The Future of the Insolvency Profession

By Hans Klopper [08/2010]

The process of appointing liquidators is in Law based on the votes of creditors in particular matters in that the liquidator nominated by the majority of creditors in value and number got appointed to that particular matter by the Master of the High Court, the supposed “watchdog” over liquidators.

This changed dramatically in the last ten years in that liquidators from the ranks of Previously disadvantaged individuals have since 2000/2001 been joined as liquidators in each and every matter as an "empowerment" exercise, no matter how small or insignificant the matters. The effect of this is that the liquidator’s ultimate remuneration, which, in most cases, is only paid at best some 18 months after having commenced with a matter, have since the introduction of this system, been halved and in some instances reduced to a third, as the remuneration of a liquidator is based on a “commission structure” being a percentage of the assets realised in a particular matter referred as a tariff regardless of how many liquidators are appointed to a matter.

Firms of Insolvency practitioners with huge overhead structures who provide a professional service have been hard hit as this system of "empowerment" has not led to a transfer of skills but to a form of a "tax" on gross turnover as many black practitioners have elected to remain inactive and to become mere "cheque collectors" in that they are only seen by the professional Insolvency Practioners when they arrive to collected their half of the fees when the matter is finalised.

The perception is however further that the insolvency practice generate massive fees and that liquidators earn huge fees for very little effort. Nothing could be further from the truth. Those who advocate that school of thought do not bear in mind that liquidators need to employ very skilled staff consisting of professionals such as attorneys and accountants and that such professionals must be provided with enough of an incentive to remain in the Insolvency Practitioners' profession. In a judgement handed down in the Highest Court of Appeal in April 2004 the Court held that the principle of “swings and roundabouts” which was with us for almost a hundred years was abandoned.

This principle provided that liquidators sometimes earn little fees for a huge amount of work and the other way around. It has been determined by accountants and professionals specialising in Insolvency Practise that it costs a practitioner between R25 000 and R30 000.00 to finalise a matter where they often earn a minimum fee of R 2500.00. (which has to be shared with ons or sometimes two other appointees) In this judgement the Court held that the Master is not free to choose whether or not to tax (“determine”) the liquidator’s remuneration and that fees must be taxed in accordance with the tariff but having done so the Master has a flexible discretions to increase the fees if there is “good cause” to do so. It was said by Court that the remuneration to which a liquidator is entitled is remuneration for work or services rendered should not be a set commission but that it must be reasonable.

The concept of ‘good cause’ is very wide but may certainly include aspects such as:

• the complexity of the matter in question

• the degree of difficulty encountered by the liquidator in the administration thereof

• the amount of work done by the liquidator

• the time spent by him or her in the discharge of the duties involved, and

if, in the winding-up of a company, particular difficulties may be experienced by the liquidator because of the nature of the assets or some other similar feature connected with the winding-up The inevitable effect of this judgement would further be that experienced liquidators will in future resort to a time keeping system whereby they could charge there professional staff out at professional rates with the effect that the cash available to creditors in smaller matters will be depleted in almost every instance as the Master would be duty bound to have regard to the time spent in that particular matter.

There appears to be a widespread perception that South African liquidators are intent on "liquidating and moving on" without regard whatsoever for the possibility of restructuring and rescuing a business. This has prompted the legislator to enact the Companies Act ,71 of 2008 ("the New Companies Act") The New Companies provides in Chapter 6 thereoff for "Business Rescue" in order to cultivate a new culture of business rescue in South Africa. It is admirable to promote a culture of business rescue as opposed to the liquidation of companies. However, it would be naive to accept that the mere establishment of legislation will ensure that entrepreneurs will creep out of the woodwork to rescue business.

The rescuing of business can only take place in an environment where entrepreneurs coming to the aid of liquidated or ailing businesses are provided with an incentive to do so. It might surprise many that the tools to implement business rescue procedures already exist in our law. There are, however, very sound reasons why such tools have not succeeded in bringing about a culture of business rescue and why Chapter 6 of the New Companies Act is not going to provide a magic wand whereby businesses in financial distress will automatically be rescued.

When a company in financial distress is placed in provisional liquidation, it is done because there is huge debt. On granting a provisional liquidation order, a moratorium known as a concursus creditorum is established and the hand of the law is laid on the company. No creditor can enforce any claim against the company, and the assets are protected from being attached by such creditors. When a provisional liquidator is appointed, he is, in terms of the Companies Act, empowered to carry on with or to discontinue any part of the business. The effect is that any prudent liquidator will take a commercial view in deciding whether it would be to the benefit of the creditors to continue with the business activities of the company.

It should only be in circumstances where it is clear that continued trading activities would lead to further deterioration of the business that a liquidator should elect to close the doors of the business and sell the assets. Liquidators with experience in turning around companies and businesses have been acting according to this principle for decades. The professional liquidator, often a chartered accountant or an attorney, will realise the consequences of an irrational decision to lock the doors and have the business's assets sold by auction or otherwise. It would be only the desperately inexperienced among liquidators who would allow the opportunity to maximise the realisation of a good business to slip past.

Chapter 6 of the New Companies Act provide for the appointment of a Business Rescue Practitioner and will provide whom qualify for such appointments. Where Business Rescue Practioners without years of experience in Insolvency Law get appointed in matters where business have to be rescued get it wrong they may end up costing affected persons as defined in the New Companies Act, being, amongst others, shareholders,creditors and employees even more.

Section 38 of the Insolvency Act have the effect that contracts of employment of workers are no longer terminated upon the liquidation of an entity, but merely suspended for a certain period. This affords the reasonably prudent liquidator the opportunity to extend to the workers the lifeline to earn an interim livelihood while he negotiates with prospective buyers. Steps are normally taken to reduce overheads to ensure profitable trading. Market forces work in a liquidator's favour where the business is well known or based on a sound business model, and it appears that the business is capable of being rescued or sold as a going concern.The same principles will apply under the Business Rescue provisions in the New Companies Act.

In terms of this the present and the New Companies Act, restructuring a compromise or an arrangement acceptable to creditors should take no longer than a few weeks. However, the parties interested in restructuring will still be faced with:

• The reluctance by the SA Revenue Service (Sars) to allow the company being rescued having incurred losses in the past, to retain assessed losses.

• No guarantee that the courts would see the benefit of the proposed rescue and order that meetings of creditors for purposes of considering the scheme or compromise may be convened.

These obstacles have in the past made it almost impossible to provide rescuers of businesses with any incentive to proceed and are the reasons for thousands of jobs having been lost. There are success stories but one finds that successes are attributable to liquidators with a rescue mentality as opposed to those who wish to "sell and move on".

The government should realise that allthough we have the old and, in few months, the new tools available for the rescue of businesses,that Sars and our Courts should make it easy and not difficult for entrepreneurs to come forward for this purpose. This is the reason that a culture to liquidate and walk away has been the order of the day until now. Many entrepreneurs said they would rather buy the business assets on an auction and open a new business elsewhere.

Business Rescue Practioners must be incentivised in order for it to work and any rescue plan must have the backing of the government and Sars.

Should Government not make it easier for Business Rescue by allowing for incurred losses to be assessed and utilised immediately such an assessment would have the effect of saving jobs as oppossed to being too pedantic?

Hans Klopper - B Proc B Comm, Managing Director of Independent Trustees (Pty) Ltd, Admitted Attorney, Cert Forensic Accounting and Fraud, Member Association of Insolvency Practitioners of South Africa (“AIPSA”), Director of Hans Klopper Inc, Chairman of the Northern Provinces Law Society’s Committee for Insolvencies and Liquidations.

Hans can be contacted on Tel. (021) 880-5400 or by e-mail.