Insolvency frameworks have two aims, the first is to protect lender rights and to minimize the extent of potential loss and write-off, arising from defaults, the other goal is to balance this need with the wider and longer term benefit of rehabilitating firms which continue to employ people and contribute to the tax base, and the economy as a whole. Anecdotal evidence and business reporting hints at widespread disappointment at the outcomes experienced from the updated 2008 Company Act, and in particular the frustration with Chapter 6 business rescue.
Independent 3rd party assessments of insolvency proceedings in SA are clear, our ways must change, we are not inhibited by our legal and regulatory frameworks, and can do much better. The comparative indicators make this clear.
|Indicator||South Africa||Sub-Saharan Africa||The OECD|
|Recovery rate (cents on the dollar/Rand) The recovery rate calculates how many cents on the dollar secured creditors recover from an insolvent firm at the end of insolvency proceedings.||35.3||20.0||72.3|
|Time (years) The average duration of insolvency proceedings. The time of the proceedings is recorded in calendar years and includes all appeals and delays.||2.0||3.0||1.7|
|Cost (% of estate) The average cost of insolvency proceedings. The cost of the proceedings is recorded as a percentage of the estate’s value.(lawyers, court, auction, administrators & depreciation)||18.0||23.1||9.0|
|Outcome (0 as piecemeal sale and 1 emerges as a going concern) In the case study run, what would the outcome of the rescue be? 1 = success going concern||0||0||1|
|Strength of insolvency framework index (0-16) The index is the sum of four component indices: commencement of proceedings index, management of debtor’s assets index, reorganization proceedings index and creditor participation index.||14.5||6.3||12.1|
What this actually says is that a firm that can be rescued in a typical OECD country might expect to become insolvent in South Africa
This need not be your expected outcome if you invest time upfront in the process. If you involve us or at least apply the insights we provide freely to you, then you stand a better chance of avoiding unnecessary pain and frustration to the benefit of debtor and creditor alike.