The creation of zombie companies seems to be an unintended consequence of South Africa’s business rescue legislation and of well-meaning state-sponsored financial lifelines. SAA, the Post Office, Tongaat Hulett — all have been kept artificially alive without much quality of life or prospects of a better future in a recognisable form.
“Business rescue proceedings,” wrote judge Moroa Tsoka in a February 2012 high court judgment, “are not for terminally ill [companies]. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.”
The concept and practice of business rescue were created in chapter six of the Companies Act of 2008. The act set up a window of opportunity for companies that would otherwise go bankrupt. Any distressed proprietary limited company can enter business rescue on the basis that not all might be lost.
With some exceptions, business rescue insulates a firm from litigation, debt repayment and liquidation for the duration of the process. It allows for the kind of methodical restructuring that would be impossible in ordinary market conditions.
But should it be offered to state-owned entities that are constituted as “companies” but are, in effect, just government departments?
In the case of the Post Office, the plan of the business rescue practitioners was predicated on government funding of R3.8bn that was promised in 2023 but has still not been paid or budgeted for. Meanwhile, the Post Office branch network has shrunk further, steadily losing business to private courier companies. Every month that passes makes its recovery less likely.
Business rescue proceedings ... are for ailing corporations, which, given time, will be rescued and become solvent
SAA exited business rescue in 2021 and was relaunched as a smaller, leaner airline with fewer routes and less staff. However, the “rescue” was dependent on huge financial input from the government. During the rescue years (2019-2021), R7.8bn was allocated to support core rescue funding and another R5.5bn for working capital and bridging finance. In all, around R23.7bn was injected across the SAA rescue window, including legacy debt repayments and emergency liquidity.
At its operational peak about 20 years ago, SAA was a global airline, serving up to 45 destinations with hundreds of flights daily and long-haul flights to several continents. After business rescue, it has a limited domestic service and a handful of long-haul flights.
Strategically, there is no need for SAA. As with the Post Office, whose role has been devoured by private operators, if SAA had not previously existed, there would now be no need to create it. The tens of billions of rand spent on both entities could have been so much better purposed.
In Tongaat Hulett we had the remarkable case of a private sector company, once a blue-chip darling of investors, brought down by fraud, excessive debt, poor strategy and systemic governance failures. Because of its importance in the KwaZulu-Natal economy, the 100% state-owned Industrial Development Corporation (IDC) stepped in with R6bn in emergency funding. It is still not clear whether Tongaat Hulett can survive — or survive in a form that would justify such support, or ever find the money to repay the IDC loan.
The question must be asked whether business rescue is an appropriate mechanism in cases where rescue depends entirely on state support to be achieved.
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