SA Express: Now Also Under Business Rescue
Ricky Klopper
Director at Klopper Attorneys Inc.
ricky@klopper.co.za
South African Express Airways SOC Limited (“SA Express”), South Africa’s other state-owned airline, was placed under business rescue on Thursday last week. Unlike in the case of the widely publicised business rescue of South African Airways, which was voluntarily placed under business rescue through a resolution of its board in December last year, SA Express was placed under business rescue by an Order of the Court after Ziegler South Africa (Pty) Ltd (“Ziegler”), one of its creditors, had urgently applied to the High Court to do so. This order may therefore be seen as ground-breaking, in that it is the first time that a state-owned company has been placed under business rescue by an Order of Court. This sets an interesting precedent which, if one considers the number of state-owned companies facing financial difficulties, may certainly be followed in future. Below I briefly point out some of the most important parts of the judgment.
In terms of section 131 of the Companies Act 71 of 2008, the substantive requirements to successfully apply to Court to have a company placed under business rescue are: (i) the application must be made by an affected person (such as a creditor, shareholder or employee) ; (ii) the court must be satisfied that either (a) the company is financially distressed; (b) the company has failed to pay over any amount in terms of an obligation; or (c) that it is just and equitable to place the company under business rescue for financial reasons; and (iii) there must be a reasonable prospect of rescuing the company.
The Court held that Ziegler, as a creditor, was an affected person despite SA Express’s allegations that Ziegler’s claim against them was disputed on the basis that the contract awarded to Ziegler was potentially irregular. The Court rejected this argument by SA Express as they had failed to substantiate this claim. It was further common cause that SA Express had failed to honour their obligations in terms of their contract with Ziegler.
The Court also held that it was beyond dispute that SA Express’s 2019 financial statements indicated that the company was factually and commercially insolvent, and “paint[ed] a picture of an entity in a dire financial crisis”.
The Court as therefore of the view that requirements (i) and (ii), as I have set them out above, were unequivocally met.
Regarding the third requirement, Ziegler had averred in their application that there was a reasonable prospect of rescuing the business, or alternatively that a business rescue would provide creditors with a better return than would be the case in a liquidation. Ziegler claimed that whilst SA Express is currently reliant on taxes, government guaranteed debt and resources from outside the aviation industry, it is inconceivable that the company would not be able to trade profitably if properly managed.
SA Express on the other hand, contended that Ziegler had not demonstrated the existence of a reasonable prospect that either of the objectives of business rescue could be achieved and that its case was based on mere speculation and was merely a precursor to liquidation.
The Court pointed out that a reasonable prospect as envisaged in the Companies Act requires a cogent evidential basis and found that Ziegler had put forward such a basis with reference to the Auditor General Report on SA Express’s failures, which had pointed out poor corporate governance and operations, irregular and wasteful expenditure, among other things, as the main causes of its demise.
The Court concluded that the applicant had demonstrated a reasonable prospect of saving the business or at the very least that it would be in the interests of justice and the public interest to afford business rescue practitioners the opportunity to formulate a business rescue plan.
SA Express have indicated that they intend on appealing this decision.
An aside:
In the recent High Court judgment of Gupta v Knoop N.O and Others, the BRPs of certain companies were removed from their positions due to a failure to investigate and report on the irregular conduct of past directors to the authorities. In terms of the stringent requirements of that judgment, the BRPs of both SA Express and SAA will be duty bound to investigate and report on the past mismanagement of these companies. It will be interesting to see whether and to what extent the BRPs will be subject to this requirement considering both of these companies’ well-known histories.
This post has been amended.
