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InsiderTAPS (7 June 2017)

Transmile - the Federal Court's decision on the making of misleading statements

In a landmark decision on 15th March 2017, the Federal Court ruled that through section 122B(a)(bb) and section 122(1) of the Securities Industry Act 1983 (“SIA”) (now repealed by Capital Markets and Services Act 2007 (“CMSA”)), the company director, chief executive officer or representative of the body corporate are liable if the companies in which they represent makes or furnishes any false or misleading statement or report to the Securities Commission (“SC”), a stock exchange, or a recognised clearing house, unless he can prove that he has exercised diligence to prevent the commission, and that there was lack of consent or connivance on their part.

The Court also ruled that section 122(1) of the SIA did not violate the Federal Constitution, particularly, (i) it did not violate the doctrine of presumption of innocence, (ii) it maintained the burden of proof in that the prosecution must prove a charge against an accused beyond all reasonable doubt, and (iii) it upholds the doctrine of separation of powers. This indicates that the charges against the former Chief Executive Officer of Transmile Group Bhd (“Transmile”), Mr. Gan Boon Aun (“Gan”) were valid and that Gan’s trial in the Sessions Court is to continue.

To recap, the SC charged Gan and Khiudin bin Mohd in July 2007 for abetting Transmile in making a misleading statement to Bursa Malaysia in regard to the revenue as reported in Transmile’s “Quarterly Report on Unaudited Consolidated Results” for the financial year ended December 2006. The duo were charged under section 86(b) of the SIA, read with section 122C(c) of the SIA as the principal charge, as well as section 122B(a)(bb) of the SIA, read with section 122(1) of the SIA, as the alternative charge. At the close of the prosecution’s case, the duo were acquitted of the principal charge, but were ordered to enter their defence on the alternative charge.

The duo contended that the alternative charge was unconstitutional and should be null and void by reason of section 122 of the SIA. They applied to stay the proceedings pursuant to section 30 of the Courts of Judicature Act 1964 (“CJA”), which provides that if there is any question as to the effect of any provision of the Constitution, the case may be transferred to the High Court. If the High Court Judge then also considers that the decision of a question as to the effect of a provision of the Constitution would be necessary to determine the proceedings in the lower court, then by virtue of section 84 of CJA, he will order for a stay of proceedings, state the question which in his opinion has arisen as to the effect of the Constitution, and refer the case to the Federal Court.

The High Court decided on the question and ruled that the section was unconstitutional, and acquitted the duo. An appeal to the Court of Appeal was then lodged by the prosecution, but only against Gan. It was held that the section was constitutional, and Gan appealed against the decision. Finally, the Federal Court then, ruled that in reference to section 30 of the CJA, only the Federal Court has jurisdiction to determine a question as to effect of any provisions of the Constitution. The High Court had no jurisdiction to decide on it, and the Court of Appeal only has jurisdiction to hear and determine any appeals from the High Court and in such circumstance, it had no jurisdiction to hear such “appeal”. The incompetent appeal was struck out, and the orders of the High Court and Court of Appeal were set aside. This matter was remitted back to the High Court and it was ordered that the High Court judge consider if there is any question, and state the question, which in their opinion has arisen as to the effect of the provision of the Constitution.

The constitutional issues concerned relate directly to section 122(1) of the SIA, where there was (i) a presumption that an offence against SIA or any regulation made, committed by a body corporate, is adjudicated upon any person who at the time was a director, chief executive officer, officer, or representative of the body corporate; and (ii) a reverse onus clause is imposed on the person to prove that the offence was committed without his consent or connivance, and that he exercised diligence to prevent it from happening.

Federal Court Judge Jeffrey Tan delivered the Court’s judgment. In the 77-page judgment, His Lordship held that the offence must first be proved to have been committed by the body corporate before it could be deemed that its human operatives, namely the directors or officers, have committed the offence. To achieve the aim of SIA, the offence of the body corporate must be attributed, and rightly so, to its human operatives. This is not only fair but also absolutely necessary to protect the stock market. It still remained that the prosecution must prove the offence of the body corporate beyond a reasonable doubt. Therefore, there was no displacement of the presumption of innocence. If it was true that section 122(1) of the SIA adjudicates guilt, Gan would not have been asked to enter his defence and the tried in Court. This section gave the opportunity to directors or officers to rebut the presumption.

His Lordship also stated that, the evident aim of SIA was to regulate the industry, to promote public confidence in the integrity of the stock market, and to punish violators with criminal and civil liability. Therefore, such a section is not only sustainable, it is also necessary to punish the responsible persons behind the offence by the body corporate.

This is the first Federal Court ruling in regard to section 122(1) and section 122B(a)(bb) of the SIA. Before this case, there were 3 reported cases on section 122B of the SIA. However, none of these raised the issue of constitutionality. In these 3 cases, 2 cases only had fines imposed, while the other case had both imprisonment and a fine imposed. The 2 cases were appealed to higher courts by the public prosecutor, and the judges added on imprisonment to their sentences. The courts all held that such offence of knowingly furnishing misleading information relating to a company listed on Bursa Malaysia, particularly relating to its financial status, is a serious and grave offence as potential investors rely on the accuracy of such information. It would be in the public interest to impose a custodial sentence. Unless a sentence proportionate to severity of the offence is passed, the public will lose confidence in Malaysia’s stock market, and wrongdoers as well as potential wrongdoers will not be deterred.

Now, it is to note this Securities Industry Act 1983 has been repealed by the CMSA; Sections 122 and 122B of the SIA has been materially replaced with sections 367 and 369 of the CMSA. Section 369 of the CMSA has now imposed imprisonment of not exceeding 10 years as well as a fine not exceeding RM3 million if a person is found liable under this section. This is a material change compared to the previous section 122B of the SIA, which allows a judge to decide to sentence a liable person to imprisonment of not exceeding 10 years, or a fine not exceeding RM3 million, or, both of these.

All in all, directors, chief executives, officers, representatives of any bodies corporate, or anyone purporting to act in such capacity, should be aware and be diligent in preventing any such offences to be committed by the body/bodies corporate they represent.

Should you have any queries on this article or for more information on Tay & Partners Corporate & Commercial Practice, please do not hesitate to contact:

Tay Beng Chai
Managing Partner and Head of Corporate Practice
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+603 2050 1881

Chang Hong Yun
Partner
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