It isn’t a secret that South African Airways (SAA) has not produced annual financial statements since the March 31, 2017 annual report.
This means it has contravened the Public Finance and Management Act (PFMA), the Companies Act, and the King IV Code of Corporate Governance. Without a financial report, SAA has most probably not submitted income tax returns for 2017 and 2018, contravening yet another act.
Going back to the 2017 annual report, the Auditor-General (AG) delivered a damning qualified opinion and indicated that “a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern”.
The AG, in the latest PFMA 2019 Consolidated General Report, stated that it has not been able to finalise the SAA 2018 and 2019 audits (no reasons given), and noted in general that: “The overall audit outcomes of the SOEs [state-owned enterprises] are the worst they have ever been.”
What is SAA hiding?
Now that SAA has thumbed its nose at everyone, including parliament’s standing committee on public accounts (Scopa), in not having finalised its 2018 and 2019 annual reports, what is it trying to hide?
This leads to the obvious question: is it trading under insolvent circumstances? There are two types of insolvencies: those where the liabilities exceed the assets; and those where the assets exceed the liabilities but the company cannot pay its creditors. SAA possibly meets both requirements.
But what are the implications?
Firstly, the failure to produce an annual report would not disguise any factual situation, for example, that SAA is trading under insolvent circumstances. It would not require an external auditor to state the obvious. In any event, the directors are responsible for ascertaining whether a company is solvent or not.
Nor will the raising of any new funds at any point in time wipe out the fact that SAA was trading while insolvent in between the raising of the emergency funds.
Trading under insolvent circumstances may trigger default clauses
Certain legal contracts and agreements (such as loans and insurance agreements) may include default clauses that will be triggered if the company is trading under insolvent circumstances, or if it hasn’t produced annual financial statements.
Who at SAA is responsible for scrutinising all legal agreements, including loans and insurance contracts, to see if there is any risk in trading while insolvent, and, in failing to produce financial statements?
SAA has a good safety record. But if there is an accident, and it is trading under insolvent conditions, what will the implications be?
Under the Companies Act, the directors have various duties and responsibilities:
- Regularly review the financial affairs of a company. (Comment: It is not difficult to tell the difference between cash in the bank and an overdraft, between long term and short term creditors, nor to ascertain whether the liabilities exceed the assets; the quarterly board minutes should make for interesting reading.)
- Exercise independent judgement. (Comment: Is a member of the ruling party who has been appointed by the government to act as a director ‘independent’? Perhaps the Companies Act, the PFMA and the King IV code should have a separate section dealing with the duties and responsibilities of directors of SOEs.)
- Act with due care and skill, and this would include not trading under insolvent circumstances. A director could be liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the company trading while technically insolvent. Not surprisingly, the Companies Act is silent on the ramifications of not reporting. However, it could be argued that the directors are not acting with due care and skill.
- Apply a solvency and liquidity test when embarking on certain actions or entering into certain transactions – the assets, fairly valued, must be equal to or exceed the liabilities of the company.
- Not withhold information from creditors. (Comment: In my view, not issuing financial statements is tantamount to withholding information from creditors).
- Implement business rescue proceedings if necessary. (Comment: Obviously the directors of an SOE couldn’t do this. This adds to the façade that SOEs comply with the Companies Act.)
Income tax returns
If SAA has not been able to produce any annual reports, it would not have been able to file any income tax returns. This should put it at risk of losing any accumulated tax loss.
If Scopa wants to achieve effective oversight of wayward SOEs, it should make an example of SAA and hold the directors and management to account.
The company should immediately be required to furnish:
- The trial balances for 2018 and 2019, as well as an unaudited income statement and balance sheet for each year.
- The quarterly management accounts, quarterly cash flows, as well as the quarterly minutes of board meetings.
- The audit committee report on accounting practices and policies, the internal financial control of the company, adherence to supply chain management and procurement policies, and internal audit and risk controls.
Companies and Intellectual Property Commission
Why has the Companies and Intellectual Property Commission (CIPC) been so quiet? If it has reason to believe that SAA is carrying on its business “recklessly” (trading under insolvent conditions), or is unable to pay its debts as they become due and payable in the normal course of business, it should issue a notice to SAA asking why it should be permitted to carry on operating.
Does the CIPC’s silence amount to acquiescence?
SAA has spiralled out of control
In 2017 I wrote that SAA is spiralling out of control. I would now broaden that statement to include the government’s management of SOEs. At this rate of ineptitude, South Africa has more to lose than SAA.
It appears that there has been a blurring of the line between the shareholder (the Department of Public Enterprises on behalf of the government), and the directors.
The directors will be held to account by the Companies Act.
The other stakeholders (employees, creditors, suppliers, and customers) will no doubt hold the government to account.
But the ultimate loss will be carried by the members of the Government Employees Pension Fund (an insolvent government will not be able to guarantee the defined benefit fund) and the taxpayer.