By Mak Yuen Teen and Chew Yi Hong

On February 19, 2020, DLF Holdings announced that it had disposed of a BMW 528iA car with the number plate SKN3333R for $72,000, resulting in a loss of disposal of $42,322. The car was registered on November 29, 2013 and its certificate of entitlement will expire on November 28, 2023.

This is what the announcement said: “The board of directors (the “Board”) of DLF Holdings Limited (the “Company” and its subsidiaries, the “Group”) wishes to announce that the Company’s wholly owned subsidiary, DLF Pte Ltd. had on 12 February 2020 disposed a motor vehicle (Vehicle No.: SKN3333R)(“Motor Vehicle”) to Abwin (1994) Pte Ltd (“Abwin”), an unrelated third party buyer, pursuant to a purchase agreement entered into between DLF Pte. Ltd. and Abwin on 5 February 2020 (“Purchase Agreement”)(“Disposal”). The Motor Vehicle has been delivered to Abwin on 12 February 2020.” 

Our reading of the announcement was that the company had sold the car and the number plate together for $72,000. We traced the car to the dealer’s website and found that the listing said that the previous owner had retained the car plate.

On February 27, 2020, we posted an article on this website about the company, which discussed a number of issues, including the sale of this car. The article titled “DLF Holdings: Driving into the unknown” was also published as a slightly abridged and updated article titled “Time for ‘fit and proper’ tests for directors of listed companies, not just for financial institutions” in the Business Times on March 3, 2020.

We had asked: “If this is the car in question, does the company still own the number plate? Or did the company sell it separately and receive the proceeds?”

On March 9, 2020, the company made another announcement about the sale of a second car, a Mercedes Benz S320L, with the number plate “SLD 3333G”. This time, the company said that the company “intends to sell the car plate at a later date and as and when the opportunity arises”.

It then referred to the earlier announcement on February 19, 2020 regarding the sale of the previous car and said that “the Company would like to update that it has sold the car plate “SKN3333R” to the Group’s Executive Chairman for S$15,000…[and that the] disposal of the car plate “SKN3333R” is not disclosable pursuant to Catalist Rules 905(3). However, the Company in the spirit of good governance, is volunteering disclosure of the said disposal.”

In the earlier announcement, the company had stated: “None of the Directors or controlling shareholders of the Company has any interest, direct or indirect (other than through their shareholdings in the Company), in the Disposal.”

Is this statement accurate given that the car plate was sold to the Executive Chairman? Was the earlier announcement which mentioned the sale of the car alongside the mention of the car plate, without disclosing that the company had retained the car plate and had sold or was selling it to the Executive Chairman, accurate? Is this “in the spirit of good governance”?

Was the board aware of the retention of the number plate and pre-approved the decision to sell the number plate separately? Was any such discussion minuted by the company secretary? Would the company clarify if it was the “previous owner” mentioned by the dealer that actually retained the plate?

Is the sponsor, PrimePartners Corporate Finance, satisfied that the disclosures are “in the spirit of good governance” and in compliance with the listing rules?

For the sale of the second car, the company said that the disposal “is classified as a non-disclosable transaction that is not subject to shareholders’ approval pursuant to paragraph 4.3(c) of Practice Note 10A of the Catalist Rules, given that the absolute relative figure computed on each Catalist Rule 1006(b), Catalist Rule 1006(c) and Catalist Rule 1006(e), amounts to less than 5% and the loss of disposal amounts to 5% or less of the Company’s consolidated net loss.” It also said: “Notwithstanding, the Company in the spirit of good governance, is volunteering disclosure of the Disposal.”

Between the announcements of the first car sale and the second car sale, the company had reported its FY2019 full year results on February 29, 2020 and also restated its FY2018 financial statements. Loss attributable to owners of the company for FY2019 was more than $3.6 million, driving shareholder’s equity down to a negative $2.98 million.

When the company announced the first car sale, it used a net asset base of $539,335, which was the value as at 30 June 2019. On that basis, the first car sale was deemed a disclosable transaction.

Fast forward three weeks, the company is decidedly in a worse shape following the huge losses and yet the second car sale (which has a higher value) is deemed a non-disclosable transaction. This is mainly due to the fact that the company has reported large negative earnings and now has large negative equity. This has led to a negative relative net asset figure (Rule 1006(a)) and “minimised” the impact of the second car sale.

In fact, the relative figures in Rule 1006 make no sense at all in this case. If the company had reported a very small profit or has very low but positive net asset value, this would be a disclosable transaction (as it was in the first sale). The company’s interpretation is that the second sale is a non-disclosable transaction but has nevertheless disclosed the sale “in the spirit of good governance”.

The company’s interpretation is not logical to us but it appears that the current rules could be interpreted this way.

In this case, the relative figure computed pursuant to Rule 1006(a) is -6.45% because the group’s net asset value is negative. The relative figure for Rule 1006(b) is “not applicable” because the group stated that it did not derive any income from the motor vehicle. It is curious why the company has applied Rule 1006(b) differently in the space of 19 days. The company had calculated the Rule 1006(b) using the loss on disposal of the first car but now say that it is “not applicable” for the second disposal.

Would it be the role of the sponsor to ensure that the company applies the exchange’s rules correctly and consistently?

Catalist Rule 1007(1) further states: “If any of the relative figures computed pursuant to Rule 1006 involves a negative figure, this Chapter [10] may still be applicable to the transaction in accordance with the applicable circumstances in Practice Note 10A, or if not so provided, at the discretion of the Exchange, in which case, the sponsor should consult the Exchange.”

Para 4.3(c) in Practice Note 10A states:

“In the following situations, unless Rule 703, Rule 905 or Rule 1009 applies, no announcement and shareholders’ approval of the transaction is required:….the disposal of an asset by an issuer (where either or both the asset or the issuer has negative net asset value), where: 

  • the absolute relative figure computed on the basis of each of Rule 1006(b), Rule 1006(c) and (if applicable) Rule 1006(e), amounts to 5% or less; and
  • if the disposal will result in a loss on disposal, the loss on disposal amounts to 5% or less of the consolidated net profit or net loss of the issuer (in each case taking into account only the absolute values)…”

Para 4.3(c) said that no announcement or shareholders’ approval is required in a case like this if the issuer has registered a negative net asset value and when the absolute relative figures computed on the basis of Rule 1006(b) and Rule 1006(c) are “5% or less”. However, in this case, only the absolute relative figure under Rule 1006(c) is “5% or less” – for Rule 1006(b), it was deemed “not applicable” by the company.  For Para 4.3(c)(ii), the loss on disposal is $29,140 and is dwarfed by the huge reported losses as well.

In our opinion, para 4.3(c) makes little sense. When interpreted according to the letter, Chapter 10 is more likely to apply to a company that has a small negative net asset value and would “spare” a company that is in a worse financial position (one with a large negative net asset value). In fact, we believe that Chapter 10 and Practice Note 10A require urgent review.

In the case of DLF, it is not obvious and not logical to us that this is a “non-disclosable transaction”. Has the sponsor consulted the Exchange and is it the Exchange’s view that it is indeed non-disclosable?

Perhaps the Exchange needs to consider hardcoding (or defining) the meaning of “good governance” as well.