What is it about the acquisition of money-lending subsidiaries that investors should be wary of? In this corporate misdeeds story, the SIDC unveils another technique that a director could use to strip away a public listed company’s (PLC) assets.
Mr B, the perpetrator of this scheme, had been eyeing cash-rich PLC B for a long time and had cooked up a scheme to strip the assets of the company. He began to execute his plan by buying the shares of PLC B. This acquisition was financed through personal borrowings from an associate. He eventually ended up as PLC B’s substantial shareholder. He was subsequently appointed as a director of the company. Once he had gained entry into PLC B as the substantial shareholder and director, he had control of, not only the management of the company’s operations, but its assets as well.

What next?

As a director of PLC B, Mr B started looking for the best ways to strip the company’s valuable asset i.e. the cash. First of all, the cash was needed to settle the personal loan that he took to finance the acquisition of PLC B. But what was more important to Mr B was that he wanted to pocket some of the millions for himself. In order to siphon off the abundant cash from PLC B, Mr B needed to devise a scheme that would appear to be a legitimate cash outflow. What Mr B did was to cause PLC B to acquire a money-lending company from one of his “associates” for a negligible sum.

As a result of the establishment of a parent-subsidiary relationship between PLC B and the money-lending company, Mr B could conveniently cause PLC B to advance money to the money-lending subsidiary without being questioned on a supposedly normal related-party transaction. Subsequently, the money-lending subsidiary started giving out loans to a customer who in actual fact was another “associate” of Mr B.