Volatile liquidation statistics

The 58.8% year-on-year fall in June 2011 liquidations to 156 from 379, following the dramatic 72.1% y-o-y fall seen in May, still raises some doubts in our minds. The volatility in the figures of late is ascribed to the business rescue provisions of the new Companies Act and the fact that voluntary liquidations have shrunk spectacularly. We are not aware of any body, be it the Companies and Intellectual Property Commission or Stats SA, that is formally monitoring the numbers of firms considering or indeed entering business rescue. Our own experience indicates 11 firms and that the key factor negatively affecting businesses potentially opting for this option, is the dearth in the approval of business rescue practitioners.

We have to treat the latest figure with incredulity given that Credit Guarantee’s leading default payment indicator for June depicts a 5.6% rise in overdue payments although our July figure is 19.3% lower, bringing the year-to-date decline to 12.2%. Similarly our claims experience for the year to date July depicts an improvement to the order of 16%. Certainly monthly volatility in these figures can be expected but yearly swings above 20% are uncommon; they would usually reflect either a sharp deterioration or improvement in the underlying economy and hence in trading conditions. Therefore, our expectation of an improvement in liquidations, taking account of business rescue provisions, is in the 15-25% region for 2011 and if this is realised it would be a significant achievement. It must be borne in mind that some business may consider rescue application solely as a means to delay contractual payments, thereby causing distress for creditors. If indeed such a ploy is behind the extraordinary fall in liquidations, it implies pain down the road.

Given that the first half 2011 liquidations are 22.9% lower than in the first six months of 2010, there were only a few sectors that fared poorly in the January – June 2011 period:

· mining and quarrying saw 18 failures compared to the 8 seen in the first 6 months of 2010

· electricity, gas and water experienced 8 liquidations vs. 3 a year earlier

· transport, storage and communication had 121 closures compared to 2010’s 73, reflecting very tight operating margins

· 398 liquidations were seen in the community, social & personal services industry vs. 174 last year.

Most indicators, be they retail sales or manufacturing production as well as many confidence indicators, point towards a weak second quarter 2011 with more to follow. Indeed, we would argue that trading conditions – order books, costs and margins – are all under extreme pressure. Further, strike season is hampering numerous industries. If indeed we are incorrect in our scepticism of the recent trend, then we look forward to a significant fall in payment defaults with a concomitant sharp reduction in ultimate liquidations.