On 10 February 2014, the Federal Court in CIMB Bank Berhad v Maybank Trustees Berhad & Another Appeals [2014] 1 MLRAU 1 (hereinafter referred to as the Pesaka Astana bonds case) delivered a decision which rattled the bond market.

The Court held that KAF Investment Bank Berhad (KAF) as the Lead Arranger for the issuance of public Islamic bonds worth RM140 million (the bonds) was entitled to exclude liability arising from the Information Memorandum (IM) through the use of Important Notice as a disclaimer.

One of the main reasons cited by the court was that the bondholders in this case were sophisticated investors with vast experience in the capital market. The burden of verifying the content of the IM thus shifted on the potential investors rather than KAF.

The Court also held that the most proximate cause of the loss was the failure on the part of Maybank Trustees Berhad (MTB) to ring-fence the Designated Accounts or alternatively to stop Pesaka Astana from operating the Designated Accounts. MTB could have done so by using its power and rights as vested upon it by the Trust Deed and the Power of Attorney but had failed to do so. MTB was held to be 100% liable to the bondholders for the loss and not KAF.

Notwithstanding MTB’s liability, the Court was of the view that there was no excuse for Pesaka Astana by its fraudulent misappropriation to deprive the bondholders of the monies. Pesaka Astana was ordered to indemnify MTB as it was not just and equitable to allow Pesaka Astana to benefit from its ill-gotten gains.

This is a landmark decision as the level of importance of proper due diligence has now been raised. Potential investors would now have to conduct a full blown due diligence on the Issuer as the IM can no longer be relied on. This would raise an issue in relation to resources, access to information, time and costs in appointing professionals to verify the data in the IM. Further, investment banks and bond trustees may have to tighten their risk management processes and fiduciary duties to investors according to industry observers in light of the Court’s decision.