The decision of the Federal Court in the recent cases of CIMB Bank Berhad v Maybank Trustees Berhad and other Appeals (Civil Appeals No. 02(f)-27-04/2012(W); 02(f)-28-04/2012(W); 02(f)-29-04/2012(W); 02(f)-30-04/2012(W); 02(f)-33-04/2012(W), 10 February 2014) has established numerous important principles relating to the law and practice of bond issues, including the duties and liabilities of the issuer, the lead arranger as well as the trustee.
The 5 appeals before the Federal Court arose from the fraud committed by one Pesaka Astana (M) Sdn Bhd (Pesaka). Pesaka had sought to raise finance through the issuance of public Islamic bonds worth RM140 million. KAF Investment Bank Berhad (KAF) was appointed as the lead arranger, facility agent and issue agent in respect of the bonds. Maybank Trustees Berhad (MTB) was appointed as the bond trustee.
Under the transaction documents, the funds paid by the bondholders were to be deposited into designated accounts to be operated solely by MTB as the sole signatory. However, as things turned out, MTB agreed to allow conventional accounts operated and controlled by Pesaka to be utilized as the designated accounts instead, and MTB was not at any material time made the sole signatory to the accounts. Pesaka subsequently utilized the monies in the designated accounts for its own purposes and failed to redeem the bonds and repay the bondholders upon the maturity of the bonds.
The bondholders commenced proceedings against numerous parties including Pesaka, KAF and MTB. The bondholders entered into a consent judgment with Pesaka and several other defendants who were shareholders and directors of Pesaka. However, instead of executing the consent judgment, the bondholders pursued their claims for breach of contract, breach of trust and negligence against KAF and MTB.
The Federal Court held that KAF was not liable to the bondholders in negligence and/or breach of contract, on the grounds that KAF could not be held liable for any information found in the Information Memorandum which it had assisted Pesaka in preparing, and that KAF was entitled to rely and act on the opinion of the transactional solicitor to the effect that all conditions precedent for the disbursement of the bond funds to Pesaka had been satisfied. The Federal Court further held that MTB was wholly to blame for the loss suffered by the bondholders, in that MTB had failed to take any steps to prevent KAF from disbursing the bond funds to Pesaka notwithstanding that it had ample opportunity to do so.
This article seeks to provide a summary of several important points of principle and practice arising from the decision of the Federal Court in CIMB Bank Berhad v Maybank Trustees Berhad:-
1. Information Memorandum
The Federal Court held that an Information Memorandum issued by an issuer with the assistance of the lead arranger is not an “agreement” within the meaning of section 65 of the Securities Commission Act 1993. According to the court, the word “agreement” in section 65 must be given its ordinary meaning, which would mean some kind of contract between two or more parties. The Information Memorandum on the face of it was not a contractual document, and was issued by KAF on behalf of Pesaka to provide information to potential investors.
Therefore, a lead arranger is entitled to include and rely on the standard “Important Notice” in an Information Memorandum to exclude any duty of care to ensure the accuracy of the information contained therein and also to disclaim any liability arising from any claim arising from the Information Memorandum, and it is not contrary to law or business practice to do so.
In this regard, the Federal Court took cognizance of the fact that the Information Memorandum is widely used in other jurisdictions and that it is common practice for a lead arranger both in Malaysia and more established capital markets to include such notices of disclaimer. The courts will give effect to such disclaimers, as generally speaking bondholders are sophisticated investors and experienced financial institutions, who have vast experience in bonds and are expected to act on independent and professional advice from their own sources in respect of the contractual obligations in the light of the disclaimers contained in an Information Memorandum.
The Federal Court’s decision to uphold the validity of disclaimers in Information Memorandums will no doubt be welcomed by arrangers of syndicated loans, bonds and other capital markets financial instruments. It is also in line with the law and practice of other leading capital markets, a fact which was clearly of material significance to the Federal Court. As section 65 of the Securities Commission Act 1993 has been re-enacted as section 256 of the Capital Markets and Services Act 2007, the interpretation of the Federal Court of the word “agreement” in section 65 will apply equally to section 256, and lead arrangers will continue to be able to exclude, disclaim or restrict their liability in relation to Information Memorandums prepared by them to be issued by issuers, unless such right is removed by amendments to the 2007 Act, which is highly unlikely.
2. Conditions Precedent to Disbursement of Bond Funds
The Federal Court held that on a proper construction of the conditions precedent to the disbursement of the bond funds, KAF was not in breach of contract. KAF was entitled to rely and act upon on the written confirmation from the transactional solicitors that all relevant conditions precedent were fulfilled, including the requirement that the relevant designated accounts were opened with MTB the sole signatory thereof.
More importantly, the Federal Court held that unless expressly provided in the transaction documents, there was no contractual duty on the part of KAF to independently verify that MTB had been made the sole signatory to the designated accounts, and that on the facts, KAF’s duty as lead arranger was merely to ensure that Pesaka had opened the designated accounts and that the mandates in form and content were acceptable to KAF.
The Federal Court’s ruling on this issue gives effect to common clauses in transaction documents which allow a party (either the arranger or the trustee) to rely in good faith on any opinion given by any professional adviser such as a firm of solicitors without incurring any liability. In practice, it is extremely difficult (if not impossible) to imagine the circumstances in which an arranger or trustee would agree to assume a positive duty to independently verify information or opinions provided to it.
In any event, it should be noted that the facts of CIMB Bank Berhad v Maybank Trustees Berhad were very peculiar, in that MTB curiously agreed to allow Pesaka’s to utilise its own accounts as the designated accounts to receive the disbursed bond funds, without notifying or warning the lead arranger KAF that it had failed to ring fence the said accounts, thus completely exposing itself to the (very real) risk of fraud by Pesaka. It is inconceivable, certainly following the decision in Maybank Trustees Berhad, that a prudent trustee would ever allow such a state of affairs to happen again.
3. Trustee Proximate Cause of Loss
The Federal Court expressed strong disapproval of the conduct of the trustee MTB on the peculiar facts of the case. MTB had wide powers and rights under the trust deed and the power of attorney to take the necessary action to ring fence the designated accounts prior to the issuance of the bonds. Despite being notified of the date of issuance of the bonds by KAF, MTB did not take any action whatsoever to ring fence the designated accounts. It also failed to exercise its powers and rights under the power of attorney or take any steps to take control of Pesaka’s accounts before the issuance of the bonds. Further, MTB failed to inform KAF that the designated accounts had yet to be ring fenced.
The judgments of all the courts in the Pesaka litigation, from the High Court up to the Federal Court, read as a scathing indictment of the negligence of MTB as trustee. Curiously, it is not clear from the judgment of the Federal Court as to why MTB failed to take any steps to prevent or delay the disbursement of the bond funds by KAF into accounts belonging to Pesaka over which MTB had no control whatsoever. Again, the peculiar facts of this case do not reflect the common practice of trustees, and it is extremely unlikely that we will see a repeat of the same mistakes (or negligence) of such gravity in the future. Be that as it may, the predicament of MTB clearly exposes the shortcomings of positive covenants normally given by the issuer to disclose any event of default or breach to the trustee: after all, it is surely impossible to expect an issuer to honour a duty to disclose its own fraud.
4. Quantum Recoverable by Bondholders against Trustee
The Federal Court held that MTB’s liability towards the bondholders was limited to the actual amount of funds which were paid into the designated account (less than RM107 million), and not the redemption value of the bonds (in excess of RM149.3 million), on the ground that (i) the sum of RM149.3 million would include a sum of circa RM31.5 million which was stated to be the value of a foreign exchange loss claim, a sum which MTB could not be held liable for as it had nothing to do with the evaluation of the foreign exchange claim, and (ii) MTB as trustee was not to be treated as the primary debtor or a guarantor for the bond issue.
Although the Federal Court did not examine in detail the principles governing equitable compensation for breaches of trust, it is submitted that the decision of the court is nevertheless consistent with established principles. As the House of Lords held in Target Holdings Ltd v Redferns  3 All ER 785, even if the immediate cause of loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred. Although the common law rules of remoteness of damage and causation do not apply, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable.
On the facts, the negligence of MTB in relation to the designated accounts could only have resulted in the bond sums being unlawfully utilised contrary to the transaction documents. There was a causal connection between MTB’s negligence and the loss of circa RM107 million representing the bond sums, but none in relation to the loss of circa RM31.5 million representing the foreign exchange loss.
5. Pre-Judgment Interest
The Federal Court held that MTB as trustee was not liable to pay any pre-judgment interest on the judgment sum of RM107 million awarded to the bondholders, on the ground that the trust deed in relation to the Islamic bond issue provided that nothing in the trust deed shall oblige the trustee to pay interest (by whatever name called) on any amount due or payable to other parties to the trust deed. The Federal Court held that the terms of the trust deed would be upheld.
The decision of the Federal Court on this point was clearly correct. Quite apart from giving effect to the contractual agreement between the parties, the courts do not appear to have any jurisdiction to award pre-judgment compensation against MTB based on ta’widh. Although the Shariah Advisory Council of Bank Negara Malaysia has resolved that ta’widh may be imposed on defaulting customer who fails to meet his repayment obligations, the Shariah Advisory Council does not appear to have issued any resolutions in relation to ta’widh which provides a mechanism similar to pre-judgment interest under civil law against wrongdoers other than defaulting customers. This should be contrasted with the issue of post-judgment interest, where O. 42, r. 12A of the Rules of Court 2012 allows the courts to impose late payment charges based on ta’widh on judgment debts arising from financial transactions in accordance with Shariah.
On the other hand, it should be noted that in other types of conventional loans, bond issues or other capital market financial instruments, pre-judgment interest will continue to be available in respect of claims for moneys due or compensation, whether by way of contractual agreement or pursuant to section 11 of the Civil Law Act 1956.
6. Indemnity by Issuer to Trustee
The Federal Court held that MTB’s right to indemnity from Pesaka would only be lost if the event of MTB’s “gross negligence, willful default, willful breach or fraudulent actions”. As the High Court did not make any finding that there was any gross negligence, willful default, willful breach of fraudulent actions on the part of MTB, MTB was entitled to rely on the indemnity clause in the trust deed to claim an indemnity from Pesaka.
The Federal Court further held that MTB was entitled to a full indemnity from Pesaka in respect of the entire judgment sum of RM107million on the ground that it would not be just and equitable for Pesaka who had received the “ill-gotten gains” to be put in a position where it can retain those gains or any part of it, applying the dictum of Lord Nicholls in Dubai Aluminum Company v Salam & Ors  1 All ER 98.
Although the Federal Court was correct to hold that MTB did not lose its right to indemnity against Pesaka based on a proper construction of the wording of the indemnity clause, it is respectfully submitted that the Federal Court’s reliance on the House of Lords’ decision in Dubai Aluminum Company v Salam is highly questionable, as Lord Nicholls’ observations in that case were made in respect of section 2(1) of the UK Civil Liability (Contribution) Act 1978, which provides that the amount of the contribution recoverable from any person ‘shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage’. There is no statutory equivalent of the UK Civil Liability (Contribution) Act 1978 in Malaysia, and it is seriously doubtful whether it was open to the Federal Court to rely on Dubai Aluminum to justify ordering Pesaka to fully indemnify MTB.
7. Knowing Receipt of Murnina
The Federal Court also dealt with the appeal of the 5th defendant Datin’ Murnina Bt. Dato’ Haji Sujak (Murnina), whose husband was the directing mind and will of Pesaka and also a defendant to the suit. Murnina had received assets acquired by her husband with the misappropriated funds. The Federal Court agreed with the High Court and Court of Appeal that Murnina was liable for being in knowing receipt of part of the misappropriated bond funds. Applying the dictum of Lord Nicholls in Royal Brunei Airlines v Tan  3 All ER 97, the Federal Court held that Murnina had acted dishonestly, in that “she had not acted as an honest person would in the circumstances”.
The Federal Court went on to hold that in the circumstances, the court “intervene by imputing a constructive trust upon Murnina” for her role in misapplying the trust monies, and that “equity therefore demands that Murnina must not be allowed to keep those monies and in the process unjustly enrich herself”.
The Federal Court’s reasoning on this issue leaves much to be desired. First, although the liability of Murnina was said to be based on knowing receipt, the court curiously relied on the Privy Council decision in Royal Brunei Airlines v Tan, which was a case involving dishonest assistance, to which different legal principles applied. The Federal Court did not refer to or consider the decision of the English Court of Appeal in BCCI v Akindele  4 All ER 221, which held that dishonesty was not an essential ingredient of a claim for knowing receipt, and that the test was simply whether the defendant’s knowledge made it unconscionable for him to retain the benefit of the receipt. It would appear that following the decision of the Federal Court in CIMB Bank Berhad v Maybank Trustees Berhad, there is now confusion under Malaysian law as to the proper legal test applicable in respect of claims for knowing receipt.
It is also unfortunate that the Federal Court thought it appropriate to hold that a constructive trust should be imputed upon Murnina. In doing so, the Federal Court does not appear to have fully appreciated that it is now well-established that it is not legally correct to describe persons under purely ancillary liability (on the basis of either dishonest assistance or knowing receipt) as being a “constructive trustee” or subject to a “constructive trust”: see e.g., Paragon Finance Plc v DB Thakerar & Co  1 All ER 400; Koh Siew Keng (P) & Anor v Koh Heng Jin  3 MLJ 822, CA; Williams v Central Bank of Nigeria  UKSC 10. Even in the case of Dubai Aluminum Company v Salam & Ors, which the Federal Court referred to with approval in a different context above, Lord Millett had observed that in the context of dishonest assistance or knowing receipt “… we should now discard the words ‘accountable as constructive trustee’ in this context and substitute the words ‘accountable in equity’.”
8. No Accessory Liability on the part of CIMB Bank
The Federal Court held that CIMB Bank was not liable towards MTB as a constructive trustee in respect of the bond funds which were paid into and transferred out of Pesaka’s accounts held with CIMB Bank. The Federal Court was of the view that there was no evidence and no finding whatsoever of dishonesty on CIMB’s part. CIMB was merely complying with Pesaka’s instructions given in the context of a banker-customer relationship, and there was nothing to establish CIMB’s accessory liability either on the ground of dishonest assistance or knowing receipt.
In coming to its conclusion, the Federal Court appears to have followed and applied not only Royal Brunei Airlines v Tan, but also Twinsectra Ltd v Yardley  2 All ER 277, and held that the test of dishonesty involves both an objective and subjective element, which was explained by Lord Hutton in Twinsectra Ltd v Yardley as:
“a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realized that by those standards his conduct was dishonest …”
In considering the test for dishonesty in the context of dishonest assistance, it is a very curious feature of the Federal Court’s judgment on this issue that the court followed and adopted the test for dishonesty as laid down by the House of Lords in Twinsectra Ltd v Yardley. Inexplicably and regrettably, the Federal Court failed to refer to or consider the subsequent decision of the Privy Council in Barlow Clowes International Ltd (in liquidation) and others v Eurotrust International Ltd and others  1 All ER 333, where Lord Hoffmann (who also delivered judgment in Twinsectra) clarified the abovequoted dictum of Lord Hutton as follows:-
“ Their Lordships accept that there is an element of ambiguity in these remarks which may have encouraged a belief, expressed in some academic writing, that the Twinsectra case had departed from the law as previously understood and invited inquiry not merely into the defendant’s mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty. But they do not consider that this is what Lord Hutton meant. The reference to ‘what he knows would offend normally accepted standards of honest conduct’ meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were.
 Similarly in the speech of Lord Hoffmann, the statement (at ) that a dishonest state of mind meant ‘consciousness that one is transgressing ordinary standards of honest behaviour’ was in their Lordships’ view intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also require him to have thought about what those standards were.“
It is hoped that the Malaysian courts in future cases on dishonest assistance will take into account the decision of the Privy Council in Barlow Clowes to avoid misunderstanding the legal test laid down in both Royal Brunei Airlines and Twinsectra.