The Select Committee on Public Enterprises and Communications was briefed by the appointed provisional liquidators of SA Express, and was told that a repeal of the SA Express Act of 2007 was being considered. The Department of Public Enterprises was unsure of the process that would occur upon post-liquidation, as a state-owned enterprise (SOE) being liquidated was uncharted waters. The Department was seeking legal advice in this regard.
The Department said that the consolidation of South African Airways (SAA) and SA Express -- with both being in business rescue by February 2020 – had been difficult. The material assets of SA Express were valued at R113 million, according to a private evaluation. The highest offer for the assets had been R50 million, which was accepted. The market conditions were poor due to the national lockdown, as well as both SOEs suffering a demise at the same time.
The Department had completed various applications to National Treasury requesting funding for the amount required to pay salaries to SA Express employees. It had also investigated its own budget, but had experienced great difficulty in paying the salaries. It had engaged with employees and considered how they might be involved in the sale of SA Express as part of the ownership model of the new structure. It had also been guided by the Liquidation Act and engaged with the Human Rights Council. The proceedings had been postponed, as National Treasury and the Department of Labour needed to be involved in the proceedings.
Members questioned whether any directors were liable for the insolvent state of the company, repeal legislation, fuel cost hedging, contingency plans, integration between SAA and Mango and what the status was of the 630 employees who had taken SA Express to the South African Human Rights Commission (SAHRC) over their suspended contracts. Members asked what the value of SA Express’s assets was, guarantees provided by the state for loans and leases canceled by the liquidators.
Members said the lesson to be learnt from SA Express was that business should be left to business people, and not the state.
SA Express was asked to provide the Committee with an update on litigations lodged by employees and creditors.
The Chairperson welcomed all in attendance, and said that a few Members were unable to attend the meeting due to connectivity issues caused by load-shedding.
SA Express: Status of provisional liquidation
Mr Aviwe Ndyamara, Provisional Liquidator, presented the report on the status of the provisional liquidation of SA Express. He said that the provisional liquidators had successfully reduced the bond of security from R1.8 billion to R113 million. The Master of the High Court had ssued the bond of security and the premium payable was R9 million per annum.
As of the 28 April 2020, with the granting of the provisional order, the employees’ salaries were outstanding for March and April 2020. The outstanding remuneration would be dealt with as claims against SA Express. The implication of the provisional order granted was that the employees’ employment contracts were by law immediately suspended. The Temporary Employee/Employer Relief Scheme (TERS) Unemployment Insurance Fund (UIF) payments for the month of April and May 2020 had been processed and received by the employees. UI19 forms, salary schedules, Section 38 letters and claim forms had been completed for the employees. Employees benefited from a special preference in terms of the insolvency law, but they would get paid only once the secured creditors’ claims had been settled.
FlySax (Pty) Ltd was the preferred bidder after a sales process had been completed. It would purchase SA Express for R50 million. The purchase price received to date was R24.7 million.
Ms L Bebee (ANC, KZN) said that the liquidation process had involved different investigations. Had it been found that any directors were liable for the insolvent state of the company? SA Express had been established by Act 5 of 2007 -- would a repeal Act be required once the liquidation process was complete? She asked SA Express to provide the Committee with an update on litigations lodged by employees and creditors?
Mr M Nhanha (DA, Eastern Cape) said that the lesson to be learnt from SA Express was that business should be left to business people, and not the state. There were parliamentary processes for documents to be tabled as confidential. Why had the report been marked as confidential when the due processes were not followed? SA Express’s had demise started as far back as the fourth Parliament, when it did not report its financials. This was a sign of issues brewing. Were there any directors or senior officials that had contributed to its demise? SA Express owed R980 million -- how much of this was due to fuel cost hedging? Did SA Express own aircraft, as it had been presented that aircraft were a part of its assets? Did the owners of Fly-Sax have links to SA Express?
The Chairperson asked what the status was of the 630 employees who had taken SA Express to the South African Human Rights Commission (SAHRC) over their suspended contracts. Was there a contingency plan in case the preferred bidder was unable to meet the required bank guarantees? What lessons could be learned, so that this did not recur at other state-owned entities (SOEs)? He asked how a breakdown of how the R183 million would be dispensed to employees. SA Express was previously supposed to be integrated with South African Airways (SAA) and Mango -- why had this proposal failed?
Mr Ndyamara said that there was a provision in the Company’s Act that allowed for a commission of inquiry into any transactions that happened prior to business rescue and the provisional liquidation. In June 2020, the liquidators had approached the court for an extension of its powers to proceed with a Section 417 and 418 enquiry. This was an ongoing process. The liquidators would like to determine if SA Express had been trading under insolvency, trading recklessly, if assets had been sold without benefit, and if there had been any offences committed by directors or fraudulent activity. The court had appointed a commissioner, and it was an ongoing process. The liquidators were gathering information and contacting former senior executives for clarification. If misappropriation of funds was found, it would be reported, and the relevant authorities would be engaged.
Whether the SA Express Act needed to be repealed needed to be considered, as the airline was currently governed by the Act. If there was success with the preferred bidder, SA Express would be governed by the Companies Act, as it would become a private company. The repeal of an Act due to the liquidation of an SOE was uncharted waters, but expert advice on the matter would be sought.
The report on the litigations against SA Express would be made available to the Committee. There was litigation for the collection of debtors, which was a priority from a land value point of view. The legal team would compile this list.
Mr Ndyamara said he was unfamiliar with the internal process regarding marking a document as confidential and not much thought had gone into marking it as confidential. It was a standard which the Department maintained.
The investigation of directors went beyond just investigating them, as it investigated reckless trading, undue preferences, fraud and the recovery of funds. It was an obligation of the liquidators to investigate the demise of SA Express.
There was a list of creditors that had been compiled from the books of the airline. Each creditor would fill out a document in an affidavit format, supported by statements, and would submit these claims to the liquidators for approval by the Master. An estimation of what percentage had been due to the hedging of fuel costs would be made known to the Committee once the claims had been approved.
SA Express owned six aircraft that were old. Four aircraft had been sold for R1.18 million. They were not operational and had been sold as scrap. Some aircraft were had not been maintained and were in a terrible condition. Some of them did not have engines.
The liquidators had made submissions to the SAHRC regarding the employment contracts, as provisional liquidation suspended employment contracts. There had been no further correspondence. The contingency plan, should the preferred bidder not obtain bank guarantees, was for SA Express to be kept under administration and go into the final stage of liquidation. Alternatively, a disposal of intangible assets to interested parties would also be considered. If no offers were received before the court date, then the airline would go into final liquidation.
The Chairperson asked the Department how much the liquidator and business practitioner would be paid.
Ms Nonny Mashika, Acting Deputy Director General (DDG): Aviation, Department of Public Enterprises, said that through observation by the Department, the gradual demise of SA Express could be attributed to operational and financial inefficiencies. The status of the aircrafts’ operational ability was alarming, as the airline had various aircraft that had been grounded and unable to be operated. Some aircraft were owned, while others were leased. The airline was mandated to provide some level of connectivity, and it was unfortunate that an airline that had pioneered transformation within the aviation industry had landed up in liquidation.
There was a need for SOEs to be strengthened. They needed enough capitalisation to enable it to operate in competitive industries. Operational inefficiencies had been picked up over time, and the Department had engaged with the Board and management on about a weekly basis to improve the airline’s performance. The Department had conducted oversight through the shareholder contract, which looked at the airline’s performance. This showed the demise as it unfolded. It was critical that the oversight model had the right tools that would allow for proper monitoring of the SOE. SOEs that experienced challenges needed stronger support.
A repeal of the SA Express Act of 2007 was being investigated, but it was uncharted waters. There were various processes that were being considered, as well as the various shareholders within SA Express. The court proceedings regarding the sale of the company would guide the process.
At the time of the demise of SA Express, it owned eight Canadair Regional Jet (CRJ) 200 aircraft that were old. It had leased nine CR-400 aircraft from Rand Merchant Bank (RMB), which were propeller type aircrafts. The employees of SA Express had been experiencing hardship since the process of business rescue. The Department had completed various applications to National Treasury requesting funding for the amount required to pay employee salaries. It had looked at its budget to try and address the issue of the payment of salaries. It had been challenging to access funding to pay the salaries owed to employees. There have been various engagements with employees, even considering how employees could be involved in the sale of SA Express as part of the ownership model of the new structure. The Department had also been guided by the Liquidation Act, and had engaged with the Human Rights Council. The Department had made proposals to the Council. The proceedings were postponed. National Treasury and the Department of Labour needed to be involved in the proceedings, considering the need for funds and the labour issues that had been raised.
In 2016, there had been consideration of how to consolidate the state-owned airlines to enable them to be efficient in their operations. Around 2018, SAA had been transferred to the Department, and that same year SA Express had begun experiencing issues with its business model. Consolidating the two businesses became difficult and had required stabilisation. SAA had entered business rescue in 2019, and SA Express had subsequently entered business rescue in February 2020. It had been a difficult road, and SA Express was experiencing dire effects.
Mr Nhanha asked what the value of SA Express’s assets was, other than the value of its aircraft. Had the airline received any loans for which the state had provided guarantees? If so, what had been the value of these guarantees?
The Chairperson asked what leases had been cancelled by the liquidators. What was the value of the leases that were cancelled? Why did the aircraft not have engines, as indicated in Mr Ndyamara’s response?
The Chairperson stated that due to some Members of the Committee being unable to participate due to connection issues caused by load-shedding, questions would be submitted in writing. He asked that the Department respond in writing.
Mr Ndyamara said that SA Express had ceased operations by the time the liquidators came into office. The Master had issued a bond of security of approximately R1.8 billion. Had the liquidators not reduced the bond of security, it would have been liable for a premium of R9 million. The liquidators had therefore persuaded a private evaluation of the material assets under the market conditions mentioned by Ms Mashika. The assets had been valued at R113 million prior to going through a sales process. The best way to test the market was to run a process that allowed everyone to bid. The outcome of the process had been an offer of R50 million. This was the highest offer for the assets, and this was the offer that had been accepted. The market conditions were conditions induced by the national lockdown.
The issue of guarantees being called upon post-liquidation was a relationship between the guarantee and the guarantor. There had been a guarantee from RMB that had been called upon. The condition of the aircraft owned by SA Express was old. The investigations sought to uncover the reason for engines being missing from aircraft. It could not be confirmed that these engines had been stolen. There was a platform that was dealing with activities that had occurred prior to liquidation, and would be tabled in the report.
Should leases not be cancelled, the Department would be obligated post-liquidation to make payment for the leases once cash came in. To avoid this, the leases were cancelled by the Auditor General of South Africa (AGSA). The preferred bidder would need to engage with AGSA regarding a new lease. As of May 2020, the total leases were R2.6 million per month, so in a ten-month period it would be a hefty amount and would be to the detriment of the creditors.
Ms Mashika said that in 2015, SA Express had received a guarantee by the state of R1.1 billion, and of R1.7 billion in 2017. The guarantee had been in place until such a time that R1.2 billion was provided around 2018 for the repayment of the debt that was guaranteed. A further R300 million was provided to the airline for liquidity purposes. The guarantees expired in 2019, so the state did not have any liabilities within SA Express.
Ms Mashika thanked the Committee for its engagement. The Department would continue to work with the liquidator to find solutions to financial challenges, including those faced by employees, especially during the time of COVID19.
The Chairperson thanked the Department and the liquidators for the report and their engagements. He then dismissed the Department.
The Committee was unable to consider the minutes of previous meetings, as it did not form a quorum because Members were unable to connect to the meeting due to load-shedding.
The meeting was adjourned.
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