ECONOMY: South African Liquidations and Debt
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Following the 2009 economic crisis, the consensus was that small South African companies have struggled to recover from debt and maintain higher levels of trade.
However, this to a certain extent has been overstated. Many companies consolidated their subsidiaries and associate entities into parent companies to reduce auditing, running costs and debt. The result was a disproportionate increase in partnership and close corporation liquidations.
The regulation introduced by government as a part of their new growth path to restrict any further registration of closed corporations was also a contributing factor.
The new Business Rescue process implemented in May last year under the revised Companies Act aims to reduce debt and facilitate company restructuring.
Business Rescue Plan to Save Businesses from Liquidations and Debt
Specific features of the Business Rescue are designed to present the option of trying to trade a company in financial distress out of its financial situation rather than using court litigation as the primary recourse.
The focus is to save jobs and maintain the companys supply chain, rather than promoting liquidations in favour of creditor risk mitigation. This also sees a shift in the onus from the debtor to the creditor in terms of responsible lending practices.
Recently released figures by Stats SA showed that liquidations of companies and close corporations have decreased almost a third year-on-year over the last four months. This is largely due to voluntary liquidations, declining by more than 50 percent. Civil debt increased slightly in January to 93 483 from a previous 88 511, up 5,6 percent.
Coface South Africa saw a marginal increase in claims for the first quarter of this year compared to Q1 2011, in line with the civil debt figures published by Stats SA.
However, what is not reflected in this figure that is different to previous years, is that the average value pertaining to each claim has shown a more pronounced increase month-on-month.
This is mainly due to protracted defaults, and as such the effects of civil debt will only become clear after the claim lag cycle of six months. Liquidations may appear to be on a downward trend, but an increase is imminent.
Protracted default is the period in which the debtor does not keep to their contractual payment terms. It could be the period between their given payment terms and the actual payment.
Credit insurance claims are normally paid out in this period and then collected directly from the debtor, depending on the type of credit insurance contract. More and more companies are expected to experience cashflow problems and will make payments late or not at all. This would see an immediate rise in protracted defaults.
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