South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.
What is a business rescue?
It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the US’s Chapter 11.
South Africa’s process is set out in Chapter 6 of the Companies Act, which came into effect in 2011. It indicates what needs to be applied when a business is in distress.
What’s the aim?
The aim is to address distress in a business, when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems. Like a sick person. You have to see a doctor when you’re sick.
The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.
In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.
It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.
SAA has accumulated unsustainable levels of debt.
When should business rescue be sought?
The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. Research shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.
How is a company placed in business rescue?
The directors file through a procedure under the Companies and Intellectual Properties Commission, which then confirms the appointment of a rescue practitioner and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior.
The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.
The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.
The rescue practitioner must also meet with the employees.
When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up.
If there’s no agreement, the business must go into liquidation, and be shut down.
But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.
Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.
What happens to the directors during the process?
Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions.
They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan.
And the employees?
Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.
The airline is a state-owned enterprise. Has one of these ever been put through this process before?
Not that I know of. I believe that this is why there was so much hesitancy to do it.
In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, asked the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline.
I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business?
As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.
The UK’s Serious Fraud Office has launched an investigation into suspicions of bribery at mining and commodity trading group Glencore.
The SFO said “it is investigating suspicions of bribery in the conduct of business by the Glencore group of companies, its officials, employees, agents and associated persons”.
In a statement, the £30bn company added: “Glencore has been notified today that the Serious Fraud Office has opened an investigation into suspicions of bribery in the conduct of business of the Glencore group.”
Glencore, which is listed on the London stock exchange but has its headquarters in Baar, Switzerland, said it would cooperate with the investigation.
Its share price fell by 9% on the news to close at 216.9p, a three-year low. The company is the world’s biggest commodity trader, buying and selling everything from oil to cotton, wheat and sugar. It operates in more than 50 countries and also has a significant mining operation for gold, silver, platinum, nickel, iron and aluminium.
The announcement of the SFO probe is the latest setback for Glencore, which is already being investigated by the US Department of Justice for alleged money laundering and corruption in Nigeria, Venezuela and the Democratic Republic of Congo (DRC), Africa’s biggest copper producer, dating back to 2007.
The announcement of a UK enquiry had been widely expected in mining circles, following a Bloomberg report in May that stated that the SFO was preparing to open a formal bribery investigation into Glencore and its work with Israeli billionaire Dan Gertler and the leader of DRC.
Gertler’s notoriety in the DRC, which is rich in resources but riven by conflict, spans nearly two decades. He is reported to have made billions from being the unofficial gatekeeper to natural resources deals in the central African country. His friendship with the nation’s former president Joseph Kabila – who was head of state from 2001 until earlier this year – has long been a source of controversy.
Gertler was cited by a 2001 UN investigation that said he had given Kabila $20m to buy weapons to equip his army against rebel groups in exchange for a monopoly on the country’s diamonds.
The Israeli was also named in a 2013 Africa Progress Panel report that said a string of mining deals struck by companies linked to him had deprived the country of more than $1.3bn in potential revenue.
In 2017, leaked documents that formed part of the Panama Papers investigation showed how Glencore had secretly loaned tens of millions of dollars to Gertler after it enlisted him to secure a controversial mining agreement in the DRC.
The tycoon has repeatedly stated that all allegations of illegal behaviour are “false and without any basis whatsoever”, that he “rejects them absolutely”, and that he transacts business “fairly and honestly, and strictly according to the law”.
Glencore has also developed a controversial reputation of its own.
The company was founded in 1974 by the commodities trader and financier Marc Rich, who in 1983 was indicted on charges described by the then US attorney for New York, Rudolph Giuliani, as “the biggest tax evasion case in United States history”.
He was also charged with buying millions of barrels of oil from Iran during the 1979-81 hostage crisis, flouting a ban on “trading with the enemy”. He fled to Switzerland and remained on the FBI’s most-wanted list until he was controversially pardoned by Bill Clinton in the final hours of his presidency in 2001.
By then, Rich had long lost control of the company following a management buyout in 1993.
Under its billionaire chief executive, Ivan Glasenberg, the company grew to become the world’s biggest commodity trader, supplying the raw materials used in products from cars to smartphones.
When it floated on the London stock exchange in May 2011 it was valued at £38bn but the shares, which were then priced at 530p each, have never been worth as much since.
Many of Glencore’s executives have left in the past year. This week, Glasenberg hinted that he could leave the company soon.
South African Airways (SAA) said on Friday it has applied to enter ‘business rescue’, a form of bankruptcy protection it hopes will save the cash-strapped state carrier from collapse.
SAA, which has been making losses since 2011, is deeply in debt and has received more than 20 billion rand ($1.36 billion) in government bailouts over the past three years — all of which has achieved little more than keeping it barely afloat.
A government memo on Wednesday said President Cyril Ramaphosa had ordered SAA to seek the business rescue — in which a specialist takes control of a company with the aim of rehabilitating it, or at least securing a better return for creditors than liquidation would bring.
After years of government dithering, the distressed state entity’s crisis was increasingly seen as a test of Ramaphosa’s resolve to carry out badly-needed economic reforms.
Years of corruption and mismanagement have put several state owned enterprises in dire straits, including power utility Eskom, whose financial problems have left it struggling to keep the lights on.
South Africa’s credit rating is teetering on the brink of junk largely because of these problems. All agencies but Moody’s have cut its rating to below investment grade, risking billions of dollars of investment outflows if Moody’s does follow suit.
How Ramaphosa handles SAA’s restructuring, in the face of fierce opposition from unions, could be taken as a signal his resoluteness in a much bigger, immanent battle with Eskom.
A strike last month left the airline without enough money to pay salaries, then two major travel insurers stopped covering its tickets against the risk of insolvency. It has been granted a 4 billion rand ($272 million) lifeline from the government and banks to launch the rescue plan.
On Thursday Les Matuson from Matuson Associates was appointed to restructure the company. He is already reviewing payments to creditors and is scheduled to come up with a plan for how to handle them within 25 days.
His appointment spurred an outcry from two of the largest trade unions at SAA, the National Union of Metalworkers of South Africa (NUMSA) and South African Cabin Crew Association (SACCA), who argued that he should have been independently chosen.
“We don’t trust a process where a shareholder and the board get to hand pick a business rescue practitioner,” SACCA President Zazi Nsibanyoni-Mugambi told Reuters on Friday.
“We can’t leave it to the same people that we’ve been complaining about for many years,” she said.
The opposition Democratic Alliance (DA)’s shadow minister for public enterprises, Ghaleb Cachalia, approved the plan, saying: “we hope that ANC government will take a stand ... in the best interest of South Africa and the economy.”
SAA flights appeared to be operating normally according to the existing schedule, ahead of the publication of a new provisional flight schedule soon.