Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn't matter whether you are a lion or a gazelle. When the sun comes up, you better start running.
- Thomas L. Friedman, The World Is Flat
In August low cost airline One Time filed for business rescue.
Business rescue is a novel option enabled by South Africa's new Companies Act, 2008. Chapter 6 of the new Act allows a business that is deemed to be "financially distressed" to apply for business rescue. In short this means that creditors finance the business turn-around by accepting a postponement in repayments. Business rescue is therefore a very private matter between the parties involved.
Management, creditors, and employees jointly show commitment to the company as they believe that its long term survival will benefit all the parties involved. If the business rescue process is unsuccessful, the normal liquidation process will follow. A liquidator will sell all of the assets and pay outstanding liabilities. This usually results in job losses and creditors receiving a fraction of the original debt. Business rescue was designed to try and avoid both events - save jobs and ensure creditors receive their fair share.
From a tax perspective, what is unique about business rescue is the fact that the process is not financed by the taxpayer but by creditors. It is recognised that the problem is industry-specific, and that the parties directly affected , should solve the problem. Potential losses are contained - creditors, employees and the company will have to reduce their demands for salaries, interest payments and benefits and invest these savings in the turn-around strategy. A job in hand seems better than no job at all. In September, state-owned SAA requested what amounts to a R5 000 0000 0000 bailout. It seeks a government guarantee for obtaining loans to finance its operations and purchase new fuel efficient planes.
SAA and One Time are both companies registered in terms of the new Companies Act 2008. This means that business rescue can be applied by both. However, SAA opted for a "government bailout" as opposed to the One Time option of filing for business rescue.
With the financial crises of 2008 the term " government bailout" was popularised in the United States. In essence it means privatising profits and socialising losses. The taxpayer - an unrelated party to SAA (Pty) Ltd is on the line for the R5 000 000 000 "bailout". Employees, creditors, and management are not asked to "take one for the team" and reduce their salaries, interest payments or benefits.
Why should Joe the plumber, Sam the builder, or Jane the teacher allocate a portion of their salaries in potential higher tax collections to fund employees, creditors and managers of SAA?
Interesting developments in the airline industry. Surely Velvet Sky problems are evident in other carriers too. With resignations in the SAA board and followed recently by its CEO and the rumoured a billion or so loss made by SAA. The business rescue practitioner needs to come up with a unique "rescue" business plan. The question is will it turn around SAA into a profitable entity?What a good case study (in the making) for Chapter 6 and corporate governance in RSA....
Right on, Stiaan! And business rescue does make a lot of sense. As long as the practitioner really has the necessary integrity, knowledge and determination for the distressed company to succeed, whilst he makes a fair and reasonable profit for himelf. It will be a national failure, like so many other well meant inovations like outcomes based education and smoke free zones if it is not supported, or if practioners are too greedy.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.
MINIMUM REQUIREMENTS TO REGISTER
The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.