Unpacking SAA’s crisis

What it means for the airline now that it has been placed into business rescue.
The aim of business rescue is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down. Image: Shutterstock

South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.

What is a business rescue?

It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the US’s Chapter 11.

South Africa’s process is set out in Chapter 6 of the Companies Act, which came into effect in 2011. It indicates what needs to be applied when a business is in distress.

What’s the aim?

The aim is to address distress in a business when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore; when it has major problems. Like a sick person. You have to see a doctor when you’re sick.

The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.

In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.

It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.

SAA has accumulated unsustainable levels of debt.

When should business rescue be sought?

The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. Research shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.

How is a company placed in business rescue?

The directors file through a procedure under the Companies and Intellectual Properties Commission, which then confirms the appointment of a rescue practitioner and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior.

The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.

Read: SAA rescue supremo faces long to-do list

The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.

The rescue practitioner must also meet with the employees.

When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up.

If there’s no agreement, the business must go into liquidation, and be shut down.

But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.

Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.

What happens to the directors during the process?

Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions.

They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan.

And the employees?

Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.

The airline is a state-owned enterprise. Has one of these ever been put through this process before?

Not that I know of. I believe that this is why there was so much hesitancy to do it.

In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, asked the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline.

I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business?

As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.The Conversation

Marius Pretorius, associate professor in strategy, leadership and turnaround, University of Pretoria.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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There do seem to be parts of SAA that can be saved, eg mango.

But the bulk of it seems unsalvageable.

Very hard to see why 75% of creditors would want to keep any loss making operations in the air. Even with govt guarantees.

I don’t think that anybody outside of SAA has enough information to determine whether Mango could actually operate profitably and sustainably, independently of its parent. We don’t know whether it has favourable leasing conditions for equipment, or favourable technical services arrangements with SAAT – just to name a few pieces of the puzzle. I’d be wary of lauding the success of Mango when it’s born of SAA.

I do trust that the qualified staff will find suitable meployment in other airlines!!

Pilots yes, but the coffee dispensers??? No they have enough already, taking them on puts them in the same position as SAA…way over staffed.

how many stewards does it take to serve coffee?

Millions of coffee shops and vendors around – what are they thinking getting 13th cheques from our taxes!
Biggest fear is the R4bn is used for MORE fat cats like these – is the business practitioner who doesn’t work for free INCLUDED or EXCLUDED in the R4bn?
If not, wait for this amount to balloon..m

The former CEO Dudu Muyeni had a teaching diploma and initially worked in the HR department. And then we wonder why this man made disaster happened.

Dudu Myeni was not the CEO, she was the board chairperson, it’s very different role.

You are right Ssbird, but she acted as if she was the CEO and the whole board of directors. She deliberately excluded the rest from decision making.That means she has to take the responsibility for it.

“The Tyranny of the Majority” … coined in 1849 and precisely describes the fate of us all in SA. Everything that was successful is being destroyed by ineptitude. The ANC parties on regardless …

There is a business. Problem 1 Taking fully charge of the business. 2 Cutting costs by reducing payroll costs either by letting employees go or them all taking a substantial pay cut. I don’t see this happening, so within 25 days the business rescue practitioner’s view should be that without above at least, the business is not viable and should close. Lol, let’see how long this exercise takes and how professional the practitioner is.

Wouldn’t it be great if the rescue practitioner can go beyond the directors of an SOE, to sanction the institution, the “shareholder”, the politician actually, who appointed the board as a front for himself? Let’s cut through the smoke and mirrors. The SOE’s are managed directly from Luthuli House. The individual boards are a farce, or a front, an excuse to reward cadres.

The crowd in Luthuli House forms the actual board at all SOE’s. These people are delinquent directors. They should be held personally responsible for the debt and job losses. The entire country should be put under business rescue in other words.

That’s where the IMF will have to come in at some point (if allowed). They are the business rescue practitioners for failed countries.

It is obvious that all the directors are delinquent, should be declared as such and then be held liable for the costs.

What I suspect though is that the shareholder (Pravin and his boss) is more delinquent than any of the directors and with their interference directors probably had no choice in the matter and were forced to break the law by operating a company that is not a going concern.

The fact remains that what has happened here is illegal. Why would the directors have asked for the company to be liquidated and then Pravin and his boss jump in to change it to business rescue? If the shareholder can override the board there should be provision somewhere in the law for him ( in this case them ) to be held liable.

They need to liquidate this thing quickly as it is going to cost the taxpayer BILLIONS.

mmmm…..so the biggest creditor is government…..Gordhan will still dictate according to his socialist ideas

Uhmmm… No, government can’t be the biggest shareholder and creditor at the same time.

maybe that’s why Gordhan can call the newest bailout “fiscally neutral” ……. : )

Why do you imagine that a shareholder cannot also be a creditor? Shareholders can and do make loans to investee companies, whilst also holding equity. In fact, many shareholder loans are extended pro rata to equity ownership, in which case the largest shareholder would also hold the largest loan balance…

The government did not loan the money but rather guaranteed the loans. They are therefor not a creditor.

Lost in all the discussions is the hard fact that globally, the airline industry has been in trouble for years.

It is becoming increasingly competitive and facing environmental pressure while operating costs, particularly fuel, keep rising. The efforts of Boeing to keep costs down that culminated in the new, big engines → different handling → (faulty) stabilising software → 747 MAX crashes is a symptom, as is the displacement of travel agents by internet search-&-book apps.

In this environment big is better and only the most efficient first-class business or subsidised survive. To expect a “whatever-the-ANC-runs-it-ruins” deployed-cadre parasite to compete in these conditions is ridiculous.

The only viable response is to shut SAA down and possibly to divert the subsidies to the (private enterprise) taxi industry to ameliorate some of the effects of spatial apartheid. The SAA employees who deserved their jobs will find work elsewhere.

I agree with the first part of your comment in that the global airline industry as a whole suffers extreme pressures, including cut throat competition. There is no strategic imperative for South Africa to have “it’s own airline” as there are plenty of foreign carriers willing and able to take up the slack. This situation extends to the local sector.

The second part of your comment, that of subsidising the taxi industry, I disagree with vehemently. Who is to say that the taxi owners won’t just pocket the cash and there is no change in the quality of service offered or the dire state of operational vehicles. By providing subsidies to an interest group I assume there must be conditions attached. Those conditions are only effective if they are policed effectively. The government has demonstrated, repeatedly, they are incapable of and/or politically unwilling to do that job.

End of comments.

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