General manager of GCL subsidiary approved $79m contract payment against company policy

The investigator appointed by Chinese polysilicon manufacturer GCL-Poly to look into a RMB510 million (US$78.8 million) payment to a state-owned enterprise for a production facility which never took shape, has found the general manager of the GCL subsidiary which paid the money approved the transfer in breach of company policy.

Presenting the findings of the Shanghai-based accountant appointed on the advice of former GCL auditor Deloitte Touche Tohmatsu to look into the matter, GCL today said the manager of the company's Jiangsu Zhongneng subsidiary only had clearance to approve contracts with up to RMB100 million (US$15.5 million) of capital spending.

The investigator, part of the Mazars global grouping, said the unidentified manager had agreed to make the RMB510 million pre-payment to the unnamed state-owned enterprise which had been appointed lead contractor by GCL to carry out engineering, procurement and construction (EPC) services on the planned granular polysilicon production unit. GCL had been eager to to break ground on the planned fab after improving its production processes but, unable to access the necessary finance, had been offered backing by the state-owned lead EPC contractor on condition that it made the pre-payment at the heart of the investigation. In those circumstances, the investigator found, the general manager of Jiangsu Zhongneng had approved the pre-payment.

One-off

The investigator said GCL was satisfied the breach of its company policy had been a one-off and said it would engage external consultants to review and, if necessary, tighten its internal policy and processes.

GCL has already admitted, in April, it failed to report the award of the EPC contract – which has since been terminated – as a major transaction, as required by stock market rules, and has said it is reviewing why this did not happen.

The pre-payment in contention, of which GCL received a 97% refund in April, prompted Deloitte to recommend an investigation of the matter, including the commercial rationale for paying the money. GCL subsequently said the independent investigator would also look into whether the payment was made to a related party. Despite GCL following Deloitte's recommendation to appoint an independent investigator, the professional services company resigned as auditor for GCL in May, citing an inability to reach agreement over the scope of the investigation. Crowe (HK) CPA Ltd subsequently replaced Deloitte as GCL's auditor.

GCL today said the independent investigator “has not identified any non-compliant or unreasonable circumstances from both a legal and commercial perspective,” in relation to the pre-payment made. The money was paid in line with the requirements of Chinese construction law that any EPC contract pre-payments be between 10% and 30% of the full value of the EPC contract and the investigator found no connections between the sub-contractor engaged to work on the EPC contract and Jiangsu Zhongneng.

The investigator was content with the explanation given for terminating the EPC contract and signing a new arrangement with different parties. GCL said the company decided to end the EPC contract in October because it wished to maintain the confidentiality of its new granular silicon production process by engaging with multiple contractors to construct different process steps of the factory, rather than with one main contractor.

New contract

As a result, GCL entered a new EPC contract for its planned polysilicon fab on January 8 and, on April 6, signed a termination agreement relating to the previous EPC, supplementing the latter with another agreement on April 25. The two termination agreements reached in April accepted the state-owned EPC lead contractor and sub contractor had incurred expenses of RMB14.72 million (US$2.28 million) by that stage, which would be kept back when the RMB510 million payment was reimbursed.

GCL's stock has been suspended from trading in Hong Kong since the start of April because the concerns raised by Deloitte over the pre-payment have rendered the company unable to publish its 2020 annual figures yet.