loss to the company.

Unfortunately, this covers only the period after April 1 this year and offenders prior to that cannot be prosecuted under this Act. And it applies only to listed companies. But still it is a powerful tool that the SC can use to bear upon miscreants who routinely get away with offences because no one is prosecuting them.
Still this is something that will enable some action to be taken at least with respect to the listed companies while the authorities finalise their long-overdue plans to rationalise the functions of the various regulatory bodies."


A good and frank article, but why did Gunasegaram not include Bursa Malaysia? They also play a large part in enforcement:

• Coming down on insider trading, which they don't: http://cgmalaysia.blogspot.com/2011/08/when-smoke-signals-are-right.html
• Ensuring quality of prospectuses and proper handling of complaints, which they don't: http://cgmalaysia.blogspot.com/2011/07/unsatisfactory-handling-of-complaints.html
• Handling Private Placements etc (no transparancy): http://cgmalaysia.blogspot.com/2011/07/private-placements-abolish-them-or.html
• Handling of Related Party Transactions (Minority Investors don't stand a chance): http://cgmalaysia.blogspot.com/2011/07/rpts-why-do-all-protective-layers-fail.html

With yearly staff cost of RM 92,000,000 and on top of that a 5-year allocation of 53,000,000 ESOS options I think the public could expect some decent enforcement from Bursa Malaysia. Apart from some fines (much too late, much too little and very selective, never against the major players) I haven't noticed any improvement in that field.

I agree with Gunasegaram to join the enforcement agencies Securities Commission and Companies Commission, but then all, including the enforcement division of Bursa Malasia.