Accounting officers for close corporations have long been required to report instances of insolvency to the Companies and Intellectual Property Commission (CIPC).
The problem with this is a lack of clarity between technical and commercial insolvency. This confusion resulted in the CIPC receiving massive volumes of reports and making it difficult to discharge its duties under the Companies Act.
Technical insolvency is when a company’s liabilities exceed its assets. Technical insolvency has long been understood to be a poor measure of a company’s ability to continue trading. For example, the parent company may issue a subordinated loan to a subsidiary so that in the event of liquidation, other creditors will get first bite of the apple. In those circumstances, the loan may effectively be written off. Counting subordinated loans as part of company liabilities provides a distorted measure of technical insolvency.
A more useful measure is commercial insolvency, which is defined in the Companies Act as the inability of a company to pay its debts when they fall due.
The CIPC has just issued a Guidance Notice outlining the responsibilities of accounting officers. If the CIPC has reason the believe that a company is unable to pay its debts when they become due and payable, it may issue a notice to the company “to show cause why it should be allowed to continue carrying on business. Read more on Accounting Weekly.