SIAS has observed that for some time now, Singapore investors have been suffering losses as a result of the unethical actions of some officers of foreign listings who have knowingly acted against the interest of shareholders and have relayed their complaints to the relevant authorities. Their wrongful actions have resulted in their companies being suspended, resulting in shareholders losing their hard earned monies in these companies. Shareholders are frustrated with no recourse for claiming their losses in Singapore. The wrongdoers are in a foreign country with which Singapore has no extradition treaty to secure their attendance in Singapore to face legal action. SGX can only enforce the listing rules in Singapore. Commercial Affairs Division has no jurisdiction beyond the shores of Singapore. What then is the plight of Singapore investors who have invested in foreign listings and have been wrongly dealt with? It would appear that in most of these cases, there is prima facie evidence of financial mismanagement.
Currently, shareholders of three foreign listings, S Chips, have been frustrated with shares suspended from trading; namely China Fibretech, China Sky and China Environment. SIAS calls on the authorities, both here in Singapore and in overseas to investigate the alleged claims and to help settle the issues facing these companies so that auditors can complete the audits, thereby allowing the companies to request trading of their shares. In all three companies, the conduct by the officers, in particular, the promoters, caused losses to shareholders. The facts relating to the wrongdoings are provided below.
China Fibretech (compiled from company announcements on SGX)
On 30th Nov 2015, the Board announced that China Fibretech’s wholly-owned subsidiary, Shishi Simwa Knitting & Dye Co, Ltd (石狮市新华针织漂染有限公司)incorporated in the PRC, received notices of claims by 3 customers on 25 and 26 Nov 2015. The notices alleged that they suffered substantial damages and financial losses due to the products processed by Shishi Simwa Knitting & Dye Co, Ltd, the Company’s subsidiary, not meeting the specified requirements, resulting in de-colouring in their end products. The alleged economic loss incurred by the Claimants (晋江市滨浪制衣 织造有 限公司 , 石狮 市爱利奴 服饰有 限公司 and 石 狮市 金太屋 纺织服饰 有限公 司) are RMB205,346,020.00 based on 418,220 items of clothing, RMB132,362,307.00 based on 269,577 items of clothing and RMB128,339,053.00 based on 261,383 items of clothing respectively, in which the total compensation amount is RMB 466,047,380.00.
According to the company’s announcement, the Board informed the Chairman and CEO, Wu Xinhua, and Management when notification from the subsidiary of the claims received by the company, to engage a reputable law firm in China to handle the claims and to establish the facts surrounding their allegations and to take steps to verify their claims. The Management was also to report on the status and development of the claims to the Board and not to admit any liability nor agree to any form of compensation before consulting and seeking the Board’s approval.
Contrary to the instructions of the Board, on 28 September 2016, the payment was approved by Wu Xinhua, executive chairman & CEO, and the non-executive and non-independent director, Wu Dezhi (uncle to the Wu Xinhua) on their own. They claimed they did so in order to avoid further compensation and interest claimed by the Claimants. This was conducted without the knowledge of the senior finance manager or the only independent director based in Singapore, nor having Board approval despite having been specifically informed.
It is common knowledge that some companies in foreign listings in Singapore have in the past alleging such claims to justify payments, without proper verification.
When queried by SGX on 4 October 2016 on what Wu Xinhua, the executive chairman & CEO, had done to safeguard the interest of the Company, whether the Company appointed a reputable lawyer to defend the Company’s interest in the significant customer claims, and to obtain supporting documents to verify the veracity of the claims to safeguard the interest of the Company’s shareholders as a whole. Wu Xinhua replied by way of announcement that:
The Company had performed the following steps in relation to the Claims to safeguard the interest of the Company:
1) Internal investigation conducted by both the Company and the Claimants;
2) Quality testing on samples of required colour conducted by independent third parties, CNTAC Testing Center (中国纺织工业联合会检测中心) and SGS-CSTC Standards Technical Services Co., Ltd. (SGS通标标准技术服务有限公司);
3) Appointment of an independent audit firm; and
4) Consulting with several independent reputable law firms
Wu was requested by the independent director and the senior finance manager to provide supporting documents to substantiate the above mentioned alleged actions but none of them had been provided to-date.
We believe, until and unless Wu Xinhua, the executive chairman and CEO provides the supporting documents as requested, one can only infer that the above initiatives did not take place as alleged and that the claims are likely to be fictitious.
In view of the above circumstances, we now have reasons to believe that Wu Xinhua, the executive chairman & CEO acted against the interest of China Fibretech and its shareholders. By acting on his own and deliberately choosing not to comply with Board’s directives, he has given reasons for worry. The claims, pertaining to the Company, Shishi Simwa Knitting & Dyeing Co. Ltd, incorporated in China and operating in China, were never fully investigated and independently verified, and yet Wu was willing to settle the claims on his own account for no acceptable reason. The auditors have also complained of not having access to the bank statements and have been unable to verify the cash at bank. At the end of the financial year 2014, the company reported it had RMB 456.1 million in the company’s bank account.
We believe there is a case for the legal authorities in China to investigate to determine whether the alleged claims against Shishi Simwa Knitting & Dyeing Co. Ltd. are genuine and not fraudulent. The circumstances relating to the alleged claims raises grave suspicion. The failure by Wu, as Chairman, to come to Singapore to meet with the Board for so long and his failure to demonstrate his willingness to meet with shareholders in Singapore, all raises serious questions about his conduct. If he had done no wrong and the claims against the subsidiary are genuine, why is he reluctant to come to Singapore to face shareholders and be accountable for his actions? Earlier, he had also defaulted on a meeting arranged by independent directors to meet with SIAS officials after promising to do so. He needs to account soon for the company’s assets and monies in the bank account. Are the company’s funds still in the bank? Are the claims true? Why is he not willing to reconstitute the Board? These are questions worrying the shareholders.
Shareholders also need to consider their options like calling for an extraordinary general meeting to appoint new directors and perhaps, call for a special audit. This will reveal where Wu stands.
China Environment Ltd
On 26 September 2016, China Environment Ltd announced the commencement of a lawsuit against the former ex-Chairman Huang Min. The suit was against Huang Min and his family members for the financial mismanagement of China Environment Ltd and its subsidiary, Fujian Dongyuan Environmental Protection Co., Ltd, and was commenced after investigations revealed that around RMB 692,550,000 trade receivables, which were to be paid to Fujian Dongyuan Environmental Protection Co Ltd by various third parties, appeared to be fictitious and unrecoverable.
We believe that the current management had commissioned an investigation with these third parties who revealed that only photocopies of the said contracts were available, with there having been no records of actual production, procurement, installation and customer correspondence, leading to the strong suggestion that these trade receivables were fictitious. China Environment Ltd has since had to impair its trade receivables by RMB 356,800,000 in its Financial Statements and Related Announcement for Second Quarter and Six Months ended 30 June 2016.
The Plaintiff’s current management has uncovered further instances of financial mismanagement, such as the misappropriation of a further RMB 25,000,000 which Huang Min had represented would be used as additional working capital, which was instead moved from China Environment Ltd, to its subsidiary, Xiamen Gongyuan Environment Protection Technology Co., Ltd, and thereafter moved to Bengbu Xingyuan (a company known to be controlled by Huang Min and/or his family). We note that the current management is not presently aware of any explanation as to this movement of the funds.
Apart from the above matters, we note that the auditors of China Environment Ltd and its subsidiary, Fujian Dongyuan Environmental Protection Co., Ltd have raised issues on the management and financial controls in place in the companies.
We note that China Environment Ltd has made a police report against Huang Min and his family members on the above matters on 21 December 2016.
We also note that China Environment Ltd’s shares have been suspended from trading since 24 June 2016.
China Sky Chemical Fibre Co. Ltd
We note that on 24 October 2016, China Sky Chemical Fibre Co Ltd and its subsidiaries (some of which are chinese entities) commenced suit against Zheng Kai Su, who was a director of China Sky Chemical Fibre Co Ltd, and who controlled the management and operations of its subsidiaries.
We note that since 2005, Zheng Kai Su provided massive amounts of intercompany loans from China Sky Chemical Fibre Co Ltd’s funds to three of China Sky Chemical Fibre Co Ltd’s subsidiaries in order to purchase assets and operating capital. As at 31 December 2015, the aggregate amount of the intercompany loans provided is approximately RMB 893,145,000.
Similar to the above companies, we note that China Sky Chemical Fibre Co Ltd has been suspended from trading since 12 August 2016, after recently resuming trading in September 2015 after a 4 year suspension over suspected regulatory breaches by the former Chief Executive Officer Huang Zhong Xuan.
In the SGX Regulator’s Column dated 17 November 2015, the Chief Regulatory Officer, Mr Tan Boon Gin rightly said, “The board of directors owes a fiduciary duty to shareholders to act in their interests and to safeguard the interest and assets of the company. The board must therefore remain vigilant and satisfy themselves on the veracity and reasonableness of the claims, payments and transactions, and appoint appropriate and suitable professionals to protect the company's interest. The Audit Committee must take a particular and active interest in the matter and view the safeguarding of the company’s assets as their top priority. Where there are concerns on possible irregularities or impropriety in the company, the board should consider if there is a need to change any of its Executive Officers or legal representative of the company.”
We call upon the relevant authorities in Singapore to make an urgent request and collaborate with the relevant overseas authorities to investigate, possible offences committed in China and/or overseas expeditiously, with respect to funds raised in Singapore and transferred to China or elsewhere and dealt with inappropriately, and bring the culprits, if any, to justice. That would be the least the affected Singapore citizens expect to be done, as they are frustrated and stranded. It would be comforting for these shareholders, in dire straits, to receive updates from time to time.
Founder, President & CEO
Securities Investors Association (Singapore)