Insolvencies set to soar this year  
6 January 2009

Insolvencies are expected to continue soaring this year as a result of the global credit crunch, says a legal expert. Company failures were likely to hit a peak in the first quarter of the year and carry on rising in the coming months, Eric Levenstein, a director at Werksmans Attorneys, said yesterday.

Slow growth, particularly in the weakening retail sector, and the lack of credit available in the market, combined with reduced lending by banks, were expected to make this year a strong prospect for increased insolvencies, Levenstein said. The credit crunch in the US and Europe has had an effect on the world economy and in SA the effects of a global recession are starting to squeeze businesses. “There is no question that SA has been extremely resilient in the wake of the world economic crisis, but one will have to watch the ability of companies to trade in these difficult economic times particularly after the normally busy Christmas period,” he said.

Company and close corporation liquidations rose 17,6% in July last year, while insolvencies of individuals and partnerships leapt 31,8% in June. New laws such as the National Credit Act have had the desired effect of reducing the amount of credit available to consumers in SA, particularly those who could not afford it.

However, the knock-on effect of the National Credit Act was a decline in spending over Christmas. Levenstein said directors would need to analyse their companies’ ability to trade profitability and to ensure that they were not trading in insolvent circumstances. The Companies Act makes provision for directors who trade companies in insolvent circumstances, particularly where it was clear that the company would not be able to pay its creditors . Levenstein said the legislation held directors personally liable for trading recklessly or with the intent to defraud the company’s creditors.

“There is no doubt that during hard times the incidence of fraud will increase exponentially,” he said. “There is no doubt that when economic times are tough, employees will dip into the company’s coffers to keep themselves going financially.”  Levenstein said bankers and institutions would have to look carefully for attempts to obtain credit by means of submitting fraudulent documents.

However, Levenstein said there was light at the end of the tunnel. The new Companies Bill had introduced the possibility of turnaround legislation into South African law. “The introduction of the business rescue provision will cause corporates in SA to take a hard look at the financials of the company and establish whether in fact the company can continue to trade as a going concern,” he said. In the current trading environment, “a frank and realistic review of the manner in which companies trade would will be essential for survival”, Levenstein said.

Sanchia Temkin, www.businessday.co.za