Linear- the final straw or another brick on the wall?

On December 29, 2009, Linear Corporation Bhd ('Linear')'s announced that its wholly-owned subsidiary, LCI Global Sdn. Bhd. ['LCI'] has on the same day accepted a project awarded by Global Investment Group Inc. ['GIC'] for contruction and completion works for the design, construction, completion and commissioning of a 350,000RT District Cooling Plant in Manjung in the state of Perak for the King Dome Project (“The Project”) with a contract sum of RM1.66 billion. For more, go here.

Like many, I was very surprised by the stunning feat achieved by this smallish company, which was and still is classified under PN1 [after being served with a Notice pursuant to Section 218 of the Companies Act, 1965 by EON Bank Berhad on September 25, 2009]. The Edge wrote about it in an article entitled "Puzzling deal for little-known Linear". Could this be true?

The market reacted predictably by sending Linear's share price skyward, from about 20 sen to an intra-day high of 87.5 sen on December 31, 2009. See the chart below.


Chart: Linear's chart as at June 9, 2010_12.30pm (Source: Quickcharts)

At that time, I was truly puzzled: how did Linear convinced the employer to grant such a huge contract to such a sickly company. I was also equally amazed that Linear would dare to take up the contract because if it failed to perform, it would suffer huge losses. How could it possibly raise the performance bond, etc which are normally requested by an employer in the contracting business. Then, Linear released its unaudited financial statement for QE31/3/2010, which showed that it has cash & bank balances of RM37 million. See the table below.


Table: Balance Sheet as at 31 March 2010

On June 4, Linear made a shocking announcement which seems to have escaped the attention of the press (Hat tip to Surihani who pointed this to me). One of Linear's director has delivered what would surely amount to a coup de grace to Linear by effecting a payment of RM36 million to the employer ('LCI') and yet unable to land the contract due to incomplete documentation. To wit:

To-date, a sum of RM36 million has been advanced by LCI to GIG as part payment of a performance consideration sum prior to the commencement of the Project("Advance"). The Advance was effected solely by a Director of the Company at the material time in an autocratic manner.

Following the reconstitution of the Board of Directors ("BOD") in early May 2010 (as detailed hereinafter), the BOD has immediately undertaken a critical and objective re-assessment of the Project. The preliminary findings are set out below:-

(i) lack of full and proper documentation relating to the contractual relationships;

(ii) no documentary evidence to demonstrate the overall viability of the King Dome Project with an estimated construction cost of about USD 5 billion;

(iii) no documentary evidence on the background and business experience of the promoters of GIG and on the financial standing of GIG;

(iv) absence of proper procedures and internal controls within Linear Group, especially limit on the powers of directors to enter into any financial and contractual commitment on behalf of the Linear Group; and

(v) no evidence of any significant progress towards the execution of the Contract.

Consequently, the BOD has resolved to take action for the full recovery of the Advance in the interest of Linear, its shareholders and other stakeholders. Currently, the BOD is seeking legal advice on this matter. A further announcement will be made at the appropriate time.

The most important sentence in the above passage is: The Advance (of RM36 million) was effected solely by a Director of the Company at the material time in an autocratic manner. How could this happen? Where is the legal advice which surely must have been sought before such a sizable amount of money was paid out? Something is very wrong with Corporate Malaysia if this case and others of the same nature (example: Maxbiz & Distech) are not dealt with firmly.