The demise of Hyflux - issues to be addressed

THE winding-up order for Hyflux is a great relief to all and sundry after such a long and arduous process. The High Court has been very patient and accommodating to give management and potential white knights time and every opportunity to revive the company. When it was patently clear that there would be no viable concrete plan that could help to salvage the company, the right decision was made by the court to put an end to all the pain and agony.

What went wrong?

How did a beloved market darling become a corporate entity so deeply mired in debt? What went wrong? Hundreds of millions of dollars invested by retail investors who had subscribed for notes issued by the company are not likely to be recovered. Many retail investors are still nursing their grief and anguish. Were there adequate and sufficient robust internal controls and risks management measures in place that could have prevented the downfall of Hyflux? These questions must be properly addressed.

Full transparency of the facts, proper accountability and legal responsibility

While it is final curtains for the company, the persons responsible for this corporate debacle should be held fully accountable so that there can be proper closure to this unfortunate episode in the corporate history of Singapore.

Full disclosure should be made to the public as to the financial position of the group in the relevant periods when the company issued notes to raise funds from the market and the events leading to its abrupt announcement that it would need court protection to stave off creditors' claims.

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The Accounting and Corporate Regulatory Authority announced in June 2020 that it was probing into the company's compliance with accounting and auditing standards over the period from 2011 to 2018. Likewise, the relevant authorities have commenced investigations on whether there have been false and misleading statements made to the market that breached disclosure rules over a period of years. At the appropriate time when investigations are completed, details of what went wrong and the persons responsible for any errant conduct should be made known to the public.

Singapore has always maintained high standards in the regulatory supervision of public listed companies and in the rigorous enforcement of market rules and conduct. This is the cornerstone that underpins the global reputation of Singapore as a financial and capital market of integrity.

Lessons to be drawn

In every major corporate failure, there are always bitter lessons and invaluable experiences to be gained. The appropriate course of action in the criminal courts should be pursued to penalise any errant conduct or culpable omission. Likewise, the liquidators should investigate and pursue all necessary civil claims to seek restitution and re-payments from parties who had entered into void or voidable transactions. This will improve recovery and benefit the many hapless unsecured creditors - in particular, the note holders - who are unlikely to recover a dime from the sale of the company's assets. Full transparency of the facts and proper legal accountability by persons responsible for the corporate debacle will help reinforce the duty of care reposed in persons entrusted to manage public listed companies. Lessons drawn from court actions against persons responsible will no doubt help to instill better awareness of the dos and don'ts in the hearts and minds of corporate managers and hopefully prevent a recurrence of similar mis-conduct and/or reprehensible omissions in the future.

Key role of the audit committee

The Hyflux episode reiterates the important role of independent directors who are entrusted with the duty to safeguard the proper governance of the corporation.

There is an increasing need for the regulators to hard-wire the rule that independent directors should be nominated by a wholly independent committee whose members are not directors or have any form of personal or business relationships with any director or controlling shareholder of the company.

Independent directors should only be elected by minority shareholders. Independent directors should not hold office for a consecutive period exceeding two terms or a period exceeding four years in totality.

Once elected, the audit committee must be provided with reasonable financial resources by the company to independently hire professionals including ad-hoc lawyers, experienced accounting executive(s), and internal auditors. These professionals should report to and are only accountable to the audit committee. This will strengthen the position of the audit committee to properly exercise supervisory review of management decisions and conduct, and if need be, to countermand executive actions that do not appear to be in the best interests of the company and the shareholders.

This will also mitigate any concerns that independent directors hold office only at the pleasure of management shareholders and are powerless to exercise any meaningful supervisory role in the governance of a company that is managed by dominant senior executives who are concurrently controlling shareholders.

Caveat emptor and the need to make informed investment decisions

The demise of Hyflux is a stark reminder to retail investors that they must be prudent and well informed in their investment decisions, irrespective of the vaunted market reputation and/or corporate track record of the issuer. Caveat emptor and knowledge-based investments must always be the guiding principles for all investors.

• The writer is a corporate lawyer and partner of international law firm Gibson Dunn & Crutcher LLP. Views and suggestions expressed in this article are the writer's personal views.