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9th June 2020
LTAT NEEDS TO CLARIFY CLAIM BY MINDEF
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The recent spate of news concerning the Armed Forces Fund Board (LTAT) does not augur well for the fund and the welfare of the armed forces personnel. The negative news is likely to cause anxiety among shareholders and possibly panic dumping of Boustead Heavy Industries Corp Bhd (BHIC) shares in an already dampened market. At best, this unfortunate episode stems from poor communication on the part of the boards of LTAT and Boustead group; or worse, possibly due to a sinister connivance to press down the BHIC shares price to allow a hostile take over. 
 
On June 5 BHIC announced to Bursa Malaysia that its subsidiary, Boustead DCNS Naval Corp Sdn Bhd (BDNC) had received a letter from Mindef claiming RM 42.8 million liquidated damages pertaining to a breach of obligations under the provisions of the In-Service Support (ISS) for the two Scorpene submarines. BHIC owns 60% of BDNC through BHIC Defence Technologies Sdn Bhd with the other 40% belonging to the French builder, DCNS. The announcement to Bursa also stated that, “The claim (by Mindef) is not expected to have any material financial impact on BHIC Group for the financial year ending 31 December 2020. BHIC Group has recognised share of loses of interest in BDNC when applying the equity method up to its interest in the joint venture”.    
 
The announcement by BHIC was ambiguous and confusing and this resulted in various news reports that left readers as confused. Upon checking it is confirmed that BHIC did ‘recognise’ this ISS non-fulfillment of contractual obligations. It made a full provision for potential claim in its 2018 Annual Report. This was despite Mindef had yet to make an official claim at that time. On hindsight, perhaps it was unwise for BHIC to have done that in 2018. The provision made in 2018 on the claim contributed to the FY2018 after-tax loss of BHIC. Its action, compounded with the delayed approval by Mindef on the variation orders claim on the Littoral Combat Ships, was part of the reasons for cost overrun and allowed negative public perception on the company. Patriot had previously made statements regarding the variation orders and made suggestions to the boards of LTAT and Boustead Group on ways to resuscitate the ailing corporate image. We have also made the case for an on-going insidious hostile takeover of BHIC; hence no need to repeat the arguments here. 
 
In view of the negative media reports arising from the so-called Mindef claim, it would be prudent for the BHIC board to quickly make a public announcement to clarify the situation and explain why it said it had “adequate basis to defend and appeal against the claim”.
 
It is understandable that military assets produced and supplied by foreign companies came with ISS contracts. This is particularly so when they involve highly secretive issues such as the weapon systems. The receiver of the assets can be at the mercy of the supplier if the original contractual terms are not properly specified. Otherwise ISS obligations like personnel training are easy to fulfill.       
 
There is also a vast difference between claims for liquidated damages and liquidated ascertained damages (LAD). What portion of the liquidated damages was due to kickbacks, governmental delay, change of government, or even unclear contractual terms? This is for the boards of LTAT and BHIC to sort out with Mindef. Only when the basis of claim is satisfactorily agreed by both parties will the claim becomes LAD. If BHIC is successful in defending the claim by Mindef, then the RM 42.8 million that was recorded as a loss in 2018 can be written back boosting as profit for this year.   
 
It is incumbent upon the boards of LTAT and BHIC to quickly make an announcement to clarify the confusion on this issue of the Mindef claim. Patriot has taken a keen interest on this issue because the military personnel are stakeholders.
 
BG Dato Mohamed Arshad Raji (Rtd)
President, Persatuan Patriot Kebangsaan  
www.patriotkebangsaan.org.my