Director and Head of Insolvency, Business Rescue, & Restructuring Practice at Werksmans Attorneys.
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Rolling blackouts and the recently announced 18.65% electricity tariff increase from April 1 are likely to place additional stress on the South African consumer and businesses in 2023 to the extent that further bankruptcies are “inevitable”, says law firm Werksmans Attorneys Insolvency and Business Rescue Practice Group Director and Head Dr Eric Levenstein.
“With the prospect of higher interest rates, low growth and still high inflation, many companies could face corporate failures particularly in the early part of 2023.
“Insolvency and business rescue practitioners will be kept busy as financial distress continues to have an impact on companies not being able to generate sustainable revenue in continued challenging trading conditions,” he says.
Increased liquidations
Recently published statistics by Statistics South Africa for November 2022 show that liquidations increased by 2.1% in the three months to November 30, 2022, compared with the three months ended November 30, 2021.
Further, in November, South Africa saw 166 filings for company and close corporation liquidations.
“We saw 51 filings in the finance, insurance, real estate and business services sectors, followed by 35 filings in the trade, catering and accommodation sectors, followed by 17 in the community, social and personal services sectors. The glimmer of good news is that the total number of liquidations decreased by 3.4% in the first 11 months of 2022, compared to the first 11 months of 2021,” he notes.
Continuously and critically evaluate trading prospects
In a distressed market, directors of failing companies must continuously and critically evaluate the trading prospects of their businesses and assess whether they continue to be sustainable.
If not, they should possibly consider an early intervention, such as a filing for a rescue process or liquidation. If directors fall short of this obligation, they could potentially open themselves up to personal claims from irate creditors who would seek to recover losses incurred by such creditors that have been trading with what is effectively an insolvent company.
The Companies Act frowns upon such behavior and imposes civil liability for reckless and insolvent trading on such directors, Levenstein notes.
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Take professional advise
If directors are uncertain of their obligations, for example, whether to file for the company’s business rescue or liquidation, he advises directors to be ready and willing to take professional advice from the company’s legal advisers and auditors in a timely fashion.
“Leaving it too late makes it far worse. Taking advice at an early stage allows for business value to be retained. Typically, where professional restructuring and rescue practitioners can get involved and negotiate a rescue plan for the entity and all stakeholders, such as creditors, shareholders, employees and suppliers, they will all face a better outcome than what would be available to them in a liquidation.”
Liquidation puts to an end the company’s ability to continue trading, he adds.
“If there are obstacles in the way, the Companies Act provides solutions and outcomes that can provide failing entities with breathing space to restructure and potentially be rescued from ultimate failure. Directors must be alive to these options, as well as where positive outcomes can occur with correct and informed decision making,” he states.
