The application to place debt-ridden water treatment firm Hyflux under judicial management was only approved by the High Court after it had granted 10 extensions to Hyflux, despite the existing poor corporate governance and mismanagement which have led to its collapse.

This was highlighted by Mak Yuen Teen – an associate professor at the National University of Singapore Business School – among other points, in his opinion article on the Hyflux saga published by Nikkei Asia on Wednesday (16 December).

“One key lesson from the restructuring of Hyflux is this: when poor corporate governance and mismanagement is a major contributor to a company’s collapse, put someone else in charge of its rehabilitation,” said Prof Mak.

Hyflux has owed S$1.84 billion to banks, S$265 million to noteholders, as well as 34,000 preference and perpetual security holders amounted to S$900 million.

The judicial management application was filed by an unsecured working group (UWG) of bank lenders on 13 August, which including Mizuho, Bangkok Bank, BNP Paribas, CTBC Bank, KfW, Korea Development Bank, and Standard Chartered Bank.

They argued that Hyflux’s management is no longer reliable to lead any restructuring effort.

On 16 November, the High Court approved the judicial management application and appointed UWG’s adviser Borrelli Walsh as interim judicial managers of Hyflux.

The Securities Investors Association Singapore (SIAS) and Hyflux’s creditor DBS voiced concerns that the appointed judicial managers should be a “neutral and independent party” with no close contact to any stakeholder group of the firm.

Justice Aedit Abdullah, however, responded that the applications for “additional or substitution” judicial managers can be applied and will be “heard another day”.

But what’s more “suspicious” in this case was the emergence of another potential investor’s details whenever the firm asked for an extension, in which the ruling judge suspected “some sort of gamesmanship was at work”, said Prof Mak.

He noted that some potential saviours of Hyflux appeared to be “less than bona fide”.

“Some included conditions that the current directors be retained and released from potential liability – despite the directors being under investigation. Others said that any offer that released the directors would not be accepted,” Prof Mak added.

Though he noted that the appointment of judicial managers could have the directors who were involved in wrongdoing to face “personal liability”, this was “never a possibility” when the restructuring of the company is being monitored by the board.

“While it is too early to tell if the directors breached their duties, there were plenty of signs of poor corporate governance and questionable decision-making,” said Prof Mak.

He pointed out that Hyflux’s CEO Olivia Lum holds multiple positions in the company, indicating that she played a dominant role.

Aside from being the CEO, Ms Lum was also the controlling shareholder, board chairman, and chair of the investment committee. She even attended meetings of the other committees without having a membership, said Prof Mak.

He also noted that four of the independent directors on the eight-member board had worked in the company for over 14 years, while some were former employees or substantial shareholders who were redesignated from non-independent to independent, or had business relationships with Hyflux in the past.

“All this points to a board that is far from independent,” Prof Mak remarked.

While Prof Mak credited Ms Lum’s entrepreneurial skills and perseverance for Hyflux’s success, what she was lacking was the necessary experience to manage a growing company and oversee investment decisions.

Similarly, Hyflux’s senior management also did not have the “necessary experience” to manage the company.

To prove this, Prof Mak said Hyflux appointed a medical doctor who was specialising in family medicine and worked as a registrar in the health ministry as its business development head in 1996.

Eventually, the business development head was promoted to be an executive director. She then became COO and later deputy CEO of Hyflux.

Prof Mak also highlighted the firm had won the tender for the Tuaspring Integrated Water and Power Plant in 2011 through “aggressive bidding”, despite having no experience in the power business.

He noted that Hyflux’s core business was providing water treatment solutions for municipalities and industries, but it expanded into power generation and waste-to-energy solutions with no experience which explains why the plant has been “loss-making since it began operations”.

Furthermore, Prof Mak pointed out that Hyflux’s business model indicated it was “highly capital-intensive” and heavily dependent on borrowings instead of operating cash flows to fund growth.

“While it was reporting high revenues and making profits, those numbers were subject to high volatility. Operating cash flows told a consistent and dire story, becoming negative from 2010 and never returning to positive territory,” he explained.

Hyflux shifted to preference shares and perpetual securities when its debt increased, however, Prof Mak noted that this “did not stem its high reliance on debt”.

“In 2011, it issued preference shares, or prefs, and in 2014, it issued its first two tranches of perpetual securities, or perps. Those perps were only available to institutional and accredited investors.

“In May 2016, it issued another tranche of perps that was so successful that it raised S$500 million, rather than the initially proposed S$300 million. Much of the amount raised from the 2016 perps came from retail investors, and the institutional and accredited investors who subscribed to the earlier perps were bailed out,” he asserted.

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