- Judge Roland Sutherland’s judgement on SAA vs Moneyweb Holdings, BDFM Publishers and Media 24 Holdings on Thursday December 17
- The minutes of the presentation SAA gave to Parliament
- And the document you were prevented from seeing: the legal opinion of Ursula Fikelepi to the SAA board. Fikelepi, SAA’s General Manager of Legal, Risk & Compliance, compiled the document explaining what steps SAA should have taken regarding the Airbus transaction, in light of the Companies Act.
Below (scroll past video) is the article first published on November 23 2015, that had to be removed in terms of an interim court order that South African Airways (SAA) got in the early hours of November 24.
Judge Roland Sutherland set aside the order on Thursday morning, which means Moneyweb can now publish this explosive document freely.
SAA did not only gag the media, but also failed to deal with the material information contained in the interdicted document during its appearance before the Parliamentary Portfolio Committee for Finance on November 18.
Former finance minister Nhlanhla Nene rejected the amended transaction as proposed by the SAA board, but Nene has since been removed from his post by President Jacob Zuma. Commentators argue that Nene’s decision regarding the SAA deal might a played a big role in his departure.
After huge currency and market movement following Nene’s removal, Zuma appointed former finance minister Pravin Gordhan to the portfolio. Gordhan has stated publicly that Nene’s SAA decision stands and SAA was instructed to revert to the so-called Swap Transaction with Airbus. He said he would engagement with the board in this regard. This would be one of his first priorities since he assumed office on Monday.
Airbus has given SAA until Monday December 21 to exercise whichever option it decides on.
The SAA board has not yet indicated publicly what it will do. The article below spells out the disastrous effect, should the SAA board defy Gordhan and fail to implement the Swap Transaction with Airbus.
Moneyweb Editor Ryk van Niekerk comments on the interdict being lifted:
This is the article that SAA tried to prevent us from publishing:
SAA’s legal head advised its board earlier this month to urgently file for business rescue or, if it sees no realistic prospect of successful business rescue, for liquidation.
“SAA is financially distressed and currently trading under insolvent circumstances and consequently trading recklessly,” according to a report, prepared by SAA General Manager Legal, Risk and Compliance Ursula Fikelepi. She and former acting CEO Thuli Mpshe signed the report, dated November 6.
SAA failed to respond to several questions Moneyweb put to it about the report, including whether content was disclosed to finance minister Nhlanhla Nene and the Parliamentary Portfolio Committee on Public Enterprises.
The report deals with the impact of two letters from Airbus dated October 2 and 26 about outstanding pre-delivery payments for aircraft ordered earlier that are due to the company.
According to the report, former CFO Wolf Meyer told the airline’s executive committee (exco) on October 20 that SAA did not have enough cash to make these payments as well as its other payments “currently due and payable”.
Fikelepi was subsequently asked by the exco to explain SAA’s legal position under the Companies Act in the light of Meyer’s statement. The board was notified of her opinion and “the urgency to address the correspondence (from Airbus) and any triggering events and actions.”
The “triggering events” Fikelepi refers to in the report, relate to the possibility of a default on the Airbus payments, that may trigger clauses in other funding and lease agreements and could result in other funders and lessors accelerating payments due by SAA. “If any one party takes action to enforce its rights, that could lead to action by other parties – and once such action starts, it can be very difficult to halt things and restore order,” Fikelepi states.
From the report it is clear that SAA’s immediate predicament is the result of the board’s decision not to ratify an agreement approved by Nene and signed on July 31 by then acting CEO Nico Bezuidenhout and Meyer, that would see SAA relieved of its earlier obligation to buy ten A320 aircraft, in favour of a lease of five A330-300 wide-body aircraft from Airbus.
The board decided to rather propose a differently structured deal directly to Airbus, the report states. This refers to a decision to rather lease the aircraft through a local company.
The understanding was that the agreement signed by Bezuidenhout and Meyer would replace the initial purchase agreement. In light of the board’s rejection of the renegotiated deal, Airbus is apparently now demanding pre-delivery payments from SAA as agreed upon in the purchase agreement. This was the subject of the letters from Airbus.
According to the report the payments were due on June 1, August 1 and November 2 and Airbus claimed performance of the “overdue amounts and reserving all rights and remedies under the purchase agreement and at law.”
If the pre-delivery payments of $17 million were made on October 23, SAA would be left with very little cash at the end of October, the report states. It refers to a cash forecast that indicates, “from 9-16 November 2015 SAA will have no more cash available.” This, while a loan repayment was due on November 10.
Previous forecasts apparently showed that even without the pre-delivery payments SAA would have run out of cash by the end of November.
The airline’s financial statements for the year ended March 31 have not been signed off, as it is not a going concern. While the R14 billion government guarantees to the airline still have room for R3 billion of further borrowings, funders are reluctant to extend further credit in view of a perception of increased risks, the report states.
SAA has 30 days to rectify breach of the Airbus contract. If that is not done, Airbus may cancel all or parts of the agreement. If it decides to enforce it rights, and issue a Notice of Default, other funders and lessors may demand accelerated payments or cancel their agreements. “All could trigger further financial distress and/or insolvency for SAA,” according to the report.
SAA will be at risk of forfeiting payments already made and facing claims for damages.
According to the report, a company is financially distressed in terms of the Companies Act, when it cannot pay all of its debts as they fall due in the following six months or become insolvent in the same period.
If a board has reasonable grounds to believe a company is financially distressed but fails to apply for business rescue, it has to notify the affected person, including creditors, of the reasons for its decision. Affected persons can then apply for a court order to place the company under business rescue.
Fikelepi says if SAA continues incurring debt while there is no reasonable prospect of creditors being paid on time, it is trading recklessly or negligently in terms of the Companies Act.
She says SAA’s dilemma could lead to a call on the government guarantee as well.
She warns that failure to take action in terms of the Companies Act, may expose directors to the risk of fines and/or imprisonment of up to 12 months.
The recommendation includes a request to government for equity injections, sale of shares or other funding mechanisms, the finalisation of the decision regarding the lease agreement with Airbus, negotiations with Airbus to suspend SAA’s obligations in terms of the earlier purchase agreement and the establishment of a transaction team to finalise the lease agreement.
While SAA failed to respond to Moneyweb’s questions, insiders have told Moneyweb that the board was “very unhappy” with the report.
Since the report was tabled on November 6, Meyer and non-executive board member Tony Dixon have resigned and Mpshe has been removed as acting CEO.