BUSINESS MAVERICK

SA Express bracing for business rescue and liquidation applications

By Ray Mahlaka 19 January 2020
Caption
The SA Express business rescue practitioners say in court papers that they want business rescue proceedings to be discontinued and the airline liquidated as ‘there is no reasonable prospect for SA Express to be rescued’.(Photo: EPA / Mikko Pihavaara)

SA Express’ creditors are circling around the cash-strapped state-owned airline. Four former service providers of SA Express want the airline to be placed under business rescue or liquidation because it cannot pay its debt. The service providers are seeking millions of rands from the airline for unpaid services.

Creditors of SA Express are pushing for the struggling state-owned airline to be placed into business rescue or the worst-case scenario of liquidation because it cannot pay its debts despite the efforts of a recently appointed board and management to turn the company around.

SA Express, whose routes typically serve SA’s smaller cities and neighbouring countries including Botswana and Zimbabwe, is insolvent and four of its former service providers have separately turned to the high court in Johannesburg to seek millions of rands from the airline for unpaid services.

In January 2020, SA Express will have to defend itself against two court applications from former service providers; one to place the airline under business rescue and the other to liquidate it.

Business rescue is a bankruptcy protection process provided for under the Companies Act that attempts to save companies that are financially distressed by restructuring their operations. It enables a company to continue operating while being restructured, temporarily suspending debt payment obligations, saving some jobs and cutting costs in the process. Meanwhile, liquidation signals the death of a company because jobs would be shed, operations would be shut and a fire-sale of assets would ensue to settle outstanding debt.

SA Express, which was also at the centre of SA’s State Capture story of corruption and looting, has joined the ranks of state-owned companies that have requested a bailout from the government. In September 2019, National Treasury approved a R300-million lifeline, which is on top of the R1.2-billion it was allocated by Finance Minister Tito Mboweni in the February budget. Interim CEO Siza Mzimela, who was appointed in August 2018, recently said the bailouts were used to service historical debt.

The airline remains distressed and its key profit metrics are still heading in the wrong direction. SA Express has not tabled financial statements in Parliament for the past two years. But the 2018/2019 annual report, which Business Maverick has seen, shows that the company recorded a loss of R591-million compared with the previous year’s loss of R162-million. Operating expenses (R1.4-billion) are more than its revenue (mainly flight ticket sales) of R707-million. Its current liabilities exceed its current assets by R374-million, making it technically insolvent. The auditor-general was unable to express an opinion on the accounts, says the annual report, resulting in a disclaimer of opinion.

In other words, the auditor-general couldn’t confirm any balance on the company’s balance sheet (mainly liabilities) and “adequacy of management’s use of the going-concern basis of accounting”.

SA Express might follow in the footsteps of South African Airways (SAA), which was placed under business rescue in December 2019 by the government because it faces a working capital crunch and debt problems. Both state-owned airlines have a strategic partnership, as SAA sells flight tickets on behalf of SA Express and pays it once passengers have travelled.

Latest service provider challenging SA Express

Ziegler SA — a logistics and transport company that provides wide-ranging services including freight forwarding, customs clearing, warehousing and supply chain management — is the latest service provider to turn to the high court to recover the money it’s owed by SA Express.

Ziegler SA, which is seeking R11.3-million from the airline for unpaid services, launched an urgent application at the high court in Johannesburg on Friday 17 January 2020 to place SA Express under business rescue, alternatively for it to be liquidated. The court application is expected to be heard on 28 January 2020.

In court papers, Ziegler SA’s MD Charl du Toit says SA Express hasn’t been able to service its debt to the company and other major creditors and will not be able to do so in future. But he believes there is a “reasonable prospect of rescuing the business of SA Express, if action is taken immediately”.

This action at SA Express, says Du Toit, refers to the appointment of business rescue practitioners Daniel Terblanche and Phahlani Mkhombo, who are prepared to implement a rescue plan that might include implementing government’s long-stated plan to merge SA Express with SAA and Mango Airlines (a low-cost airline and subsidiary of SAA), finding strategic equity partners for the airline, cancelling SA Express’ least-profitable flight routes, and others.

A judge will only approve a business rescue application if he or she believes that there is a reasonable prospect of SAA Express surviving. If a court grants Ziegler SA’s application, the government (owner of SA Express) would have no control over the rescue process.

Ziegler SA’s battle for compensation dates back to 2017. On 23 January 2017, Ziegler SA and SA Express concluded a written memorandum of agreement that would see the former being responsible for, among other things, the local and international movement of aircraft and engine parts for maintenance on behalf of SA Express. The agreement was valid from 18 February 2017 to 17 February 2019.

Du Toit says since the agreement was concluded between both parties, SA Express has “rarely, if ever” honoured payments to it within the required and agreed 30 days. He says payments were not honoured even after Ziegler SA agreed to extend payment terms to 60 days — at the request of SA Express. As of 23 December 2019, SA Express had racked up debt to Ziegler SA of R11,294,986.80 (including accrued interest).

In addition to Ziegler SA’s application, SA Express faces three more liquidation applications from its former service providers, which have become creditors, including FlyFofa Airways which is claiming R18.7-million from the airline, Mothebe Shuttle Services (R1.5-million) and African Charter Airlines (R14-million). Business Maverick understands that FlyFofa Airways’ liquidation application might be heard in court on 29 January 2020.

SA Express responds

SA Express has hit back at Ziegler SA in a statement, saying at close of business on Friday 17 January 2020, the airline “had not received confirmation of the notice of application for the airline to be placed under business rescue”. In a statement, the airline says it is prepared to oppose the application “should the application be received”. Ziegler SA has given SA Express a deadline of Monday 21 January to formally indicate if it plans to oppose the urgent court application.

Although SA Express didn’t name Ziegler SA in its statement, the airline inferred that the company’s intentions are “malicious” as it was one of the service providers that was awarded an irregular contract by SA Express.

This supplier is one of many who are currently under internal review for serious abuse of the procurement system, unfair pricing and overcharging.

SA Express also points out that suppliers who have obtained contracts legitimately are compliant in working with the airline to ensure that payments are reasonable for both parties, while those with dubious contracts constantly bulldoze to ensure that they get their way before the conclusion of irregular contract investigations,” says SA Express.

In a series of letter exchanges between lawyers of Ziegler SA and SA Express since 25 April 2019, which accompany the company’s urgent court application, the airline has acknowledged its debt to Zeigler SA and that there was no legal dispute over the amount.

In his court papers, Du Toit says SA Express has never had any problems with how Zeigler SA was contracted by the airline or complained about the quality of work it delivered.

Further, in a statement released on Monday 22 January, SA Express said it will oppose Ziegler SA’s urgent application, adding that the contract it had with the company was concluded on an irregular basis. 

Like other state-owned enterprises, SA Express was also at the centre of SA’s State Capture story of corruption and looting. A new board and management was installed by Public Enterprises Minister Pravin Gordhan in May 2018 and its work so far has centred around reviewing SA Express’ previously concluded contracts with service providers, the airline said.

“Ziegler SA was one of the contractors identified as irregular and misaligned to the Public Finance Management Act. Upon reviewing this particular contract, SA Express discovered a number of discrepancies allowed by the previous leaders of the organisation.

“One such gross misalignment was a clause in the contract that limited SA Express’ ability to review and dispute incorrect invoices. The new addendum mentioned in media reports refers to reinstating SA Express’ ability to review invoicing prior to payment,” SA Express said.

“The airline assumes that the application to place SA Express under business rescue was driven solely by self-serving motives, which would allow Ziegler SA to claim funds against their own credit insurance and at the disadvantage of other creditors who may not have the same benefits.” BM

Story updated with SA Express’ comments.

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