Mar 4,2014 / News / Legal Brief

INTRODUCTION

To date, appointments have occurred by means of the so-called “requisition system”. This system involves the submission to the Master by creditors of an insolvent estate of a form (a standard form used in practice by the liquidator fraternity), motivating and endorsing the appointment of a particular practitioner. This preliminary appointment takes place before any meetings of creditors is conducted and is based solely on the Master’s consideration of the requisitions. Appointments remain at the Master’s sole and absolute discretion. The appointment is then subsequently finalised at the first meeting of creditors by way of a vote.

The role of the provisional liquidator is (amongst other things) to gather information and to take the estate assets in question into safe custody. At this early stage, the liquidator does not have the power to dispose of the assets or take steps for the recovery of claims. This authority is generally granted to him or her by the duly proved creditors in the estate at the second meeting of creditors.

Certain liquidated estates require a greater degree of insight and/or expertise in order to deliver an appropriate accounting to the creditors of the estate in question. The aim is to achieve the maximum possible dividend payable to creditors. Some liquidated entities own unique assets which require industry knowledge and expertise to be preserved and maintained. Certain estates may involve exceedingly complex financial issues. No two estates are alike.

Thus far, the need for creditors to be given an opportunity to recommend the appointment of a specific person as liquidator has been recognised in the requisition process outlined above.

Whilst requisitions have been treated as one mechanism by which the Master can be informed as to the preference of the creditors in the estate, the Master has until now retained a discretion as to the appointment of a liquidator, which can result in the appointment of two or more liquidators (generally affirmative or BEE appointments) where appropriate.

EFFECT OF THE NEW POLICY

The new policy which was gazetted on 7 February 2014, eliminates virtually any discretion on the part of the Master insofar as the appointment of practitioners is concerned, and furthermore removes entirely the preference of any of the creditors in the estate concerning such appointment.

In summary, the appointment of liquidators with effect from 31 March 2014 will be based on a mechanical process of allocations derived from lists which the Master is required to compile and maintain, classifying practitioners into the following categories:

• Category A: African, Coloured, Indian and Chinese females;

• Category B: African, Coloured, Indian and Chinese males;

• Category C: White females; and

• Category D: White males

Within these categories, practitioners will be reflected as senior or junior depending on their years of experience, and the appointment by the Master of practitioners will be undertaken purely on an alphabetical basis in a specified ratio of A4: B3: C2 and D1 – i.e. for every four appointments in Category A, there will be three appointments in Category B, two in Category C and one in Category D. A seemingly mechanical approach.

The only exception to the allocation according to this very strict directive is that the Master may, having regard to the complexity of the matter and the suitability of the next-in-line insolvency practitioner, but subject to any applicable law, appoint a senior practitioner jointly with a junior or senior practitioner appointed in alphabetical order. In those limited circumstances, the Master must then motivate the appointment of this individual and explain such appointment to the practitioner who would otherwise have been appointed but for the exercise of this discretion.

The allocation of a list-based appointment system, irrespective of the merits of each of the candidates on the list, will have the invariable outcome that appointments which are inappropriate for specific estates and their administration will be made.

Of course, it goes without saying that creditors will understandably be concerned where assets of substantial value are being managed by persons lacking experience, with little or no track record.

CONCERNS OVER PRACTITIONER APPOINTMENTS

As a result, it is concerning that the appointment of suitably experienced practitioners may be the exception rather than the rule. This will now occur without motivation from the creditors in question. As a result, the Master will have no knowledge as to the nature of the estate when allocating a liquidator without the needed input from the creditors. Even with the exercise of this discretion by the Master, the Master may not, in terms of the policy, apply his mind to the suitability or appropriateness of an appointment.

According to the new policy, a senior liquidator must have received one instruction per year for a five-year period to qualify as senior. This is by no means a substantive measure of ability or competence to administer a complex estate.

A further concern is that whilst individuals may put forward their names for the panel with the Master, and whilst appointments might be made, there is nothing to stop practitioners from entering into fee-sharing arrangements in order to merely “window dress” an appointment, whereby candidates undertake none of the actual work of the winding-up of the estate, but take a fee in respect of the work done.

The policy does specify that to be appointed to the panel, an individual must demonstrate to the Master that he/she has appropriate infrastructure and experience. This is not defined and there are no specific qualifications required. One must bear in mind too, that liquidators are not regulated by industry bodies or legislation and that it is unlikely that the Master will have the ability to appropriately audit the infrastructure and experience on an ongoing basis.

CONCLUSION

All in all, the new system creates uncertainty and leaves stakeholders with a sense of disquiet. It seems that unless the Master takes a more vigorous oversight role in relation to the administration of estates and engages with practitioners who fail to render estate accounts on time, or who administer them poorly, much abuse could ensue and the empowerment objectives of the policy will ultimately not be met.

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