Resolve the big issues at Sino- Environment

22 March 2010

Since taking office at Sino-Environment in January, the new board and CEO appear to have hit the ground running in getting the company back in shape.

Within three months of their appointment, they have held talks with bondholders on a standstill agreement and obtained support from key managers of the group subsidiaries in China.

But while this is encouraging, they may only be scratching the surface of the real issues facing the company. Also of concern is the emergence of a new senior executive who could be linked to ousted chairman and CEO Sun Jiangrong.

Last week, Sino-Environment disclosed that during a visit by some of its directors to the Fuzhou plant, the key managers there pledged their support to restart business operations in return for a stake of at least 20 per cent through the subscription of new shares.

The key management is led by deputy general manager Tian Yuan, who is the legal representative of Thumb Environment, a Sino-Environment subsidiary.

Interestingly, Mr Tian has never been mentioned in the group’s annual reports nor has he ever been introduced as a key manager – until now.

But the fact that he is the legal representative of a group subsidiary whose overall business planning was determined by Mr Sun suggests that there must be a link.

It would be in the best interests of all concerned to address this issue openly. If Mr Tian is truly independent of Mr Sun, then the matter can be laid to rest.

Mr Sun was accused of misappropriation in police reports filed by the group’s independent directors last year in Singapore, Hong Kong and China, and investigations outside of China are still ongoing.

One would recall that the roots of Sino-Environment’s debacle can be traced back to Mr Sun’s financial woes early last year that led to him losing his entire majority stake in Sino-Environment – which, in turn, triggered the group’s default on a $149 million convertible bond issue. Months later, PricewaterhouseCoopers (PwC) found that several material transactions were made by the group without board approval and authorisation.

But investigations by PwC are not over yet. It has been hindered in completing the probe as the former executive directors, including Mr Sun, have refused to provide authorisation letters for PwC to obtain bank statements directly and independently.

Hence, an immediate concern should be to provide PwC the authorisation needed to conduct independent checks and to render full assistance for its work to be completed.

This is so crucial, given that tens of millions of missing dollars are still unaccounted for, and quarterly results have not been reported for the whole of last year.

And since these new directors led by new CEO Sam Chong Keen have obtained cooperation from the key managers in China, then a reasonable question would be: why haven’t the auditors been sent in to continue their investigations?

Since the new directors have expressed their intention to update the group accounts as soon as possible, and to identify and plug gaps in corporate governance and internal controls procedures, shareholders are likely to evaluate their resolve based on the actions they take and the answers they provide.

However, there is no longer any mention of the $14 million of cash reserves that the former executive directors claimed to have kept in a Xiamen bank and which they were prepared to remit to Singapore. Neither has there been any indication of seeking a transfer of this cash to the Singapore account.

What is of utmost importance is to change the signatory of the company’s bank accounts. Three months have passed since Mr Sun’s resignation but it remains unclear if he has surrendered the company seal – which provides the legal capacity to make and execute agreements, provide guarantees, and transfer assets.

Without retrieving this seal and removing Mr Sun as legal representative, the new directors will not have effective control over the Chinese subsidiaries, even if they eventually gain majority representation on the boards – something that Mr Sam is trying to achieve.

Clearly, many pertinent issues remain unresolved. The new directors have been trying to steer the company back to a path of viability, which is some comfort for shareholders. But their efforts could well be in vain if the more critical issues are not addressed promptly and resolved satisfactorily.


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