SAA business rescue holds lessons for other state-owned enterprises

In view of the dire state of SA’s state-owned enterprises (SOEs), it comes as no surprise that there is heightened interest in not only the outcome of the SAA business rescue but also in whether such proceedings, as a process, are a workable solution for SOEs in general. The objectives of business rescue are either to return a financially distressed company to solvency or, if that is not possible, to provide a better return to creditors or shareholders than would be achieved from immediate liquidation of the company.

With this in mind, the critical question often asked is whether business rescue proceedings are a viable option for financially distressed SOEs. There are some key takeaways to be distilled from the SAA business rescue process.

The process has already left its mark on employment law relating to business rescue. The first notable contribution is that of the labour court in National Union of Metalworkers of SA (Numsa) vs SAA (in business rescue) & others, which was confirmed on appeal.

These judgments firmly establish that a business rescue plan is a necessary precondition for any retrenchment processes under the Labour Relations Act during business rescue proceedings. The courts further confirmed that, in the absence of a business rescue plan contemplating retrenchments, the issuing of retrenchment notices is premature and procedurally unfair.

NEED FOR SPEED

The upshot is that when dismissals based on operational requirements are necessary, business rescue practitioners will be required to prepare and present business rescue plans swiftly and without delay.

This may pose challenges, especially in the case of SOEs with complex businesses and operations. In such instances, it is unlikely that a business rescue plan will be published within 25 days of the appointment of the business rescue practitioner, as contemplated in section 151(5) of the Companies Act.

Another key judgment of the labour court in the SAA business rescue process, again involving Numsa, was its confirmation that only the high court is empowered to uplift the general moratorium on legal proceedings provided for in section 133 of the Companies Act. As such, employees who wish to commence legal proceedings in the labour court against an employer that has been placed in business rescue must do so in accordance with the provisions of section 133, by obtaining written consent from the business rescue practitioners or leave from the high court.

The key takeaway from the

SAA business rescue process is that maintaining a constructive relationship with employees and organised labour is critical to the success of the process. Standoffs with trade unions and employees, as we have seen in the case of SAA, are a significant impediment to the rescue process, resulting in delays and unnecessary costs.

Post-commencement finance is also critical to the effective rescue of any financially distressed company. Therefore, a key component in every business rescue plan is securing turnaround finance to meet the company’s working capital requirements and restructuring costs, among others.

Given the circumstances surrounding postcommencement finance, section 135 of the Companies Act provides a level of statutory protection to postcommencement financiers, such that they rank as superpriority creditors and enjoy a preference over the company’s pre-rescue creditors. Postcommencement finance can be obtained from various sources, including the company’s existing lenders (the banks), the shareholders, private equity providers and third-party acquirers of the company.

In the case of SAA, to date a large part of its funding has been provided by the government, as sole shareholder. However, obtaining government funding is challenged in light of the ever-increasing demands placed on the strained fiscus.

POLITICS

SOEs therefore may have to seriously consider alternatives to government funding: privatisation through private equity investments and/or debt equity swaps with creditors. Political considerations play a major role in this determination, taking into consideration the case made for the public ownership of state assets.

Another unique feature in the context of business rescue proceedings involving SOEs is the Public Finance Management Act, which is aimed at regulating financial management in the government. Business rescue practitioners are required to comply with the provisions of both the Companies Act and the Public Finance Management Act for the duration of the process.

Yet the provisions of the two acts are sometimes at crosspurposes. For instance, the public finance act provides for certain procedures to be adhered to and authorisations that must be obtained by SOEs when alienating or encumbering state assets or concluding agreements involving future financial commitments. These provisions of the act may, in certain circumstances, be incongruent with the extensive management powers afforded to business rescue practitioners under the Companies Act.

All considered, business rescue proceedings remain an attractive option for financially distressed entities that seek a fresh start as solvent entities, while preserving jobs and their place in the market.

MAINTAINING A CONSTRUCTIVE RELATIONSHIP WITH EMPLOYEES AND ORGANISED LABOUR IS CRITICAL TO SUCCESS

● Levenstein is director and head of insolvency, business rescue & restructuring practice at Werksmans Attorneys.