Insurance implications for businesses when acquiring liquidated assets

The number of companies being wound up in South Africa fell in April 2011, suggesting business conditions are continuing to improve; but, for companies looking to acquire assets from an ailing firm, it is essential to conduct a thorough review of the insurance implications to ensure no future claims arise.

According to Statistics South Africa, the number of company liquidations fell 25,4% year-on-year in April 2011 from 358 to 267. However, the recent case of Pamodzi Gold has highlighted the difficulties that can arise when liquidating a company after the North Gauteng High Court ruled the liquidators were “no longer suitable” following a complaint about the relationship between the liquidators and Aurora Empowerment Systems, which was granted management of two of Pamodzi’s mines.

There are key factors for any business acquiring the assets of a liquidated firm to bear in mind. If a company is still trading in any form, then all relevant insurance still needs to be in place to cover past warranties or indemnities. This could prove especially important following the implementation of the Consumer Protection Act (CPA). It is also important that if the business being acquired had any guarantees in place to clients and customers that some form of cover is also taken out by the new owner as this could potentially result in future claims that must be insured against.

For any company that is taking over another business as a going concern, there are some essential insurance risks that need to be carefully examined by the new owner. This may include product liability insurance if the business is involved in the manufacture or sale of goods; professional indemnity insurance against negligence claims, and director and officers liability insurance to protect senior management in the event of a claim against them.

Besides the assets themselves being insured, one also needs to ascertain whether the assets are owned by the company or whether they are leased or financed. If the assets are leased or financed, there is likely to be an onus on the part of the new owner with regards to the type of insurance required. It’s also important to remember that any cover should be for replacement value, not for the book or sale value.

Once a liquidator has been appointed, they will conduct a review of the current insurance of the business assets. The liquidator must ensure that all of the assets are fully covered during the liquidation process and must also have guarantees in place to ensure that if they disappear with assets or mismanage the liquidation that there is some form of protection for the creditors.

Any business owner who is struggling financially and is considering liquidation should first speak to their financial advisor to determine what their options are. Insurance is an essential purchase for any business; without it, a company could be bankrupted. However, if one is facing severe financial constraints, then it may be advisable to consider cutting back on certain non-essential premiums such as all-risk cover, which can prove expensive.

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