SAA: business rescue not the panacea
Hours after news broke that SAA would go into business rescue in essentially the last throw of the dice to save the ailing airline, the government went all out to justify the move.
In the justification of the decision, SAA’s shareholder also spelt out its expectations from the business rescue process that is going to unfold.
Public enterprises minister Pravin Gordhan says business rescue is the optimal mechanism to restore confidence in SAA and to safeguard its assets. He says the process will restructure the airline and reposition it into a stronger and sustainable entity that can grow and attract an equity partner.
The loss-making SAA has a much-needed reprieve and a shot at survival. But business rescue is no panacea for the airline’s problems.
According to the June statistics of the department of trade & industry’s Companies and Intellectual Property Commission, 3,298 distressed entities entered the business rescue process in the eight years to June 1 2019. Of these, 1,275 are still under administration, 400 were liquidated and a paltry 571 were substantially turned around. That is a low success rate.
In terms of the Companies Act, business rescue is meant to facilitate the rehabilitation of a financially distressed company. It is a relatively new phenomenon in SA and became part of the act in May 2011. It throws a lifeline to distressed companies teetering on the brink of insolvency. Before the introduction of business rescue, the only other option for such firms was liquidation.
The construction industry has had the misfortune of seeing many of its once-glorious giants slip into business rescue. These include Group Five, Basil Read and Esor Construction.
SAA has the unwelcome distinction of being the first state-owned company to go into business rescue. That makes the rehabilitation of the airline different from other business rescue processes seen in the country before.
There are already question marks about whether the government, SAA’s shareholder and funder, can step aside and let business rescue practitioner Les Matuson get on with the job.
Judging by Gordhan’s utterances, the government has already put its desired outcome out there. This is before Matuson has come up with a business rescue plan. Will the shareholder give Matuson space to consider all options that will be of interest to the airline’s stakeholders, including employees and creditors?
Lawyer Alex Elliot of Blackbox Law says the decision to go into business rescue should be taken by the board, not the shareholder. That suggests that in the SAA case the government is an overbearing shareholder who controls the board, Elliot says. He hopes that the vastly experienced Matuson will not feel beholden to the shareholder to the exclusion of other stakeholders.
Given the low success rate in SA, is business rescue delaying the inevitable?
Elliot says a successful business rescue is possible but requires tough decisions. Without doubt, it often requires restructuring, which entails selling off assets. But, most importantly, it necessitates a change in mindset because 90% of the time businesses fail because of poor management decisions. This often requires business rescue practitioners to examine the entity’s business model and management culture.
IT NECESSITATES A CHANGE IN MINDSET BECAUSE 90% OF THE TIME BUSINESSES FAIL BECAUSE OF POOR MANAGEMENT DECISIONS
While statistics suggest that very few companies come out of business rescue stronger, there are cases where the process has been reinvigorating.
Esor’s business practitioner, Hans Klopper of BDO Business Restructuring, says the construction company was placed in business rescue in August 2018. At the commencement of its business rescue proceedings Esor had about 1,200 employees. Many of those employees were on the verge of being retrenched. The company was under severe financial stress because of onerous contracts which were incomplete.
A year later, Esor is possibly the only large construction company that has undergone a restructuring and is still trading.