Insolvency Practitioners: Appointment Policy

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Justice and Correctional Services

22 August 2014
Chairperson: Mr M Motshekga (ANC)
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Meeting Summary

The Chief Master of the High Court presented the Department of Justice and Correctional Services Policy on the Appointment of Insolvency Practitioners which was focused on promoting equality, transparency and fairness in the insolvency industry, aiming for transformation. He detailed the previous system of appointments called the requisition system, which had failed to foster any transformation in the industry and allowed for exploitation by certain parties. He then dealt with the nuances of the new policy, which made use of a ratio for allocation of insolvency matters based on the race of the particular practitioner. The policy also distinguished between senior and junior practitioners in an effort to ensure entrants are given an opportunity and to enable skills transfer. The policy made provision for the Master to appoint a provisional liquidator before the first meeting of creditors who would not be displaced by the liquidator who is elected by the creditors, through a joint mandate being given.

Adv Basson related information about litigation which had sprung from the Policy. He said that two separate cases had been lodged by associations of insolvency practitioners, later being merged into a single trial, and that pending the outcome of the hearing of oral evidence the implementation of the policy continues to be interdicted. However, the matters which impinged on the constitutionality of the policy have been identified, the various parties are in agreement as to which aspects are problematic and the Department is involved in efforts to amend the policy based on the outcomes of the litigation.

The discussion saw Members’ concern focused on the requirements for inclusion on the national list of insolvency practitioners, particularly the qualifications required and the position of the Department on skills development among previously disadvantaged individuals. There were also concerns about the absence of an over-arching regulatory framework for the industry and the costs relating to the insolvency process.

The Department responded by detailing the efforts it was engaged to ensure new entrants to the industry are encouraged and equipped with the requisite skills through partnerships with associations of practitioners. The details of the application process for inclusion on the list of insolvency practitioners were noted.

Meeting report

The Chairperson began the meeting by welcoming Adv Lester Basson, Chief Master of the High Court and Adv Martin Mafojane, Chief Director: Office of the Chief Master, Department of Justice and Correctional Services. He asked them to address what led to the Policy and why the Department has been taken to court. In his personal experience, having participated in the insolvency industry, transformation was lagging and many of the black participants are mere fronts. His experience was so difficult that it has led to him resigning from the firm through which he made his attempt. Transformation was a constitutional imperative and could not be ignored. He thanked the Department for taking the bull by the horns and gave them the floor.

Policy on Appointment of Insolvency Practitioners: briefing by Department

Adv Lester Basson, Chief Master of the High Court, said that that the Minister is empowered by the Insolvency Act 24 of 1936, as amended, and Close Corporations Act to produce policy for appointments geared towards promoting transparency, equality and transformation in the industry. By virtue of section 339 of the Companies Act the Policy applies to insolvent companies. This has produced the Department’s Policy on Insolvency Practitioners.

Adv Basson said that the policy’s strategy for transformation is to bring into the appointment process all persons who qualify for such appointment, as well as fairness and equality. This change has been catalysed by the failure of the requisition system which was the product of the Department’s non-statutory policy of 2001. The requisition system was a process whereby the creditors approach the Master nominating a prospective liquidator and undertaking to prove their claim at the first meeting of creditors and vote for the nominee. He said that “in no more than 3% of the people who had requisitioned the Master prove their claims and vote the way they had undertaken”. The reason for this is obvious – being that if the creditor proves a claim they may be liable in the event that the estate is in deficit and will have to contribute. The aim had been for the Master to calculate the number and value of requisitions and appoint liquidators and trustees according to a tier system. The failure of the requisition system due to the actions of creditors and practitioners who have “made an industry out of getting the most requisitions”, has led to the failure of the transformative effort and abolishment of the requisition system. The resistance of the established players in the insolvency industry to the present effort to transform should therefore not come as a surprise. The Policy had previously been approved by Cabinet, but with technical problems, relating to the definition of a black person. This was in the process of being resolved and resubmission will follow the completion of that process.

The Policy at present consists of seven clauses. Clauses 1 and 2 contain the definitions and the Policy objective, respectively. Clause 3 prescribes the scope of application of the Policy, which is where the Master exercises its discretion, mostly on provisional and joint appointments. The provisional phase of a liquidation is where the Master has the sole discretion and this is before the creditors have nominated, voted for and elected the liquidator at the first meeting of creditors. This therefore means that the creditors only have control over who is appointed liquidator after they have proven a claim at the first meeting. Creditors may still approach the Master to discuss the appointment, but they have no right to intervene at the first stage. At the first meeting of the creditors, the practitioner provisionally appointed by the master will be jointly appointed with the practitioner voted for by the creditors according to the value of their proven claims. This ensures that the candidate chosen by Master is not extricated from the liquidation at the second phase.

Mr Swart (ACDP) asked if he could interrupt the presentation because he felt he needed clarity on this key point. There was an inconsistency in saying that the Master has an exclusive discretion to appoint at the provisional phase only and that the creditors have the right to appoint at the second stage, yet are bound by the Master’s choice.

Adv Basson replied that it was previously the Policy of the Master to appoint a multiplicity of provisional liquidators, but this has been revised to the appointment of a single practitioner and if the matter is sufficiently complex a second. Further, in a complex matter the creditors who are the separate majorities in number and value will be able to appoint a third and fourth liquidator respectively. Lastly, the appointment of the Master will stand regardless of the creditors’ appointments.

Mr S Swart (ACDP) asked whether in a straightforward liquidation, there could be three liquidators and, if so, would this not greatly increase the cost of the liquidation?

Adv Basson replied that irrespective of how many liquidators are appointed, the liquidators fee remains the same and in terms of current case law, the fee is shared equally among the liquidators.

Mr L Mpumlwana (ANC) asked what the nature of the equality among the liquidators is.

Adv Basson replied that in terms of the law the liquidators are all of equal standing and entitled to an equal share of the fee. However, if the liquidators agree to adjust the fee that is a private matter separate from the Master’s Office. In the event the liquidators dispute entitlement to the fee, they are entitled to place this disagreement before the Master for a decision.

Adv Basson continued that the Policy is aimed at rooting out corruption and fronting in the industry, as well as transformation with an emphasis on the advancement of women in insolvency work. Therefore, the insolvency practitioners on every Master’s list must be divided into the following categories: A- African, Coloured, Indian and Chinese females; B- African, Coloured, Indian and Chinese males; C- White females; and D- White males. Also, only a person who was a South African citizen before 1994 or issue of such may qualify for either category A or B. This will result in work being allocated in a ratio of 4:3:2:1 among the categories, which for example results in African, coloured, Indian and Chinese males receiving two out of ten appointments and white females receiving two of the ten. The Master’s lists must distinguish between senior practitioners, who have been appointed at least once in every year for the last five years, and junior practitioners, who have not been appointed every year yet satisfy the Master about their capacity. The list comprises both the junior and senior names and these are arranged alphabetically, the order of which determines the appointment. Depending on the complexity of the matter, the Master may appoint a senior practitioner jointly with a junior or another senior practitioner as determined by the alphabetical list. If such an appointment is made, reasons must be recorded and provided to the practitioners.

The Chairperson interjected asking who is going to monitor the allocation of the appointments.

Adv Basson replied that a proper record will be kept of all appointments and the Chief Master has set up monitoring committees at provincial level. These committees will generally consist of a representative of the Master’s Office, a representative from the South African Restructuring and Insolvency Practitioners Association (SARIPA) , a representative from the Association for Black Business Rescue and Insolvency Practitioners (ABRIPSA) and a representative of the South African Institute for Charted Accountants (SAICA) and a representative of the relevant law society. The public nature of the appointments alleviates the need for monitoring.

Adv Basson said that if an insolvency practitioner due for appointment fails to lodge a bond of security in time, the next person in line is appointed and the other person moved to the back of the list. If a conflict of interest is involved the next-in-line person will be appointed and the next appointment in that category will go to the person who had a conflict of interest. The Chief Master has issued directives to be used by all Masters for the implementation and monitoring of the Policy. Training has been given to all officials in Master’s offices who will be implementing the Policy.

Adv Basson turned to the litigation arising from the Policy. On 27 February 2014 an interactive meeting was held with stakeholders to determine if a solution could be found that would avoid litigation. The meeting did not succeed and the first action was instituted in the North Gauteng High Court by the Concerned Insolvency Practitioners Association (CIPA); later a further case was instituted by SARIPA in the Western Cape High Court. A number of organisations including Solidarity and the National Association of Managing Agents joined the CIPA case, while ABRIPSA  joined both matters. The CIPA matter was enrolled on 25 March 2014, but was postponed pending the outcome of the decision of the Western Cape High Court. In the SARIPA case an interdict was granted against the implementation of the policy on 28 March 2014.

The major issue of the case was a possible interpretation of the Policy which resulted in certain persons not being covered by the categories, specifically those born after 27 April 1994. Both cases have now been transferred to the Western Cape High Court, where arguments on the merits will be heard in October 2014, implying that the policy will be interdicted until the outcome of those hearings. The Department has been advised that amendment of the policy will cure all defects which raised constitutional concerns. The amendment of the policy was approved by the Minister, however the process was stalled by the elections. At present the briefing of the present Minister on the Policy has been completed and a memorandum for Cabinet is being drafted which will hopefully be approved by the relevant Cabinet Committee. The Department is confident that the amended policy is constitutional and will promote transformation through appointments and the transfer of the skills of experienced practitioners.

The Chairperson noted that the Committee has been briefed before Cabinet had been briefed and before the litigation has been concluded. He asked what the Department would like the Committee to do.

Adv Basson replied that the purpose of the meeting was merely to appraise the Committee and to ensure the transparency of the actions of the Department.

The Chairperson asked whether insolvency practitioners can receive training from Justice College to aid previously disadvantaged individuals. This was because in his experience skilled practitioners were unwilling to impart their skills, as these had been earned and were valuable. How is transformation meant to occur without some form of training institution?

Adv Basson replied that there are a number of initiatives in this area, of which Justice College is one. The various institutions representing insolvency practitioners have been making efforts to increase their members’ skills. For example there is a course on insolvency practice at the University of Pretoria where practitioners present the course. Also, there are institutions like the Association for the Advancement of Black Insolvency Practitioners of South Africa which provide training and mentorship projects. This is to aid the initiative against fronting by enabling the appointment of black individuals as sole liquidators. This avoids the situation where a black joint liquidator is excluded from the actual work of the liquidation. The Master has engaged the various Sheriffs of Court to be involved in upcoming liquidation proceedings in order to assist new appointees. SAICA and the law societies have been engaged to aid in skills development and have proposed a joint training initiative. This builds a supportive environment where all the stakeholders are supportive of new entrants, without necessitating the Justice College which is focused on the public service being involved in the training of private practitioners.

Mr S Swart said that they were awaiting the outcome of the review application and not just on that one defect regarding people born after 27 April 1994, because there were possibly other defects which affect the Policy’s constitutionality according to Judge Gamble. He asked if it was the case that one does not need a qualification to be a liquidator and that there is no overarching regulatory body or framework for the industry which is troubling as liquidations affect the core of the economy. He asked for comment on the Fidentia matter where workers’ funds had been lost through liquidation costs and instances where liquidators were unable to remedy asset stripping.

Adv Basson fully agreed that what has occurred in the litigation has not exhausted the issues, but the Department is prepared to deal with the issues as the cases are resolved. Judge Gamble indicated that there may be other issues affecting the lawfulness of the Policy. On the need for a qualification to enter the Master's Panel, this is currently unregulated. Three issues need to be addressed regarding the regulation of the industry: the appointments policy, the regulations, and the transformation of the insolvency legislation. The transformation of insolvency legislation has been pursued through the Unified Insolvency Draft Bill which has been on the table for a number of years. It is still being decided whether the regulation of the insolvency industry will be done under this Bill. The regulation of qualification to the panel ought to be regulated under this Bill. Until the Office of the Chief Master has issued guidelines and in keeping with international standards, a degree in law or accounting is required for admission onto the list. However, he agreed that where a person has no qualification and has received the vote of the creditors, the Master will have difficulty in not appointing them as liquidator as they have a right. He noted there have been abuses of the right to be appointed in the past and part of the problem is solved by requiring liquidators to put up security for the value of the assets they have control over during the liquidation process. A pressing concern was the cost of liquidation, because a large amount can be spent in the examination enquiries and potentially on liquidation. The creditors and Masters are enjoined to jointly monitor expenditure. He conceded that in the insolvency industry, large amounts of money are misutilised or go missing during the process. Regarding the asset stripping, there are processes in place for the recovery of the assets. In the Aurora matter there has been a section 417 interrogation with the Companies and Intellectual Property Commission making findings and possible contraventions have been identified and this has been referred to the National Prosecuting Authority. On the Fidentia losses, only where there is malpractice can one recover and what is needed is more parties in the insolvency industry to encourage peer oversight.

Ms M Pilane-Majake (ANC) echoed the need for an overarching regulatory framework. She appreciated the points regarding the abolishment of the requisition system and the suggestions for improvement. She wanted clarity on how the reactions of creditors to the possibility of a deficit in the estate would be handled.

Adv Basson replied that the Insolvency Act states that where a deficit is found in an estate where the assets are insufficient to satisfy the administration costs, the creditors will be responsible for a pro rata share of these costs. Therefore, creditors must be careful when proving claims and monitor the spending of the liquidators.

Mr B Bongo (ANC) commented that the initiative is aiding in breaking the monopoly of established players in the sector.

The Chairperson asked whether they look at the Office of the Master impeding transformation. For example, where qualified people wish to be involved with the panel, yet are told that the panel is closed and that the Master will inform them when it reopens. This does not aid the fight against youth unemployment nor aid transformation.

Adv Basson replied that Mr Mafojane is responsible for admissions to the panel, and assured the Committee that a properly qualified person, having applied properly, will be admitted to the panel.

Mr Mafojane said that the approach adopted by the Department about the list, has been tackled by a team which began by dealing with the national list. Engagement with the stakeholders, resulted in the need to reassess the list being identified, because there were allegations that people, who were  clearly unqualified, were included on it. The Department therefore embarked on independent process to create a unified practitioner list. This began with a process of information gathering which indicated that there were approximately 1 280 practitioners countrywide. Applications were extended for people to submit their information, including proof of their good standing in terms of tax and their association bodies. This was so the Department as part of government ensured good governance practices and that Treasury was at least receiving its due from the work allocated. The qualifications required were a four year legal degree or a commerce degree; however the Department was mindful that there were people with vested interests in the industry who did not have these qualifications yet have acquired the requisite skills leading to the inclusion of a clause catering for such people. The total number of applications which met all the requirements was 485 to date. Answering the question from the chair about the young qualified persons not being included on the list, the Department has conducted interviews of more than 110 such persons of which 99 are likely to succeed. Further, the process was centralised to the Office of the Chief Master and was not closed. The interview process was necessary in order to determine the veracity of the skills which these people should have acquired through their degrees. Where applicants were unsuccessful the Department has not closed the process to them and they are free to reapply in the next round of interviews. Lastly, only 166 out of the 485 practitioners on the list were female and the male domination of the industry is a concern.

The Chairperson said that he did not understand the purpose of the interviews for admission to the list, where people have the requisite qualifications. Secondly, he was concerned about the need for the practitioners to supply security for the assets under liquidation. It is difficult for new practitioners to access capital for this security, as they do not have a proven track record, leading to an additional barrier to entry and obstacle to transformation. He suggested that a fund be established which is similar to the Attorney’s Fidelity Fund to aid the new entrants.

Adv Basson replied that the bond of security is not provided by banks, but by the insurance industry and they have demonstrated a willingness to accommodate new people subject to stringent criteria. However, these have not been a bar where the practitioner has been able to prove support in the handling of the liquidation process. He gave his assurance that the Department is continually in communication with the insurance industry, which had led to the fears of the insurance company being allayed.  Lastly, if a fund were to be set up in this area, it would require approximately R160 billion and this would be difficult to do from scratch.

Mr Mafojane replied that the reason for the interviews was to determine the detailed information that the list requires from applicants. The Department is confident that if a person is qualified, the interview should not be a problem, particularly if they have gone through the insolvency diploma course, and all that is tested are the fundamental basics. The interviews are not final as the few disappointed applicants may reapply and the policy objectives will not be affected.

The Chairperson said that it seems as though the interviews are double testing. The problem was that in the context where youth unemployment leads to people not utilising their skills for periods of time and then when tested, they cannot demonstrate their full abilities. This was the reason he had suggested the creation of a training institute and felt that the Department ought to revise this procedure.  

Adv Basson assumed responsibility for this matter and said he would present solutions when the report on the outcome of the ongoing litigation is presented. Perhaps a solution could be approaching an association of insolvency practitioners to provide some form of training to the applicants who are unsuccessful or before the interviews are conducted.

The Chairperson said that he had experienced a compassionate and efficient Master's Office at Polokwane. However, the office closes early and the number of people wishing to use the service is high resulting in people who have traveled from rural areas being turned away. He asked Adv Basson to look into this matter.

Adv Basson responded that these are values all Offices of the Master aspire to. Specifically in Polokwane, the Office is going to be ready to move into the new court building around January 2015 and the increase in space should help. Sub-offices are being created in order to reach more people and one site has already been set up, with staff and infrastructure. He concluded by saying that accessibility, compassion and efficiency were their watchwords.

The Chairperson said that the Committee was aware of large numbers of vacancies in the Department of Justice and Correctional Services. He asked if it was aware of the Association of Unemployed Graduates which could be made use of in the Master’s Office. He further requested a report once the interview process was completed, which indicates that although applicants were unsuccessful, whether their qualifications could be used in other parts of the Department.

Adv Basson hesitated to make any commitments for the Department in the absence of the Director General of the Department. He however could assure the Committee that there were soon to be 100 unemployed people taken on as interns in the Master’s Offices alone. On the question about unsuccessful applicants being used in the Master’s Office, he said that he himself had entered the Master’s Office with no skills. It was committed to developing people with skills within the institution itself and the reason for the interviews is to ensure that the persons entrusted with full control of an estate must be of a certain standard for protection of the interested creditor.

The Chairperson declared the meeting adjourned.

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