SC to recommend appeal for heavier sentence for Transmile ex-CEO

Sunday 05 May 2024

This article first appeared in The Edge Malaysia Weekly on August 31, 2020 - September 6, 2020

TRANSMILE Group Bhd founder and former CEO Gan Boon Aun may have been convicted last Thursday, but that may not be the end of his 10-year-long court case. Following the judge’s guilty verdict, the Securities Commission Malaysia (SC) said it would be recommending to the public prosecutor to appeal for a heavier sentence against Gan.

The decision rests with the Attorney-General’s Chambers.

On Thursday, Sessions Court judge Tuan Hasbullah Adam fined Gan RM2.5 million (in default 18 months’ imprisonment) and sentenced him to one day’s jail.

In the SC’s statement on the same day, it said it would be recommending to the public prosecutor to appeal against the sentence.

During mitigation, Deputy Public Prosecutor Mohd Hafiz Mohd Yusof had urged the court to order 18 to 24 months’ imprisonment and a fine of RM2 million.

“We are not asking for the maximum punishment, but a custodial sentence is warranted. We pray that the court impose a custodial sentence of between 18 and 24 months and a fine of RM2 million,” he said.

Hafiz said the sentence should act as a deterrent and that it should be based on the sentencing trend in similar cases prior to this.

“We requested for a deterrent sentence, and based on the sentencing trend in similar offences (in previous cases), we say that a range of between 18 and 24 months (imprisonment) is appropriate, given the facts of the case,” he told The Edge at the end of the proceedings last Thursday.

“We’re happy that at least the trial has finished, and we will see how it goes from there,” he added.

Gan was found guilty by the Sessions Court of furnishing misleading financial statements to Bursa Malaysia in 2007. In delivering his judgment, Hasbullah said the defence had failed to prove that the offence committed by the group — furnishing misleading statements to Bursa with intent to deceive — was not a result of Gan’s consent as a director.

Hasbullah further ruled that the defence had also failed to prove that the accused had exercised all such diligence to prevent the commission of the offence.

Transmile, listed on June 27, 1997, was a darling of the stock market. It had six wholly-owned subsidiaries, including Transmile Air Services Sdn Bhd (TAS), which was the biggest revenue contributor to the group, and Transmile Management Sdn Bhd.

Transmile’s principal activities through its subsidiary companies included provision of air transport services, trading and leasing of aircraft and supplying of aircraft spare parts and accessories.

Transmile had submitted an announcement to Bursa in respect of its unaudited results that showed RM989.19 million as revenue for the financial year ended Dec 31, 2006, and RM338.47 million as revenue for the fourth quarter of that year.

This was deemed a misleading statement as TAS’ revenue of RM333.36 million, which was included in the said revenue figure, was false. TAS’ revenue had been inflated by including fictitious sales transactions between TAS and 20 purported customers.

The overstated revenue was likely to have induced market investors to purchase Transmile shares, as the company had reported stellar performance for that year. In actual fact, Transmile suffered losses of RM126.3 million instead of making a profit of RM157.5 million in 2006, and it chalked up losses totalling RM369.6 million instead of the RM84.4 million profit reported in 2005.

On Feb 8, 2007, Transmile’s external auditors, at the time known as Deloitte & Touche (Deloitte), queried the chief financial officer (CFO) about certain transactions involving the 20 purported customers. According to Deloitte, these transactions not only lacked economic justification but also supporting documentation.

In fact, at an audit committee meeting on Feb 14, 2007, Gan had told Deloitte that he was aware of the transactions involving the 20 purported customers and undertook to provide the supporting documents and explanations to the transactions.

The next day, Gan attended Transmile’s 37th board of directors meeting, during which the unaudited fourth quarterly results were approved by the board. Despite his knowledge of the transactions involving the 20 purported customers, he did not raise the issue highlighted by Deloitte to the board.

Subsequently, it was proven in court that there were several meetings convened by the audit committee and the board, which were attended by Gan, but he failed to highlight the audit concerns raised by Deloitte.

After the results announcement on Feb 15, 2007, Gan was noted to have continued to conceal the full facts about the irregular transactions from the board until May 9, 2007, when the CFO admitted to the overstatement of the revenue. Gan resigned on Aug 1, 2007.

The prosecution managed to prove that there were in fact no sales transactions between TAS and the 20 purported customers amounting to RM333.36 million. In order to appear as if the 20 purported customers had paid TAS for flight charter services, Gan had authorised the payment of monies from TAS to some of the bogus customers.

They were in fact 20 dormant firms that had a paid-up capital of RM2 each. The monies were then immediately paid back to TAS and recorded as genuine payments for the flight charter services rendered by TAS (contra transactions).

Furthermore, Gan advanced at least RM35 million of his own money to TAS to make the said payments through a third-party company, Primatasi Sendirian Bhd, to create the impression of “genuine collections” with the auditors.

Upon receiving the funds and recording in TAS’ books as collections, TAS then transferred the funds back into Primatasi.

The accounting scandal was exposed in 2007 and the chartered air-freight service company was categorised as a Practice Note 17 company in 2010. It was eventually suspended and delisted from Bursa in 2011.

The charge

That Transmile Group Bhd committed an offence under Section 122B(a)(bb) of the Securities Industry Act 1983 (Act 280) when it, with intent to deceive, furnished a misleading statement to Bursa Malaysia Securities Bhd in Transmile Group Bhd’s “Quarterly Report On Unaudited Consolidated Results For The Financial Year Ended December 31, 2006” and that Gan Boon Aun, who at the time of the commission of the offence was a director of Transmile Group Bhd, is deemed to have committed an offence under Section 122B(a)(bb) read together with Section 122(1) of the Securities Industry Act 1983, and punishable under Section 122B of the same Act.

Under this Act, a convicted offender is liable to a fine not exceeding RM3 million or to imprisonment for a term not exceeding 10 years or to both.

The constitutional challenge that delayed the trial

Although the defence was called in the Transmile case on March 16, 2011, the defence’s case only commenced seven years later on July 27, 2018. This was due to a constitutional challenge by Transmile Group Bhd founder and former CEO Gan Boon Aun and executive director Khiudin Mohd against the validity of the charge brought against them.

The trial first commenced on July 22, 2010, and the prosecution closed its case on Jan 28, 2011, after having called 42 witnesses. The Sessions Court then held that the prosecution had proven a prima facie case and ordered both the accused to enter their defence on the alternative charge.

However, on the eve of the hearing of the defence’s case, Gan and Khiudin filed an application under Section 30 of the Courts of Judicature Act 1964 to challenge the constitutionality of Section 122(1) of the Securities Industry Act 1983 (SIA) under which they were charged — which states that if a corporate body has committed an offence under the act, a director or chief executive officer, or one purporting to act in such a capacity for the company, is deemed liable.

They argued that the law was inconsistent with, among others, Article 5(1) of the Federal Constitution, which provides that “no person shall be deprived of his life or personal liberty save in accordance with law”.

To recap, in July 2007, Gan and Khiudin, together with former chief financial officer Lo Chok Ping, were first charged with abetting the company in making a misleading statement to Bursa Malaysia in its quarterly report. The trio claimed trial.

In an interesting twist, the Securities Commission Malaysia (SC) withdrew the charge against Lo in May 2008 after he paid a compound of RM700,000, while Khiudin was acquitted of the charge later in 2016.

In November 2011, the High Court upheld the duo’s challenge and ruled that the section was unconstitutional, which prompted the SC to file an appeal to the Court of Appeal against the High Court’s decision.

But in a landmark decision, the Court of Appeal on Sept 28, 2015, overturned the High Court’s decision and held that the law was valid and not unconstitutional. In delivering the verdict, the then appellate court’s Justice Datuk Tengku Maimun Tuan Mat, who is the current Chief Justice of Malaysia, said the section did not violate the Federal Constitution.

Two years later on March 15, 2017, following a further appeal by Gan, the Federal Court upheld that Section 122(1) of the SIA was constitutional and ordered the case to be remitted to the Sessions Court for commencement of the defence’s case.

Not giving up, Gan on April 27, 2017, filed an application under Rule 137 of the Rules of the Federal Court 1995 to review and set aside the decision of the Federal Court, but the application was dismissed.

On the eve of the hearing of the defence’s case, Gan made another similar application under Section 30 of the Courts of Judicature Act 1964 but was again unsuccessful. He then filed a motion for revision to the High Court on Dec 15, 2017, but that was also dismissed.

The Court of Appeal later ordered the defence’s case to commence after the prosecution successfully raised a preliminary objection following the defence’s appeal to the appellate court.

The defence’s case finally commenced on July 27, 2018, almost seven years after the defence was called, where Gan elected to give sworn testimony from the dock. He was the sole defence witness.

Lead defence counsel Datuk Tan Hock Chuan had initially indicated that the defence intended to call up former transport minister Tun Dr Ling Liong Sik, who was also non-executive chairman of Transmile, as a defence witness. However, according to Tan, Ling was not able to attend court due to undisclosed reasons.

Ling joined Transmile in April 2004, and vacated the chairman’s post two days before the group’s annual general meeting on Sept 5, 2007. The scandal broke out in April 2007.

Midway through his testimony as a defence witness, Gan, on Nov 6, 2019, pleaded guilty to the alternative charge, but denied certain facts of the case presented by the prosecution. His denial basically absolves him from the responsibility of knowing the fact that there were untrue statements and irregular transactions prior to Transmile reporting its quarterly results to Bursa Malaysia.

As such, Sessions Court judge Tuan Hasbullah Adam rejected Gan’s guilty plea as he found it to be insufficient. In his ruling, Hasbullah said the plea was done with certain repudiation to the facts of the case, which he considered to be significant to the charge.

He ruled that the guilty plea must be completely unreserved, unqualified and unequivocal. Note that the alternative charge is against Transmile and not against Gan individually. Gan is charged in the alternative charge as a director acting on behalf of the company.

In contrast, the initial principal charge was against him individually for abetting Transmile in making those misleading statements, but Gan had been acquitted on that charge.

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