Anneke Barnard | Senior Manager | Estates and Business Restructuring | BDO South Africa | mail me |
We are living in a time of economic uncertainty. Inflation is skyrocketing, Eskom is loadshedding, and food prices are the highest they’ve been in 14 years. These conditions are putting a lot of strain on business owners, and some tough decisions regarding the future may need to be made.
Shareholders and Directors have a responsibility to always act in the best interest of affected parties of a company. And so, when it comes to assessing a company’s health it’s standard protocol for each business to undergo a solvency and liquidity test, as prescribed by Section 4 of the Companies Act 71 of 2008.
For a business to satisfy the conditions of the test, according to the Companies Act, several factors need to be in considered. The assets of the company – or if it’s a member of a group, aggregate assets – must be “as fairly valued, equal or exceed the liabilities of the company […] or, if the company is a member of a group of companies, the aggregate liabilities.”
In addition, the company must always be able to pay its debts as they become due, in the ordinary course of business for up to 12 months following the date of the test.
If a company fails the solvency and liquidity test, the Board must decide on a course of action for the company. What are the options if the business can no longer continue with its operations, or manage to survive under certain conditions? It’s a tough call that impacts creditors, shareholders, clients and employees alike.
Option 1 – Liquidation
Initiated by the directors of a company, liquidation is the typical course of action when a business is insolvent, meaning its liabilities exceed its assets and its unable to pay its debts, as and when they fall due, with little or no prospect of its fortunes changing.
For an insolvent business liquidation can help in …
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Read the full article by Anneke Barnard, Senior Manager, Estates and Business Restructuring, BDO South Africa, as well as a host of other topical management articles written by professionals, consultants and academics in the April/May 2023 edition of BusinessBrief.
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