South Africa: Directors Warned About Trading While Insolvent

17 March 2009

JOHANNESBURG (Business Day) — DIRECTORS need to keep a careful watch on the financial status of their companies and make sure they are not trading in insolvent circumstances.

According to recent liquidation figures, the South African economy is going to be placed under considerable pressure in the months ahead.

The total number of insolvencies recorded had increased by 58,3% over the past year. According to Statistics SA, when comparing January 2008 and January 2009 figures, there were increases of 113,7% in close corporations liquidations and 31,0% in company liquidations. Economists have said that this year the market could see a 25% increase in liquidations as payment defaults were likely to increase 50% in the current interest rate environment.

Statistics SA has further warned that there will be an expected decline in employment of as much as 4,3% (about 500000 jobs) this year.

"When directors analyse the state of the economy, together with the financial crisis being experienced in overseas jurisdictions, it is becoming evident that directors are going to have to keep a careful watch on the financial status of their companies, particularly when one considers whether or not a company is trading in insolvent circumstances," Levenstein said.

"The onus now lies with directors to ensure that when the warning signs become self-evident, that they immediately take legal and financial advice and, if necessary, place their companies into liquidation or cease trading."

Early signs of a "looming insolvency" would be things such as cash flow problems, a balance sheet showing liabilities in excess of the company's assets and an inability of the part of the company to pay its debts as and when they fall due.

Levenstein said other warning signs were continuing trading losses, a net asset deficiency, a continued failure to meet tax commitments, and delayed payment to essential and nonessential creditors.

"A loss of key personnel would be of huge significance, particularly in those sectors where a company finds it very difficult or impossible to replace such skilled people. Workforce management is critical and will be a challenge this year. Corporate governance was critical. Directors who allow companies to continue to trade in insolvent circumstances must recognise that this may become assessed at insolvency inquiries in the post-liquidation period," Levenstein said.