Business rescue and SAA: A last lifeline before liquidation

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The board of flag carrier South African Airways has confirmed that it has adopted a resolution to place the struggling carrier into business rescue.  

This follows the leaking of a letter on Wednesday evening from President Cyril Ramaphosa to Cabinet stating that the national airline must enter voluntary business rescue, which brought months of speculation about how the state would try to save the cash-strapped airline to a close.

Ramaphosa's remarks were included in a letter signed by presidency director-general Cassius Lubisi, which was dated December 4. In the letter, Lubisi writes that business rescue is the only 'viable route" to stop an "uncontrollable implosion" of the airline.

SAA, meanwhile, in a separate statement on Thursday morning said that the decision to enter business rescue was the considered and unanimous conclusion" of the board in order to "create a better return for the company’s creditors and shareholders". The department of public enterprises said business rescue was the "optimal mechanism to restore confidence in SAA". 

But what does business rescue mean?

According to the Companies Act of 2008, if a company cannot pay its debts and risks becoming insolvent within six months, its board can apply for it to be placed in business rescue, or a court can order it.

The goal of a business rescue application is to help the company get back on its feet and continue trading and operating. Under liquidation, on the other hand, a company's assets are sold off and it is shut down.

Once a company has been placed in business rescue, a business rescue practitioner is appointed with wide-ranging powers. The company's board, usually its highest decision making body, must run all its decisions past the practitioner, who assumes "full management control of the company".

Investigate, develop, implement 

The role of the practitioner is, according to the act, to first investigate whether there is a prospect that the company can be saved, and then to develop, publish and - if approved - implement a rescue plan.

Cape-based law firm Herold Gie Attorneys previously told Fin24 that business rescue provides a financially distressed company with the opportunity to restructure and pay its creditors and save jobs, while it continues to trade as an economically contributing entity.

"The act also offers a ‘moratorium’ on legal proceedings or liquidation procedures against any company that is in business rescue," he told Fin24.

This point was stressed by trade union Solidarity in mid-November, when it announced that it had lodged an application to have the airline placed under business rescue. While Solidarity was not mentioned in Wednesday's letter, its chief operating officer Dirk Hermann said on Wednesday evening that its application had forced the state's hand.

Hermann added that Solidarity's legal team will be meeting with SAA and government ministers on Thursday morning to plot a way forward.

Crafting a plan 

According to the Companies Act, if a practitioner believes there is a prospect to save the company, he or she must publish a business rescue plan after consulting with creditors, the company's management and other affected persons - which is the case of SAA will likely include the department of public enterprises. After the pan has been published, the practitioner must call a meeting of creditors and entities with voting rights to decide whether or not to move forward with the plan. 

According to Phatshoane Henney Attorneys, business rescue can be described as a last lifeline before liquidation.

"Business rescue compared to liquidation provides for the company’s debt to be managed and contracts restructured and reorganized in order for the company to continue to trade on a solvent basis rather than selling off all of the company’s assets and the company being shut down as in the case of liquidation," it said in an opinion.

"The business rescue process is therefore a last lifeline to try and turn a company around before it has to close its doors when liquidated."

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