When a company doesn’t know how its money has gone missing

A company director who lent a large sum to help his firm expand its business found himself embroiled in a corporate comedy of errors after being accused of stealing money that was his in the first place.

Much of the debacle stemmed from the fact that the firm – a bakery chain – seemed to have poor financial checks and a lack of proper records on how its funds were being used.

The saga began when the company director volunteered to lend the firm $150,000 so it could open another branch after his fellow shareholders ignored calls from the company’s boss for a fund injection.

But the offer to help came at possibly the worst time because the finance manager, who compiled paperwork for the loan, was later found to have pocketed around $400,000 of company funds.

So when the director asked for the return of his $150,000, he and the managing director, who had approved this repayment, were accused of being in cahoots with the finance manager.

This case serves as a warning for businesses to tighten their financial and audit controls because no one in this bakery chain had a clue about how much of its money was missing, until the rogue manager confessed after being caught.

The company then launched an unusual lawsuit to go after the director, the managing director and the rogue manager, accusing them of a “conspiracy to misappropriate” involving “all transactions that looked suspicious, could not be explained or where supporting documents could not be found”.

High Court Judge Hri Kumar Nair noted that the lawsuit succeeded only in showing that the bakery chain “lacked proper financial controls” as its suit was filed “without evidence that the defendants had taken or benefitted from the monies”.

Not surprisingly, the company could not support its accusation that the director and the managing director were working with the finance manager to siphon money from the accounts.

It could not even prove that the rogue manager had taken the money due to its poor bookkeeping. It also wanted the court to infer that she took money from transactions that it could not explain and had no supporting documents.

Ironically, even the culprit was not sure how much she had embezzled; she returned about $420,000 to the company after being caught but later found that she might have overpaid by $80,000.

This prompted her to file a claim demanding that the company return $80,000. But just like the suits filed by the bakery, all the claims in this case were thrown out since no one could shed light on the nature of the missing funds.

This case illustrates three important rules that all companies should learn.

Paramount to have proper records

The bakery chain has six shareholders but some of the decisions that they made were done informally through phone messages.

For instance, when the company made an urgent call for a fund injection to pay for a new store, none of the shareholders responded except the director, who ended up being sued for his trouble.

Fortunately, he had the foresight to ask for a letter of agreement to document his transfer of $150,000 – not as a capital injection but as a short-term loan to be repaid in just one month.

This agreement was signed by both the finance manager and managing director, who even sent a phone message to inform his boss, the main shareholder, of the nature of the loan.

The repayments of the loan were also recorded in the company’s general ledger, proving that there was no monkey business involved in trying to “hide or disguise” the loan.

On top of that, a copy of the agreement was attached as a supporting document to the payment vouchers for the return of the loan to the lender.

With such clear records, Justice Nair found that all payments relating to the loan were done properly and that the director did nothing wrong in asking for the return of his money.

There was also no reason to suspect that the managing director had colluded in fabricating the loan agreement because he even told his boss, the main shareholder, who did not object to it at the time.

Duties of employees

All employees must abide by the rules of their companies, and those who do so should have no fear of being accused of any wrongdoing.

In this case, the company accused both the director and managing director of breaching their duties because they failed to disclose “the true state of matters concerning the transfer of $150,000”.

But even Justice Nair was unclear what the company meant by this because the loan was recorded in an agreement and its repayment was also done through proper accounting procedures.

He noted that the company also failed to explain why the managing director had a duty to disclose the repayment of the loan or how he was in breach of that duty. This was because his boss had authorised him to accept the loan and that he, in turn, had told the boss when the director asked for the money back.

The boss did not stop the repayment then but only suggested, “as a matter of convenience”, that part of the repayment be set off against the director’s future capital contributions.

A complaint was made against the managing director relating to his authority to make payments exceeding $3,000 without his boss’s approval. But he explained that this limit was irrelevant in this case, as this applied to “operational expenses” only. 

The judge found that the managing director did nothing wrong because the loan repayments were done under the agreement and the company could not decline to honour the deal because it needed the money at the time.

Wrongdoings must be proven

Even after getting back $420,000 from the rogue manager, the company, which had 12 outlets by August 2024, asked her for an extra $400,000. This was “compensation” to cover for the loss of profits as it claimed it was unable to use the misappropriated funds to open new stores earlier.

It was not disputed that the manager siphoned money for herself supposedly between 2015 and 2018 but what was less clear was whether her actions had prevented the company from opening more stores.

For instance, there was talk of a plan of opening “40 stores as soon as possible” but all the three defendants said such a plan never existed and that no meetings were held to discuss it.

As a result, they argued that the company could not prove that it suffered losses due to the inability to open more stores.

Justice Nair agreed that there was no evidence to prove that the failure to open more stores was on account of the lack of funds caused by the finance manager’s misappropriation. “I find the existence of the plan, for which there was scant evidence, a red herring,” he added.

He also noted that even when the manager started to return the bulk of the money she took by 2018, no new stores were opened. Instead, in 2020, the boss used the company funds to repay some of the loans from other shareholders, including repayments to himself.

As a result, Justice Nair ruled that the company failed to sue the finance manager for more compensation and ended up having to cover $75,000 of her legal costs.

It also had to pay legal costs of $95,000 to the director and $120,000 to the managing director for dragging them to court.

So the lesson to remember is this – it is perilous not to keep proper records of your money, because the absence of such documents would make it very hard for you to reclaim your cash if it ever goes missing.

Tan Ooi Boon is the Invest Editor of The Straits Times.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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