Judgment: SA Airlink v SAA and rights of companies under business rescue
JOHANESBURG – The media is awash with opinions on the South African Airways (SAA) restructuring process. What most agree on is that SAA’s business rescue practitioners have an arduous task ahead of them. But what happens when a significant creditor challenges the practitioner’s decision and decides to litigate?
On January 17, 2020, SA Airlink approached the High Court in Johannesburg, on an urgent basis, to enforce its statutory and contractual rights against SAA.
SA Airlink argued that the general moratorium on legal proceedings and enforcement actions against a company that has filed for protection (Chapter 6 of the 2008 Companies Act) should be relaxed, and that it should be allowed to sue SAA. The reason, SA Airlink argued, is that it was owed R510 million, but not as “debt owned” by SAA just before the rescue process began (as contemplated in section 154(2) of the Companies Act), but as an accrual of various contractual revenues including but not limited to alliance, license and commercial agreements between the parties.
The heart of the impasse between the two parties was this: SA Airlink said that an agency relationship existed between it and SAA, which SAA denies. SAA says it had no obligation to transfer any revenues to SA Airlink from the sale of tickets, because this revenue belongs to SAA. SAA further alleged that a debtor–creditor relationship existed between the parties, which means that SA Airlink is a creditor of SAA and must be dealt with under the application business-rescue legislation.
Despite the fact that the revenue in question seemed to accrue prior to business-rescue proceedings, SA Airlink said these revenues are not pre-business rescue commencement debts. It contended that the relevant debts only became due for payment after the date of business rescue and as such it is post- and not pre-commencement debt. SA Airlink’s arguments around the so called “unflown revenues” developed into an argument that such funds are held in trust by SAA on behalf of SA Airlink and are in fact owned by SA Airlink. There is a dispute of interpretation and fact here: SAA disputes both the claim of “unflown revenues” and the interpretation of the Companies Act.
The Court was accordingly saddled with the need to make a determination on how section 133 (1) of the Companies Act applies and if in fact the general moratorium would apply. SA Airlink changed its tact in its arguments before the Court, alleging that the revenues in question fall outside of the general moratorium, as the funds are unlawfully held by SAA, which was a deviation from its original notice of motion. These arguments were augmented by the allegation of agency on behalf of SA Airlink by SAA. SAA disputed this position and argued that the funds held in the bank accounts of SAA became the property of the respective banks into which accounts the revenues were paid and that no agreement existed with such banks with regard to “reserving” such funds for SA Airlink or that SAA was not entitled to such funds.
Ultimately the determination of whether or not an agency agreement exists, is a matter of law, determined by reading the various contractual agreements between the parties not in isolation but as a whole. SAA alleged that, at best, they were acting as an independent contractor and not as agent and principle. Counsel for SAA contended that nothing before the Court supported the argument that SA Airlink is entitled to payment on any basis other than as a concurrent creditor of SAA. Counsel for SAA further alleged that the debt owed to SA Airlink in terms of a debtor–creditor relationship was one that fell squarely within the definition of section 154(2) of the Companies Act.
The Court pointed out that the general moratorium is essential because it offers a company breathing space to restructure its affairs. This moratorium allows the business rescue practitioner, with creditors and other affected parties, to formulate a business rescue plan designed to achieve the purpose of the process. The Court indicated that it is necessary, in light of the judgment and principles laid out in Arendse and others v van der Merwe and another NNO, for a party to establish a prima facie right against a company and give reasons why the proceedings were necessary and appropriate. A prima facie case would only be established if the averments revealed a cause of action or a triable issue.
The Court indicated that it has inherent discretion to grant leave to proceed or not in the interest of justice. The Companies Act needs to be read as a whole and a balance needs to be struck between fairness and convenience. The Court, applying the principles laid out in Arendse and others v van der Merwe and another NNO, found that SA Airlink’s papers lacked any allegation that conforms to such principles. The Court found that no case was made that distinguishes the claims of SA Airlink from other creditors of SAA. The Court expanded on its analysis of the principles laid out in terms of the relevant precedent in that SA Airlink made out no case on the impact that the proposed legal proceedings would have on the wellbeing of SAA and its ability to regain financial health and whether such proceedings would further negatively impact on the purpose of the business rescue proceedings.
The result of the this considered approach by the Court was to dismiss SA Airlink’s application for leave to sue SAA.
As innocuous as this judgment may appear, it cannot be overstated how important the judgment is in entrenching the sanctity of the general moratorium as a cornerstone of any business rescue process.
Equally important is that the basic principles applicable to the granting of leave to institute proceedings against a financially distressed company, as laid out in Arendse and others v van der Merwe and another NNO, have been clearly set out and applied again. In doing so, our courts have provided much needed certainty for litigious parties, as a guide, who seek to institute proceedings against a company subject to business rescue proceedings.
Christopher Rey is a restructuring professional at BDO South Africa.