Despite the pandemic, liquidations were actually down by 9.1% back in October of 2020. The South African government has several programmes in place in order to help businesses big and small stay afloat and deal with the consequences of the pandemic. The government also injected R500bn into the economy throughout 2020 to help businesses stay afloat. But none of that stopped an increasing number of businesses from going into liquidation.
The total number of company liquidations in 2020 was 1,164, according to the preliminary report. Of those, 134 were voluntary liquidations, while the rest were compulsory.
A voluntary liquidation happens when a company decides to stop doing business on its own. Compulsory liquidations, on the other hand, are usually initiated by creditors. In both cases, the liquidation process results in permanently closing down a business and distributing its assets to claimants. And the number of voluntary liquidations in 2020 was almost 10% higher than it was in 2019.
Some sectors were hit harder than others in December. Of the liquidations, 54% of them (634 in total) were in the financing, insurance, real estate and business services industry. The second hardest hit sector was trade, catering and accommodation, which saw 397 liquidations (34% of the total for the month).
The high number of businesses closing in the last month of the year does not necessarily mean that December was harder for business than November. Financial experts have pointed out that the increase in business liquidations is probably just a delayed response to the damage caused by the pandemic earlier in the year. Businesses were crippled by the lockdowns and the impact of the virus, and ventures that failed to recover throughout the year are only now being shut down permanently.
Last year, the South African Reserve Bank cut interest rates by 300 basis points, down to 3.5%. And, in January, the bank’s governor, Lesetja Kganyago, pointed out that the policies adopted by the bank to cushion the impact of the pandemic could not be felt right away because the economy was in lockdown at the time. He stated that since the lockdowns have been relaxed, the effects of the interest rate reductions should help the economy improve.
It’s unclear what the effects of the increased number of insolvencies will have on the economy. While a significant number of businesses managed to survive 2020, 2021 will likely see the liquidation of hundreds of businesses that never quite recovered from the lockdowns that happened last year.
On the upside, the liquidation of several companies combined with low-interest rates does create many opportunities for savvy entrepreneurs. As economic activity begins to resume, new businesses — with the help of consulting firms like Arbtech — will likely be created to fill the gaps left by the companies that were liquidated.
