A company that can't pay its debts is declared insolvent; a company that is being sold off is liquidated. There have been new figures released by Statistics SA that show there has been a rise in the number of liquidations 35.8% in the first 7 months of 2009 compared to the same period in 2008. There has been a fall in insolvencies by 17.9% for the first 6 months of 2009 compared to the same period in 2008. This shows that while more companies are biting the dust less of them are going to the wall due to debts they can't service. What are the factors?
- The National Credit Act
- More proactive debt management
- More negative outlook
The majority of companies that were liquidated were voluntary liquidations, this means that more companies are looking at their future and not seeing one, so they are voluntarily closing their doors and selling off the assets of the company. The amount of companies that have been declared insolvent has dropped leading to the assumption that they are either dealing with their debt earlier or are voluntarily liquidating before it becomes a court ruling and an involuntary liquidation is ordered. With more companies liquidating the outlook becomes bleaker.
All business decisions should be taken on a business case basis. Hard looks at the actual realities of that company's balance sheet need to be taken, but bear in mind that negative, or positive, sentiment can skew this hard look, and a squint could lead to unnecessary steps being taken. If, however, there is no longer a business case then it makes sense to liquidate the company. In a recessionary environment these liquidations can be expected, but with a rise in liquidations and a drop in insolvencies it tends to ask the question: Are these companies going under due to fear of the recession and future liabilities or real business cases?