It’s probably too late to save SAA

The attempt by trade union Solidarity to save South African Airways (SAA) by applying for it to be placed in business rescue will most probably fail to prevent the liquidation of the indebted airline.

The provisions in the legislation dealing with business rescue, Chapter 6 of the Companies Act No 71 of 2008, indicates that a court would probably refuse to allow business rescue and opt to liquidate SAA.

The ugly truth is that it is far too late to save SAA through a process of business rescue. A team of business rescue practitioners should have been called in years ago.

A comprehensive overview of the relevant sections of the Companies Act by Werksmans Attorneys soon after the process of business rescue was introduced to SA highlights the fact that a company should commence with business rescue proceedings at the first signs of it being financially distressed. In the case of SAA, that would have been when it tabled its 2013 annual report.

The airline was already insolvent then. The 2013 annual report showed that total liabilities exceeded assets by R849 million, but this figure included a subordinated loan of R1.3 billion from government as equity – the real figure was negative equity of nearly R2.2 billion. The income statement reported a loss of R1.2 billion in the year to March 2013.

That was the point at which management, the responsible minister or external management professionals needed to act. A year later, total liabilities exceeded assets by R4.8 billion and SAA reported a loss of R2.6 billion.

Management even raised the matter of the airline’s status as a going concern in the 2014 annual report, but neglected to take remedial steps.

SAA still had a chance of surviving if action had been taken in 2014.

The last time SAA published its financials was for the year to March 2017, when liabilities exceeded assets by R17.8 billion and it suffered a loss of nearly R5.6 billion.

The auditor-general issued a qualified audit opinion on the 2017 financial statements that included a long list of shortcomings in SAA’s financial management. He said that SAA could not be regarded as a going concern given six consecutive years of big losses and its huge debt burden. He mentioned that SAA couldn’t pay is debts when due.

 Information black hole

There is no way to tell what has happened since then. If losses continued at the same rate, SAA’s liabilities could exceed its assets by at least R24 billion now. Management has stated on more than one occasion that is cannot meet its commitments timeously.

The Werksmans report on business rescue says that a company should commence business rescue as soon it is reasonably unlikely that it will be able to pay its debts when due during the ensuing six months, or when it is likely that the company will become insolvent in the immediate ensuing six months.

The author of the report, Werksmans director Eric Levenstein, quoted a high court judgment that ruled that “business rescue proceedings are not for terminally ill corporations. Nor are they for [the] chronically ill. They are for ailing corporations, which given time, will be rescued and become solvent”.

Other options

This statement supports the contention that a company should apply for business rescue at the first signs of financial distress, says Levenstein.

“Once a company is more than financially distressed, options other than business rescue become more attractive for ailing companies, such as liquidation or compromises.”

Levenstein’s analysis of the legislation shows that stakeholders other than management can apply for a company to be placed in business rescue. An affected person, including employees, credit providers and suppliers, can make a formal application to court for an order to place the company under supervision and commence business rescue proceedings.

He lists three reasons that stakeholders can offer to the court:

• That the company is financially distressed;
• That the company has failed to pay over any amount in terms of an obligation or contract with respect of employment-related matters; or
• It is just and equitable to do so for financial reasons and that there is a reasonable prospect of rescuing the company.

Levenstein points out that any application to place a company in business rescue can be opposed as is the case with any other application to the court. The party needs to file a notice to the court of its intention to oppose the application and then needs to serve an answering affidavit on the applicant.

In this case, SAA management or public enterprises minister Pravin Gordhan, in his role as representative of the shareholder, could file the notice to oppose the application.

Compromise unlikely

Alternatively, the application for business rescue could be withdrawn if a compromise can be reached with the applicant, but that seems unlikely in this case.

Business rescue would do SAA good, if it is possible. A business rescue practitioner will do what management needed to do a long time ago.

Chapter 6 of the Companies Act prescribes four actions that a business rescue practitioner must take:

• The practitioner must immediately investigate the affairs of the company;
• The practitioner must convene meetings with the creditors and with the employees within 10 business days after being appointed to advise them of the prospects of rescuing the company;
• A business rescue plan must be published within 25 days after the process started; and
• The business rescue practitioner must convene a meeting of creditors and any other holders of voting interests to consider the rescue plan within 10 days of its publication.

The time frame to effect change is very short, but business rescue requires urgent intervention.

Unfortunately, Levenstein was not available to explain the process further and give an opinion on how it might play out at SAA. Neither SAA nor Solidarity answered questions from Moneyweb.

Full control

Legislation restricts the responsibilities and authority of directors when a company is put in business rescue. The business rescue practitioner will have full management control over SAA, effectively replacing the directors and management.

Directors can continue to exercise their functions, subject to the authority of the practitioner, and management can continue with its work in accordance with instructions from the business rescue practitioner.

In addition, SAA directors and management have a general responsibility to co-operate, assist and comply with request of the practitioner and furnish any information required. This includes financial statements that have not even been shared with the auditor-general, and which will show the true state of affairs at SAA.

Levenstein says in his report that the introduction of business rescue represents a move away from a culture of liquidation to a culture of rescue, if possible. If not, it will at least achieve a better result when winding up the company.

However, his explanation of factual insolvency (liabilities exceeding assets) and commercial insolvency (being able to honour commitments over the next 12 months) does not bode well for SAA, which has not been factually or commercially solvent since 2014.

Whatever the outcome of the application for business rescue, striking workers, Solidarity or management will be blamed for the closure or downsizing of SAA. Irresponsible lending by banks, lax oversight by politicians and the apathetic stance of taxpayers should be blamed as well.

The unwillingness to take action in 2014 will now have a huge effect on the airline industry as a whole, as well as on employees, credit providers, customers and suppliers.

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