On 22 January 2018, Statistics South Africa released a report for the period January to December 2017 on insolvencies in South Africa. This report reveals a general decrease in liquidations.
In 2017, the total number of liquidations decreased by 3,4% compared to 2016. There were 1868 liquidations in 2017 compared to 1934 in 2016. This conforms to the general trend of a decrease in the total number of liquidations each year for the past nine years. This can be attributed to many companies utilising the business rescue process to seek to turn businesses around alternatively seeking to manage the liquidation process within a business rescue.
The margin of the decrease, however, seems to be getting smaller each year. The decrease between 2011 and 2012 was 23,4% and roughly 12% between 2012 and 2013. This trend finds similar application in voluntary liquidations, with 3178 in 2011, 1734 in 2016 and 1657 in 2017. The picture is, however, somewhat different in terms of compulsory liquidations. The number of compulsory liquidations has fluctuated between 381 and 200 each year for the past nine years. This may be as a result of creditors opting to engage in other methods of recovery such as a simple money judgment application or negotiated settlements as opposed to lengthy liquidation proceedings.
The financing, insurance, real estate and business services industries remain the sectors with the highest number of insolvencies in 2017, with 611 in total. Mining and electricity, gas and water are the two sectors with the fewest liquidations for 2017, with eight each. Again, many of the mining entities have utilised the business rescue process to seek to turn their fortunes around. The lower figure of insolvencies in the mining sector may also be attributable to the fact that there are simply fewer mining companies than the other categories listed in the report.
Insolvencies of individuals and partnerships remain significantly higher than liquidations, with over 2535 in 2017. These have also gradually decreased over the years, with 6078 in 2009. The decrease in the number of sequestrations can be attributed to the National Credit Act, No 34 of 2005 imposing stricter lending requirements coupled with the debt review process.
This begs the question as to what lies in store for 2018 given the looming governmental reform, resulting in a stronger rand and an increase in foreign investor confidence. These factors will hopefully lead to a decrease in sequestrations and liquidations in 2018.
Informal business rescue processes have also had a noticeable impact on the number of liquidations. In 2016 and 2017, many large companies underwent informal restructurings as an alternative to business rescue. In this regard, companies (and appointed restructuring specialists) work with their creditors in an attempt to reach a mutually satisfactory, negotiated solution to a company’s financial predicament.
Research has shown that informal restructures have a higher success rate than business rescue. This success may be attributable to the fact that the solutions sought under an informal restructuring are mutually satisfactory to the company and all of its creditors. One of the major disadvantages of this process is that the companies do not enjoy the benefit of the legal moratorium as envisaged in the Companies Act, No 71 of 2008. Any legal proceedings can be instituted against a company which is engaged in informal restructuring. However, we expect this trend to increase in 2018 especially for large companies who are just “too big to fail”.