After government refused the business rescue practitioners of debt-laden national carrier SAA a further R10 billion in funding to continue with their business rescue process, the end of one of the world’s oldest airlines is looking increasingly likely.
A report on the national carrier is expected to be released by the airline’s shareholder, the department of public enterprises, on Monday.
Apart from some chartered repatriation and cargo flights, SAA’s operations – like those of all other airlines in the country – have come to halt due to coronavirus travel bans. But even before the lockdown commenced in late March, the airline’s routes had been reduced to only the popular Cape Town to Johannesburg flight.
On Friday the practitioners issued a draft termination of employment agreement to unions represented at the airline, giving them until Friday, April 24 to accept or reject it.
While the NTM union has put forward a counter proposal, the other two key unions at the airline – National Union of Metal Workers of South Africa (Numsa) and the SA Cabin Crew Association (Sacca) – say they are still consulting with government. In a joint statement on Sunday the two unions said that they currently see “no need to subject workers to these horrific offers that are being made by one of the BRPs”, and believe the airline can still be rescued “in some form”.
But provided the flag carrier cannot be saved, is liquidation the only option?
Justine Hoppe, director at Mazars Recovery and Restructuring, says the airline’s business rescue process is unlikely to survive without external funding, which government has turned down. And while it will be interesting to see where the business rescue practitioners go from here, she says the business rescue process has probability reached its end.
Government decided to let SAA go into voluntary business rescue in December last year. It is estimated that over approximately 14 years, the airline has incurred over R28 billion in cumulative losses. Nevertheless, it has repeatedly been given lifelines thanks to government assistance or guarantees. In Budget 2020 SAA was allocated R16.4 billion over three years – of which R11.2 billion was for the airline’s debt servicing costs.
Already in December 2019, Les Matuson, one of the airline’s joint BRPs, indicated that the vast majority of business rescue proceedings in South Africa have followed the option of developing a plan that results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the airline.
Business rescue allows a company to restructure its business in order to continue to operate. It is also a process to assist creditors to obtain a greater advantage compared to what they would have obtained in the liquidation of the company, explains legal expert Ryan Thotharam, a director at Biccari Bollo Mariano Inc.
Rene Bekker, chief operations officer of the SA Restructuring and Insolvency Practitioners Association NPC, says that if a business rescue process requires funding and its shareholder cannot or won’t supply the required funding – then the company, via its BRP, would have to find alternative sources of funding by way of a loan from a third party, normally a financial institution.
In the case of SAA, government funds have dried up and banks are not willing to go out on a limb anymore to lend. A few months ago, however, the airline did receive R3.5 billion in emergency funding from the state-owned Development Bank of Southern Africa.
“If the BRP cannot reduce costs sufficiently for the company to be able to meet all its post business rescue liabilities – unless he proceeds with a sale of the company or its assets – then there simply is no reasonable prospect that a company can be saved. Then the BRP is duty bound to apply to court for the conversion of the rescue process into a formal liquidation,” says Bekker.
A company is liquidated because it is unable to pay its debt. A liquidator will then dispose of the assets of the company and use the proceeds to pay creditors. Bekker says that, for employees, liquidation most often means the loss of their employment and its associated benefits. For creditors, liquidation means that they will most likely not recover all that is owed to them.
In certain circumstances, creditors could also have a possible claim of reckless trading against directors and management of a company.
While a liquidation is a formal, legal process in terms of the Companies Act, a structured “wind down” is different, Bekker explains. A structured winding down can be done in terms of a business rescue process, where a business rescue plan adopted by creditors provides for a bespoke process to dispose of assets over time. SAA’s BRPs have not yet announced such a plan, however.
“Sometimes, a so-called structured wind down is also conducted informally, by way of an agreement between a company and its creditors, with no legislative intervention,” says Bekker.
Thotharam says that a winding down could be done in one of various ways, the first being via a compromise or arrangement made between the company and its members and/or creditors, or class of members and/or creditors. The arrangement would then be binding on all the creditors, if sanctioned by a special resolution of members and the creditors of the company.
“An informal winding down or business rescue, will allow the company, alternatively, the BRP, to deal to with the company’s affairs, in commercial terms, which more often than not deals a better dividend for creditors and affected people,” says Thotharam.