A new policy on the appointment of insolvency practitioners to administer insolvent South African estates was published earlier this year. The new policy, which has yet to be implemented, effectively seeks to eliminate the discretion of the Master of the High Court and remove the consideration of any preference of creditors insofar as the appointment of insolvency practitioners is concerned.

The Current System

At present, the appointment of insolvency practitioners occurs through a requisition system. Creditors of the insolvent estate submit a form to the Master nominating the appointment of a specific insolvency practitioner as a liquidator of the insolvent estate. Whilst the actual appointment of an insolvency practitioner remains in the sole and absolute discretion of the Master, this system gives creditors an opportunity to recommend, motivate and endorse the appointment of a specific person.

Some liquidation estates are complex and require an experienced liquidator. Others may require specialised industry knowledge and expertise to preserve the assets of the estate and achieve the maximum potential dividend for creditors. The current system of nomination has provided a significant degree of comfort to substantial creditors that the insolvent estate is “in good hands”.

The New Policy

The new policy (as amended) provides a mechanical allocation process that eliminates the Master’s discretion and removes the consideration of any preference of creditors. Insolvency practitioners are separated into senior and junior practitioners depending on their years of experience, and further classified into the following categories:

  • Category A: African, Coloured, Indian and Chinese females who became South African citizens before 27 April 1994;
  • Category B: African, Coloured, Indian and Chinese males who became South African citizens before 27 April 1994;
  • Category C: White females who became South African citizens before 27 April 1994; and
  • Category D: African, Coloured, Indian and Chinese females and males, and White females, who became South African citizens on or after 27 April 1994 and White males who are South African citizens.

The Master is then required to allocate insolvency practitioners to insolvent estates on an alphabetical basis in a specific ratio. The ratio of appointments of categories A:B:C:D is 4:3:2:1. The one proviso to this general rule is that the Master may jointly appoint a senior practitioner together with a junior practitioner in limited circumstances arising out of the complexity of the matter and the suitability of the person next-in-line alphabetically. The Master, however, is required to explain why he believes it to be necessary to deviate from the mechanical allocation system.

The new policy appears to provide for a relatively fair allocation process taking into account the country’s transformation objectives. But without any input from creditors, the Master is unlikely to have any knowledge of the nature of the estate when making the allocation. Accordingly, there is concern in the market that the mechanical allocation process will lead to inappropriate appointments. For example, an estate with substantial assets may be allocated to an inexperienced practitioner. Furthermore, there is concern with the seniority of practitioners being based primarily on years of experience, which does not necessarily measure the individual’s competence to administer a complicated estate.

Outlook

In light of these and other concerns, both the South African Restructuring and Insolvency Practitioners Association (SARIPA) and the Concerned Insolvency Practitioners Association (with the trade union, Solidarity, joining) have filed separate court papers against the new policy.

SARIPA has been granted an interdict which prevents the Master from implementing the new policy until the hearing and final adjudication of its application challenging the lawfulness and constitutionality of the new policy. The matter was heard by the Cape High Court in October 2014 and judgment was reserved. The interdict against the implementation of the new policy remains in place until a final determination of the legal proceedings is made.

 

Author

Associate, Johannesburg
Email: Nikita Shaw

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