BURSA MALAYSIA SECURITIES PUBLICLY REPRIMANDS AND/OR FINES SERBA DINAMIK HOLDINGS BERHAD (IN LIQUIDATION) AND TEN (10) DIRECTORS

Bursa Malaysia Securities Berhad [Registration No.: 200301033577 (635998-W)] (Bursa Malaysia Securities) has publicly reprimanded Serba Dinamik Holdings Berhad (in liquidation) (SERBADK) and 10 of its directors for breaches of Bursa Malaysia Securities Main Market Listing Requirements (Main LR). In addition, 10 directors of SERBADK were imposed total fines ranging from RM355,200 to RM1,376,000.

SERBADK was publicly reprimanded for the breaches of the following provisions of the Main LR:-

Table 1

SERBADK was also required to review and ensure the adequacy and effectiveness of its financial reporting function and carry out a limited review on the company’s quarterly report submission and comply with the training requirement imposed by Bursa Securities.

The following penalties were imposed on 10 directors of SERBADK at the material time who had breached paragraph 16.13(b) of the Main LR for permitting the company to commit the breaches as follows:-

Table 2

The findings of breaches and imposition of the above penalties on SERBADK and its directors were made pursuant to paragraph 16.19 of the Main LR upon completion of due process and after taking into consideration all facts and circumstances of the matter including the materiality of the breaches, impact of the breaches to SERBADK and shareholders/investors and the roles, responsibilities, knowledge, involvement and conduct/action/inaction of the directors.

Bursa Malaysia Securities views the contraventions seriously as timely and accurate disclosure of financial statements and material information are fundamental obligations of listed companies and are of paramount importance in ensuring an orderly and fair market for securities traded on Bursa Malaysia Securities and maintaining market integrity and investor confidence. Further, it is mandatory for listed companies and its directors to comply with the directive issued by Bursa Malaysia Securities.  All directors (be it executive or non-executive) of listed companies must also ensure compliance of the Main LR and maintain the highest standards of integrity, accountability, corporate governance and responsibility to its shareholders and the investing public. There was a serious dereliction of duties by the Board of Directors (BOD) of SERBADK and corporate governance failures in view of the numerous breaches by SERBADK and the directors, particularly in failing to ensure proper and timely disclosure of material information and transparency to the market and compliance with the regulator’s directive.  Bursa Malaysia Securities will not hesitate to take enforcement actions against culpable directors who fail to discharge their duties (including newly appointed directors and notwithstanding the director’s resignation) and thus permitted/caused the listed company to commit breaches of the Main LR.  

BACKGROUND

I. Failure to announce the FFU immediately and in accordance with Bursa Malaysia Securities’ Directive

On 2 July 2021, EY was appointed as the independent reviewer to undertake the Special Independent Review to assess the accuracy and veracity of the matters raised by SERBADK’s former external auditors, KPMG PLT (KPMG) in the course of carrying out the annual statutory audit of SERBADK for the year ended 31 December 2020.  The audit issues raised by KPMG concerned recognition of SERBADK Group’s revenue, purchases, receivables, payables and materials on site balances which might adversely affect, to a material extent, the financial position of SERBADK Group. On 21 October 2021, the FFU pursuant to the Special Independent Review were presented by EY during a joint meeting with the representatives from Bursa Malaysia Securities and 3 Independent Non-Executive Directors (INEDs) of SERBADK.

The information contained in the FFU was clearly material to SERBADK’s shareholders and investors which required immediate disclosure pursuant to paragraph 9.03 of the Main LR. However, despite being advised of the obligation to announce the FFU immediately on 21 October 2021 and the Directive to make an announcement of the FFU by 26 October 2021, SERBADK and the directors at the material time had refused to make an immediate announcement of the FFU and comply with the Directive. The Board of SERBADK had instead on 25 October 2021 announced, amongst others, that there was no document on the FFU given to the INEDs and any document or report from EY did not fall within paragraphs 9.03 and 9.35A of the Main LR and further agreed to file legal action against Bursa Malaysia Securities on 3 November 2021 as announced by SERBADK on 8 November 2021 (SERBADK’s OS) which was an attempt to delay compliance with and defeat/stifle the Directive.   

The refusal and continued refusal to disclose the FFU and comply with the Directive had led to the suspension in the trading of SERBADK’s securities with effect from 2.30 p.m. on 22 October 2021 and necessitated Bursa Malaysia Securities to initiate legal action on 23 November 2021 (Bursa’s OS 535) to enforce and give effect to the Directive. SERBADK had only announced the FFU on 21 April 2022 as required by the High Court’s order dated 7 February 2022 in allowing Bursa’s OS 535 and following the Court of Appeal’s decision to dismiss SERBADK’s stay application on 11 April 2022.

An aggravating fine was imposed on the Board (including the INEDs) at the material time who had blatantly disregarded the Main LR and the Directive in refusing to announce the FFU immediately and as directed by Bursa Malaysia Securities.    

Two other directors, namely Abu Bakar and Noor Azri, who were only appointed on 25 November 2021, were also fined as they had a duty, but failed to ensure SERBADK make an immediate announcement of the FFU and rectify the blatant contravention of the Directive, particularly where the Directive had not been set aside and SERBADK did not procure any interim injunction against Bursa Malaysia Securities pending the outcome of SERBADK’s OS. There was no evidence of any reasonable enquiry or step taken by them to ascertain and ensure that SERBADK announce the FFU particularly in view of Bursa’s OS 535 which was served on SERBADK on 25 November 2021 and announced on 30 November 2021, after their appointment.

II. Financial Reporting Breach – Delay in Issuance of AR 2021

SERBADK’s failure to issue the AR 2021 by the Extended Due Date was mainly due to the failure to provide the necessary, proper and complete information/documents to its external auditors, Nexia to facilitate and expedite the audit and the numerous outstanding and unresolved audit issues.  

The Board had failed to discharge their duties to ensure timely issuance of the AR 2021 where they had essentially merely relied on the management to finalise the audit and failed to discharge their duty of supervision to ensure SERBADK provided the necessary, proper and complete information/documents to the external auditors.

Notwithstanding that Dato’ Ilyas and Johan had resigned on 22 November 2021, prior to the Extended Due Date, they were not absolved particularly as they were aware during the Special BOD meeting on 18 November 2021 that only about 50% of the audit was completed, SERBADK was unable to issue the AR 2021 by the Extended Due Date and of the potential Disclaimer Opinion by Nexia in the AFS 2021.

In addition, the Board at the material time (including Abu Bakar and Noor Azri who were newly appointed 5 days prior to the Extended Due date) had agreed and allowed the delay in issuance of the AR 2021 during the Special BOD meeting on 30 November 2021 and further delayed the issuance of the AR 2021 only on 6 January 2022 even though the AFS 2021 had been approved by the Board on 22 December 2021.

Upon issuance of the AR 2021, SERBADK also made the PN17 First Announcement on the triggering of the prescribed criteria under paragraph 2.1(d) of PN17 as the external auditors had expressed a Disclaimer Opinion in the AFS 2021.

III. Financial Reporting Breach – Inaccurate QR 30 June 2021

SERBADK had reported an unaudited profit after tax and minority interest of RM759.980 million in the QR 30 June 2021 announced on 29 September 2021. However, SERBADK had subsequently reported an audited loss after tax and minority interest of RM175.839 million in the AFS 2021 announced on 6 January 2022 which represented a difference of RM935.819 million or 123% between the QR 30 June 2021 and AFS 2021.

The deviation was mainly due to the adjustments for under provision of impairment of trade receivables amounting to RM395 million and inventories write down amounting to RM552.6 million.

There was no reasonable explanation/evidence of any change in circumstances post announcement of the QR 30 June 2021 which justified the adjustments being made only in the AFS 2021 where –

• the impairment of trade receivables was made specifically for the customers highlighted by KPMG in relation to collection that had been identified as uncollectable and management had yet to obtain any certainty of the issues; and
• the inventories write down of RM550 million were in respect of the customers highlighted by KPMG and had been impaired without any reason.

The Board had merely and overly relied on the management to ensure the QR 30 June 2021 complied with the Main LR and failed to undertake independent assessment in approving the QR 30 June 2021. There was no reasonable basis for the directors to accept that the QR 30 June 2021 was indeed accurate and reliable or free from material misstatements particularly in view of: -

(a) the materiality of the audit issues raised by KPMG which were unresolved and the Special Independent Review and audit were still pending; and

(b) the directors’ failure to scrutinise and vigilantly probe, question and challenge the management on the numerous audit issues raised by KPMG and/or in approving the QR 30 June 2021.

III. Disclosure Breach – Defaults in Payment

SERBADK had delayed in making an immediate announcement of the defaults in payment of various credit facilities as set out in Table 3 below:

Table 3

SERBADK and the Board had failed to ensure an immediate announcement of the default in payment of the USD Sukuk despite the following: -

• the news articles by The Edge entitled “Serba Dinamik Misses Coupon Payment for US$300m Sukuk” dated 11 November 2021 and “Serba Dinamik Subsidiary Defaults on Bond Coupon Payment” dated 10 December 2021; and
• the advice of the company secretary that SERBADK was required to make an immediate announcement once an event of default was triggered during the Special BOD meeting on 30 November 2021 and various engagements of Bursa Malaysia Securities.

In addition, SERBADK had only announced the defaults in payment under the Master Murabahah Agreement and the ICP Programme upon initiation of legal actions by the lenders.  This was unacceptable and in clear contravention of paragraph 9.19A(1) of the Main LR as a listed issuer must make an immediate announcement of default in payment upon occurrence of a default, irrespective of whether a demand has been made by the lender or negotiations with the lenders.

SERBADK was unable to provide Bursa Malaysia Securities a solvency declaration pursuant to paragraph 9.19A(4) of the Main LR upon the announcement of the default in payment of the USD Sukuk and had triggered the prescribed criteria under paragraph 2.1(f) of PN17.

The Board had failed to demonstrate that they had discharged their duty of supervision and taken reasonable steps, assessment and enquiries to ensure compliance with paragraph 9.19A(1) of the Main LR.

V. Disclosure Breach – Disclaimer Opinion & PN17 First Announcement

On 22 December 2021, the Board had approved the AFS 2021 and the external auditors had finalised and issued the Auditors’ Report to the AFS 2021 containing the Disclaimer Opinion. As such, SERBADK was required to make an immediate announcement of the Disclaimer Opinion in accordance with paragraph 9.19(37) of the Main LR and had triggered the prescribed criteria under paragraph 2.1(d) of PN17 on 22 December 2021 where SERBADK was required to, amongst others, make the PN17 First Announcement in accordance with paragraph 8.04(3)(b) of the Main LR read together with paragraph 4.1(a) of PN17.

However, SERBADK had only announced the Disclaimer Opinion and made the PN17 First Announcement upon issuance of the AR 2021 (which included the AFS 2021 and the Auditors’ Report) on 6 January 2022.

The Board had failed to undertake reasonable enquiries and/or independent assessment to ensure an immediate announcement of the Disclaimer Opinion and PN17 First Announcement was made upon the Board’s approval of the AFS 2021 and finalisation of the Auditors’ Report containing the Disclaimer Opinion on 22 December 2021 despite the numerous advice from the company secretary and the implication/materiality of the Disclaimer Opinion and the PN17 First Announcement. They had further agreed and allowed the announcement of the Disclaimer Opinion and PN17 First Announcement together with the notice of annual general meeting/issuance of the AR 2021 on 6 January 2022, which was in contravention of the clear requirements of paragraph 9.19(37) of the Main LR and paragraph 2.1(d) of PN17.

VI. Disclosure Breach – Material Litigations & Winding-Up Petition

SERBADK had also failed to make an immediate announcement of various litigations, the material developments arising from the litigations and the Winding-Up Petition. The litigations and Winding-Up Petition concerned the veracity of SERBADK’s financials or financial condition and compliance with the Directive and material developments arising from the Defaults in Payment which were important to the shareholders and investors of SERBADK to facilitate informed investment decision.

The numerous failures (i.e. a total of 25 instances) to ensure timely announcement of the litigations and the material developments arising therefrom and the Winding-Up Petition (which also did not comply with the prescribed contents) were blatant disregard of the Main LR and reflected poor governance of the company to ensure compliance of the Main LR. 

Dato’ Karim, the Group Managing Director and Chief Executive Officer and Datuk Nazim, the Executive Director who were primarily responsible for the finance function and/or liaising with the lawyers on the material litigations and Winding-Up Petition had failed to ensure the company’s compliance with the Main LR.  Further, they had failed to escalate the material litigations to the Board on a timely basis to enable/ensure proper deliberation, assessment and compliance with the Main LR.