SAA ‘stand-off’ could undermine business rescue in SA

When the state allowed one of its state-owned enterprises in South African Airways (SAA) to move into business rescue almost six months ago in an unprecedented move, it was a test of its ability to accept the will of the market when it came to the fate of the national carrier.

The “stand-off” between Minister of Public Enterprises Pravin Gordhan and one of the airline’s joint business rescue practitioners, Siviwe Dongwana during last weeks parliamentary briefing has provided an answer with commentators raising the question whether the state was now “unduly interfering” and “undermining” a legally prescribed process.

The 86-year-old state-owned airline hasn’t made a profit in about eight years and has cost the government almost R30 billion in bailouts over the past decade.

Gordhan and the unions represented at SAA are hellbent on trying to save the airline and jobs – or somehow create a “new SAA” from the ashes of old one.

The BRPs, on the other hand, due to a lack of government funding, still see a structured winding down as the best option. They seem to have concluded that there is no reasonable prospect for SAA to be rescued as a financially viable entity, especially in the current coronavirus environment, which has devastated the airline industry.

The BRPs are aiming to present a new business rescue proposal at the end of this month. It would have to be approved by affected parties, including creditors.

Gordhan did hint during the parliamentary briefing that more money might become available if a business rescue plan acceptable to government is proposed. He is also hoping to find a suitable equity partner for the airline, although this seems unlikely in the current coronavirus environment.

Why business rescue?

Gideon Slabbert, managing director and business rescue practitioner at Turnaround Rescue Solutions, explains that the Companies Act established business rescue in 2011 as a means to try and restore a financially distressed company based on the core principles of independence, equality and fairness to all affected parties as well as not trading recklessly.

The undue intervention of stakeholders can, therefore, compromise the intent of the process.

Business rescue places a legal freeze (moratorium) on all debt and provides a business with the opportunity to restructure its debt while, at the same time, independently, assessing and implementing strategies that can ensure profitable future trade as a going concern.

In liquidation, on the other hand, all business assets are frozen and sold to pay for the liabilities. Continuing to operate a business when you know it is insolvent, is considered reckless trading as defined in the Companies Act.

“If the business cannot be restored in its existing structure, the practitioner should determine to what extent the business operations can be scaled down to ensure that all affected parties receive a better return than in liquidation,” says Slabbert.

In the view of George Nell, a senior business rescue practitioner at Corporate Business Rescue, to try and balance the business rescue expectations of SAA to such an extent that all affected parties are satisfied, currently seems to border on “an impossibility”.

“It seems as if all parties are acting within their rights, but expectations and reality do not meet. The question central to the problem is: can anybody conclude that there is a reasonable prospect of rescuing SAA at this stage?” asks Nell.  “It seems that the balance of probabilities and likelihood of continuing on a solvent basis sway heavily against such a conclusion with new funding or without it.”

Murky waters

In terms of the business rescue process, creditors may consult with the practitioner about any matter relating to the business rescue proceedings but may not direct or instruct the practitioner.

“This is where the water becomes a bit murky when it comes to SAA and the interactive relationship between government, employees and the business rescue practitioners,” explains Nell.

“The application of the authority granted to government in terms of the Public Finance Management Act versus the authority and fiduciary duties of the business rescue practitioners in terms of the Companies Act, are seemingly not aligned. If not resolved, this could change the landscape of business rescue in SA for years to come.”

The South African government is the sole shareholder and a major creditor of SAA. Therefore, as an “affected person”, it plays an important role in the rescue process.

“This would have been the same in any other business rescue where there is a majority shareholder, who is also a major creditor,” says Tobie Jordaan, a director at Cliffe Dekker Hofmeyr, who specialises in business rescue, insolvency and restructuring.

“SAA is the first SOE which has been placed under business rescue and the interplay between the various sets of legislation applicable to a specific rescue of a specific SOE must be considered to determine the effect of government’s interrogation or interest in the business rescue.”

Should there be an irreconcilable conflict between the provisions of the PFMA and the Companies Act, and should it not be possible to apply the provisions concurrently, the provisions of the PFMA will prevail, in his view.

Labour Court challenge

The business rescue process was also challenged in the Labour Court. The judge found in favour of unions the National Union of Metal Workers of SA (Numsa) and the SA Cabin Crew Association (Sacca) by declaring a section 189 retrenchment process started by the BRPs as unfair without a business rescue plan having been submitted.

The unions argued that, without a rescue plan having been submitted, there is no indication to what extent labour would be needed going forward.

Jordaan says the judgment certainly has sparked a debate in legal and business circles, especially as it came at a time where companies and employees are already exposed to the economic impact of the Covid-19 pandemic.

Kylene Weyers, a senior associate in dispute resolution at Cliffe Dekker Hofmeyr, says in many cases it will be financially impossible for a company to continue paying its employees until a business rescue plan is approved.

“Especially in complex business rescues where it may take a longer time to prepare a suitable business rescue plan, having to wait for the plan to be approved before carrying out retrenchments may render many business rescues unlikely to succeed,” says Weyers.

“It comes down to the interpretation of legislation and different views have been formed on whether the judge got it right. Leave to appeal has been requested. If not overturned, it could have a detrimental effect on the objectives of business rescue, being, inter alia, to return a company to solvency.”

Sandile July and Lisa Appelgryn of Werksmans Attorneys are of the view that the Labour Court came to the wrong conclusion and agree that the judgement is likely to negatively impact the financial viability of an employer that may already be in financial distress, by unnecessarily delaying the operation of section 189.

This could also impact the potential success of the business rescue process and where urgent retrenchments need to be advanced prior to a plan being published.

They see it as perfectly plausible that a business rescue practitioner, in the course of carrying out and prior to the adoption of the business rescue plan, contemplates the dismissal of employees as a measure to reduce the company’s expenses.

In the view of July and Appelgryn, there was no need for the business rescue practitioners to withdraw the section 189(3) notices already issued by SAA in November 2019 prior to their appointment.

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