Hin Leong restructuring viable only when combined with group companies, personal assets: judicial managers

Singapore — Singapore oil trader Hin Leong Trading's restructuring or rehabilitation will only be viable if it is clubbed with other group companies under the Lim Family, including Ocean Tankers and Universal Terminal, the family's personal assets and their willingness to divest ownership, court-appointed interim judicial managers, or IJMs, said in a filing seen by S&P Global Platts.

Hin Leong Trading "on its own will have no reasonable prospects of being restructured or rehabilitated," the IJMs from PricewaterhouseCoopers concluded in the preliminary report dated June 23.

Hin Leong was previously advised that seeking investors to inject new equity would not be adequate to restructure its "massive unsustainable debt," and it would have to commit other assets like its shipping and storage companies Ocean Tankers, Xihe and Universal Terminal, as well as the personal assets of the shareholders.

The IJMs maintained the same recommendations, saying the assets should be put together as an integrated petroleum trading platform, because their operations were interdependent and as a standalone company Hin Leong's oil trading activities had already ceased, with no counterparty willing to trade with it due to negative publicity.

"Any scheme of arrangement that is designed for the restructuring of the company on its own is unlikely to result in recovery that is better than a liquidation scenario," they said.

"Currently, the value of assets identified by the IJMs to date of approximately $257 million represents only 7% of the massive liabilities of approximately $3.5 billion," they added.

A spokesman for Rajah & Tann Singapore, legal advisor to the IJMs, declined to comment on the report. Davinder Singh Chambers, who represent OK Lim and the Lim Family, did not respond to queries.

IRRREGULARITIES AND FRAUD

In April, Singapore's Supreme Court appointed IJMs to assess the prospects of restructuring Hin Leong, after the oil trader was unable to meet its debt obligations, leading to its collapse.

The IJMs said they "faced unique challenges" in conducting their investigations that included account manipulation and numerous forged documents.

"The scale of the irregularities uncovered in just the financial year ended 31 October 2019 alone is highly troubling, and suggests that the company had, possibly for many years, been carrying on its business by presenting a picture of financial health that was a far cry from the underlying reality," the report said.

It said assets for that year were grossly overstated by "an astonishing amount" of at least $3 billion, comprising $2.23 billion in accounts receivables which have no prospect of recovery and $0.8 billion in inventory shortfalls, and it was still investigating whether the losses were caused by the leakage of cash and inventory.

Hing Leong "fabricated fictitious gains from derivatives trading and fictitious profits from sales invoices" for the same year.

The report also found evidence of accumulated derivatives trading losses of about $808 million over the past 10 years, in line with OK Lim's affidavit.

These losses were "concealed through the overstatement of derivatives gains in its audited financial statements by as much as $2.1 billion over the same period" which "in turn suggests that the practice of creating fictitious derivatives and/or trading gains extends further back than the financial year ended 31 October 2019."

Derivatives trading profits of about $436 million were overstated for that year, allowing the company to recognize net derivatives trading gains of $120 million, without which it would have recorded a net derivatives trading loss for the year, the report said.

Hin Leong also overstated account receivables by "the manipulation of accounting entries".

Inter-bank transfers between the company's bank accounts gave the false impression that receivables were collected, when no payments were actually received from customers, allowing "an appearance of legitimacy by ensuring that its accounts receivables were kept current."

Hin Leong fabricated documents to facilitate these transactions.

The IJM investigation found that forged documents or documents with "dubious authenticity" included bank remittance advices, bank statements, bills of lading, sales contracts, sales invoices, swap trade confirmations, swap trade tickets, deal settlement slips and inter-tank transfer certificates.

"The scale and regularity of the fabrication suggests that the practice was routine and pervasive," the report said, adding that the forgeries mislead banks into extending financing to Hin Leong and act as supporting documentation for fictitious gains or profits.

Additionally, the investigators found that as of May 20, 2020, Hin Leong's total inventory was worth $212 million, but for the financial year ended Oct. 31, 2019, its value was overstated by at least $809 million.

ONGOING DISCUSSIONS

The IJMs said it held talks with potential investors, including Chinese state-owned enterprises and oil and gas companies, and regional and global traders who submitted written expressions of interest in various businesses of Hin Leong Group.

The investigators were not able to interview OK Lim whose lawyers stated he was "unfit to be questioned for prolonged periods of time," and were continuing their investigations for a supplemental report by July 20.