Business rescue plans for SAA: Engagement with Public Enterprises Ministry & Business Rescue Practitioners
Public Accounts (SCOPA)
15 May 2020
Chairperson: Mr M Hlengwa (IFP)
[LIVE] Public Enterprises Minister Gordhan briefs SCOPA on SAA, SA Express
The joint committee discussed the business rescue plans for SAA. It was briefed by the Department of Public Enterprises, the Ministry and the business rescue practitioners.
MPs were informed that SAA was unable to meet its financial obligations including payment of salaries. The Department assisted management to put in an application to the UIF for the payment of salaries. There was a partial payment via the UIF to the employees. The business was in a difficult position to show that it was still operational. The Minister stated that the covid-19 pandemic had a devastating impact on the aviation industry both globally and locally. South African Airways had felt the sting of the pandemic and the closures of international borders. The Minister also confirmed that the business rescue practitioners had not produced a business rescue plan. The Department had received a draft business plan but rejected it because it was extremely inadequate. The court action taken against SAA was also discussed. The court action arose from the business rescue practitioners wanting to proceed with the retrenchment process without a business rescue plan. The court ordered that the business rescue practitioners must present a business rescue plan before beginning a retrenchment process.
The business rescue practitioners highlighted the development of the business restructuring plan, the business restructuring plan timeline, the contents of the draft business restructuring plan, the utilisation and management of funds and the key actions taken by the business restructuring practitioners to date. The impact of covid-19 was also discussed. The business rescue practitioners stated that a “winding-down” option would be the one suggested over the restructuring option.
The Committee was concerned by both presentations. They were aware that SAA was already in trouble when it was hit by the impact of the covid-19 pandemic. The Committee held a very dim view on delays and the business rescue practitioners needed to be aware of that. The Committee stated that the constant shifting of goal posts was unacceptable. The South African Airways headache cannot continue to be a permanent feature of the South African discourse. Some members of the Committee queried whether liquidation was still an option and what was meant by “winding-down”? The Committee also wanted to know how much was spent on the fees of the business rescue practitioners? The Committee was also concerned that the business rescue practitioners had overstepped their mandate as they were not put in place to oversee the liquidation process or run an airline. More information was asked to be provided on the new airline, suggested by the Department, and how much this new airline would cost.
The Minister said that it was petulant for the business rescue practitioners to suggest a “winding-down” process when they did not receive the funding they requested from Government. The Committee was informed that from 1 May all employees of South African Airways were on unpaid leave as the entity was unable to pay the salaries of their employees. The Minister confirmed that Government would not accept liquidation as an option. It was the business rescue practitioners’ responsibility to create a credible plan that presents different possible options. The outcome must be a viable and solvent business. The Minister asked how can the business practitioners justify taking R5.5 billion and spreading it over 162 days and not having a credible business plan for a viable business to emerge? The Minister shared the concern that the business rescue practitioners had not stuck to their deadline of 25 days. The Minister revealed that over four months the two business practitioners had been around paid R30 million. The Minister also agreed that the business rescue practitioners had overstepped their mandate and that they were not put in place to run an airline.
The Chairperson said that the meeting would be about staffing matters and for the Committee to receive an update on the state of affairs at SAA. The business rescue practitioners were supposed to have completed their work by 6 March and extensions were then applied for. SAA was faced with court action and tough decisions lay ahead. The Minister of Public Enterprises would explain some of the decisions that were taken. The business rescue practitioners had wanted R10 billion and Government had made a decision on that matter. That decision was to be further explained to the Committee. The focus of today’s meeting would be on SAA. There were also some outstanding matters that arose out of the previous meeting and the Minister should address those matters in his presentation.
Briefing by the Minister, SAA & Department
Mr Pravin Gordhan, Minister of Public Enterprises, began the presentation by responding to the concerns set out in a letter sent by the Committee. The letter first requests that the Department report back on the matters that arose on the 19 February meeting. Secondly, there was supposed to be a business rescue plan that the Department had to present to the Committee on 6 March and the Department will provide an update on that. It was also requested that an update be given on the impact of the Covid-19 pandemic, both internationally and in South Africa. With respect to SAA in particular, the letter made reference to bailouts that have been provided in the past. The Department sent the Committee a pack of information which gives the history of the bailouts and contributions from the fiscus. The letter also asked how much SAA needs? Work still needed to be done on how much a new airline might need. The letter also made reference to a legal opinion within SAA. The Committee also requested information on the developments in SA Express. There would be a separate presentation given by the business rescue practitioners.
The Minister said that he would also address the non-business rescue matters first and then move on to the business rescue process itself. There was a misrepresentation of the meeting on 18 February. It was suggested that the Department muzzled the business rescue practitioners. The Department was telling the Committee that the work of the business rescue practitioners was incomplete. The investigations that they were required to do, in terms of Chapter Six of the Companies Act, was not completed and it was decided that the Department give them more time to do their work. The Department was fully committed to present a business rescue plan to the Committee as soon as it was available.
Ms Thandeka Mgoduso, Acting Executive Chairperson, SAA, provided the outlook of the board on the legal opinion. The legal opinion addressed itself to whether the directors of the board were trading recklessly or not. It was important to understand the situation that the board and company was in. The rationale why it took so long to prepare and table the accounts would be addressed by the Chair of the Audit Committee.
Mr Akhter Moosa, Chairman, Audit Committee of SAA, said that the legal opinion that SAA sought was around the reckless trading carried out by directors because of the short term nature of funding that was made available on the back of sovereign guarantees of the shareholder. It was not a legal opinion on whether SAA should or should not submit financial statements.
The Minister then proceeded to address the issue of bailouts. He read out a table stating the guarantees and cash injections SAA received between 2003 and 2020. A total of R31.243 billion was given to SAA in the form of cash injections. A total of R19.114 billion of guarantees was given to SAA.
Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said that the business rescue practitioners had requested the liquidation of SA Express….[His connection was too poor for him to continue]
Mr Kgathatso Tlhakudi, DG, DPE, said the business was placed into provisional liquidation on 28 April 2020. The business was unable to meet its financial obligations including payment of salaries. The Department assisted management to put in an application to the UIF for the payment of salaries. There was a partial payment via the UIF to the employees. The business was in a difficult position to show that it was still operational, which was a requirement for it to still receive additional assistance. The liquidator was in charge of the liquidation process going forward. This would ensure that financial liabilities are dealt with.
The Minister proceeded to give an update on how the Covid-19 pandemic has had a significant impact on the international and national aviation industry. The pandemic has had a significant impact on the aviation industry as many countries are on different levels of lockdown. These lockdowns have had an impact on economies all over the world. One of the dimensions of lockdown has been the closure of borders. The closure of borders has resulted in the restriction of international and domestic travel. The impact has been devastating globally. Major airlines have plans that are grounded and parked off. There has been the grounding of international flights. The financials of airlines have also been impacted. Aviation is a narrow margin business. Airlines all over the world are requesting financial assistance from their respective governments. There has also been an impact on employees. Some have been laid off or on leave from their jobs in one way or another. Some employees are only having a portion of their salaries paid while others are on unpaid leave. The restart of the aviation industry will be slow. It depends on the opening of international borders and since every country is at a different level of lockdown this will happen incrementally. Fear of travel will impact on the load carrying factor of each aircraft as social distancing might still need to happen. This will in turn increase the price of tickets. Another challenge facing the aviation industry after the covid-19 pandemic will be the reluctance of people to travel. Business will have to be done in a new way. It will take about three years for the aviation industry, globally, to recover. SAA was suffering due to the lockdown. Only in lockdown level 2 will domestic travel be allowed. The pandemic has also had a devastating impact on tourism. The question arises when will people across the world be comfortable to travel? The impact of the pandemic was changing every week. The Department would provide the Committee with the updated information in a couple of weeks.
He then commented on the business rescue process. There were a few issues that he wanted to emphatically clear up so that there was no misunderstanding. Government intended for some time to enter into a restructuring process for SAA which would enable it to become more financially viable, more competitive but also less dependent on the fiscus. The situation at the end of 2019 was regrettable. The board of SAA made a decision on 5 December 2019 that the business rescue was the better option to pursue given the constraints on raising finance, either from the fiscus or lenders in South Africa. The business rescue process, in terms of chapter six of the Companies Act, is about making sure that once the business rescue process was started the outcome should be a viable business. Government decided that the restructuring of SAA must continue albeit through the business rescue process. SAA was a national interest matter. The Companies Act does specify a number of things that have to be undertaken during the business rescue process. The legislation stipulates that the business rescue practitioners should make a decision if the business was rescuable. The business rescue plan should also be produced in 25 days with a provision of extensions if it was needed. Nobody imagined that there would be an extension of five months. There was very little aviation experience among the business rescue practitioners, if any. There was a concern over the use of consultants. There was also a question of money. A loan of over R3.5 billion was raised to assist post-commencement finance. The business rescue practitioners will take the Committee through the spending. What was also critical was the amount of money spent on fees by various players in this particular process. One of the requirements of the restructuring is how the R5.5 billion would be optimised? What are the other cost cutting mechanisms that are available? The business rescue plan would help Government decide whether to provide money when there was a request for money or should it supply money on the basis of a plan? Government’s preference was the latter. Money should be used for the business rescue exercise. A draft copy of the business rescue plan was given to the Department on 5 May. On consultation, with legal advisors, it was found to be extremely deficient. It was in this regard that the Department consulted with an aviation expert company to ask what a post pandemic airline looked like. He also raised a point on labour. The Department had cooperation with all eight labour unions that are within SAA. The Department managed to create a labour consultative forum where all eight unions were represented. The unions signed a compact. They have also participated in technical workshops in helping design a future airline and making contributions. These employees have also taken a salary sacrifice. The Department was working with the unions on a social plan for those people who would not be accommodated. That involves training and skills development. He complimented the unions for their cooperation and participation. There have been offers to purchase SAA’s assets but there is a screening process that is being undertaken to discern between what is genuine and what was not. He emphasized the Government was very aware of covid-19 and was aware that the business rescue process needed to be concluded a long time ago. The outcome of this process needed to be a viable airline, retaining as many workers as possible and making the airline non-reliant of the fiscus.
Briefing by Business Rescue Practitioners (BRPs)
The business rescue practitioners gave their presentation. The presentation was led by Mr Siviwe Dongwana. The presentation consisted of the development of the business restructuring plan, the business restructuring plan timeline, the contents of the draft business restructuring plan, the utilisation and management of funds and the key actions taken by the business restructuring practitioners to date. The impact of covid-19 was also discussed.
The primary objective of the business rescue was to maximise the likelihood of the company continuing in existence on a solvent basis, also known as the “restructuring option”. The secondary objective was to result in a better return for creditors or shareholders that would from immediate liquidation of the company, also known as the “winding-down option”.
The reasons for the delay in producing the business rescue plan were given. These reasons included uncertainty with regards to funding, the declaration of the State of Disaster by the President, the impact of covid-19 and further uncertainty with regards to funding. On 23 April, the business rescue practitioners had notified all affected parties that they would pursue the “winding-down” option as the best option for SAA due to financial constraints. Government wanted the restructuring option. The cost of the selected restructuring option was R7.7 billion. The total spend by the business rescue practitioners was R9.9 billion.
The total expenditure was broken down as follows: 20% was spent on fuel, 16% was spent on salaries and allowances, 12% was spent on subsidiaries, 12% was spent on aircraft leases, 12% was spent on Airlink and 28% was used for other expenses. The cash management initiatives comprised of value for money assessments, suspension of loss making routes and an assessment of outsourced services for insourcing.
Mr A Lees (DA) said much of what he heard from the presentations was quiet frightening. He directed his questions to Mr Matuson. Can SAA be rescued without further funding from the State? Did they have external funding? He then had a question on page three of the presentation. It talks about the “winding down” option. Where in the Act does it make provision for the “winding down” option as opposed to liquidation? Given that the State has made it clear that there will be no further funding why did the business rescue practitioners not file for liquidation? What percentage of salaries were being paid to flight crews as of the 1 April? Were they getting 50% of their salaries or were they on unpaid leave? How much was the management of the airline being paid? Have the business rescue practitioners paid SARS all outstanding payments? He did not see any indication on slide 5 that the R2 billion that was provided to SAA in December has been repaid. Has the R2 billion been repaid? He then had a question for Minister Gordhan. Government refused to provide R7.7 billion that the business practitioners were asking for because there was no approved business rescue plan. If there was an approved business rescue plan, would the State provide all the funds stated in the approved rescue plan? He then had a question on the repatriation of South African citizens’ flights. These flights were expensive and there was funding involved. What has the funding arrangements been for those flights? Who has funded the total cost of these flights? Has the money for these flights all gone to SAA? Has DIRCO taken any of the money or have any agents taken some of the funding? He then had a question for the Deputy Minister. Was the State going to oppose liquidation of SAA?
Mr G Cachalia (DA) asked the business rescue practitioners, in term of the Companies Act, how does Government select an option that business rescue puts forward by writing a cheque that it is unable to cash? If the BRPs job was to rekindle a company on a solvent basis but requires funding from Government to do so, which was not forthcoming, then surely it needs to move to liquidation. He then commented on Minister Gordhan’s analysis on the current state of global aviation industry. If the best airlines were in “ICU” how will the worst airlines be resuscitated? Was Government going to continue handing bailouts to SAA and/or to its successor which will “arise from the ashes of its phoenix like demise”?
Mr S Somyo (ANC) said that in terms of the Companies Act specific things needed to be done during business rescue. The business rescue plan needed to be agreed to by the parties that are involved. The Minister confirmed that the draft plan was given to the Department. The draft was deemed to be inadequate. In the absence of that plan how did the Department view the continued critical actions taken by the business rescue practitioners? The BRPs required funds from the shareholder without that plan. There has been a five month period without a plan and they were still making decisions. There was also court action being taken by labour unions. Even if the Department gave the BRPs extra funding that would have had to be informed by the plan. How dare the practitioners give themselves and extension when it was not known where they were going? The practitioners were here today and there is no sight of the business rescue plan. A fine audit needed to be done and the Department needed to provide a breakdown of what the business rescue practitioners have actually used the large sums of money they had been given.
The Chairperson asked the Department if they could receive a copy of the draft business rescue plan as the Committee had not read it.
Ms N Mente-Nqweniso (EFF) said her first point of concern was on the plan. The Minister said that because of the deficiencies in the plan the Department requested legal opinion. He then made a decision that he could not support SAA because of the plan. Was the Minister not supporting SAA because of the deficient plan? What would the Minister’s funding amount of preference be to SAA? In March, the last time the Committee met, part of the things SAA was going to do was look into its operational costs. Looking at the financials SAA have provided under operational losses versus the income, the explanation for the operational losses does not provide any confidence or comfort. She then discussed the pie chart that was shown in the presentation. There was a significant amount of money paid to creditors. Then there was also 28% paid to ‘other’. Other is always problematic. She hoped that the Committee would get more details about that in the plan. When its states money spent on other did the BRPs make cuts to other unnecessary funding and make cuts to other contracts? What exactly was spent under ‘other’? It was important that all interested parties were clear and transparent with one another. What are the contracts that have been paid? How many aircrafts does SAA have? The Committee needed to receive all that information. The money that is given to SAA is never accounted for. The Minister said that he did not support the draft rescue plan. He then mentioned a new airline. This did not make sense to her. If there was money for a new airline but yet there was no money to rescue a current airline. How much money would it cost to create a new airline? What would be the Minister’s preferred figure in keeping SAA afloat? The business rescue process was part of the Companies Act and certain things needed to happen first before liquidation was declared. Can SAA sustain itself? If it cannot sustain itself then how much money does it need? SAA also needed to show where and how savings have been made.
Mr B Hadebe (ANC) asked if the BRPs had the required skills to rescue SAA. He asked this because they were supposed to have tabled a plan within 25 days. Instead the practitioners asked for extension after extension and in the process tax payer’s money have been exhausted. Today there was still no business rescue plan. Do the BRPs think that they are still the relevant parties to carry out the mandate that they had been ordered to carry out within 25 days? There was even a legal process to stop retrenchments. There cannot be retrenchments before a plan has been accepted. He asked the Department why they kept quiet when the plan was not ready within 25 days. The presentation given by the practitioners also stated that they only did consultations after the plan was drafted. Why did the Department allow these events to unfold that went in contravention to the Companies Act?
The Chairperson said that if SAA was to be restructured, how were the subsidiaries going to be affected? In the financials the impairments increased in 2018 from R26 million to R568 million. Which accounts were impaired and for how much? He then questioned the practitioners. In the Companies Act that deals with contravention of the law it states that the practitioners must forward evidence to the appropriate authority for further investigation and possible prosecution. What has been uncovered and what has been done? It was important that consequence management was also a part of this process. An airline cannot crash without their being any consequences. During this whole process the Committee has not seen a move towards any consequences. The Minister applauded the unions but at the same time the unions took SAA to court. He wanted to hear from the practitioners about their level of engagement with the unions. If SAA was to be restructured or if there was going to be a new airline what is the cost of that? What Government must not do is to throw financial solutions to non-financial problems.
Minister Gordhan responded to the questions posed to the Department. What the Companies Act requires the BRPs to do is to decide whether the entity, in this case SAA, was rescuable. The Department was not a part of the creditors committee and the employees committee. The BRPs decided at some stage that the entity was rescuable. Secondly, the practitioners were to also conduct further investigations which included meeting with consultants. This would then be crafted into a business rescue plan. The R5.5 billion was not just to run the business. The first objective is to carry on with the business, trim the business down so that costs are cut and then as quickly as possible produce a business rescue plan. That plan will indicate what business model will be recommended for a viable, competitive airline not dependent on the fiscus and retaining the optimum number of jobs. This included selecting which routes will be taken in flying regionally, continentally and internationally. Then the most fuel efficient aircrafts are needed to fulfil this purpose. Depending on the routes and the aircraft an organisational model needed to be chosen. The next issue would then be how many staff is needed. A financial model was also needed that would support the new airline. There were different ways in starting a new airline. One way was to acquire assets from the old airline or there was the option of restructuring. Restructuring means the reorganising of the existing airline so that something new emerges from it. The impact of covid-19 has meant that any restart in creating a new airline would start small and then be built up over two or three years. The number of staff needed at the start-up phase of the airline will be different to the number of staff needed two or three years later. In relation to the post commencement finance (PCF) and questions over money, Minister Gordhan said it was not about not having money. The question is what do you provide money for? Is it to continue to spend? Or is it to spend in order to achieve the objective of a rescued business? If money was to be spent it must be according to an approved business rescue plan. The amount of money Government was willing to provide depended on the business model that is produced. The R7.7 billion that was given is about the restructuring process. The Department still needed to do projections on how much the new airline would cost and would then provide that information to the Committee. He then responded to Mr Lees’ questions. foreign currency borrowing was a risky exercise. The volatility of foreign currencies and the exchange rate all needed to be taken into consideration. That is why the Department told SAA that it could not borrow. If they did borrow, what would the borrowing be for? Funds will be mobilised once there is a clear modelling plan that states how much funds will be needed for restructuring. The BRPs could provide more information on the funding behind the repatriation flights. DIRCO was the channel through which foreign governments were to approach the South African Government for assistance so that they could repatriate their citizens. He then responded to the comment Mr Cachalia made about most airlines being in ICU because of the covid-19 pandemic. Most airlines are asking “how do we survive and how do we thrive and how do we grow again in a post-covid environment”? That was the same question SAA was confronted with. Those airlines who cannot manage are shutting down. SAA was not operating so there were no bailouts. The Department wanted the business rescue process to be concluded as soon as possible. There needs to be a viable business at the end of this process. Bailouts will be given to the successor airline depending on what the requirements are and how Government was able to bring together different forms of capital to make it work. The extension after extension after the 25 day period, by the BRPs, was not something that should be taken lightly. Minister Gordhan said that the draft plan, which would be circulated to members, was an incomplete plan. It was not a matter of supporting the plan. There was no plan. He agreed with the question Ms Mente-Nqweniso asked, what was the 28% spent on others actually for? The evergreen contract was in respect to the pilots and the privileges and benefits that were assigned to them on an ‘evergreen’ basis. The “winding-down” option was not an alternative and the Department did not consider it to be an alternative to the actual outcome the Companies Act desires. The purpose of Government supplying R5.5 billion was to complete a business rescue process which must end with a viable, trimmed down, streamlined, cost-effective business. It was petulant for the BRPs to suggest a “winding-down” option when they did not receive the funding they requested. He wondered who was waiting in the wings to pick up the pieces and at what price? These are assets that belong to the public of South Africa. SAA has had many turnaround plans. He then responded to the question over why the Department kept quiet. The Department did not keep quiet. The request for extensions did not come to the Department. Those requests go to the creditors committee. The Department had various engagements with the business rescue practitioners and their legal advisors. The Department made it clear that they were not happy with these endless extensions and the fact that there was no business rescue plan after five months of work and the amount of money and fees that have been earned. He agreed with Mr Hadebe that before a plan was finalised there needs to be all forms of engagements and consultations. SAA had three important subsidiaries. The Air Chefs board decreased the number of employees it was currently using. They have cut various costs in order to survive until their future is determined. The second subsidiary was Mango. Soon after lockdown was announced the management of Mango agreed to a 50% salary cut. Nothing of that sort happened at SAA. The third subsidiary was SAA technical. It was also seriously impacted by corruption in the past. It has also trimmed down its salary bill in order to survive. SAA technical was a very valuable asset as far as Government and the aviation industry in South Africa was concerned. The models over the cost of a new airline were still being concluded. Then various engagements needed to take place outside and inside Government as well.
Mr Dongwana responded to the questions posed to the BRPs. The Act did refer to a “winding down” option. The Act states that if it is not possible for the company to continue operating on a solvent basis and survive then there is an option of immediate liquidation of the company. The “winding-down” was an option that was better than liquidation as assets lose their value during liquidation. All salaries in SAA were paid for in April. SAA was also up-to-date with all taxes to SARS. The R2 billion that the practitioners received initially was going to be paid but as things stand it has not yet been paid. All the repatriation flights were paid for by foreign governments, through DIRCO, for their citizens. The repatriation of South African citizens flights were paid for by the passengers but the charge was minimum. SAA was not making any profits from those repatriation flights because it was considered a humanitarian mission.
He responded to Mr Cachalia who asked if SAA should be liquidated. The practitioners view was that the best way forward was not to liquidate but rather to run a structured “wind-down”. The draft business plan is anticipating a “winding-down” process.
He replied to Mr Somyo’s issue about the extensions. It was not that the business rescue practitioners wanted all the money for the restructuring process at the beginning but it was important that the practitioners knew whether the restructuring would be funded. That enables a development of a plan to be in the context of a very specific budget. It also enables the practitioners to take the plan to the creditors for approval. In the Companies Act it was also required that they provide projections for the next three years. It was important, in providing that information and numbers in the business rescue plan, that the business rescue plan was underpinned by a commitment of what funding would be made available. There was no committed amount that supported the business rescue and restructuring of the company. This made it difficult to finalise a business rescue plan. The practitioners accepted the concerns raised by members. The practitioners would look into how to best respond to the issues raised.
He responded to the 28% spent on other expenses. The pie chart was simply a summary of the preceding slide for ease of reference they were summarised in the pie chart.
He responded to the concern over the practitioners skills in aviation. They did consult with aviation experts and the practitioners were dependent on them. The Minister was correct when he said that the extensions were granted by the creditors committee and not the shareholder. The Companies Act provides for the creation of the creditors committee and employees committee. The employees committee is comprised of members for all the unions in SAA. It also has representatives from all non-unionised management and non-management staff. That committee elected a chairperson. It was stipulated that the practitioners consult with that committee on the business rescue plan. The unions, with exception of two unions, and non-unionised management took part in the section 189 process and it was done under the auspices of the CCMA. There have also been investigations into problematic contracts. All suspicious contracts have been sent to the SIU as the practitioners took the value for money aspect of the process very seriously. The practitioners were happy to provide a list of all contracts that were currently under investigation.
Mr Les Matuson, BRP, started by highlighting the leadership of Minister Gordhan during this tricky period in the aviation industry especially since the outbreak of the covid-19 pandemic. The Minister was committed to ensuring a sustainable new airline which was fiscally independent. The Minister has been consistent throughout the process. The practitioners were committed in working with the Department to achieve their desired outcome. He then responded to the comments on liquidation. The liquidation process was a very destructive one. The restructuring process would have a much better return than the liquidation process. Liquidation generally sows chaos. The company would lose Air Operator Certificate (AOC) and various licenses. Calculations showed that the dividends was very close to zero. Under liquidation the whole staff complement would be unemployed. The liquidation process was long and arduous process and could last between two to three years. There could be no dividends paid to any staff until the liquidation is complete. A liquidation process would materially erode value and the net recovery for creditors would be an absolute disaster.
Adv Melanchton Makob, Deputy Director General, DPE, commented on the labour court judgement. The court action emanates from the provisions of section 136 of the Companies Act that anticipates that the business rescue plan must be developed before any retrenchment can proceed. The BRPs wanted to proceed with the retrenchment process by issuing section 189 notices without a business rescue plan. The court ordered that the business rescue practitioners must present a business rescue plan before beginning a retrenchment process. Effectively saying that the notices they issued were procedurally unfair. The BRPs were ordered to withdraw the notices that were issued. The court ordered that the business rescue practitioners were allowed to offer and the employees were allowed to accept any voluntary severance package. The court pronounced on the matter that before any retrenchment process can begin there has to be a business rescue plan in place.
Mr Tlhakudi said that as an accounting authority he had a responsibility, in line with the Public Finance Management Act, to ensure that there is an effective, transparent and economical use of resources that was allocated to the Department and by extension to its entities. He had a responsibility that once these funds were transferred to entities that they were managed in accordance with the provisions of the Act. The requests from the BRPs have had to be scrutinized. The Department had approached the BRPs numerous times asking them how the funds were being utilised. The Department also asked them to address wasteful expenditure at the entity. The Department was still waiting for information on the ‘onerous contracts’ that the practitioners have spoken about. If aircrafts were returned to their lessors promptly during the lockdown period SAA would have been able to save almost R100 million a month in maintenance costs. In the last week the Department has had to plead with the BRPs that those aircrafts must be returned. He then responded to the issue of restructuring costs that stood at R7.7 billion. This figure was a moving target. The BRPs needed to justify to the Department where any request for funding will be spent and what will be the outcome produce.
The Chairperson asked the Deputy Minister to provide an update on what has happening at SA Express as he had received a message from a SA Express employee who said they had not been paid since March.
Deputy Minister Masualle said that presently there was a provisional liquidation order which the court is waiting any affected party to review that. The Department was having discussions with the appointed liquidators and has not arrived at any position yet. The Department was sympathetic to the employees of SA Express whose salaries were not being paid. The Department engaged with UIF and have been able to make interventions albeit ones that were not adequate.
Ms Mgoduso said that some financing questions have been unanswered. Specifically the operational costs and the R49 billion accumulated figure as well as re-negotiations and re-finances. What are the specific line items? The Chairperson requested information on increments that have contributed to the loss. The board has not received any financial report from the BRPs. There was also a question on the many turnarounds strategies that have been put on the table by SAA. She was not sure if the BRPs had taken previous work that had been done into consideration when they started the business rescue process.
Mr M Dirks (ANC) said that the practitioners did not answer whether they themselves had any aviation experience. He raised the issue of cost cutting measures. One of the tasks of the BRPs was to implement cost cutting measures. The BRPs must outline all the cost cutting measures they have put in place since they took over the airline. Have they returned those aircrafts that were loaned? Have the business rescue practitioners dealt with the issue of the evergreen contracts? Have they cut those contracts? What was the cost of each of the BRPs salary over the past five months?
Ms O Maotwe (EFF) said it was clear that the BRPs were not taking the Committee seriously and was not taking the Department seriously. The BRPs did not want to be held accountable. She proposed that they resign with immediate effect. If they do not resign the EFF would go to court to remove them. The practitioners were not forthcoming with how much they were being paid. How much money had they recouped from the evergreen contract? The business rescue practitioners were overstepping their mandate. They were performing the role of liquidators. Their essential role was to rehabilitate the company. Once they start the process of “winding-down” then they were going further than their mandate. She also questioned why the Minister insisted on privatising the SOEs under his leadership. There were other SOEs, like the SABC, who had recovered and were doing well. She did not agree with the Minister’s view of trying to restructure and privatise SAA.
Ms B Van Minnen (DA) said that larger airlines were dumping airline shares as they did not see any future in the airline industry after the covid-19 pandemic. Why was Government giving such consideration to starting a new airline? How would it differ from the current situation in SAA with its many turnarounds plans? How can this course of action even been considered in the current airspace environment? Given the pronouncements of Mr Matuson, she was concerned that this process was aimed at starting a new airline all along.
Ms B Swarts (ANC) said that the business rescue plan was supposed to be completed in 25 days and now five months later the Committee only had a draft plan before it. She was concerned that the Department and the BRPs were at loggerheads with one another. The practitioners had not provided a business plan but rather an escape plan. The BRPs had never had the intention of ever rescuing South African Airways. They have not stated how much they are paying themselves, their consultants and their lawyers. The fact that they opposed the court order when they were taken to court by labour unions shows that their intentions was to make money for themselves and not to save the airline. How many meeting did the business rescue team have with the board of SAA and shareholders before important decisions were made? She was sure that the business rescue team would have sold off all of SAA’s assets if Treasury did not remove the exemption they had given them.
Mr Cachalia asked the Minister if he will allow the private sector to step in to pick up SAA’s assets to prevent a possible public sector failure. The private sector will give the fiscus and the public sector a welcome break.
Mr Somyo commented on the lack of aviation experience and skills the BRPs had. He asked the Minister how far away the Department was from the development of an aviation strategy which could be part of the sustenance that South Africans seeks to benefit from in terms of a new airline?
Mr Hadebe asked the BRPs if they had tabled a business rescue plan. If not, when are they planning to table such a plan? Five months into their appointment and no plan has been published. Do they think they are the suitable candidates to conduct this task of rescuing SAA? They were unable to indicate how their funds were going to be utilised even though the business rescue practitioner was an accounting authority. Were they suitable for the job?
Mr Lees said that section 141 was very clear. If at any time during the business rescue proceedings the practitioner concludes there is no reasonable prospect of the company to be rescued the practitioner must immediately stop the business rescue process and apply for liquidation. If there is no funding made available from the State and they cannot find any other sources of funding, can SAA be rescued? If the answer is no then why have they not applied for liquidation? He had information from flight crews in SAA and Mango that their salaries have not been paid and that they have been put on unpaid leave. Yet Mr Dongwana does not seem to know this. He did not know who to believe as he was getting reports that flight crew were on unpaid leave but the business rescue practitioners do not know that? In terms of section 132 of the Companies Act the BRPs are required to do monthly reports. Could the Committee see those reports?
Ms Mente-Nqweniso said it was clear that the Minister refused the bailout because there was no plan. There is no plan after five months. The Committee should not spend its time speaking to people who have no capacity to produce a viable plan to turnaround SAA. If this was a draft that meant it could still take another five months to be finalized. Does the Minister have the money to save SAA? If he has enough money to start a new airline it means that he cans save SAA and put new measures in place. The fact that the Committee did not have financials for 2019 informs them about the accumulated figure of expenditures versus the operational cost. The figures used in the presentation were not in line with the figures in the audited statement and this was problematic.
Mr Matuson said that they would accelerate the production of the business rescue plan and the comments of the Committee were noted and accepted.
Mr Dongwana said that neither he nor Mr Matuson had previous experience in rescuing an airline. That was why they received support from Alvarez and Marsal who have aviation experience. He then responded to the issue of evergreen contracts. Section 189 had two objectives and this was the order that the court responded to. The fees of the BRPs were regulated by the CIPC. The fees of the rest of the team can be provided to the Committee. He then responded to the question on why airplanes were not returned. They had returned some planes; however once the lockdown started and there was a band on international travel as a consequence of that they were not in a position to return planes. The aircraft lessors are supported by credit which is guaranteed by Government. The issue of returning aircrafts cannot be done in a reckless manner because it may result in guarantees being called on Government. The process of returning planes needs to be managed very properly. If the aircrafts were not returned in the manner agreed upon in the contract then additional claims will be made to SAA. SAA also had legal agreements as to how it was to maintain the airplanes that it needed to honour.
He highlighted that the practitioners provided regular reports to the Department. The business rescue plan will be geared towards a “winding-down” option and it will be completed as soon as engagements are done with all relevant parties and stakeholders. He said in response to Mr Lees that a “winding-down” option would provide a better return for creditors and the shareholders. He added that as of the 1st of May all employees were on unpaid leave and that SAA was unable to pay the salaries of employees.
The Chairperson said it was clear that the Committee needed to have more engagements with the BRPs. The more answers were given, the more questions arose. The Committee was also not pleased that it only received the draft business rescue plan during the meeting. All other matters, concerns and questions that were not answered would be sent to the Department and the BRPs in written form. The issue of SA Express also still needed to be discussed in further meetings. The shifting of goal posts was simply unacceptable. The SAA headache cannot continue to be a permanent feature of the South African discourse. The Committee would like a date for when the business rescue plan would be finalized. It cannot be an open-ended date. He mentioned that cost cutting and consequence management were two important features of the business rescue process that needed to occur.
Minister Gordhan responded to the issue of returning of aircrafts. Mr Dongwana only raised the obstacles to returning aircrafts while the rest of the world was actually doing it. He had not heard of all those complications before. On the issue of fees, a total of R30 million was shared between the two business rescue practitioners over four months. The hourly rate that is in the legislation was not a reflection of the amount of money the team was receiving. Each practitioner came with different teams. The point Ms Maotwe made about the BRPs overstepping their mandate needed to be reflected upon. In response to Ms Van Minnen he said the dumping of shares was an investment choice. The business rescue plan was about rescuing a business and creating a new entity that emerges that is more viable. He responded to Mr Cachalia. The private sector was required for providing many services to airlines. Government looked forward to a strategic equity partner. He did not want people to ‘pick up’ assets. Government wanted people to pay a fair price if and when a particular asset is put on sale. Value must be collected for that. The Department did not want a garage sale out of this process. Other people cannot profit on what is currently public property. He responded to Mr Somyo’s question. There was somewhat of an aviation strategy but both the Minister of Transport and the Department of Public Enterprises agreed they needed to review that strategy.
The Minister said that Mr Lees had his mind fixated on liquidation from the very beginning. He did not understand why. If he was a public representative concerned with the public interest then he should be looking for ways to create a viable entity, for public interest, with private sector participation. Liquidation as far as Government was concerned was not on the books. One has to ask the question who is waiting in the wings to pick up these assets? Has anybody cut a deal with someone in a nefarious fashion so that they make a deal off public assets? Mango is paying 50% salaries at the moment like many airlines were doing globally. There was a way of getting money to worker’s if the interests of workers were taken to heart. The advice of the Department was ignored. Government’s opinion of the business rescue process was that the process needed to be followed as prescribed by law. The outcome must be that there is a viable business at the end of this process. If the board wanted liquidation it could have decided to do so on 5 of December 2019. The decision at that time was to go into business rescue. The job of the BRPs was to make the best effort possible to ensure there is a viable business at the end of the process and not be petulant about when they receive money. Once it is decided that the business is rescuable then a commitment is made to create a credible plan which will take the entity in the right direction. The Act states it needs to be created in 25 days. Extensions are allowed but now it has been 162 days. How can the BRPs justify taking R5.5 billion and spreading it over 162 days and not having a credible business plan for a viable business to emerge? The BRPs were not put in place to run an airline. They were put in place to make a plan so that competent managers were appointed to run the airline. They say they do not have aviation experience so why do they want to run the airline for 162 days? In the Department’s view the post-commencement finance needed to be stretched as much as possible. It was quite astounding that after all the interaction that occurred today Mr Dongwana still says, to the Committee and to the South African public, that the business rescue plan will be done through the “wind-down” option. It was shocking. Instead of saying that they will create a business rescue plan that presents two or three options on which the relevant players will be consulted which the Act requires them to do. Only then can Government either financially support one plan over the other. Here there is a determination to produce a business rescue plan for a “wind-down” without presenting any other options. A “wind-down” means in simple terms that assets will be incrementally disposed of so that creditors and other get what they want to get but at the end of which the airline has nothing. The key mission that the Companies Act mandates is not achieved. Government would not accept liquidation as an option. It was the BRPs responsibility, with all the money that has been spent, to emerge with a credible plan that presents different options and the outcome must be a viable business that is fair to creditors, fair to employees and fair to the public. The aviation industry in South Africa as a whole was in trouble. He hoped that through further consultation with the Committee and the BRPs some consensus could be agreed to.
The Chairperson said that an unhealthy relationship between the BRPs and Government was not in the best interest of SAA. R15 million for each of the business practitioners over four months did not sit well with him. This operation was not a money making scheme. The tax payer cannot continue to pay for something that has no end in sight. The Committee wants a timeline and date for when the matter would be concluded. All South Africans cannot afford an airline that will bleed South Africa further.
The meeting was adjourned.
- Companies Act 71 of 2008 - Chapter 6 -Business Rescue and compromise with creditors (1)
- Media Statement: Scopa Instructs SAA Business Rescue Practitioners to Set a Date for Finalisation of Plan
- Recapitalisation and Guarantees to SAA since 2003 04
- Draft 2019 SAA financials - 06 December 2019
- SAA: 88 Group and Company Annual Financial Statements for the year ended 31 March 2018 Contents to Financial Report
- SCOPA presentation
Hlengwa, Mr M
Cachalia, Mr G K
Dirks, Mr MA
Gordhan, Mr PJ
Hadebe, Mr BM
Lees, Mr RA
Maotwe, Ms OMC
Masualle, Mr PG
Mente, Ms NV
Somyo, Mr SS
Swarts, Ms B
Van Minnen, Ms BM
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