Strict solvency rule or business could be shut

THE South African Institute of Professional Accountants has called on its members to warn their clients about certain aspects of the new Companies Act, saying it could have far-reaching implications on the way entities do business.

Saipa technical executive Faith Ngwenya, speaking after public hearings on the Companies Act Amendment Bill, said the "government had not budged on the controversial Section 22(1)(b) of trading under insolvent circumstances".

"So we urge our members to warn their clients of this section and its implication in order to avoid any unintended consequences of the law."

Under the new Companies Act most forms of business entities will be required to perform a solvency and liquidity test as part of the preparation of its set of annual financial statements.

If a business is judged to be either technically or commercially insolvent, it may be required to stop trading.

"Also under this act, businesses that might have been able to trade out of technically insolvent positions given the chance will now be scrutinised by the commission and depending on the results of the investigation could find themselves being shut down," Ngwenya said.

"There is likely to be enormous impact on the economy as businesses close and people lose their jobs."

Ngwenya said some banks had already started applying the law, asking businesses for certificates of solvency before deciding whether or not to grant loans.

She said another aspect that needed consideration was the use of symbols in company names.

"The DTI (Department of Trade and Industry) has confirmed that the new Act will allow the use of symbols in company names, thereby rejecting the objection by banks that it would be costly to upgrade their systems to be able to read symbols and foreign language.

"But a delay in the implementation was agreed on."