Oct 30,2012 / News / Legal Brief

No-frills airline operator 1time recently announced it will be cutting two aircraft from its fleet and that there will have to be a number of job losses. This follows its application for business rescue proceedings due to financial distress at its subsidiary companies.
“South Africa has had a long history of airlines in financial distress and this year alone, there have been reports of at least four airline companies experiencing difficulties,” says Eric Levenstein, director at Werksmans Attorneys. “What makes 1Time Airlines stand out is that it is the first financially distressed airline to make use of the new business rescue provisions in the Companies Act.”
Before May 2011, airlines in financial distress simply went into liquidation, as was the case with Phoenix Air, Sun Air and Nationwide, among others. “It will be illuminating to see whether business rescue will enable 1Time to rise above its financial woes and continue to fly,” Levenstein says.
Business rescue allows companies unable to meet their cash flow obligations an opportunity to restructure their debt. Once they have filed for business rescue, they also have the opportunity to seek post-commencement funding so that they can continue operating.
Levenstein says business rescue is fast becoming part and parcel of restructuring companies in financial distress. However, before 1Time’s application, no other local airline had taken this route. Earlier this year, Velvet Sky went into liquidation without successfully filing for business rescue.
1Time filed for business rescue in August 2012, leading to the appointment of a business rescue practitioner to compile a business restructuring plan. According to media reports, 1Time’s business rescue practitioner has proposed that the government consider subsidising the airline industry as a whole through selected levies and taxes.

Levenstein says this proposal reflects the financial difficulties facing the entire airline industry in South Africa, particularly after the Airports Company of South Africa’s latest increases in airport taxes and fees. “In addition, volatile oil prices and other input costs have aggravated the deteriorating financial position of the industry,” he says, pointing to reports that Comair recently announced losses for the first time in almost 20 years. “

BUSINESS RESCUE NO GUARANTEE OF SURVIVAL

Going into business rescue does not necessarily mean an ailing company will survive. “Many companies, having filed for business rescue, have ended up in liquidation,” Levenstein says. “The success of business rescue really comes down to the ability of the business rescue practitioner to consult effectively with creditors and all stakeholders in an effort to work together to rescue the company.”
After consulting all stakeholders, the practitioner must prepare a business rescue plan outlining how the company’s affairs, business, property, debt and other liabilities and equity can be restructured to maximise the likelihood that it will continue to exist on a solvent footing.
“Points covered in the plan would include how the company would pay its creditors over a period of time, possibly sell off loss-making divisions or subsidiaries, restructure the workforce and ultimately deliver a better option for all stakeholders, as an alternative to liquidation,” Levenstein says.
“If it is not possible for the company to continue trading on a solvent basis, the business rescue practitioner must formulate a plan to ensure a better return for creditors or shareholders than would otherwise result from the immediate liquidation of the company. If neither of these options is possible, the practitioner is obligated to place the company into liquidation.”

Should the practitioner be of the view that business rescue is feasible; the restructuring plan is put to creditors at a section 151 meeting.

MAJORITY VOTE NECESSARY AMONG CREDITORS

At that meeting, the business rescue practitioner must attempt to persuade the creditors and shareholders that there is a reasonable prospect of the company being rescued. Alternatively, the practitioner must propose the payment of a larger dividend than in a liquidation. After discussion and possible suggestions on amendments to the business rescue plan, the practitioner must call for a vote to approve it.
“The plan will only be approved if it is supported by the holders of more than 75% of the creditors’ voting interests,” says Levenstein. This must include at least 50% of the voting interests of independent creditors, meaning those who are not employees, directors or shareholders.
Shareholders will only get a vote if their rights are affected in some way, for example if the plan suggests a dilution of their position within the company’s shareholders. Here, shareholders would have to approve the plan by way of a majority vote.
Once the business rescue plan has been voted in, it is binding on the company and on each of the creditors of the company, including shareholders.
“Whether or not 1Time Airlines will be effectively restructured is up for debate at this point in time,” Levenstein says. “Given the extent of the company’s debt, the most important aspect would be the ability of the business rescue practitioner to raise post-commencement finance to enable 1Time to continue to trade and pay its expenses on an on-going basis.”
Considering the difficulties that the entire airlines industry is facing, the progress of this particular business rescue will be closely watched.