Run on Numbers: Public Interest Scores – liquidations and business rescue procedures

The Companies and Intellectual Property Commission’s (CIPC) head office in Pretoria. Photo Sizwe Ndingane

The Companies and Intellectual Property Commission’s (CIPC) head office in Pretoria. Photo Sizwe Ndingane

Published Jul 30, 2023

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  1. According to the latest figures by Statistics SA, the number of liquidations in SA increased by 128 in June., with 116 of them doing so voluntarily, while 12 were compelled to do so. This takes the total number of liquidations in SA since the start of the year to 802. However, it should be noted that the number of liquidations in the country had decreased substantially compared to last year. The total number of liquidations decreased by 11,7% in June 2023 compared with June 2022. There was a decrease of 17% in the second quarter of 2023 compared with the second quarter of 2022. The total number of liquidations decreased by 14% in the first six months of 2023 compared with the first six months of 2022.
  2. According to the data, and across the whole year, the finance, insurance, real estate and business services industry were the hardest hit, reporting 278 liquidations since the start of the year. With rolling blackouts and pricing pressures providing little reprieve, many more businesses can still face the chopping block. During the course of this year, some private and public companies have entered the business rescue process, like Tongaat Hulett and the South African Post Office (SAPO). According to a 2022 Companies and Intellectual Property Commission (CIPC) report, of the 4 370 companies that entered business rescue between 2011 and June 2022, 546 ended up in liquidation.
  3. In taking a deeper look into how insolvency plays out, much as in a divorce, the previous commonality between connected people is lost. Every insolvent company ends up destroying jobs, and that is why it is important to keep an eye on the numbers. There are 7 933 000 unemployed people in South Africa, according to the official data. And when we look at the employment aspects of liquidations and business rescue, more people could soon join the almost eight million spectators in the stands. The SAPO business rescue plan is putting 7 000 jobs at risk. The number of people employed in the country is just over 16 million, and that is out of a total population of almost 60 million.
  4. In the insolvency and business rescue worlds the big lenders and the SA Revenue Service are usually in charge and stand first in line to collect their dues. To protect the public and the ordinary worker, there are, however, some measures in place to attempt in levelling the playing field. One such measure is the measurement of the public score of a company. A public interest score (PIS) must be calculated and submitted at the end of each fiscal year, along with the company’s financial statements, to the CIPC. The score is an indication of a company’s level of public interest, which then translate to the level to which it must be regulated, and the financial reporting standards required to protect public interest. The Companies Act of 2008 prescribe whether a company requires an independent review, or audit, of financial statements, by whom, and what financial reporting standards are applicable. It can also determine the need for a social and ethics committee for private (non-state owned and unlisted) companies with a high PIS. The PIS is based on a points system. Points are given for a simple set of structural and financial parameters like number of employees, third-party liabilities, turnover and the number of shareholders. The number of employees in this calculation plays a significant role. Regular Inspections are also performed by the Independent Regulatory Board for Auditors, under the Auditing Profession Act.
  5. An example of an unusually high PIS score is that of Steinhoff. According to the company’s 2022 Annual Report, in December 2022, Steinhoff released details of the proposed Maturity Extension Transaction, including the terms of the debt extension which resulted in the decision by shareholders to delist the company this week. Steinhoff will be given a three-year debt repayment holiday due to its delisting, which comes after creditors approved a proposed debt restructuring plan in May.The latest public interest score of the company raised the ceiling, with the total debt and turnover each contributing more than 200 400 points. A further example of a very large PIS is SAPO, whose 2022 annual report stated that “permanent staff numbers were reduced from 15 826 to 14 460 in the period under review”. The turnover of SAPO is more than R3 billion and the payment to its employees exceed R3.6bn. SAPO’s business rescue plan entails a cut of R1.33bn in employee costs. The government will provide R3.8bn in Business Rescue funding. SAPO received R7.9bn in bailouts from 2014 to 2019 and R2.4bn in this year’s February Budget. With the latest injection, total bailouts amount to a staggering R14.1bn.

It is important to note that the valuations in a company’s balance sheet would typically be based on original cost less depreciation. Once a company or an individual is faced with a liquidation value of assets is determined by their “fire sale” values. This term is used to describe the likely price an item can be sold at an auction to realise value in the least amount of time. The discounted value may be more than 20% and in many cases, the values realise only 50% or less of its balance sheet value. The person that stands last in the queue is the debtor and there is rarely any value left to be distributed to them. It is important to stave off liquidation with every bit of strength that one can muster.

* Kruger in an independent analyst

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