Face the Facts

04 April 2007 Credit Guarantee Insurance Corporation of Africa L

The "Companies Bill, 2007", presently open for comment from business, may have far-reaching consequences for 'business' in general.

In the current climate, with so much regulation and new compliance issues being the order of the day, many companies could be excused for wanting to stick their heads in the sand and postpone worrying about the consequences of another piece of legislation affecting them.

"But, by that time, it may just be too late to shut the proverbial door, because perhaps the most daunting issue for corporate creditors to face up to, will be the facet of the Bill dealing with business rescues," comments Gernot Kruger, General Manager at Credit Guarantee Insurance Corporation.

"Not dissimilar to the Chapter 11 proceedings in the USA, many supplier companies could be caught short by this legislation. While in itself, the rationale behind trying to keep a company afloat and trying to trade it out of a financial collapse and retain jobs, is laudable, the ensuing result may be completely unpalatable for creditors," he says.

Simply put, once a company applies for 'business rescue protection', creditors must cease all pending and current legal action in respect of debt recovery and will literally be unable to collect what is owing to them for the period.  In this time, those very same creditors may be called upon to continue supplying the defaulting debtor company. This will obviously put additional strain on the cash flow of the supplier and is of course, likely to impact the relationships that may have taken years to build up. The dilemma really relates to the forced supply of goods under what amounts to a new dispensation relating to the debtor company.  It almost excuses the past debt and gives the debtor time to breathe new life into the company. Of course, that is the theory, but unless this is rigorously enforced, there are going to be too many unscrupulous business owners out there who will use this facet of the legislation as an excuse to delay payment to their creditors.

The dire need to protect ones own cash flow while being compelled to extend ongoing credit to the debtor, will require much business maturity. However, if you apply sound corporate governance principles, insuring your debtors against this very default, will alleviate all of the associated stress. Having passed the risk of non-payment to a professional debtors insurer, suppliers would not need to worry about this problem.

"We at Credit Guarantee have already come out strongly in support of the proposed legislation and have confirmed that, should this Bill be enacted, the company will immediately add this new eventuality into its policies as an act of insolvency.  We would then indemnify our insured clients immediately upon one of their creditors applying for business rescue and supplement their cash flow while waiting out the rescue period," concludes Krger.


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