This article first appeared in The Edge Malaysia Weekly on October 23, 2017 - October 29, 2017

A special audit of Metronic Global Bhd (MGB) has highlighted various corporate governance issues at the troubled engineering firm, which is also involved in the property development and fertiliser businesses.

In May this year, Bursa Malaysia ordered a review of MGB following a discussion with the company’s audit committee to improve its internal controls and corporate governance practices. This was after a list of issues was identified by the stock exchange and MGB’s audit committee.

MGB appointed Ferrier Hodgson MH Sdn Bhd to conduct the review and the auditor completed its report on Sept 20.

While a number of problems were outlined by the auditor, a notable item concerned a RM4.86 million loan from a former director of MGB to be used to fully subscribe for the company’s entitlement to a rights issue by mobile and digital solutions company, MNC Wireless Bhd.

In August 2015, MNC had announced a renounceable rights issue of up to 311.76 million new shares with 207.84 million free warrants at 15 sen apiece on the basis of three rights shares and two warrants for every MNC share held, which was passed at an extraordinary general meeting (EGM) in December the same year.

Towards the end of last year, MNC’s share price plunged to a low of six sen after touching a 1½-year high of 35 sen in September.

MGB — the largest shareholder of MNC — had subscribed for 53.14 million shares, according to a Nov 22, 2016, filing with Bursa, bumping up its stake in the latter to 18.75%.

However, this was only after MGB filed a writ of summons against MNC in October last year, naming Datuk Seri Pang Chow Huat, Kua Khai Shyuan, Wong Kok Seong, Pang Siaw Sian, Thu Soon Shien and Christopher Tan Chor How as defendants and seeking an injunction to restrain the defendants from executing the rights issue.

According to court documents, MGB had authorised Jackson Tan Ew Chew — who was an adviser to the company at the time — to affirm the affidavit on behalf of the company.

Note that Jackson’s name does not appear in any of MGB’s annual reports or list of substantial shareholders. But it did appear in the announcement of the special audit, announcing his resignation as adviser prior to the commencement of the audit as he was a related party to a former director of MGB.

According to court documents, the injunction was sought as MGB alleged that Chow Huat had breached an agreement between him and the company on the purchase of its stake in MNC.

The plaintiff also claimed that Chow Huat failed to make a takeover offer after he allegedly obtained control of MNC. MGB alleged that he had conspired with the other defendants to cause it to sell its shares in the company to injure the plaintiff and other shareholders.

Meanwhile, MNC, in its defence, denied all allegations made in the statement of claim by MGB. The defendants also requested further clarification on the allegations made as they said the items outlined by the plaintiff were only general accusations without the provision of details.

Also in October last year, MGB and Lee Koh Yung — a shareholder of MNC — served a special notice to convene an EGM to seek the removal of Christopher, Siaw Sian, Thu and Kua — who currently sits on the board of MGB — from the board of MNC.

MGB sought to replace these directors with Nga Koo Koy, Eric Boon Chuan Kit, Ng Wee Peng, Tan Kian Hong and Raja Aida Jasmin Raja Shahrome. Raja Aida was formerly MGB’s chief operating officer.

However, following a boardroom reshuffle at MGB, the company reconsidered its intention to call for an EGM to allow MNC’s board to carry out its business expansion plan pursuant to the rights issue.

The reshuffle saw the resignation of Ng and Datuk Tan Choon Hwa from the board; they were replaced by Khor Ben Jin and Patrick Chin Hau Yui.

The injunction sought by MGB against MNC’s rights issue was also struck out by the High Court earlier this year with the company stating in an announcement that it may appeal the decision.

MGB executive director Ric Koh Wai Chee says the company will not be appealing the decision and will instead focus on the results of the special audit to take action against the culpable parties.

“We have engaged some lawyers to look at the actions to take against these culpable parties,” he tells The Edge. “Judging from the results of the special audit, it involves one former director. Of course, there are some employees who are deemed to be involved as well.”

It is worth noting that former MGB chief financial officer Boon was removed in the special audit while he was on voluntary leave as the company said he had obstructed and compromised the special audit by entering the office premises while on leave, without prior approval.

However, Boon argued against the decision, saying the allegations were untrue, baseless and intentionally made to remove him from his post. “Why accuse me of unauthorised entry into the office premises when it was clearly stated in the company’s announcement on May 19 that I was on voluntary leave and not forced leave?

“If I were not allowed to enter the premises, then why did they not deactivate my access card immediately when I was put on leave? Instead it was only deactivated in early June this year,” he says in a statement.

“This was done right after I completed the work required for the submission of the first-quarter results, which the board itself requested me to do even though I was supposed to be on leave.”

Since his removal, Boon has filed a case with the Industrial Relations Department to seek his reinstatement and has made police reports against the board of directors on the matter.

As for the RM4.86 million loan, the auditors noted that the previous board had waived internal controls in its subscription for MNC’s rights issue. The auditor could not find any investment paper or documentation to justify the full subscription for the rights issue.

“Ferrier Hodgson has not sighted any investment paper/board paper or office memorandum on the justification to subscribe fully for MGB’s entitlement to MNC’s rights issue,” the auditor says in the Bursa filing.

The issue related to MGB’s stake in MNC aside, the auditor outlined six other items in the special audit, according to filings with the exchange, including unsold fertiliser stock amounting to RM1.5 million, which was sold back to the supplier at up to a 60% discount, and MGB’s venture into the Gaharu fossil business in March 2015 by purchasing an equal share in it for US$150,000 without appropriate internal approvals.

The auditor also notes that payments for units sold to a former director in MGB’s Kuala Krai property project went directly to the contractor instead of MGB, which it said could be a potential breach of related-party transactions.

Other items include an initial deposit of RM6.4 million paid for land acquired in Cheras, which could not be substantiated with a sale and purchase agreement, the selling of RM511,898 worth of antiques and paintings at a loss or at cost to a related party as well as irregularities in the additional purchase of 3,400 healthcare foot massage machines despite it being a slow-moving item.

In the financial year ended Dec 31, 2016, MGB slipped into the red with a net loss of RM5 million despite posting a 32% year-on-year jump in revenue, dragged down by its property and fertiliser divisions. The company reported a net profit of RM3.97 million in the preceding financial year.

Koh says the company will be focusing on its core business and is on the lookout for opportunities to dispose of its non-core businesses, but did not elaborate. “Our top priority is still engineering and technology and we are looking for parties that may be interested in our non-core businesses. However, we do intend to finish the ongoing property project as it’s not worthwhile to abandon it.”

As at Oct 9, MGB had 16.066% equity interest in MNC.

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