China State Construction Engineering (M) Sdn. Bhd. provides MYR 46.5 million interest-free loan for Astaka @ One Bukit Senyum Project

On December 18, 2014, Astaka Padu Sdn Bhd (APSD)— a property management company in Johor Bahru, Malaysia and wholly owned subsidiary of Astaka Holdings — appointed China State Construction Engineering (M) Sdn. Bhd. to carry out the construction works for the Astaka @ One Bukit Senyum Project. APSD then issued a $200 million (RM 640 million) construction contract to China State Construction Engineering (M) Sdn. Bhd. on August 2, 2015. Per the terms of the construction contract, CSCE was required to complete the project by November 4, 2017. A progress claim for certificate no. 21 to 23 was received between December 5, 2016 and February 2, 2017. The outstanding amount owed to CSCE for certificate claims no. 21, 22, 23 was RM 46,532,461.19. Then, on April 12, 2017, APSB entered into an RM 46,532,461.19 interest-free loan agreement with China State Construction Engineering (M) Sdn. Bhd. RM 46,532,461.19 represented the amount that APSB owed to China State Construction Engineering (M) Sdn. Bhd as at February 28, 2017 (for progress claims issued by China State Construction Engineering (M) Sdn. Bhd to APSB). APSB proposed the loan to China State Construction Engineering (M) Sdn. Bhd. because APSB was unable to make payments for progress payment claims under certificate no. 21 to 23 due to cash flow problems. The loan was to be repaid by June 30, 2017 or upon APSB's receipt of a written demand from China State Construction Engineering (M) Sdn. Bhd. at any time after the date of loan agreement, whichever was earlier. In the event that APSB was unable to repay the loan on such repayment date, China State Construction Engineering (M) Sdn. Bhd would upon receipt of APSB’s written request grant APSB a final extension of time until September 30, 2017 ( an “Extended Due Date”) to repay the loan, provided that late interest would be charged at a rate of 8.5% per annum on the outstanding balance of the loan until its date of full repayment. The loan was secured (i.e. collateralized) against land parcels located in Bukit Pelali owned by Bukit Pelali Properties Sdn Bhd (“BPSB”), a joint venture of APSB. The purpose of the Astaka @ One Bukit Senyum Project was to construct residential towers, a five-star hotel, branded residences, serviced apartments, an entertainment hub, an office tower, and the headquarters of Johor Bahru’s City Council (Menara MBJB) in Johor Bahru within Johor State. China State Construction Engineering (M) Sdn. Bhd. was the contractor responsible for implementation. Construction began on or around August 2, 2015. Then, on June 6, 2017, a topping off ceremony took place at the project site. On October 1, 2018, a Certificate of Practical Completion ("CPC") was issued to China State Construction Engineering (M) Sdn. Bhd to certify that construction activities were practically completed on September 19, 2018. However, this project was plagued by controversies related to a contractual dispute. As of the June 30, 2017 loan repayment date, it had not been repaid and APSB did not make a formal request to China State Construction Engineering (M) Sdn. Bhd. for a final extension to September 30, 2017. APSB then received three letters of demand from China State Construction Engineering (M) Sdn. Bhd. for the recovery of the outstanding debt. The first letter, received by APSB's lawyers on October 2, 2018, stated for the lawyers to 'kindly urge your clients to repay the loan with the late payment interest'. The claim amount of MYR 51.48 million (SGD 16.55 million) represented 313.5% of APSD’s cash and cash equivalents, 21.2% of its net asset value (NAV), and 213.9% of its net profit before tax. The second letter of demand, received by APSB on February 13, 2019, demanded the outstanding amount plus interest to be paid within 60 days, failing which China State Construction Engineering (M) Sdn. Bhd would have to commence legal proceedings for the recovery of the same. That claim amount of MYR 113.54 million represented 1,420% of APSD’s cash and cash equivalents, 47.8% of its NAV, and 838.3% of its net profit before tax. The third letter of demand, dated July 11, 2019, was sent to APSB by courier. It stated that China State Construction Engineering (M) Sdn. Bhd was thereby making a payment claim pursuant to and under the Construction Industry Payment and Adjudication Act. The claim amount of MYR 125.35 million represented 659.3% of the APSD’s cash and cash equivalents, 62.4% of its NAV, and 925.4% of its net profit before tax. The management confirmed that the group had not received any legal letter of demand, other than a letter from a supplier for an outstanding amount of approximately MYR 1.8 million. On September 5, 2019, APSD released an announcement on the Singapore Exchange (SGX) relating to the receipt of the letters, the need for the prior year adjustment on the under-recognition of interest expense, and the intention to appoint an independent reviewer to undertake a review of the matters that 'might have given rise to the oversight'. It then requested for a voluntary suspension of the trading of its shares, the resolution of the letters of demand, and the issues raised by the independent review to be undertaken. Trading in the company's shares have remained suspended to date. It is facing legal proceedings from one of its contractors and China State Construction Engineering (M) Sdn. Bhd. SGX said there was no dispute that APSB was in default of the loan. It noted that amounts claimed in the letters of demand constituted a 'significant' proportion of the group's assets; repaying the loans would result in a substantial outflow of APSD’s cash, and in turn would result in a significant deterioration of its financial position and diminution in the value of its assets, and potentially affect its ability to operate. Non-disclosure of the receipt of the letters of demand had also resulted in investors and shareholders trading in the company's securities without the knowledge that there existed factors that would adversely affect the company's value and prospects. On July 22, 2019, a resolution agreement was signed by the relevant parties, which stated that the company would plead guilty to failing to promptly disclose the receipt of the third letter of demand. Astaka Holdings' executive director and former chief executive Zamani Bin Kasim was required to resign from all his current positions and not to be appointed to any position in the company for two years from August 17, 2021. Public reprimands were also issued to APSD, Mr. Zamani, and former chief financial officer of Astaka Holdings Lee Shih Yi. Since APSD had failed to pay pursuant to the loan agreement, China State Construction Engineering (M) Sdn. Bhd. initiated adjudication proceedings against Astaka Padu Sdn Bhd by way of a payment claim dated July 11, 2019 (“the First Payment Claim”), for the unpaid sum. The parties then entered into negotiations which crystallized into a settlement agreement dated October 1, 2019 (“the Settlement Agreement”), whereby APSD had agreed to settle outstanding payments. APSD, however still failed to make payment according to the timeline stipulated in the Settlement Agreement. China State Construction Engineering (M) Sdn. Bhd. then demanded from APSD the outstanding sums under the Settlement Agreement, to which APSD had failed to comply with. As of April 3, 2020, APSB had paid RM21,135,991.93 to China State Construction Engineering (M) Sdn. Bhd. The sum due from APSB to China State Construction Engineering (M) Sdn. Bhd. under the loan agreement was RM 74,378,046.43 As a result, China State Construction Engineering (M) Sdn. Bhd. issued a second payment claim on November 25, 2020 (“the Second Payment Claim”) to claim for sums due under the Settlement Agreement.

Additional details

1. This project is also known as the Astaka high-rise commercial residential project. The Chinese project title is 来西亚ASTAKA高层商用住宅项目 or ASTAKA高层商用住宅项目. The Malay project title is Cadangan Pembangunan Fasa 1 – Bangunan Perdagangan 70 Tingkat. 2. According to Sinosure, it underwrote this project for amount equivalent to $103 million. Therefore, for the time being, AidData assumes that the loan from China State Construction Engineering (M) Sdn. Bhd. was backed by a Sinosure credit insurance policy. However, it is possible that the August 2, 2015 commercial contract was financed with a loan from a Chinese bank. This issue merits further investigation. 3. Astaka Padu Sdn Bhd defaulted on its contractual payment obligations to China State Construction Engineering (M) Sdn. Bhd before it requested and secured an interest-free loan from China State Construction Engineering (M) Sdn. Bhd on April 12, 2017.

Number of official sources

8

Number of total sources

14