Rolling power blackouts and the steep increases in electricity tariffs could tip many businesses into bankruptcy, putting thousands of jobs on the line, says Eric Levenstein, director and head of the insolvency and business rescue practice group at Werksmans Attorneys.
Big and small businesses are counting the cost after power utility Eskom ramped up power cuts to stage 6 indefinitely, prompting calls from some political parties and civil society members for a national shutdown in protest.
The worsening power crises coincided with energy regulator Nersa granting Eskom an increase of 18.65% in electricity tariffs starting in April. More than double the current inflation rate, the increase is certain to squeeze businesses and consumers already overburdened by the rising cost of living.
“With the prospect of higher interest rates, low growth, and still high inflation, many companies could face corporate failures, particularly in the early part of 2023,” Levenstein said in a statement on Monday.
“Insolvency and business rescue practitioners will be kept busy as financial distress continues to have an impact on companies not being able to generate sustainable revenue in continued challenging trading conditions.”
Small, medium and micro enterprises are especially vulnerable to load-shedding because they may not have enough resources for backup plans compared to their bigger counterparts.
The recently published data by Stats SA for November 2022 show that liquidations rose 2.1% in the three months ended November 2022, compared to the same period a year earlier. A year-on-year increase of 4.4% was recorded in November 2022.
In November, there were 166 filings for company and close corporation liquidations. “We saw 51 filings in the finance, insurance, real estate and business services sectors, followed by 35 filings in the trade, catering and accommodation sectors, followed by 17 in the community, social and personal services sectors,” Levenstein noted.
“The glimmer of good news is that the total number of liquidations decreased by 3.4% in the first 11 months of 2022, as compared with the first 11 months of 2021.”
SA is not alone. Worldwide there is an expectation that Zombie companies — those trading on the cusp of insolvency where there is no real prospect of a restructuring or rescue — will have no choice but to file for bankruptcy.
“In a distressed market, directors of failing companies must continuously and critically evaluate the trading prospects of their businesses and assess whether they continue to be sustainable,” Levenstein added.
“If not, they should possibly consider an early intervention, such as a filing for a rescue process or liquidation.”
The Companies Act of 2008 imposes civil liability for reckless and insolvent trading on directors.
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