Warning over ‘zombie companies’ in South Africa
Load shedding, electricity price hikes and the knock-on effects are going to place additional stress on consumers and businesses this year – to the extent that more bankruptcies in the country are “inevitable”, says Dr Eric Levenstein, Director and Head of the Insolvency and Business Rescue Practice Group at Werksmans Attorneys.
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, he said.
“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.”
This situation has thrown up red flags for what are deemed “zombie companies” – those businesses trading on the cusp of insolvency and where there is no real prospect of a restructuring or rescue – both in South Africa and abroad.
There is an expectation that these zombie companies will have no choice but to file for insolvency or bankruptcy, given the headwinds posed by the economic environment.
Recently published statistics by Stats SA for November 2022 show that liquidations have increased by 2.1% in the three months ended November 2022, as compared to the three months ended November 2021.
A year-on-year increase of 4.4% was recorded in November 2022. In November 2022, South Africa saw 166 filings for company and close corporation liquidations.
According to Levenstein, South Africa 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.
“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 legal expert said.
The Companies Act 2008, frowns upon such behaviour and imposes civil liability for reckless and insolvent trading on such directors, he said.
Levenstein warned directors to act quickly and decisively, and not leave matters for the last minute.
“Leaving it too late makes it far worse. Typically, where professional restructuring and rescue practitioners can get involved and negotiate a rescue plan for the entity and all stakeholders -creditors, shareholders, employees and suppliers – all face a better outcome than what would be available to them in a liquidation,” he said.
“Liquidation puts to an end the company’s ability to continue trading.”
Levenstein said that there must be a recognition that corporates are living entities and must be maintained operationally and financially.
“If obstacles are thrown in their way, the Companies Act provides solutions and outcomes that can provide failing entities a breathing space to restructure, and potentially be rescued from ultimate failure. Directors must be alive to these options and where positive outcomes can occur with correct and informed decision making,” he said.
Read: Government collapse – and 4 other things businesses in South Africa are stressing about in 2023
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