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Aug 22 2012 16:45 Fin24

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1time applies for business rescue

 
Cape Town - Companies are not using business rescue provisions in the new Companies Act as they were intended and the process is therefore not often successful in turning companies around, said Clinton Pavlovic, Senior Associate at Pietersen Incorporated.

He was responding to an announcement late on Tuesday by no-frills airline operator 1time Holdings [JSE:1TM] that it was applying for business rescue proceedings due to financial distress at its subsidiary companies 1time Airline Proprietary Limited and Jetworx Aircraft Services Proprietary Limited.

Pavlovic said 1Time's business rescue call has occurred in the wake of the recent failure of another domestic airline in similar circumstances.

“Prudence and fiduciary responsibility to both shareholders and other shareholders would have compelled the airline to make its decision.

“Let’s hope it’s not too late.”

Pavlovic said business rescue is always preferable to liquidation for all stakeholders, especially employees as it provides an opportunity to save the business.

 “But in many cases directors delay implementing business rescue proceedings until it is too late and the company is technically insolvent.”

He said business rescue is generally seen more as a delaying tactic to hold off creditors, after which the company goes into liquidation anyway.

Creditors can oppose the action in court if they feel there is no reasonable prospect of rescuing the company.

“Without the buy-in of major creditors, the business rescue process simply won’t be successful,” he said.  

Under section 129 of the Companies Act, the board of directors can voluntarily place a company into business rescue when it runs into financial distress.  But many boards avoid doing this as it sends out a negative message to creditors and investors.

1time’s share price plunged over 42.86% to 8c a share on Wednesday on the news that it was applying for business rescue proceedings.

1time’s board said it believes the implementation of business rescue will afford the executive directors the opportunity to develop and implement the business rescue plan in a manner that will optimise the likelihood of the subsidiaries continuing to exist as going concerns.

Pavlovic said that although the board of directors continue to exercise their function under business rescue, it is subject to the authority of an appointed turnaround practitioner.

“The boards’ hands are tied in many ways, as the turnaround specialist must sign off all decisions.”

He said creditors have to decide whether they will cooperate and wait to see if the turnaround strategy works, or oppose the resolution and file for the company’s liquidation instead.

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1time  |  business rescue
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