This article first appeared in The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

This monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge. 

Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here. 

High Court (‘HC’): Judicial managers who fail to act within the prescribed time due to incorrect interpretation of their duties will not be granted an extension of time (‘EOT’)

Judicial management (‘JM’) comprises one of the few corporate rescue mechanisms offered by the Companies Act 2016 (‘CA 2016’), whereby a court appoints an insolvency practitioner to act as the company’s judicial manager. On the making of the judicial management order (‘JMO’), the judicial manager takes into his control all company property and is conferred all the powers and duties that were previously conferred on the company’s directors. All winding-up applications against the company also cease. The statutory idea is that this enables the judicial manager to prepare a statement of proposal (‘Statement’) to be presented to the company’s creditors for their approval within 60 days from the date of the JMO. A total of 75% of creditors in value would need to approve the Statement, failing which the court either discharges the JMO or makes a consequential order it deems fit. If the Statement is approved, it is envisioned that the judicial manager then manages the company pursuant to the approved Statement and thereafter hands over the rehabilitated company back to the company’s board after the JM period is over.  

Issues

Section 420 of the CA 2016 provides that a judicial manager shall ‘within sixty days or such longer period as the Court may allow’ send his Statement to all creditors. The important question before the HC was whether the court ought to exercise its discretion to extend the 60-day period for the judicial manager to send the Statement to the company’s creditors. The question came before the HC in Panzana Enterprise Sdn Bhd v MKP Builders & Ors (judgment dated 22.6.2024).

Case summary

The applicant, Panzana Enterprise Sdn Bhd (‘the Company’), was placed under JM for six months by order of the High Court on 23.8.2023, to end on 22.2.2024. Datuk Raveendra Kumar a/l Nathan was appointed as judicial manager. Disagreements arose between the solicitors on the draft JMO but were eventually resolved to result in a sealed and extracted JMO dated 22.9.2023. The appointed judicial manager had until 22.10.2023, that is, 60 days from 23.8.2023, to send the Statement to all creditors and present it in a meeting of creditors. On 22.10.2023, the Company filed an application to request an EOT beyond the 60-day period to send the Statement to all creditors (‘Statement EOT’). The primary reason for requesting a Statement EOT was attributed to the delay in obtaining a sealed court order that the judicial manager claimed was necessary to validate his appointment. The application for the Statement EOT also did not specify how much more time the judicial manager required. Of the 19 creditors that had intervened in the Company’s JM proceedings, four resisted the Statement EOT. In its judgment, the HC (per Raja Rozela Raja Toran JC) denied the judicial manager’s request for a Statement EOT.

Decision

Insolvency courts will not grant an EOT premised on a fundamental misunderstanding of the necessity for precise and timely actions in JM

The HC held that based on the facts before the court, the reasons provided by the judicial manager for the delay in sending out the Statement within time was unmeritorious. The judicial manager’s primary reason for failing to meet the 60-day timeline was the delay in obtaining the sealed JM, which he claimed was necessary to validate his appointment. 

The HC also observed that the judicial manager published the JMO in Berita Harian and the New Straits Times on 8.9.2023 and wrote to a legal firm with instruction to act for the Company in a civil suit on 12.9.2023, that is, dates that occurred before the sealed JMO was issued on 22.9.2023 and found this indicated the judicial manager’s awareness of his appointment date.

The HC held that sending notices to creditors is a ‘simple process that should not inherently delay the timeline, especially when the required modifications to notices … be it via e-mail or post, are minimal’ and that the other reason that separate ongoing proceedings caused disruptions was ‘similarly unconvincing … without concrete evidence’. Most of all, the HC found that the request for a Statement EOT without a clear timeline for when the Statement would actually be sent to creditors was ‘unacceptable’ and led to ‘further uncertainty and potential delays’.  

Overall, the HC held the judicial manager’s failure to act within the prescribed time of 60 days did not merit the grant of a Statement EOT for the delay was attributed to an incorrect and invalid interpretation of when his duties began.

Court of Appeal (‘CA’): Securities Commission in a civil action against an individual for insider trading does not require consent of Attorney General; proof of insider trading does not require knowledge of eventual share price nor proof of ‘improper use’ of insider information

The Securities Commission (‘SC’) is empowered under the Securities Industry Act 1983 (‘SIA 1983’) (now repealed by the Capital Markets and Services Act 2007 (‘CMSA 2007’)) to take civil action for recovery of three times of the gains made by an individual who has committed an offence of prohibited conduct of person in possession of inside information, typically referred to as insider trading. The SC may either in its discretion charge the individual for the offence or pursue a civil action, or proceed with both: s 90A(6) of the SIA 1983 (or s 200 of the CMSA 2007). 

The offence of insider trading involves several elements per s 89E(1) of the SIA 1983. Generally, it is agreed that there needs to be the element of one being an insider possessed of generally unavailable price-sensitive insider information, and when so possessed of such information, proceeds to acquire or dispose of shares.

Issues

A charge of insider trading may be pursued as: (i) a criminal offence ‘liable to conviction to a fine’ and ‘imprisonment for a term not exceeding 10 years’; (ii) by way of civil action ‘to recover an amount equal to three times’ the difference between when the price of shares when disposed/acquired and the price of shares when the information was generally available; or (iii) both a criminal offence and by way of civil action pursuant to s 89E(4) read together with s 90A(1) and (6) of the SIA 1983.

A criminal offence requires the consent of the Attorney General (‘AG’) as the offence is construed to be an offence against the state though there may be persons who are victims: Article 145(3) of the Federal Constitution (‘FC’). The question arose as to whether the SC was required to obtain consent from the AG in a civil suit against insider trading since the ingredients for a civil action against insider trading are the same as that in a criminal prosecution, notwithstanding that the former is proved on a balance of probabilities. 

Separately, on the elements of insider trading to be proved by the SC, questions arose as to how they ought to be defined, particularly on the elements of whether the SC needed to prove: (i) knowledge of share price as comprising part of the insider information; and (ii) ‘improper use’ of the insider information. 

Case summary

A corporate lawyer practising at Messrs Kadir Andri & Partners (‘KAAP’), Sreesanthan a/l Eliathamby (‘Mr Sreesanthan’), was appointed by CIMB Investment Bank (‘CIMB’) over a corporate exercise of privatisation of Worldwide Holdings Bud (‘Worldwide’), a listed company that was a subsidiary of Selangor state development agency, Perbadanan Kemajuan Negeri Selangor (‘PKNS’). In the run-up to his formal appointment and Worldwide’s announcement on Bursa Malaysia (‘Bursa Announcement’), Mr Sreesanthan bought two tranches of shares (200,000 and 400,000 shares respectively) in Worldwide (‘Impugned Shares’). Mr Sreesanthan disposed of the Impugned Shares after the Bursa Announcement when CIMB officials queried him on his acquisition of shares, having themselves stumbled upon his shareholding when going through the list of shareholders in Worldwide.

Chief of the SC’s complaints was that Mr Sreesanthan had committed insider trading, for which the SC could charge him for the offence or pursue a civil action, or both. The SC in this instance pursued a civil action for recovery of three times of the gains he had made on top of civil penalties and a fine not exceeding RM1 million. The HC found that the SC had proved its case against Mr Sreesanthan and that none of the defences had been made out. The HC further ordered that Mr Sreesanthan pay the sum of RM2,989,402 to the SC and be barred from becoming a director of any public listed company for a period of 10 years. Mr Sreesanthan appealed to the CA (Lee Swee Seng, Gunalan Muniandy and Hashim Hamzah JJCA) and in a unanimous decision delivered by Lee Swee Seng JCA, the appeal was dismissed. 

Decision

A. Consent of the AG is not required for the commencement of a wrongdoing that can be both the subject of a civil action and criminal proceedings 

The CA held that though the ingredients of a criminal offence of insider trading are the same as that of a civil action against insider trading, though proved on a balance of probabilities, its equivalent in a civil action does not require the consent of the AG as would be required in a criminal prosecution. In response to the argument that the phrase of ‘any proceedings for an offence’ under Article 145(3) of the FC must be interpreted broadly to cover all proceedings taken in respect of an offence be it criminal, civil or regulatory so long as the consequences of contravention exhibit the traits of an offence, the CA held that there is a material difference between a criminal offence and a civil wrong. 

The CA further reasoned that it is the SC, as ‘the regulator tasked with the duty of ensuring and enhancing market transparency and integrity’, that is reposed with the discretion on whether to pursue a civil remedy or not, and if the AG’s prior consent was required, it would have been expressly provided. The matter was framed as falling under the doctrine of separation of powers, for a court ought to be slow to legislate on behalf of the AG under the FC. 

B. Circumstantial evidence can prove an individual knew or reasonably knew information was not generally available

It may be proved by direct or circumstantial evidence that an individual knows or ought reasonably to know that the information is not generally available. The CA observed that circumstantial evidence would be typical because generally no written record or mention of it in writing may be found, given the price-sensitive nature of the insider information. Since there is, as the CA termed it, an ‘uneven investment playing field where those with such information may abuse it to their advantage to make a quick gain or to avoid a quick loss’, the CA pointed out that the dilemma of human nature is addressed in Rule 9.05 of the Main Market Listing Requirements (‘MMLR’). Rule 9.05 provides that listed issuers may in exceptional circumstances refrain from publicly disclosing material provided there is complete confidentiality, but the listed issuer must refrain from delaying disclosure for an unreasonable period since it is unlikely confidentiality can be maintained beyond a short period.  

On the facts, CIMB approached KAAP where Mr Sreesanthan was its corporate advisory face. Witnesses who were part of CIMB’s committee testified they were positive in recalling that they had communicated to Mr Sreesanthan the identity of the entity, being PKNS, and that it wanted to privatise its listed subsidiary. Further, Mr Sreesanthan’s associate, who worked exclusively for him, testified that she was instructed to study the State Enactment after being briefed by him and that she saw his handwriting of ‘Worldwide Properties B’ at the corner of her printed email. Ms Koh also informed Mr Sreesanthan in her email of the password to open an attachment was “Worldwide”, not because Mr Sreesanthan was unaware of the target company but because the password was case-sensitive. The CA held that such circumstantial evidence was sufficient, given that at the time, it was public knowledge from documents filed with Bursa that PKNS had only one listed subsidiary, Worldwide. The CA also rejected Mr Sreesanthan’s explanation that he had bought the Impugned Shares purely based on the CIMB April Research Report that he earlier received from his remisier. 

C. Subjective knowledge of actual price of shares upon not generally known information becoming public is not relevant

The CA accepted that knowledge of the actual price of the shares to be fixed upon public announcement is not necessary to show that a reasonable person would expect the not generally available information to have a material effect on the price of the shares. In the CA’s view, the rationale is that the offer to purchase shares in a company to be privatised, like Worldwide, must be at a premium for otherwise there would be no incentive for the other non-PKNS shareholders to dislodge their shares. The CA held that the test wasn’t a subjective test but an objective one provided by s 89E(1)(b) of the SIA 1983’s use of the words ‘reasonable person [who] would expect it to have a material effect on the price or the value of securities’. 

D. ‘Improper use’ of insider information need not be proved 

The CA rejected the argument that insider trading is not proved if the SC had not shown how the alleged individual has made ‘improper use’ of price-sensitive insider information without which there is no mens rea (intention/knowledge of wrongdoing) for the offence. This was because of an amendment introduced by the Securities Industry (Amendment) Act 1998 wherein the old s 90 of the SIA 1983 was repealed and substituted with s 89A-89O. The CA held that such amendments did away with the requirement to prove ‘improper use’ of the information. Therefore, the law did not need to deal with lapses of memory or failure to recall the true nature of the information possessed but can deal instead with objectively available circumstances that should have led a person to understand a prohibition on trading will apply. 

As such, it was not necessary for a court to determine which is the trigger or predominant factor in the decision to purchase the shares for the prohibition ‘is against the purchase of shares when one is in possession of not generally available price-sensitive insider information’. The CA held the HC was right to conclude on the balance of probabilities that Mr Sreesanthan was in possession of not generally available price-sensitive insider information and that he purchased the Impugned Shares before such information was made public. 

NB: Mr Sreesanthan has obtained leave to appeal to the Federal Court at the time of publication, premised on several legal questions including on whether the Attorney General’s consent is required when the Securities Commission commences civil proceedings in relation to an offence for insider trading.

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