Departing business rescue - a 1Time one-way ticket to liquidation

Business rescue proceedings can be initiated in one of two ways: the board of directors of the financially distressed company can resolve to place the company in business rescue; alternatively creditors, shareholders, employees or trade unions of the company may apply to the high court for a business rescue order.

According to the published cautionary announcement earlier this year, the board was of the view that reasonable prospects of rescuing the subsidiaries existed, an integral requirement of the Companies Act, No 71 of 2008 ("Companies Act") for business rescue. The question raised, however, was: How were external factors going to contribute to the success or failure of business rescue proceedings?

An alternative mechanism to liquidation

Business rescue (as envisaged in Chapter 6 of the Companies Act) serves as an alternative mechanism to liquidation for companies on the brink of insolvency. Companies experiencing financial hardships, to the extent that they could be classified as "financially distressed", would qualify to engage in this rather optimistic procedure. In fact, the Companies Act not only entitles, but indirectly obliges, the board of a company to at least consider business rescue proceedings when the company is teetering: section 129(7) provides that if the board has reasonable grounds to believe that the company is financially distressed, and the board has not resolved to place the company in business rescue, the board needs to explain the situation to its stakeholders and why it hasn't opted for business rescue. Business rescue concerns proceedings to facilitate the rehabilitation of a company that is in financial distress by providing for:

1. The temporary supervision of the company and of the management of its affairs, business and property
   
2. A temporary moratorium on the rights of claimants against the company or in respect of property in its possession
   
3. The development and implementation, if approved, of a plan to rescue the company by restructuring its affairs in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or at least results in a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company.
   

Business rescue plans must be objective and not speculative. The plan must provide a sustainable solution to the cause of the failure of the company to enable the company to continue on a solvent basis. There has to be a genuine attempt at rehabilitating the company or providing a better return to creditors and shareholders than would a liquidation; using business rescue as a delay tactic that merely postpones an inevitable liquidation does not serve this purpose.

Earlier in 2012, a 1Time aircraft had reportedly made an emergency landing as a result of an alleged failed engine, raising issues pertaining to maintenance and an ageing charter fleet. 1Time's fleet consisted of 12 McDonnel Douglas MD80s, some dating back to the 1980s, which are presently far less fuel efficient than the Boeing 737-800s more commonly used by its competitors.

External factors

While, legally and financially, success may be conceivable within a hypothetical vacuum, external factors like conduct of and reactions by consumers, rising input costs and competition in the marketplace could ultimately be considered as some reasons that emerged as the defective engine to the business rescue flight, as on Friday, 2 November, 2012, the 1Time Board announced that the company had resolved upon consultation with the business rescue practitioner that the business had no reasonable prospects of being rescued - resulting in the absence of the integral element of business rescue. Accordingly, 1Time filed for liquidation.

The announcement of 1Time's business rescue and eventual liquidation could be considered to impact negatively on the public's perception of the reliability of airlines (a particularly sensitive point in the airline industry). The earlier liquidation of VelvetSky Airlines still has many passengers smarting after being left stranded at airports. 1Time passengers are now added to this vessel of grievance. While the airline's hope that the business rescue would have sent a message to passengers that the airline was serious about remaining in business and that it would exhaust all measures in an effort to do so, the overwhelming reality of their extensive debt and inability to pay creditors proved to be its downfall.

In addition, it is undeniable that the availability of alternative carriers to a relatively small market also cannot be ignored as a factor contributing to the failed business rescue attempt. Although 1Time boasted to be the second-most-preferred airline, four alternatives remain, among them two low-cost carriers, namely Mango and Kulula.

From some sources it appears as if a slim majority of business rescue cases since the commencement of the Companies Act have, in fact, yielded successful turnarounds. One could be forgiven for not being overly optimistic about the prospects of success of business rescue proceedings in respect of a particularly beleaguered company.

1Time will now be added to the many companies that have taken off in business rescue and landed in liquidation.