South African Airways - Understanding the possibility of business rescue proceedings
Over the last twenty four months, we have been closely monitoring the financial condition of South African Airways (SAA) and advising our aviation and financing clients regarding their general exposure to SAA and, in particular, the risks and likelihood of an SAA insolvency and/or business rescue. Although SAA has a new board and the sentiment towards SAA has improved, its financial difficulties continue:
- SAA posted a loss of ZAR 5.6 billion for the year ended March 2017, greater than initially anticipated; and
- In 2017 the National Treasury extended a further bailout of ZAR 3 billion to avoid SAA defaulting on certain of its maturing loan facilities.
Whilst the speculation of SAA's business rescue is not new, we thought certain recent developments warranted attention. On 8 April 2018 it was reported that trade union, Solidarity (which has approximately 140,000 members in all occupational fields in South Africa) intends to approach the courts to seek to place SAA under business rescue (the Application) in terms of the Companies Act, 71 of 2008 (Companies Act). In summary, the article also states that:
- Solidarity wrote to President Cyril Ramaphosa, Finance Minister Nhlanhla Nene and Minister of Public Enterprises, Pravin Gordhan to invite them to join the Application. We are not aware of any responses having been received as at the date of this alert;
- Solidarity argues that SAA does not have "reasonable prospects" of generating growth or profits based on its recent financial performance;
- The only way that SAA could become a sustainable business is to privatise it, either wholly or in part; and
- Solidarity would approach the courts "in due course" and would "reveal its legal strategy" at a media briefing on 12 April 2018.
We set out below a brief overview of the purpose and process of business rescue proceedings and our understanding of what would need to be established by Solidarity in order to succeed with the proposed Application.
Business rescue is a process aimed at facilitating the corporate rescue and rehabilitation of companies that are financially distressed. The objective of business rescue is the development and implementation, if approved, of a plan to rescue a financially distressed company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company (the Plan).
A financially distressed company is a company that appears to be reasonably unlikely to be able to pay all of its debts as they become due and payable within the immediately ensuing six months, or a company that appears to be reasonably likely to become insolvent within the immediately ensuing six months.
The Plan must include:
- specified items of background information and forecasts (including lists of assets, creditors, proved claims, shareholders and probable dividends);
- the proposal with details of its implications (including the benefit of the Plan as opposed to liquidation, the order of preference of payment, and the effect of the Plan on each class of creditor); and
- details of the assumptions and any conditions (including any conditions to be satisfied for the Plan to be fully implemented, its effect on employee numbers and projected financial statements for the next three years).
If the Application is brought, it must be brought on notice to all Affected Parties. An Affected Party is defined in the Companies Act as:
"in relation to a company,—
(i) a shareholder or creditor of the company;
(ii) any registered trade union representing employees of the company; and
(iii) if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives;"
Any person who falls within the definition of an "Affected Person" has a right to receive notice of and participate in the hearing of the Application and should be joined as a respondent to the Application. In these circumstances, any Affected Person who has been joined can file papers in support or opposition of the Application.
The Application should recommend a business rescue practitioner (BRP) which the courts will appoint on an interim basis if the Application is granted. A BRP:
- is an officer of the court and has the same statutory responsibilities, duties and liabilities, including the codified fiduciary duties, and the codified duty of care skill and diligence; and
- must be a member in good standing of a legal, accounting or business management profession that is accredited by the Companies and Intellectual Properties Commission (CIPC); be licensed as such by CIPC; have integrity, impartiality and objectivity; be eligible to act as a director in terms of the Companies Act and not be on probation; be independent; and meet any minimum qualifications the Minister may specify.
The interim appointment of the BRP is subject to ratification by the holders of a majority of the independent creditors' voting interests at the first meeting of creditors, which must be held within 10 days of the interim practitioner's appointment.
If the order sought in the Application is granted, there are a number of consequences which will follow and which include, but are not limited to:
- the BRP taking over full management control of SAA in substitution for its board and pre-existing management;
- a general moratorium on legal proceedings coming into effect. In this regard, lessors may find it difficult to repossess their aircraft as "no person may exercise any right in respect of any property in the lawful possession of the company."*.That said, given the importance of the relationship with its lessors and the critical nature of the availability of aircraft to the success of any Plan, we would expect a BRP to require that SAA's current aircraft and leasing arrangements largely remain in place and to therefore continue to pay the lease rentals due. We would anticipate that any fleet rationalisation forming part of the Plan would be carried out on a negotiated basis with the relevant and affected lessors; and
- the BRP being entitled to suspend any obligations of SAA that arises under an agreement to which SAA was a party at the commencement of the business rescue proceedings and would otherwise become due during those proceedings. In this regard, if the Plan involved the suspension of any loan repayment obligations to SAA's lenders, in our view, this would not impact any government guarantees issued in respect of these obligations.
During business rescue, the BRP is required to consult with creditors of the company, other affected persons, directors and management, and then prepare the Plan for consideration and adoption at a creditors’ meeting (and where shareholder rights are affected by the plan, also at a shareholders’ meeting). Once adopted by the requisite majority of creditors and/or creditors and shareholders, the plan must be implemented in accordance with its terms.
Our Initial Views
Although it is premature to express an opinion on the prospects of success or likely outcome of the Application (if launched), we would anticipate SAA itself or National Treasury opposing the Application (for largely political considerations rather than a substantive defence based on the financial condition of SAA).
To succeed, Solidarity will have to show financial distress (as contemplated and defined in the Companies Act). This might be difficult if National Treasury (as SAA's representative shareholder) continues to express willingness and, in fact, continues to extend further bail-outs to SAA such that SAA is able to meet all its payments as and when they fall due. Further, Solidarity will likely have to convince the courts that business rescue is a better and more appropriate solution to SAA's problems that affording the recently appointed board an opportunity to implement and deliver on their latest turn-around strategy.
*Notably, the conflict between the rights of the BRP under the Companies Act and the Cape Town Convention, in particular Article 13, raise interesting and as yet untested issues as a matter of South African law