Li & Fung (0494) will be taken to court by more than 10 factories that say the supply-chain giant refused to pay them for toys they shipped to bankrupt US retailer KB Toys up to six months before it went belly-up, The Standard has learned.
Li & Fung stopped honoring letters of credit it issued to Hong Kong-owned suppliers of KB Toys as early as June, Ricky Ng Wai-bong, a spokesman for the Joint Committee for Li & Fung Creditors, told The Standard.
More than 10 factories plan to file writs against Li & Fung in the Hong Kong courts around the time of Lunar New Year, Ng said following a meeting of the committee yesterday afternoon.
"We're not going to let them get away with this," Ng said. The factories "feel they've been shortchanged" by somebody they regarded as trustworthy, he said.
At the root of the issue is what responsibilities Li & Fung had as the middle man between KB Toys, the buyer in the United States, and the mainland factories that produced the toys.
"Li & Fung wears different hats to suit their needs," an industry source said. "Towards the financial world, they are a trading company ... Towards their customers, they present themselves as agents who demand a commission for their services."
Li & Fung claims it was only acting as an agent, but the managing director of one KB Toys supplier said letters of credit were issued in Li & Fung's name.
Li & Fung was heavily involved in every step of the process, Lewis Luk Tei, a veteran of the Hong Kong toy industry who is acting as an honorary advisor to the committee, told The Standard.
"When contracts say one thing, but if the actions or behavior show another thing, then the court will need to look at what is the actual fact," Luk said.
The factory manager said he was left wondering why Li & Fung did not inform the suppliers about the dire financial situation of KB Toys in the months leading up to its bankruptcy.
"Before the company filed for Chapter 11, we had no idea how bad the situation was," he said.
The suppliers paid Li & Fung commissions of between 5 and 6 percent to act as their agent, according to Ng.
"If Li & Fung is acting as a good agent, it should be responsible to let the vendors know," the factory owner said. "We didn't know things were so bad at KB."
For more than a week, Li & Fung has continued to refuse to meet with the committee, which represents more than 40 factories which worked through Li & Fung to supply KB Toys, Ng said.
Li & Fung has met with some of the suppliers individually but has not come up with any "new and useful offers," he explained.
"Otherwise our members will not be filing writs against Li & Fung," Ng said.
A spokeswoman for Li & Fung said the company has met with over 100 of the factories involved to discuss their individual circumstances.
"Most of them have expressed a desire to work with us to seek maximum compensation from the KB Toys bankruptcy," she said.
The other thirty-odd members of the committee will first seek assistance from relevant government departments and political parties but will pursue "all forms and modes of legal redress" if the current situation persists, Ng said. "The committee is looking at moving along `in stages,' giving Li & Fung always a reconcilable option," he said.
The factory manager said Li & Fung is saying on paper that it is just an agent, "but in practice, they are acting like a trader."
UOB Kay Hian analyst Ken Lee said: "I didn't know that Li & Fung is an agent before you told me." Lee has covered Li & Fung for two and a half years, according to Bloomberg data.
A spokeswoman for Li & Fung said the letters of credit were issued "by Li & Fung as KB Toy's agent."
"We act as an agent for KB Toys in managing the production of its orders at factories appointed by KB Toys," she said.
The suppliers invoiced directly to KB Toys, not to Li & Fung, she said.
However, the factory manager said the letters of credit issued by Li & Fung did not specify that payment to the suppliers was subject to Li & Fung being paid by KB Toys.
"It becomes now a social issue," Luk said. "If the supplier is shipping goods to overseas and they got an L/C and still cannot get paid, then that is a big problem."
A letter of credit should be a guarantee for shipment, but it turned out to not mean anything, the factory manager said. Li & Fung charged fees to arrange these letters of credit, which were later not honored, he said.
Li & Fung began to claim "all of a sudden" that the letters of credit were opened on behalf of KB Toys and could not be honored until Li & Fung got paid, the factory manager said.
Raymond Wong Wai-ming, finance director of toy maker Kin Yat Holdings (0638), said the party that issues the letter of credit should be responsible for the payment.
"The suppliers trusted Li & Fung because of the L/C that Li & Fung issued," said Wong, whose company was not a KB Toys supplier.
A spokeswoman for the government-owned Hong Kong Export Credit Insurance Corp said the company has not provided insurance to any exporters with orders from KB Toys since 2004, when the US toy retailer filed for Chapter 11 bankruptcy protection the first time.
Some suppliers did not feel comfortable working directly with KB Toys, which is why they worked through Li & Fung, Luk said. A letter of credit from Li & Fung seemed to be a more secure document than a letter of credit issued by KB Toys, he said.