Contingencies

EOH Holdings Limited (‘EOH’) issued parent company guarantees (‘PCGs’), as required by a client for a wholly owned subsidiary PiA Solar SA Proprietary Limited (‘PiA’). The guarantees provided are for a period of years during both construction and after handover including an operation warranty guarantee, which by the nature could (in the event of underperformance by PiA) compel EOH to either ensure physical performance or settle such underperformance in cash terms. While PiA had undergone some operational challenges as a result of several factors, including COVID-19, the Group has intervened in order to minimise the potential impact of these PCGs. The projects subject of these PCGs are now substantially complete, with the last project to achieve handover to the end client expected during November, 2020. The Group thus believes that the risk presented by the PCGs, albeit still in existence, is now sufficiently mitigated such that no cash flow impact is expected in the future.

During the course of the current financial year, the Group also issued a PCG for another subsidiary EOH Mthombo (Pty) Ltd relating to the implementation of an ERP solution at the City of Johannesburg (COJ) for a project which was signed during the 2017 financial year. The COJ guarantee compels the Group to either ensure physical performance or settle such underperformance in cash terms. A cash balance of R53 million is currently in restricted cash.

Fine imposed by the JSE Limited

The JSE Limited (JSE) imposed a fine on the Group on 29 July 2020 for prior period errors contained in the Group’s previously published financial statements for the financial years ended 31 July 2017 and 31 July 2018. The fine was for R7.5 million of which R2.5 million is suspended for a period of five years on condition that the Group is not found to be in breach of material and important provisions of the JSE Listings Requirements. The R5 million was raised as liability at 31 July 2020, with the suspended amount being a contingent liability.

Legal claims

The Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business, none of which are considered material on an individual basis or in aggregate. Management has no reason to believe that the disposition of these matters will have a materially adverse effect on the consolidated financial position of the Company.

Uncertain tax exposure

The Group operates in numerous tax jurisdictions and the Group’s interpretation and application of the various tax rules applied in direct and indirect tax filings may result in disputes between the Group and the relevant tax authority. The outcome of such disputes may not be favourable to the Group. At year end there were a number of tax disputes ongoing in various of the Group’s operating entities, the most significant of which related to a PAYE dispute which the Group is contesting. At 31 July 2020, the Group had provided for R257 million on the PAYE liability assessed and potential future assessments, and have submitted a notice of objection to the tax authority and based on internal and external legal and technical advice obtained, the Group remains confident that it has a strong legal case to contest the remaining exposure. R10 million of the R257 million provision was repaid as at 31 July 2020. Refer to note 23 for the provision raised.

There is further uncertainty regarding historical taxes that may be due as a result of the impact of the fraudulent transactions identified in the forensic investigation performed by ENS during the 2019 financial year. Provisions based on best estimates were recognised at 31 July 2019 and no changes were made during the period ended 31 July 2020.

Uncertain exposure due to suspect transactions

An assessment was undertaken in relation to contracts flagged by ENS as being associated with suspicious activities, for purposes of determining the likelihood of a claim/s being raised against EOH in relation to the contracts in question. The total contingent exposure identified in consequence of the results of that assessment is R84.2 million.

The assessments which resulted in a claim being regarded as likely and where a contingent liability was identified were in relation to the following contracts:

• Amathole District Municipality (ADM) – SAP Implementation Contracts: there are disputes raised by ADM as to deliverables and sums payable to EOH under this contract, however, EOH maintains that it has performed substantially on the contract. Deloitte prepared a forensic report on instruction of National Treasury (10 October 2019) and National Treasury issued an Intervention and Close-Out report (27 February 2020). ADM did not accept the findings of the Intervention and Close-Out report (27 February 2020), however, no further steps have yet been taken by ADM. In the event of a successful challenge to the validity of the contract, EOH would be entitled to just and equitable relief and would never be exposed for the full value of the contract.
• USAASA – SAP Implementation: National Treasury is investigating this contract, however the scope of the investigation is unknown to EOH. There is a risk that there may be a finding of impropriety in the contract. This contract came to a natural conclusion at the end of 2017, with EOH having performed and with no claims or complaints having arisen since. Any claims to be raised will have probably prescribed. In the event of a successful challenge to the validity of this contract, EOH, having performed under the contract, would be entitled to motivate a just and equitable remedy. It would be unlikely and certainly contrary to the principles of just and equitable relief, that EOH would have to “refund” USAASA.

The assessments which resulted in claims being regarded as possible and where a contingent liability was identified were in relation to the following contracts:

• Department of Water and Sanitation (DWS) – Project Muratho SAP Upgrade: This contract came to its natural conclusion in October 2015 with EOH having performed thereunder and with no claims or complaints being instituted against it. It is unlikely that any attempt to set aside this contract would succeed due to excessive delay. In the event of a successful challenge to the validity of this contract, EOH having performed under the contract would be entitled to motivate a just and equitable remedy and would not be expected to ‘refund’ DWS.
• DWS – SAP Roll-Out to Catchment Management Agencies: The contract came to an end in September 2016 with no claims being instituted, for the same reasons outlined above, any attempt to overturn this contract would encounter difficulties due to delay and would not require an appropriate ruling as to just and equitable remedy in circumstances where performance was rendered.
• City of Johannesburg – SAP Licence Sale: The contract came to conclusion with EOH having performed its obligations in 2015 with no claims subsequently arising. Any claims will, in all likelihood, have prescribed. In the event of a successful challenge to the validity of this contract, EOH having performed under the contract would be entitled to motivate a just and equitable remedy.
• Department of Home Affairs (DHA) – ABIS (Biometric): There are currently no disputes relating to the value received, however, there are current disputes relating to contractual interpretation and entitlement derived under the contract terms, as amended, with EOH claiming R53 million excluding VAT and DHA claiming R44 million.

Commitments