Private debt securities: Adviser and arranger just as liable as issuer

Source: Biz Star

Court decision will impact future private debt security issues

PETALING JAYA: In a judgement that will likely send ripples in the private debt securities (PDS) market, the High Court ruled that the adviser and arranger of such issues were just as liable as the issuer for losses suffered by bondholders.

The Singapore Business Times in a recent report said the judgement by Justice Mary Lim, based on an RM149mil lawsuit filed by 10 local financial institutions against bond issuer Pesaka Astana (M) Sdn Bhd, would “radically raise the bar on standards governing private debt issues in Malaysia.”

Although Pesaka Astana and related companies, which were associated with Rafie Sain, had entered into a consent judgement in favour of the financial institutions back in 2008, the lawsuit was unprecedented because it also named the deal’s independent advisers as defendants.

Others named in the suit included Mayban Trustees Bhd and KAF Discounts Bhd, the arranger of the deal, both of whom have opted to go to trial.

Malaysian Rating Corp Bhd chief executive officer Razlan Mohamed said the case underscored the importance of corporate governance.

“I think this case goes to show that the parties advising the bond issues, including the rating agencies, have to emphasise the importance of governance,” he told StarBiz.

According to the newspaper, the plaintiffs’ core argument was that they had gone into the deal on the basis of an information memorandum by KAF Discounts that was “false and misleading” while Mayban failed to exercise the necessary care and due diligence expected of a trustee.

Lim said in a verbal judgement that the plaintiffs had depended on the information memorandum to make informed investment decisions.

She said the information was in the memorandum and “therefore it is KAF’s liability in the event of any misstatement therein.”

In a statement to StarBiz, Mayban said it was reviewing the decision made by the High Court on June 30 in awarding judgement against it and another defendant in a suit filed in 2005 by holders of the bonds issued by Pesaka Astana, and “is actively considering the appropriate course of action.”

Mayban said the judgment delivered by the High Court “has no impact to the business operations of the company and that it has in place a strong team of professionals with priority chiefly on protecting the interest of all stakeholders and upholding best standards of service and management practice.”

Meanwhile, Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose said it looked like a clear case of a misallignment of the advisers’ and investors’ objectives.

“The judgement is a landmark because the traditional rule of ‘caveat emptor’ has been overruled as the adviser and arranger of the issue were also held culpable. The judge has ruled that the original issue documents were misleading and that the trustees were irresponsible,” he noted.

The local financial institutions had filed the suit in late 2005 against Pesaka Astana, a company that supplied fire-fighting and military vehicles to the Defence Ministry.

The company had defaulted in September 2005 on RM140mil worth of Islamic debt securities issued in April 2004.

According to the newspaper, despite the consent judgement, nothing had been paid and the decision by the court took as long as it did due to claims and counterclaims by various parties.

The 10 plaintiffs included Malaysia Discounts Bhd, CIMB Bank Bhd, Abrar Discounts Bhd, Avenue Invest Bhd, Bank Muamalat Malaysia Bhd, Commerce Life Assurance Bhd, Malaysian Assurance Alliance Bhd, Southern Investment Bank Bhd, Universal Trustee (M) Bhd and BHLB Trustee Bhd.

The Singapore Business Times said the suit underscored a newly-found ruthlessness in Malaysian financial litigation as at least two of the litigants on both sides of the suit were government-linked companies.

“Malayan Banking Bhd and CIMB are both majority state-owned and might have resorted to quiet, and state-brokered, mediation in less competitive times,” the newspaper said.