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Is SAA trading under insolvent circumstances?

Default clauses may be triggered in contracts and agreements.

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.

Scopa

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.

Read: SAA spiralling out of control

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.

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COMMENTS   23

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Fly SAA – No Way !!! If it cannot do its books( a menial clerical task) how do they maintain airplanes (serious technical tasks) ????

If the top brass cannot even get financials together imagine the maths skills of the refueler.

I am sure most people or potential passengers will start supporting SAA when the residents of Soweto start supporting ESKOM!!!

Ok starting tomorrow!

Funguyinjnb – In this lifetime??? I think not.

When I worked for government until 2012, we were scared stiff by the Auditor General, our Board Members and SCOPA and spent weeks making sure there were no problems, and if there were, they could be explained or steps or procedures were in place to rectify them. The board members knew the business and processes and most of the challenges, and grilled the officials frequently – even the overtly ANC supportive ones. Board members appear now to be appointed purely on how loyal they are to Luthuli House, the party and their cadre comrades without even the basic knowledge of how to run a spaza shop – clueless, inept and arrogant.

Nice article. All it would take to finish off SAA for good would be for a creditor to sue the directors in their personal capacity for non payment and trading in insolvent circumstances.

That would put an end to people willing to sit on the board.

I agree and imagine how twitchy creditors must be! I would need fuel, tyres etc to all be paid for in advance before supplying anything. But maybe it is ANC cadres tenderpreneuring who are all being paid too much for too little, probably in advance that has put SAA in this position and probably ongoing.

Amazing the blatant, barefaced arrogance of continuing to break the law by the “holier than thou” Gordhan et al wehn it suits them.

Liquidate the cesspool of corruption and theft. That the best gift the taxpayer can get from Santa !

Do not fly SAA. Do not allow them any chance whatsoever. They have been leeching us for way too long.

…it’l be a sad day to hear of SAA’s closure. Being managed by those with politics ahead of operations governance is the contagion in many of the SOE’s

It happened in South Korea with many of its state owned industries left in peril, resulting in a more competitive market place afterwards

Columbia, not as quick to recover as S. Korea is seeing benefits of the same strategy

Proof that you cannot run an entity politically.

The ANC MPs just want their perpetual free flights while robbing it blind.

LOL, I can see empty planes except for MPs. They might as well have cabinet meetings there.

Can you see the chef saying … Chicken or Beef 🙂

And surely the govt cannot lend SAA more money, as Tito Mboweni suggested they would do, as this would amount to reckless lending.

And Gordhan has the NERVE to say it’s OUR “collective responsibility” to fly SAA!
This man is seriously ILL!

Can the lenders who are seemingly waiting to step in if government guarantees are provided not also be held to account as being reckless in their lending and possibly supportive of a corrupt organization? Certainly they abandoned other customers fast enough over any concerns about their business activities.
One almost feels sorry for the way KPMG was treated relative to the red carpet treatment SAA seems to get!

What has happened to the statement by one of the unions seeking a salary increase, that it is unsafe to fly SAA. Is it now safe to do so?

They all know and are complicit in allowing SAA to trade illegally as it has not been a going concern for years.

Tito said no more bailouts maybe loans. Whoever agrees to more loans should be locked up.

Maybe someone needs to go and lay a charge starting with the shareholder.

“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.”

How does one possibly meet both requirements ? It’s sure either assets exceed liabilities, liabilities exceed assets, or assets equal liabilities, and you can only be in one of those three positions at any one point in time ?

Happy to be schooled on accounting if I have this wrong 🙂

de facto insolvency = factual insolvency when the value of liabilities exceed the value of the assets.

de jure insolvency also called commercially insolvent when company may not be factually insolvent but according to the legal definition in the Act a company cannot pay its creditors .

Both can exist at same time.

I stopped flying SAA in 2010 after an air hostess, for no apparent reason other than me being a white Afrikaans speaking middle aged man pulled me out of the line at the door of the plane and told me my carry-on luggage was too big. My case was smaller than the passenger in front of and behind me in the queue who both had laptop bags the same size as mine as well. When I demanded to see the captain she called him after much aggravation. After seeing why I was unhappy he offered to keep my laptop bag in the cockpit. The hostess then told him she would report him if he did that. He then shrugged and said, I’m sorry sir, I cannot help you. I responded with, I’m sorry sir, I won’t fly SAA again. After flying SAA exclusively for 15 years before that, I used up my Voyager miles after that and since then have not flown SAA again if I had any other choice. No other airline has ever given me the same grief over the same items of carry-on luggage.

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