COVID-19

Financial fallout from the COVID-19 pandemic

Prior to the World Health Organisation declaring COVID-19 a pandemic South Africa’s economy had already contracted in the last two quarters of 2019. Arising from the subsequent lockdown in South Africa on Friday 27 March 2020, the credit rating agency Moody’s cut South Africa’s sovereign credit rating to sub-investment grade, meaning that the country now has a “junk” rating status from all three major credit rating agencies.

As a result of the downgrade, South Africa’s government bonds will be excluded from the FTSE World Government Bond Index, and it will no doubt become more expensive to borrow money and the International Monetary Fund (IMF) reduced South Africa’s growth forecast for 2020 to only 0.8% and for 2021 to 1.0%. Should you be interested in more growth information consult the IMF’s reports on www.imf.org.

Never forget that all these loans created by government will need to be repaid at some stage and ultimately the source of government revenue will always be taxation of corporations and individuals. We should not be surprised by increased tax rates at some stage in the near to medium term.

The IMF published a “Pain Index for April 2020” ranking the United States at number one as the country that has been most affected by the recession caused by COVID-19, followed by South Africa at number 2 and then Italy, France, the UK and Turkey.

Projected global economic growth in the second half of 2020 is set to fall to negative 3%, a downgrade of 6.3% from January 2020. The IMF report states that “… this makes the Great Lockdown the worst recession since the Great Depression in 1929 and far worse than the Global Financial Crisis in 2009”.

We have been witness to the immense fallout in South Africa and it may get worse before it turns to a positive outcome.

SAA Airways, SA Express, Comair and Edcon filed for business rescue as set out in the Companies Act, 71 of 2011 (the Companies Act). These are not small companies proving that no matter how large your company may be it is still vulnerable to global and local factors beyond your control. We are well aware of the controversy of SA Airways and that their financial woes existed well before the lockdown; the lockdown probably became the last nail in the coffin for SAA.

Restaurants, hotels, hospitality, conference centres, entertainment venues, sports event companies and the transport sector will all suffer for as long as the lockdown is in force and probably for many months thereafter while trying to recoup losses.

As for persons resident in South Africa, the situation is just as bleak and unemployment has drastically increased during the lockdown phase and is now above 30%. Such unemployment figures are at the highest level since the Great Depression of 1929. In hard times humanity tends to undertake drastic measures and we have seen rioting and looting none of which are to be condoned as tough as it may seem to grasp.

The inability of companies to trade in this lockdown period leaves many companies and businesses unable to generate any revenue to meet their continued overhead costs, such as salaries and wages, rental obligations to landlords, creditors, suppliers and the payment of public utilities (lights, water, electricity, rates and taxes) and will ultimately result in failed business ventures and higher unemployment numbers. The number of businesses undertaking business rescue will dramatically increase in 2020. A key monthly report to follow is “P0043 – Statistics of Liquidations and insolvencies” published by STATSSA.

The Companies Act states that if a company cannot pay its debts in the ordinary course of business (as and when they fall due) and for the next 6 month period, then they must consider filing for formal business rescue. If directors ignore this obligation and, not with standing, continue to trade their companies in insolvent circumstances, and thereby “recklessly”, then they may open themselves up to personal liability claims.

Companies use the lockdown’s restriction of trade status as a means to state that there is no available revenue to pay creditors and are requesting a 3/6 month payment deferment on outstanding amounts due. Whilst this may give short-term relief the debt remains unpaid and must be cleared as soon as the moratorium has ended. This will apply additional pressure on cash flow management of these companies.

The fact that a company has admitted to not being able to pay their debt is a dangerous route to undertake but what other option is there at that point in time is the obvious viewpoint. Creditors not willing to agree to a payment moratorium may bring forward an application for liquidation of the company.

The Companies Act is very clear on this. If an application for the liquidation of the company is launched, this would prevent the company from passing a resolution to place the company into business rescue. The company is then faced with having to intervene in the liquidation application and to try and persuade the court that a business rescue would be a better option for the company than a liquidation.

All this may sound like doom and gloom however the lockdown status will make many companies rethink how they operate. One positive outcome is restructuring of the business. This may well include downsizing (unemployment being the negative result of course), new marketing strategies, business diversification and operational review.

Directors must be proactive in managing the business during and beyond the lockdown. Cost-cutting is essential during the lockdown and should be implemented without delay. Where possible all tax liabilities must be reviewed and professional tax consultants should be consulted. If the business rescue option is invoked it goes without saying that implementing such measures requires legal input. Failure by directors to take proactive steps may result in directors being held personally liable in terms of the Act.

Never forget to openly engage with the stakeholders below dependent on your type of business:

  • Employees and Trade Unions
  • Suppliers and Creditors
  • Landlords
  • Bankers
  • Government – financial aid assistance, UIF, corporate tax subsidies and employee tax incentives
  • Credit Insurers
  • Your internal Finance Department for cost-cutting measures

Now is the time to create inventive solutions for the survival of yourself, your company and your employees.

Author Craig Tonkin

Leave a Reply

Your email address will not be published. Required fields are marked *