ON Sept 25, candy maker Khee San Bhd said in an exchange filing that initial findings by forensic auditors at BDO Governance Advisory Sdn Bhd reveal what appear likely to be fraudulent activities. These include fictitious sales in­voices of RM39.45 million as well as purchase invoices amounting to RM4.47 million that are not supported by stock card movements used as a basis for the drawdown of credit facilities.

All applications for the credit facilities were approved by Khee San’s former substantial shareholder and chairman Datuk Sri Liew Yew Chung.

Liew was also CEO and substantial shareholder of London Biscuits Bhd (LBB), which is now in liquidation. Khee San was a 20% associate company of LBB until Dec 20, 2019.

The BDO auditors had been tasked by Khee San in June to review its credit facilities in default and the validity of the invoices and supporting documents relating to the credit facilities.

All this came to light because of a writ of summons and statement of claim by Bank of China (M) Bhd against Khee San’s wholly-owned subsidiary Khee San Food Industries Sdn Bhd (KSFI) for a total of RM14.62 million. The writ was served in early August 2019.

As it fought the case, Khee San was on the lookout for new investors to help solve its financial woes. The company disclosed two potential deals. One was a share sale agreement with Wah Kong Corp Sdn Bhd in September 2019 and the other was a proposed private placement of a 45.11% interest to Mamee-Double Decker (M) Sdn Bhd in December. Unfortunately, both fell through.

From there, Khee San’s problems spiralled. Shortly after the proposed private placement lapsed in June 2020, Khee San was served with a writ of summons and statement of claim by another bank for defaulting on its payments.

On June 22, Alliance Bank Malaysia Bhd served a claim for RM4.7 million from Khee San and KSFI.

Then on June 25, Khee San announced that it had engaged BDO to review two specific areas of the company’s books for the period of Oct 1, 2018 to March 31, 2019. Specifically, BDO was to look into these areas:

i) To review the validity of purchase orders, invoices and other relevant documents used as the basis to draw down financing from its bankers; and ii) To trace the movement of funds from the receipt of the drawdowns to any subsequent withdrawals and transfers of these funds.

Khee San said the probe was necessary because of the discrepancies in the supporting documents used to draw down the banking facilities.

Notably, former chairman Liew was already out of the picture at this point, having resigned on Sept 13, 2019, citing “burnout stress syndrome”. This coincides with his resignation from LBB as well.

At Khee San, two board members had resigned several months before Liew. They were Leslie Looi Meng (resigned on July 3) and Huang Yan Teo (July 26). The two were independent non-executive directors of Khee San and also held directorships in LBB.

By Dec 12, Liew had also ceased to be a substantial shareholder of Khee San. His direct equity interest in Khee San, based on its 2018 annual report, amounted to 10.58%.

After announcing the probe into the company, Khee San was served a letter of demand by OCBC Al-Amin Bank Bhd for defaulting on payment at its subsidiary’s level. KSFI had defaulted on banking facilities totalling RM4.96 million from the bank.

Khee San also disclosed that it had defaulted on loan payments amounting to RM73.5 million in the form of bankers’ acceptance and overdrafts with eight banks. The banks are HSBC Bank Bhd, Bank of China, UOB Bank Bhd, Maybank, CIMB Bank Bhd, OCBC Bank, Standard Chartered and ­Alliance Bank Malaysia Bhd.

When stating the reason for the defaults in its exchange filing, Khee San said the “funds earmarked for the repayments were then channelled to the then holding company LBB”.

The July 6 announcement was followed by queries on the defaults from Bursa. The answers highlighted that former Khee San chairman Liew, who was also CEO of LBB, not only directly handled all matters related to banking facilities, but even Khee San’s accounting matters were “handled” by LBB’s accounting department.

Were the two listed companies operating out of the same place?

Khee San and its subsidiary are now  taking the banks to court on the basis of the banks’ negligence in allowing the drawdown of the facilities offered based on fictitious documents that were not supported by underlying transactions.

Khee San states that the banks owe them a duty of care to make reasonable enquiries to ensure that the transactions were genuine before allowing the drawdowns.

Its counter-suit against Alliance Bank stands out. In its statement, it claims that the bank had negligently drawn down RM892,000 to Secret Ingredients Sdn Bhd (SISB), which is fictitious, as there was no genuine proof of transactions attached to it.

Notably, SISB is linked to LBB. The former came into the spotlight after LBB’s external auditors brought up in its FY2018 financial statements that there was a significant transaction between the two companies and that it was indicative of a related-party relationship despite the absence of a legal connection. However, LBB’s management disagreed.

SISB was a shareholder of Khee San, according to the latter’s FY2017 an­nual report, holding 1.57%. It appears to have ceased to be a shareholder of the company since.

Kok Puh Chin, the major shareholder of SISB, remained a shareholder of Khee San, however, with 0.69% interest as at April 23, 2018, according to its FY2018 annual report, which is also its last.

Besides its action against the banks, on Sept 28, Khee San filed a writ of summons against Liew, claiming that the company had uncovered fraudulent schemes perpetrated by him from Oct 1, 2018 to July 4, 2019 by reason of his ability to control or dictate the business and financial operations of the company.

Red flags aplenty

In hindsight, there were many red flags prior to the actions taken by the banks.

Besides the issue of having Liew directly in charge of all matters relating to banking facilities while Khee San’s accounting functions were left to LBB, the composition of the board and senior management is also telling.

Based on the FY2018 annual report, there were a total of nine directors on the board, with six listed as independent. Other than Liew, however, two individuals on the board — Leslie Looi Meng and Huang Yan Teo — were also directors of LBB. Liew’s sister Liew Yet Mei was also on the board as an alternate director to Liew.

Interestingly, the company made no mention of a financial controller role in its FY2018 annual report, but it did have an accountant, Yap Chun Chih, as part of its senior management.

Furthermore, Liew was CEO of Khee San until he relinquished his position on Jan 5, 2017. He was succeeded by Edward Tan Juan Peng. Liew was appointed chairman after his father, Datuk Sri Liew Kuak Hin, resigned from the position on Dec 15, 2016.

The question is, how did the board members and senior management overlook Liew’s alleged misdeeds?

In May 2018, the Securities Commission Malaysia fined Khee San directors for their failure to prepare the group’s and company’s audited financial statements in accordance with approved accounting standards for the financial years ended June 30, 2015 and June 30, 2016.

The accounts for those years had to be restated and reaudited.

Looking at Khee San’s FY2018 annual report, several developments raise eyebrows.

The group, which reported an 18-month financial period (FPE2018) because of a change in its financial year-end from June 30, 2017 to Dec 31, 2018, saw a 79% rise in revenue to RM258.63 million compared with FY2017, attributable to “newly secured customers”. While sales increased because of more new customers, so did its trade receivables, as the company reported higher credit sales during FPE2018. Trade receivables in its balance sheet increased to RM114.2 million in FPE2018 from RM60.08 million in FY2017. It is interesting that the normal credit terms of the company ranges from immediate payment to 180 days.

Khee San’s other payables and accruals also saw a sharp spike in FPE2018 to RM81.73 million from just RM2.71 million in FY2017.

The increase is largely related to RM75.13 million, assumed to be due to LBB, given that the accounts indicated that it was payable to “a major corporate shareholder with a common director in the company”. LBB was the largest shareholder of Khee San at that point.

In its related-party transaction (RPT) for the year, there was an amount of RM71.89 million in purchases from LBB, for which the nature of the transaction was not defined.

Meanwhile, in other payables was also an amount of RM626,446 that was “due to a person connected to one of the directors in the company”.

Khee San’s RPT also saw a substantial increase in sales in FPE2018, rising to RM56.8 million that year from RM36.77 million in FY2017.

New management taking charge

Since the exit of LBB and Liew from Khee San, a new shareholder, Datuk Dr Ng Meng Kee, has emerged. He held a 14.9% stake as at April 22, 2020, making him the largest shareholder of Khee San. The next largest shareholder was individual Koh Chee Meng, with a 7.5% stake.

There have also been new management appointments. While Tan remains CEO of the company, Ng Chee Keong has been appointed as his deputy. Philip Voo Lip Sang is the financial controller.

The forensic probe by BDO is expected to be concluded this month, and observers believe that what has been uncovered so far is merely the tip of the iceberg.