SAICA: Draft Solvency Guide

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SAICA: Draft Solvency Guide

• 05 March 2025
• Regulatory Compliance and Legislation
• South African Accounting Academy

Summary:

The South African Institute of Chartered Accountants (SAICA) has published a Draft Guide on Insolvency and Financial Distress, which is available for public comments.

Article:

The guide seeks to define solvency and provide guidance on how companies should respond when insolvent.

This Guide aims to provide summary guidance to assist a company, its directors, Registered auditors, independent reviewers, compilation practitioners and Chartered Accountants in other capacities, when considering the application of certain relevant sections relating to solvency and liquidity in the Companies Act, 2008 other relevant laws.

Contents:

• Disclaimer
• Introduction
• Definitions
• Part 1
• Insolvency
  • Responses to insolvency
• Financial distress
  • Responses to financial distress
    • Board resolves to commence business rescue proceedings
    • Board does not resolve to commence business rescue proceedings
    • Liquidation (winding up of insolvent company)
• Annexure A – Prevalent Sections in the Companies Act, 2008 referring to the term “insolvent”
• Annexure B
  • Subordination agreements
  • Letters of support

Part 1 reflects on the situations where companies find themselves in a state of factual insolvency, commercial insolvency or financial distress and the potential responses that may be considered under these circumstances.

Although the Act does not define either a “solvent company” or its converse, - an “insolvent company”, reference to the term “insolvent” in Sections 9, 22, 79, 80 and 163 of the Act. Refer to the Table in Annexure A for the relevant references. The converse of “insolvency” i.e., “solvency” will be used where the context in this Guide requires.

The law regulating the insolvency of a company is primarily the provisions of the 20081 and 2008 Companies Acts and the law relating to insolvency, underpinned by relevant legislation, common law and case law, which primarily goes beyond the scope of this Guide.

In Part 2 of this Guide, the implications of trading whilst being insolvent or financially distressed and the potential reporting obligations where reckless trading is evident, is explored.

Access the Draft Solvency Guide comment table - which is to be used insert comments, at  https://saicawebprstorage.blob.core.windows.net/uploads/resources/Solvency-Guide-Comment-table.docx

Click here to download the 15-page Guide:

https://saicawebprstorage.blob.core.windows.net/uploads/resources/Draft-Solvency-Guide.pdf

Relevance to Auditors, Independent Reviewers & Accountants:

• The Companies Act is yet another piece of legislation that your clients must comply with, and which you must assess compliance with.  If they don’t comply with the relevant laws and regulations, you have certain reporting obligations in terms of NOCLAR (NOn-Compliance with Laws And Regulations) – this could include reporting to management, qualifying your audit opinion, reporting a Reportable Irregularity, etc.
• This Guide aims to provide summary guidance to assist Registered auditors, independent reviewers, compilation practitioners and Chartered Accountants in other capacities, when considering the application of certain relevant sections relating to solvency and liquidity in the Companies Act, 2008 other relevant laws.
• Auditors, Independent reviewers and Compilers need to ensure that insolvency issues are properly disclosed in the AFS.
• You should be aware of useful guides that are published by regulators, e.g. SAICA.

Relevance to Your Clients:

• Companies should consider how to respond when insolvent.
• This Guide aims to provide summary guidance to assist a company and its directors when considering the application of certain relevant sections relating to solvency and liquidity in the Companies Act, 2008 other relevant laws.

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