EXPLAINER | Here's what could happen if SAA is liquidated

A South African Airways aircraft on the apron of Frankfurt Airport in 2018.
A South African Airways aircraft on the apron of Frankfurt Airport in 2018.
Silas Stein/picture alliance via Getty Images
  • The clock is ticking for the DPE to try and find a suitable strategic equity partner for the airline. 
  • This partner would have to be willing to put in at least R10.3 billlion as a start, to implement the rescue plan - and the airline would likely still run at a loss for some time. 
  • Employees' contracts are automatically suspended on granting of a liquidation order - no work and no pay. 
  • Liquidation could also result in an insolvency inquiry - "a very powerful means of subpoenaing documents and interrogating witnesses", which could mean a detailed probe into the reasons for the airline's failure.
  • The business rescue plan states that the liquidation process could take years. Post-rescue commencement creditors are likely to only receive their final dividend after several years, while concurrent creditors will not receive a dividend. The liquidator would be entitled to an estimated R369 million based on the realisation of the assets.


Could the "unthinkable" happen and South African Airways be liquidated after all?

The Department of Public Enterprises issuing a statement on Thursday morning to discourage the state-owned flag carrier's creditors - which includes employees - from making any decisions that could lead to the winding down of the national carrier and disposing of its assets.

But the question lingers.

On 25 June 69% of creditors voted for an adjournment until 14 July to vote on a proposed business rescue plan, with unions saying they wanted more time to come up with a better plan.

The clock is ticking for the DPE to try and find a suitable strategic equity partner for the airline. This partner would have to be willing to put in at least R10.3 billion – as a start - to implement the proposed plan, which still foresees the airline continuing to operate at a lost for a few years to come.

But what would it mean if no other option remains for the practitioners but to "discharge" the business rescue process and open it up for either themselves or a creditor to apply for liquidation?

Firstly, employees' contracts are automatically suspended upon the granting of a liquidation order - no work and no pay. Employees of SAA have in any event not been paid since May this year.

According to aviation economist Joachim Vermooten, SAA's assets mostly comprise its investments in Mango, SAA Technical (which also owns some properties), Air Chefs, as well as A340 four-engine, wide-body aircraft, components and engines as well as trade debtors and some cash deposits.

Furthermore, SAA leases most of its aircraft and, accordingly in a liquidation, there will likely be limited assets which can be realised for distribution to creditors. The rescue plan also foresees that concurrent creditors will receive nothing in the case of a liquidation.

This is not the case for four big banks who have their total of R16.4 billion in loans to the airline guaranteed by government. In liquidation, government will likely be called on to honour these guarantees.

Insolvency enquiry

Alex Eliott of Eliott Attorneys says it is also possible that the liquidators or major creditors might insist on an insolvency inquiry, in order to investigate the reasons for the failure of SAA.

"The insolvency inquiry mechanism is a very powerful means of subpoenaing documents and interrogating witnesses. If the evidence revealed in the enquiry is sufficient, the liquidators or the creditors may institute claims against the recipients of funds or property or institute claims against the directors for reckless trading," says Eliot.

"In the event that the unions’ claims of systemic fraud and corruption throughout SAA and its subsidiaries are justified, a liquidation could be viewed with some trepidation by some of the former board members and managers within the SAA group."

The ambit of the inquiry could even extend to SAA's subsidiaries Mango, SAA Technical and Air Chefs. By contrast, there is no mechanism for such an inquiry in business rescue.

Zero dividend either way?

A concurrent creditor of the airline, who wants to remain anonymous, says it is probably true that concurrent creditors will receive zero in a liquidation, but in his view, concurrent creditors' position in the business rescue plan is no different to that of a liquidation based on the business rescue practitioners' own version.

"The plan provides that concurrent creditors will be paid 7.5 cents in the rand over a three-year period, but if you interrogate the plan in further detail it is evident that the plan is conditional. There are at least two conditions that legally cannot be met by 15 July 2020 - one from a labour legislation perspective and the other from a Parliamentary process perspective," says the creditor.

"The financial forecasts prepared by the business rescue practitioners indicates that SAA will continue to trade commercially insolvent post-rescue and will in any event not be able to pay concurrent creditors in the absence of further assistance from taxpayers."

In the view of the creditor, the plan presents concurrent creditors only with "a conditional promise of something in the future" and given the airline's past performance, will could very well end with concurrent creditors getting zero, just as would be the case if the airline is liquidated.

Long process

In the proposed rescue plan, it is stated that, given the complexity of SAA, it is likely that a liquidation would last longer than two years. It states that post-rescue commencement creditors are likely to only receive their final dividend after several years, while concurrent creditors will not receive a dividend.

In liquidation, employees would be entitled to receive a maximum amount of R32 000 per employee to the extent that there are funds available. Employees will only receive payment once the final liquidation and distribution account has been approved at the end of the liquidation process, which can take up to 24 months.

The estimated fees a liquidator would be entitled to, as calculated by PwC, is approximately R369 million based on the realisation of the assets.

ZAR/USD
17.38
(-0.05)
ZAR/GBP
22.72
(-0.10)
ZAR/EUR
20.56
(-0.12)
ZAR/AUD
12.45
(-0.12)
ZAR/JPY
0.16
(-0.19)
Gold
1942.90
(+0.07)
Silver
26.42
(+0.07)
Platinum
941.16
(+0.46)
Brent Crude
44.74
(-0.36)
Palladium
2104.73
(+0.41)
All Share
57077.48
(-0.60)
Top 40
52737.48
(-0.65)
Financial 15
10156.41
(-0.69)
Industrial 25
75107.47
(-0.84)
Resource 10
58926.78
(-0.40)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1005 votes
It depends on how the funds are used.
74% - 6753 votes
No. We should have gotten the loan elsewhere.
15% - 1418 votes
Vote