With airlines across the world collapsing, can business rescue proceedings assist the ailing South African aviation industry?
The aviation industry is susceptible to unpredictable events outside its control. In South Africa, an already difficult economic and operating environment combined with a pandemic has proven too much for the local industry to bear.
South African Airways and Comair have entered business rescue. South African Express entered business rescue and now finds itself in provisional liquidation. Remaining competitors face immense financial strain, with revenue streams disappearing overnight, and no certainty as to when they will reappear.
Yet global airline history has shown that proper restructuring in insolvent circumstances can allow an airline to survive and emerge stronger. Combining that with subsequent airline consolidation makes for an even better storyline. The American airline industry is testimony to that.
The business rescue provisions in the South African Companies Act create breathing space for any company entering business rescue to exit it as a going concern based on two key principles:
- Firstly, it offers "standstill" protection from creditors, while the company restructures, in the form of a general moratorium on legal proceedings against the company. This is a key motivator for a company wanting to enter business rescue as time dwindles and creditors start to circle.
- Secondly, it facilitates the company having access to financing in order to be able to successfully restructure. Financing has two parts: trying to ensure that the company has sufficient remaining cash resources at the time it enters business rescue; and encouraging existing and new lenders (and suppliers) to advance funding after the commencement of business rescue by conferring on them a preference over unsecured creditors who preceded the commencement of business rescue.
The Companies Act attempts to encourage companies to "go sufficiently early" (into business rescue) by giving "financially distressed" a rolling forward-looking meaning of whether a company, within the forthcoming six months, will be able to pay all its debts as they become due and payable or will become insolvent, with the board of a company to consider resolving that the company voluntarily begin business rescue proceedings if the board has reasonable grounds to believe that this financial distress exists and there appears to be a reasonable prospect of rescuing the company.
Bolstering this "go sufficiently early" approach, if the board has reasonable grounds to believe that the company is financially distressed, but does not resolve to voluntarily begin business rescue proceedings, the board must inform shareholders, creditors, trade unions and those employees not represented by trade unions of the financial distress Sending such a notification makes the business rescue or liquidation prophecy self-fulfilling, which is why it is rarely sent. Notwithstanding these encouragements most companies enter business rescue too late.
At the time of entering business rescue a company usually has no security left to give lenders - if it did, all things being equal and time permitting, it would have been able to raise more cash. As far as new lending from existing or new lenders after the commencement of business rescue is concerned, the state of play is often already so dire that it is unclear to potential lenders where the resources will come from to repay even their preferred advancements. Moreover, the development of this type of lending in South Africa is, in legal terms, still in its infancy. Lending in these circumstances requires the certainty of process and treatment that time and repeated usage can bring, such as in the "Chapter 11" bankruptcy procedures of the United States. This post-commencement finance also tends to dry up at the time it is most needed, as healthier companies scramble, during recessions, to increase their existing facilities from ever-scarcer resources. This lack of true post-commencement finance has always been an impediment to a successful business rescue in South Africa. What is left is the rudimentary form, when existing suppliers, often beholden to their customers, agree to provide such financing by continuing the ongoing supply of goods and services in return for upfront or accelerated payments in the hope that things will return to normal.
While no mention is made of it in the Companies Act, a third, overlooked principle of business rescue proceedings, which enhances the breathing space created by the standstill and hopefully the access to pre- and post-commencement financing, is pre-planning: having a restructuring plan ready, ideally devised with external expertise, before entering into business rescue. In some countries this is called a "pre-packaged" restructuring plan which, in its high watermark form, is immediately executable by the functionaries charged with overseeing the restructuring, as soon as they are appointed. Placing the obligation to produce a plan upon the business rescue practitioners, once they have been appointed and are trying to grapple with the intricacies of an unfamiliar business, wastes valuable time. Business rescue is disruptive to the business and time is not your friend. The longer the process takes, the more likely it is that key employees, suppliers and customers will desert the company. Recognising this, the Companies Act requires that a business rescue plan be published within 25 business days of the appointment of the business rescue practitioner, unless a longer time is allowed by the courts on application made by the company, or the holders of a majority of the creditors’ voting interests. Unfortunately, experience has shown that meeting the target of 25 business days is the exception, not the rule. That confirms why following a "pre-packaged" route is desirable.
Airlines illustrate these points, given their position at the forefront of the current economic maelstrom, but what has been said in respect of airlines and business rescue applies equally to any other business.
In considering these principles, how is the business rescue process expected to play out in the South African airline industry? Various considerations need to be taken into account when predicting whether a company will exit from business rescue as a going concern, but key indicators are:
- whether the company went sufficiently early into business rescue. The scarcer its financial resources at the onset of business rescue, the more difficult it will be to exit the process as a going concern;
- the availability of post-commencement finance after entering into business rescue, whether from existing or new lenders or suppliers. If this is lacking or runs out before a rescue plan is proposed and adopted, the ability to implement the rescue plan will be limited or non-existent, even more so if the business rescue process commenced with very little existing cash in the business;
- whether a business rescue plan or at least the rudiments of one was prepared before business rescue commenced. A lack of pre-planning does not bode well, as valuable time is lost while the business rescue practitioners work against the clock to create one from scratch; and
- how long it takes to publish a business rescue plan - the longer it takes, the more likely it is that suppliers, key employees and customers will desert the company.
As they say in law, the facts speak for themselves. So will the business rescue outcomes.