Special auditor uncovers serious, suspicious lapses in FORELAND FABRICTECH

In the just-released 41-page executive summary of special auditor BDO, there's a tonne of dirt against various members of the senior management of Foreland Fabrictech, in particular executive chairman Tsoi Kin Chit.

The company had too easily (and suspiciously) succumbed to a compensation claim of a whopping RMB283 m by a client whose order for Foreland's goods amounted to only RMB4 million. You have to read the report in full to know the extent of the management lapses, the incompetence, and ludicrousness of the company's business deal-making.

The following are excerpts of BDO's report pointing the finger squarely at Tsoi:

Tsoi Kin Chit: From army clerk to failed chairman (and S-cheat) ♦ Served in the Chinese army from January 1969 to June 1976, handling clerical work. ♦ In June 1979, joined Jinjiang Second Welfare Factory, a state-owned shoe-manufacturing enterprise, as factory manager until June 1996. ♦ In October 1988, founded Fulian Knitting and has been its Chairman and MD since then. ♦ In April 2007, listed Foreland Fabrictech on SGX. ♦ June 2015, sold 29.5% stake for just $1 m (0.6 cent a share). Left with 11.03%.

As a director of Fulian (Knitting Co, a wholly-owned subsidiary of Foreland Fabrictech), Mr. Tsoi has a duty to protect and act in the interests of Fulian. In our view, without taking reasonable steps to defend Fulian and mitigate Fulian’s “exposure” in respect of the purported claim by Jiangxi Longdu prior to entering into the settlement agreement with Jiangxi Longdu, Mr. Tsoi may not have acted in the interest of and / or fully discharged his duty owed to Foreland and / or Fulian:

a. By not providing Fujian Minhua Law Firm with the full facts / information, Fujian Minhua Law Firm would not be in a position to render Fulian comprehensive legal advice to defend Fulian and mitigate Fulian’s “exposure” in respect of the purported claim by Jiangxi Longdu;

b. By not taking the Company’s former independent directors’ requests to seek a second legal opinion;

c. By not taking the Company’s former independent directors’ requests to engage a reputable audit firm to re-assess Jiangxi Longdu’s purported claim against Fulian;

d. By not engaging a third party to verify Jiangxi Longdu’s claim on the defective dyed textile;

e. By not verifying the accuracy, veracity, and / or reasonableness of the items listed in the Economic Losses which form the basis of Jiangxi Longdu’s claims against Fulian; and

f. By not clarifying with Fujian Hua Tie and understanding the basis of their assessment of the losses purportedly suffered by Jiangxi Longdu.

6.57 Owing to the substantial amount claimed by Jiangxi Longdu against Fulian, Mr. Tsoi, as a director of Fulian, should have taken all reasonable steps to defend Fulian and mitigate Fulian’s “exposure” in respect of the purported claim by Jiangxi Longdu.

By relying on the Legal Advice (which in our view, was limited) and the Appraisal Report that is neither comprehensive nor detailed to enter into the settlement agreement with Jiangxi Longdu, Mr. Tsoi may not have acted in the interest of Foreland / Fulian and may have breached his fiduciary duties towards Foreland / Fulian.

6.58 As the directors of Foreland, Mr. Tsoi, Mr. Zhang and Mr. Chen Chao Ying have to act in the interest of Foreland and / or Fulian (a wholly-owned subsidiary of Foreland). Based on our findings, it appears that inadequate due diligence was carried out in respect of the purported claim by Jiangxi Longdu.

In this regard, by voting in favour to enter into the settlement agreement with Jiangxi Longdu, Mr. Tsoi, Mr. Zhang and Mr. Chen Chao Ying may not have acted in the interest of Foreland and / or Fulian and may have breached their fiduciary duties owed to Foreland and / or Fulian.

6.59 We are of the view that Mr. Tsoi, Mr. Zhang and Mr. Chen Chao Ying should have taken all reasonable steps to defend Fulian and mitigate Fulian’s “exposure” before agreeing to enter into the settlement agreement with Jiangxi Longdu considering that the settlement sum of RMB283 million (NB: As per the Statement of Claim dated 9 December 2013 filed by Jiangxi Longdu in the Fujian High People’s Court, Jiangxi Longdu was claiming for a sum of RMB289 million against Fulian) would have almost “wiped out” Fulian’s entire cash balance of RMB288 million (balance as at 30 April 2014 as per Fulian’s general ledgers) (NB: As per the audited financial statements for the financial year ended 31 December 2013, the cash balance was RMB292 million).

6.60 As a shareholder of Foreland as well as a director of Foreland and Fulian, Mr. Tsoi has an interest in Fulian’s business dealings and owed a duty to act in the interest of Foreland’s shareholders, regardless of whether he has a material interest in the transaction or otherwise. In this regard, it is also our view that Mr. Tsoi may have breached Rule 103 (5) of the Exchange’s listing rules.