Gulf Holding KSC (Closed) – Financial and Legal Problems – Part 2

As I mentioned in Part 1 and will mention again, this is the state at GH prior to GFH’s rescue activities. Until we see 2018 FY financials we won’t have information on current conditions and thus be able to measure the level of success of GFH.

In Part 1 we looked at GH’s dismal FY 2017 and 2016 annual financials.  

More than enough woe for the company there.  

What could possibly be worse?  

How about the auditor refusing for the second year to render an opinion?  

How about numerous legal woes?  

With GH’s FY 2017 AGM Package, we have a detailed exposition from Ernst and Young’s Kuwait Office AlAiban and AlOsaimi and Partners.  Normally, we would not see this.  There would be a few short sentences in the auditors’ report disavowing an opinion with very high level reasons given.  But, scant detail.  

Here we have a 2.5 page exposition laundry list of problems ending with what appears to AA as a rather damning statement.  You’ll have to read further to learn just what the auditor said.  

Let’s run down the points for focus.  

1. In the introduction (paragraph 2), the auditor states that it “was unable to obtain sufficient or appropriate evidence” to give an opinion. 
2. This is followed by 3 numbered paragraphs explaining why. 
3. The final paragraph (the usual one about compliance with local law and maintaining proper books of record) follows the standard paragraphs about (a) the board management’s responsibility for preparation of the financials and (b) the auditors’ responsibility for the audit. 

Let’s look closer at the auditors’ reason for not rendering an opinion. 

Paragraph 1 – Company Financials Recapitalization and Sukuk  

1. As of 31 December 2017 accumulated losses reached KD 69.2 million and current liabilities exceeded current assets substantially more than KD33.1 million.  
2. According to the Sukuk restructuring terms GH was to make two KD1.5 million payments to the sukuk holders.  It make the first 4 April 2017.  The second due 31 December 2017 was postponed as part of negotiations among GH, the sukuk holders, and a related party (presumably but not stated GFH).  A new agreement was struck on 7 March 2018 with the payment due on 31 March 2018 which was later amended to 31 May 2018.  
3. As part of the recapitalization (required because accumulated losses exceeded the maximum percentage of paid in capital), on 1 March 2018 at the delayed 2016 EGM, the shareholders approved using the FX Reserve along with the Voluntary and Statutory Reserves.  E&Y considers use of the FX Reserve as a violation of IAS 21.  
4. Additionally at the same meeting the shareholders agreed to 77.6 million new shares (par 100 fils) to increase capital.    It is unclear what the point here is.  Is the point that the board and management have taken no concrete steps and that the outcome is uncertain?  

Paragraph 2 – Al Areen Downtown Project   

1. On 19 January 2012 the Bahrain Chamber for Dispute Resolution issued a judgment against GH and affiliated companies--Al Areen Downtown Real Estate Development Company, Al-Areen Real Estate Company LLC and Diyaar Bahrain Real Estate Company WLL.-- requiring then to pay KD29.3 million (USD96.7 million) plus 3% interest to Boulevard Al Areen Real Estate Development Company.   
2. GH and its subsidiaries were ordered to transfer the land title to AlAreen Downtown Real Estate Development Company (hereafter “Downtown”) and other parties (unspecified) and issue shares so that Downtown would own 81.5% of Dhahiat Al Areen Company.  
3. According to the auditor, the BCDR decision required the consolidation of Dhahiat into Downtown for financial reporting purposes, but that GH has not done this.  
4. In 2015 Boulevard and the GH companies entered into negotiations.  As of the date of the annual report, GH and associated companies were reportedly finalizing the negotiations. 

Now we'll exit E&Y's comments for a closer look at the legal case and  status of the companies involved.

GBCorp is both a GH shareholder and a shareholder in Boulevard.   GBCorp’s FY 2018 audited annual report  note 6.1 provides some additional information. What follows is GBCorp's account.  After it had subscribed to Boulevard, the project developer and other owners of the land did not transfer the land to the project company nor did they issue shares to Boulevard for its subscription.  Perhaps these are the shares in Downtown referred to in point #3 above.  

As per GBCorp the GH Group did not fulfill its obligations under the proposed settlement agreement, the request for execution of the judgement was re-instated as is pending as of the date of GBCorp’s financials.  

As per the Bahrain MOIC website (www.sijilat.bh) as of 17 June 2019 here are details on the state of the companies involved in the litigation:  

1. Gulf Holding KSCC Branch (CR 61962-1) in Bahrain was “under sequester” as of 25 April 2019 and had earlier been under sequester as of 12 March 2017 and 12 November 2016.  
2. Dhahiat Al Areen (CR 67389-1) was “under sequester” as of 8 February 2018 and CR was not renewed.  Earlier under sequester as of 3 July 2012.  
3. Al Areen Downtown Global Real Estate Development Co. SPC (CR 99533-1) “deleted by law” 19 May 2019.  Note the “Global” in the name. 
4. Al Areen Downtown Real Estate Development Co SPC (CR 59127-1) “under sequester” but has filed on 28 April 2019 to remove sequester (CR201958845).  Or it may be that sequester has been lifted on that date but one data item on page (the “under sequester” reference) has not yet been updated.  
5. Diyaar al Bahrain Real Estate Development Co (CR 58196-1) “under sequester”.  You will find a list of court cases under sequester details at the MOIC website.   You will also notice that Mr. Esam Janahi is listed as a 50% shareholder along with Mr. Abdul Rahman Al Jasmi, also with 50%.  According to this listing, Mr. Janahi is “under sequester”.     
6. Boulevard Al Areen Real Estate Development – Couldn’t find them at the MOIC site. 

Now back to E&Y's commentary.

Paragraph 3 – Villa Royale Morocco    

1. As of 31 December 2017, the title to the land in Tangier for this project had not been transferred to GH.   Transfer is subject to GH paying the remaining balance of KD7.6 million.  The seller agreed in April 2018 to extend the due date for payment until 29 April 2019.  GH will pay by issuing redeemable preferred shares.  
2. E&Y notes that it was unable to perform the necessary procedures to value the land. 

Report on Legal and Other Regulatory Requirements  

1. GH has not taken concrete steps to rectify its capital position, i.e., accumulated losses more than 75% of paid in capital.   E&Y described the EGM resolutions as “merely plans” but that no action has been taken.  
2. E and Y also states that “we are unable to conclude that the Company maintains regular accounting books and that the consolidated financial statements are consistent with those presented in these books.” 
3. On its face that appears to go beyond noting a lack of action on the capital issue, the various legal issues regarding Villa Royal Morocco or AlAreen Downtown. And, as such, a rather damning assessment of GH's accounting.

On a positive note, GFH appears to have made progress in alleviating some of GH’s distress.  

It's unclear as to the status of the legal claims.  Companies are still under sequester.  

Does this mean that settlement agreements have not been finalized?  That they have but the legal process and updating of the MOIC records has not been completed yet? 

If we obtain 2018 and later year financials for GH, we will be able to see in better detail what has been achieved and what remains to be achieved.