Chesterfield deal 'an illusion'
SHARE placements and property deals at locally-listed Chesterfield found to be prejudicial to shareholders yesterday by a high court judge were detailed in public for the first time yesterday.
'On October 19, 1993, Chesterfield arranged a private placing of 136 million 10-cent shares at 50 cents a share,' said Barrie Barlow QC, for the Securities and Futures Commission (SFC). 'The proceeds of $67 million net of costs were to be applied for additional working capital and to reduce borrowings.
'Save for $250,000, within two weeks the money had been used to repay intra-group borrowings from MKI Corp and MKI had bought 23 million shares, representing 17.6 per cent of the newly issued share capital.' In the High Court yesterday, Mr Justice Rogers said: 'Then the deal was sort of like a marvellous optical illusion - the money goes round in a circle?' Mr Barlow said: 'The whole point of the scheme was that if MKI's stake in Chesterfield fell below 20 per cent, then it would have to revalue it at market prices rather than the price it bought in at.' In his judgment, Mr Justice Rogers said it was 'highly questionable' that the money raised had been used to reduce borrowings as the defendants had said originally.
He said the idea was to keep the holding at more than 20 per cent to prevent a substantial loss to MKI.
'Just six months later there was another placement on April 18, 1994, and a further 163.2 million shares were sold at 33 cents each,' Mr Barlow said.
The $52 million proceeds were supposedly to be used for additional working capital and to reduce debt with half of the total going to each use, Mr Barlow said.
'Within a week, 98 per cent had been paid to MKI for inter-company debts and MKI bought 33 million shares or 20.2 per cent of the newly issued capital,' Mr Barlow said. 'The placement was even more duplicitous and brazen than the first.' When the SFC investigated Chesterfield's books in October last year, officials were made suspicious about inter-company loans. The loans were all processed through a Chesterfield subsidiary called Ruby Park and there were no documents.
Ruby Park was used as a joint treasury for MKI and Chesterfield until December 1993 when another company was used. Mr Barlow said loans within the group were made at a rate of one per cent above the Hongkong Bank's best lending rate which was 'far below commercial terms'.
He said the cheap loans and the use of the common treasury was part of a pattern at the company. MKI and Chesterfield were both run by MKI Management Services which was chaired by Arthur Lai Cheuk-kwan. Mr Barlow said this caused conflicts of interest.
Another deal which gave SFC officials cause for concern was a February 1993 property purchase which involved Ip Chi-keong. Chesterfield agreed to buy from Good Faith international, a company controlled by Mr Ip, eight blocks of Chinese property called Fu Yuen Garden.
The price was $130 million with $124.52 million to be paid to Good Faith through 113.2 million shares in Chesterfield at $1.10 a share and the remainder to be paid on completion of the property project - supposedly in August last year.
There were no studies carried out for the deal for Chesterfield except a letter from the vendors' valuer stating the property was worth more than $130 million.
Good Faith was allotted its shares on April 14, 1993, and Mr Ip almost immediately sold them through various accounts. He was helped by a Chesterfield manager and some shares were sold through a Ruby Park account.
The investment turned out to be worthless, Mr Justice Rogers said. It has now been written down to $1,000 by Chesterfield.
A second property deal involving a land development site and a supposed golf course involved Wong Kim-chao and a company called Zhongshan Fong Tat Property Development.
Chesterfield agreed to buy 22 townhouses from Fong Tat for $435 million, with $20 million to be paid within seven days of a guarantee being received. A second deal was also struck to buy a development site and a golf course.
The overall deal was long delayed and it was agreed that Fong Tat's structure be changed and the investment be converted to a shareholding, the total investment of $62.1 million was written down to $32.1 million.
Mr Justice Rogers said the question in the case turned on whether the deals were unfairly prejudicial to some or all Chesterfield investors.
'At one end of the scale are acts of fraud and at the other end neglect or inaction,' he said. 'The facts as outlined in evidence filed by SFC show the conduct to fall closer to the higher end of the scale than anywhere close to negligence.' 'The court has no alternative but to grant orders and costs,' he said.