Monday, 11 August 2014

More horror stories regarding China listed companies

On the website of Singapore Law Watch is available a judgement regarding a court case by the liquidator of Celestial Nutrifoods Ltd, one of the many so called "S-chips" that went under. The case is interesting, it is about Celestial's former auditor (PricewaterhouseCoopers) who doesn't want to release additional documents to the liquidator, documents that could help the liquidator to recover some assets and/or enable him to take legal action against the alleged perpetrators.

Some snippets (emphasis mine, some comments in blue):

5. On 12 June 2006, the Company raised S$235m from investors by issuing Zero Coupon Convertible Bonds (“the Bonds”). The bondholders were granted put options which allowed them to compel the Company to redeem all or some of the Bonds at 116.5% of their face value. On 23 May 2009, a majority of the bondholders exercised their put options and the Company was required to redeem the Bonds on 12 June 2009. Shortly thereafter, the Company announced it would be unable to meet this obligation. On the due date, it failed to redeem any of the Bonds.

7. After taking control of the Company in December 2010, the Liquidator discovered that the Group’s operating companies, management and directors were based in the PRC. Despite his efforts, he was unable to obtain any meaningful assistance from them with regard to the affairs of the Company or of its subsidiaries. He also ascertained that the Company’s main assets, namely the PRC Subsidiaries, appeared to have been diverted to third parties in the series of suspicious transactions. The Liquidator considered that the Company’s shareholders and creditors had been left holding shares in a worthless company whose assets had been completely stripped away.

8. The Liquidator also discovered that the Company did not have funds to investigate suspicious transactions or to commence legal proceedings against other parties to recover money and assets that were allegedly paid out wrongfully. The Liquidator therefore entered into a Funding Agreement (“the Funding Agreement”) with several creditors (collectively referred to as “Blackrock creditors”) who are members of a group identified as the Blackrock Group.

[this is lucky for the others involved, like the minority shareholders; it won't give them any financial return, but at least a chance at some justice and transparency; in Eratat's case for instance there might not be any fund who helps with legal proceedings]

10 Turning to PwC, its role in regard to the Company was set out in the affidavit of Mr Tan Boon Chok. PwC was engaged to audit the consolidated financial statements of the Company for the financial years (“FY”) 2004 to 2009. It issued audit reports for FY 2004 to FY 2009.

[that might explain PwC's reluctance to provide more information, since they had audited the accounts starting FY 2004]

21. The Liquidator has identified seven suspicious and/or irregular and/or undisclosed transactions undertaken by the Company and the Group between 2006 and 2010 which warrant further investigation. These can be briefly described as follows:

(a) surreptitious disposal of substantially all of the Company’s assets on or around 4 December 2010 by way of an auction (“the Auction”) of the shares of the PRC Subsidiaries which had been pledged to the China Construction Bank (“CCB”) as security for certain loans apparently extended by CCB to the BVI Subsidiaries;

(b) cash payments totalling some S$16.8m to Power Charm Group Ltd (“Power Charm”) between December 2009 and September 2010;

(c) payment of some RMB 70m in or around December 2009 to purchase technical know-how in respect of a Bio-diesel Plant;

(d) goods that had been sold and returned, the value of which amounted to RMB 254m in 2009 and RMB 437.1 million in 2010, and some of which were subsequently re-sold for only RMB 14.8m;

(e) cash payments of some RMB 529m without written documentation in relation to the Soybean Hi-Tech Industrial Zone in Daqing (“Soybean Zone”);

(f) an undisclosed lease of land to construct a hotel known as the Daqing Manhatwen Hotel; and

(g) suspicious transactions described in certain anonymous letters regarding the Company.

78. The Liquidator also needs documents in order to assist in understanding two payments made in late 2008. First, RMB 268m was paid to the Daqing New Hi-Tech City Construction Investment Development Co Ltd (“NHC”) apparently in relation to loans made by NHC to the Group for the construction of what was called the Soybean Zone. Second, a sum of RMB 261m was paid to contractors. These payments were made without written documentation and the Liquidator has not been able to determine whether any services were provided by the contractors. The Liquidator cannot even ascertain the identity of these contractors.

81. In all the circumstances, I am satisfied that the application must be allowed and that PwC and its relevant representatives, Mr Tham Tuck Seng and Tan Boon Chok, shall produce all books, correspondence and documents in their custody, power or control as may be required by the Liquidator including PwC working papers and all documents and records in its possession which were supplied to it by the Company and any member of the Group.

[It is good that PwC has to handover the documents. However, we are already in 2014, while the company went under in 2009, the chance to recuperate any asset or to get some form of justice is getting smaller each year]

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