CRS Business Rescue
The turnaround industry and its business rescue industry component in South Africa

Liquidations statistics

Meaningful liquidations statistics

We don't publish separate voluntarily and compulsory liquidations graphs anymore, because the causal distinction between the two has become blurred. 

Voluntarily liquidation is cheaper and more effective.  Compulsory liquidations, after representing the highest proportion during the nineties and before, have therefore dwindled to around 10% over the past four years.

For more information, see Liquidations statistics as a lagging indicator for turnaround industry activity.

Whilst separate companies and close corporation liquidations graphs are still presented below, one must bear in mind that since the new Companies Act was implemented on 1 May 2011, no more close corporations can be registered. It can also be expected that some existing close corporations will choose to become companies instead.

Before, close corporation statistics gave an indication of smaller firm liquidations, whilst company liquidations statistics gave an indication of larger firm liquidations.

Going forward it is probably best to focus solely on total liquidations statistics to measure liquidations movements.

Liquidations past 48 months

Click on any thumbnail below and use the NEXT and PREVIUS buttons for enlarged views of the most recent monthly liquidations statistics (May 2011) - companies, close corporations and total.

 

Company liquidations per month

Close corporation liquidations per month

Total liquidations per month

The short-term trend in liquidations is sharply down

The May 2011 liquidations figures shows a substantial drop against past levels. 

On 1 May 2011 the business rescue provisions in Chapter 6 of the Companies Act No. 71 of 2008, the Companies Amendment Act No. 3 of 2011, and the Companies Regulations, 2011 were implemented.

This immediately raises questions as to the significance of the impact of new business rescue legislation on reduced liquidations statistics in the same month.  We propose that the following three factors be considered:

  • Potential of statistical aberrations in the data.
  • The impact of new business rescue legislation:
    • Companies and close corporations placed in business rescue during May 2011.
    • The boards of companies and close corporations, and their affected persons (shareholders, creditors, employees, and labour unions) holding off with business rescue filings and court applications until business rescue practitioners have been registered.
  • Improvement in the economy

Potential of statistical aberrations in the data

Although we believe that the very low May 2011 liquidations statistics do reflect Chapter 6 business rescue effects, care should be exercised. 

Note that liquidators face significant case backlogs and fluctuating capacity, compromising the consistency of liquidations data.  Because of this, longer-term trends in the data, such as for liquidations per annum shown below, are considerably more useful than the volatile shorter-term monthly data.

Credit Guarantee, in Liquidations Fall by an Unexpected 72.1%. (2011) noted that "“It must be noted that liquidations represent a lagging indicator and, following on the slow administrative month in April owing to the high number of public holidays, when reported failures fell over 25%, we would have expected to have seen a rebound in May’s figure... In fact, this goes back to September 2007, when recorded liquidations rose 113% year-on-year, following the public-sector strike in the preceding months".

Before fully attributing the decreased liquidations to business rescue, we recommend waiting for another month or two to make sure that this is indeed a sustainable new trend.

The impact of new business rescue legislation

Stats SA reported that the relatively low number of liquidations in May could be attributed to the new Companies Act of 2008, which came into effect on 1 May and which introduced provisions for business rescue and compromise with creditors ("Companies Act a Contributing Factor for Decrease in Liquidations in May", 2011); "Far Fewer Companies Closing Down", 2011)

The counter view according to "Liquidations Plummet to Levels Seen Before 2007" (Anderson, 2011) is that is that the drop in May liquidations is not attributable to the business rescue provisions in the Act.  We don't concur with the counter view.

The impact of new business rescue legislation - companies and close corporations placed in business rescue during May 2011

Although neither CIPC nor Stats SA publish business rescue figures (hopefully they will), it is known that a small number of companies and close corporations, that otherwise might have been placed in liquidation, have been placed in business rescue since 1 May 2011. 

Had their liquidation proceedings begun in prior months instead of waiting for business rescue legislation to be implemented, their liquidations would have taken place in May or beyond.

  • An example is DRDGOLD Limited - DRDGOLD Suspends Financial Assistance to Blyvoor (2011)
  • For instance, CRS Business Rescue has helped companies to adopt and file their board resolutions with CIPC to voluntarily begin business rescue proceedings in terms of section 129 of the Act, thereby immediately gaining the breathing space offered by the general moratorium on legal proceedings against the company.

At filing CRS Business Rescue has helped these entities to apply to CIPC for extension to appoint the business rescue practitioner, or for a business rescue practitioner to be granted an interim license and to be appointed.

  • We are aware of court applications by affected persons (shareholders, creditors, employees or labour unions) to place companies under compulsory business rescue in terms of section 131 of the Act, but we don't know whether court orders to this affect were in fact made. The application for Pinnacle Point was withdrawn after 2 days - see "Liquidations Plummet to Levels Seen Before 2007" (Anderson, 2011).

If the court makes an order for business rescue, the court may make a further order to appoint an interim business rescue practitioner nominated by the affected person who applied for business rescue, subject to ratification by a subsequent vote by independent creditors. 

The impact of new business rescue legislation - boards and affected persons holding off with business rescue filings and court applications until business rescue practitioners have been registered

The uncertainty created by having new business rescue legislation since 1 May 2011 but slow filtering of the news that business rescue practitioners are indeed awarded interim licenses so that business rescue can commence and continue, may have caused boards and affected persons to delay business rescue of companies and close corporations that otherwise might have been liquidated, until such time as the business rescue implementation process with regard to business rescue practitioners is clear.

This process is now clear - see Registration as a business rescue practitioner.

Improvement in the economy

"Liquidations Plummet to Levels Seen Before 2007" (Anderson, 2011) suggests that the decreased May 2011 liquidation statistics may be due to an improved economy and end of the recession, but not due to new business rescue legislation. Could it be due to both?


The sudden drop in May liquidations figures will of course have affected year-on-year liquidations statistics:

  • Company liquidations for the first 5 months of 2011 are 22% lower than in the corresponding period in 2010, and the latter 8% higher than in the first 5 months of 2009. 
  • Close corporation liquidations for the first 5 months of 2011 are 8% lower than in the corresponding period in 2010, and the latter 2% lower than in the first 5 months of 2009. 
  • Total liquidations for the first 5 months of 2011 are 15% lower than in the corresponding period in 2010, and the latter 3% higher than in the first 5 months of 2009. 

See turnaround market watch for more information on the prospects of future liquidations activity.

Liquidations since 1989

Click on any thumbnail below and use the NEXT and PREVIUS buttons for enlarged views of the most recent annual liquidations statistics - companies, close corporations and total.

 

Monthly company liquidations per annum

Monthly close corporation liquidations per annum

Monthly liquidations per annum

Monthly annual liquidations per annum show a drop in year-to-date 2011 statistics by virtue of the substantive drop in May 2011 liquidations statistics.

New business rescue legislation implemented on 1 May 2011will give financially distressed but economically viable companies a second chance should informal creditor workout fail or not be attempted.  As such it will have a tempering effect on liquidation statistics.

See turnaround market watch for more information about the state of the economy and its effect on liquidations.

Liquidations statistics as a lagging indicator for turnaround industry activity

The level of company liquidations serves as a proxy for market potential for turnaround and business rescue practitioners involved in the Turnaround and business rescue industries.

The more liquidations, the more turnaround work, whether in the informal workout setting or in the Chapter 6 business rescue setting.

It is difficult, however, to try gauge the actual number of potential sizable turnarounds from the total number of liquidations, because most liquidations are of small firms.

  • More than 90% of companies being liquidated have assets of less than R150,000;
  • More than 95% of companies being liquidated have less than five employees;

Yet, the year-on-year fluctuation in total liquidations serve as a useful indication of increasing or decreasing demand for turnaround.

But caution should be exercised during the first year after business rescue legislation has been implemented on 1 May 2011, since business rescue will of course save some companies from liquidation.

Compulsory company liquidations

Traditionally, as is the international practice, the focus has been on compulsory company liquidations, which flows from financial distress, representing a lagging indicator of the potential market for turnaround. 

However, creditors that in the past would have initiated compulsory liquidation have for years now preferred to initiate a voluntarily liquidation in cooperation with the company since it is cheaper and more effective than compulsory liquidation.

Voluntary company liquidations

In the past, voluntary company liquidations did not receive much attention as these are not necessarily as a consequence of financial distress.

The reason for this is self evident as those statistics relate to insignificant companies, one man shows, empty shells and by and large defunct companies.

In the case of a voluntary liquidation by companies themselves, the companies are solvent and are terminated (and consequently liquidated prior to their dissolution) due to the companies wanting to discontinue operations, for whatever reason.

Most of the voluntary liquidations nowadays are by creditors, in which case the company is insolvent, but a less expensive (and less onerous) procedure than compulsory liquidation is followed to get them into liquidation.

The breakdown between voluntary liquidations by companies vs. by creditors is not published by Stats SA.

Shift towards voluntary company liquidations

Compulsory company liquidations have decreased from between 60% and 80% of total company liquidations during the early nineties, to 40% to 60% during the late nineties, and to less than 20% during the twentieth century, and less than 10% during the past 5 years (see graph below). 

 

Compulsory versus voluntarily company liquidations

 

Why the shift?

For many years prior to the early nineties advisors to companies wanting to place itself in a form of voluntary liquidation was of the view that such a process could only be facilitated through the Courts when the company was unable to pay its debts or insolvent.

The issue of which liquidator(s) to be appointed was an integral part of the process.

In those days the Master did not make the details of pending liquidations public by publishing the lists of Respondents on its notice board so liquidators who had been “tipped of” about the pending liquidation could do all their canvassing without fear of any opposition.

In the middle nineties the Master started making the lists available and the “competition” for appointment became fierce because the information was now in the public domain.

It then dawned upon companies, attorneys and liquidators that the passing of a resolution for a creditors’ voluntary winding-up was a much better way to keep the information of the pending liquidation out of the public domain as there was no legal requirement to obtain a security bond from the Master prior to the adoption of a resolution as is the position when launching a Court application.

It became the preferred route and was being driven by the fact that, in many instances, insolvency practitioners and attorneys specialising in insolvency law deemed it to be more beneficial to control the process through the mechanism of a voluntary winding-up as opposed to a Court liquidation.

In following the resolution route the role players once again had the inside track as the prospective liquidator could do all his canvassing in peace and quiet. 

It also became a much cheaper and less cumbersome option than to go to Court for an Order placing a company in liquidation bearing in mind that the costs involved for a Court liquidation could be anything between R20,000.00 and R50,000.00 as opposed to, possibly, a maximum of R5,000.00 in the case of a voluntary winding-up.

Most, if not all, liquidation applications are driven by the parties who have a vested interest in the appointment of the liquidator, i.e. the attorneys or the liquidators themselves.

It took the Master a few years to cotton on to this and the Master started publishing resolutions with a 48 period to all role players to get their act together in so far as nominations etc. are concerned.

By then the process of passing a creditors’ voluntary winding up resolution had proved to be a much cheaper, quicker and more effective way to place a company in liquidation than to go the Court route.

New business rescue legislation will increase the proportion of compulsory liquidations again

Implemented on 1 May 2011, new business rescue legislation will not only decrease total liquidations, but the proportion represented by compulsory liquidations relative to voluntarily liquidations will increase again.

The reason is that in terms of the new business rescue legislation employees will be better off in a (compulsory) liquidation following unsuccessful business rescue compared with a voluntary liquidation by creditors.

  • Their employment contracts will be maintained during business rescue, rather than having their employment contracts suspended in liquidation.
  • In the event of unsuccessful business rescue, employees will be preferred creditors during subsequent liquidation rather than having limited preferred creditor status they would otherwise have had under insolvency legislation.

It therefore follows that employees, or their labour unions, who will have the right as affected persons to commence compulsory business rescue proceedings in terms of section 131, will prefer business rescue above voluntarily liquidation, even if the company is economically unviable, which is not the purpose of Chapter 6 business rescue.  Yet, many such attempts will unfortunately succeed, only for business rescue to fail, with compulsory liquidation to follow, but with employees better off than having been liquidated straight off in the first place.

The net effect of new business rescue legislation will therefore be an increase in the current low proportion of compulsory liquidations relative to total liquidations.

References and readings

Media articles

Anderson, A. (2011, June 28). Liquidations Plummet to Levels Seen Before 2007. BusinessDay.

Companies Act a Contributing Factor for Decrease in Liquidations in May. (2011, June 27). Business Live.

Company Investors Would Not Give a Second Glance Keeps Making History. (2011, June 27). BusinessDay.

DRDGOLD Limited - DRDGOLD Suspends Financial Assistance to Blyvoor. (2011, June). ABN Digital,

Far Fewer Companies Closing Down. (2011, June 27). Business Report.

Liquidations Fall by an Unexpected 72.1%. (2011, July 8). Engineering News. Retrieved July 8, 2011

Smit, P. (2010, September 10). Formalisation of Business Rescue Rules Could Help Lower SA’s Liquidation Rate. Engineering News.

Websites

Van der Walt, J. (2010). Business Rescue in South Africa. CRS Business Rescue.

Van der Walt, J. (2010). Business Rescue Legislation in South Africa. CRS Business Rescue.

Van der Walt, J. (2010). Business Rescue Regulations in South Africa. CRS Business Rescue.



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