china essence shares halted after it reports dubious share transfers at subsidiaries 1242252015

Former Executive Chairman and CEO admits he kept the board in the dark

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By :  ,  Financial Analyst

Cayman Islands-incorporated China Essence Group Ltd. (SGX:G54), which is one of the largest integrated producers of potato products in China, announced Monday (September 7), that a preliminary company “search” by Moore Stephens CPA Limited had revealed certain shareholding irregularities at two subsidiaries in China.

“The shareholding of at least two of the subsidiaries had been changed to certain individuals in April 2015,” China Essence said in a statement. “Moore Stephens notified the Board on the evening of Friday 4th September 2015.”

The company had revamped its board on August 3, and clarified that the new directors had no knowledge of these goings-on at the Chinese subsidiaries.

However, Non-Executive Independent Chairman, Mr Er Kwong Wah, who was a member of the older board, confirmed that “the transactions were neither authorized by the former Board nor submitted to the former Board for approval.”

Apparently, former Executive Chairman and Chief Executive Officer, Mr Zhao Libin executed these transactions but did not disclose the matter to the Board. The company asked for an explanation from Mr Zhao through Chief Financial Officer, Mr Yap Kong Wai who was told that farmers who were owed long-standing debts by the company “had almost run riot at the factory.”

“The local government had to step in to quench the riot by settling the debts on behalf of the subsidiaries,” China Essence said in its statement. “In return, the two subsidiaries had to transfer the shares to the local government as held in trust.”

These unauthorised transactions also remained undeclared in the company’s first quarter 2015 earnings report.

China Essence recorded losses of 25.37 million yuan (SG$5.68 million) during the quarter ended June 30.

According to the Straits Times, the company’s auditors, BDO Limited and BDO LLP, also resigned in July over "long-outstanding" audit fees.

Trading in the shares of China Essence was halted Monday until such time as the company is able to offer additional clarifications on the matter.

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