In: Accounting
CASE 2: RELATED PARTY TRANSACTIONS
According to its website, Tradewinds (M) Bhd. (“Tradewinds”) is an
investment holding company with core businesses in oil palm and
sugar. Its authorized capital is RM500 million, and paid-up capital
is RM296.5 million. According to its 2008 Annual Report, its trade
receivables as at 31 December 2008 was RM323.2 million, and 65%
thereof (RM209.9 million) were due from its related parties. A big
portion of it (RM193.9 million or 60%) arose from its transactions
with Bukhary Sdn. Bhd. (“Bukhary”). This was an increase from the
previous year where its total trade receivables was RM315.1
million, of which RM176.7 million (56%) were due from its related
parties. Bukhary’s debts then amounted to RM167.8 million (53%).
The increase was notwithstanding the increase in the normal credit
term from 60 days to 90 days. Further, the interest for late
payment was reduced from 18% in 2007 to 6.5% in 2008.
It is observed that the trade receivables from Bukhary
arose from the sale of refined sugar from Gula Padang Terap Sdn.
Bhd. (“GPT”) which is a subsidiary of Tradewinds. For the financial
year 2008, the aggregate value of the sale was RM165 million. It
would be interesting to find out what is the total sale of GPT and
the credit terms given to other purchasers, for Para 10.09(2) of
the Bursa Malaysia Listing Requirements demand that the recurrent
related party transactions must be “in the ordinary course of
business and are on terms not more favourable to the related party
than those generally available to the public”. The 2008 Annual
Report also revealed that among the interested directors or
shareholders in this recurrent related party transaction were Syed
Azmin Syed Nor (“Syed Azmin”), who was also a member of the Audit
Committee (“AC”). Syed Azmin was said to be a non-independent non-
executive director because he is the brother of Syed Mokhtar who
held an indirect major shareholding in Tradewinds. One of the
functions of the AC is to review the related party transactions and
conflict of interests situation. The issue is how independent is
the AC where one of its members has already declared his interest
in Bukhary which is a substantial debtor of the group. Further, the
following observations which also raise questions on the
independence of the AC are made.
The members of the AC were somewhat “connected”. The Chairman of
the Committee, Ooi Teik Huat (“Ooi”), was also a director of MMC
Corporation, DRB-Hicom Bhd., EON Bhd., Tradewinds Plantations Bhd.
and Johor Port Bhd. These companies share a common substantial
shareholder in Syed Mokhtar who is the brother of Syed Azmin. The
other member of the AC was Khalid bin Sufat (“Khalid”), an
independent non-executive director who was also appointed a
director of a company known as Amtek Holdings Bhd. Syed Azmin was
also a director of this company. It is also observed that Ooi and
Khalid were appointed on 1 April 2009, upon the resignation of two
directors who were also members of the AC. The reasons for their
resignation from the board and AC were not revealed.
However, despite the mounting debts and the issue whether the deal
with Bukhary was an arm’s length transaction, the shareholders of
Tradewinds had at the company’s annual general meeting on 17 June
2009, renewed its mandate for recurrent related party transactions
with Bukhary for an estimated value of RM300 million from 17 June
2009 to 16 June 2010.
Source: Adapted from IABR & ITLC Conference Proceedings,
2010.
Required:
Determine the related parties, related party transactions and the
reporting company in the above case.
Explain how the related party transactions above affect shareholders’ interest.
Discuss how the audit committee neutrality can be affected by the appointment of family members in it.
Related parties are
1.Bukhary Sdn,Gula Padang Terap Sdn,Syed Azmin Syed,Ooi Teik Huat (“Ooi”),Khalid bin Sufat (“Khalid”)
Related party transactions are,
Bukhary entered in to a transaction with company substantially so its an related party transaction.
trade receivables from Bukhary arose from the sale of refined sugar from Gula Padang Terap Sdn. Bhd. (“GPT”) which is a subsidiary of Tradewinds. hence for GPT this is a related party transaction.
Tradewinds (M) Bhd is the reporting entity
2.The presence of influence in related party relationships can individually affect the transactions of the entity with other parties, such as trade restrictions on a subsidiary placed by its parent or not to engage in certain activities.
Audit commitee has to consider the other decisions and also the directors who are interested.if the transactions entered by the comoany are related to parties who are intrested then not to consider their participation in that transaction.and also to be disclosed in shareholders committee.