COSATU submission on the

Draft Policy on the Appointment of Liquidators and Trustees

Submitted to the Dept of Justice on 02 June 2003

Table of Contents

1. Introduction

2. The Nature of the problem

2.1 Requisition for Liquidators

2.2 Consultation with trade unions and workers

3. Cosatu's overall concerns with the draft policy

4. Comments on specific provisions in the policy

 

4.1 Policy Objectives

4.2 Definition of PDIS

4.3 Long Term Proposals

4.4 Uniform Code

4.5 Master's role in promoting affirmative action appointments

5. Other concerns falling out of the policy process

6. Conclusion

 


1. Introduction

COSATU welcomes the opportunity to make a submission on the Department’s Draft Policy on the Appointment of Liquidators and Trustees (hereafter the Policy). We have engaged extensively in various processes around insolvency law reform to ensure that workers rights are meaningfully considered and protected in liquidation processes. We believe that the proposed policy, if appropriately formulated, has significant implications for addressing some of our concerns. It is on this basis that we have submitted comments to the Justice Portfolio Committee on 10 January 2003 supporting the Judicial Matters Amendment Bill 2 of 2003, which enables the making of this Policy.

We are especially grateful to the Department for the consultative approach it has adopted and for making allowances to accommodate COSATU’s own internal consultative processes. In this regard it is important to note that our submission is drawn from inputs made by our affiliate unions which have extensive experience in liquidation processes.

We have raised a number of issues in this submission, which we believe would be necessary to resolve through a process of direct engagement with the Department. There is also a need for a further process to discuss other areas of insolvency reform falling outside this policy pertaining to the combined insolvency and business recovery bill. This includes dealing with both the problems experienced in the implementation of the recent amendments to the Insolvency Act as well as addressing other policy gaps.

2. The Nature of the Problem

It has been our experience that the rights of workers are consistently violated with impunity by liquidators1 , larger secured2 creditors (in most instances financial institutions) and Masters alike, in direct contradiction of both insolvency and labour law provisions. In particular, there is no uniformity in the approach adopted by different Masters to the appointment of liquidators, often leading to the arbitrary rejection of liquidators requisitioned/nominated by unions on false grounds. Masters and liquidators in general display bias towards secured creditors, thereby prejudicing other creditors. Liquidators, especially those that are long established, depend on secured creditors for regular requisitions. Therefore, they rarely challenge them especially where this would impact on the possibility of receiving further nominations.

This was clearly illustrated during the liquidation of Kelvinator in 1999. Here neither the Master nor the liquidators involved asked creditors to prove that their claims were secured. It was only after NUMSA (National Union of Metalworkers of South Africa) challenged one of the creditors, a financial institution, that it arose that the creditor had falsely represented itself as a secured creditor. In the absence of the action taken by NUMSA the liquidators would have processed the creditor’s claim as a secured one. This would have substantially reduced, if not completely wiped out, the amount paid out in respect of workers’ claims.

Secured creditors abuse their ranking and influence over liquidators to sway decisions in the liquidation process in their favour. They place considerable pressure on liquidators to sell off the assets rather than to try and save the business or sell it as a whole, even where this would be to the benefit of all creditors. Unless addressed meaningfully this pattern will seriously undermine the aims of the Department’s proposed legislation on “business recovery”.

2.1 Requisitions for Liquidators

Trade unions are increasingly using the requisition process to secure the rights of workers since they, in most instances, constitute the majority of creditors in number. However, a disturbing trend has developed with masters, other creditors and employers deliberately acting to block these requisitions. This has taken various different forms as outlined below.

2.1.1 Liquidating Claims
Requisitions for the appointment of liquidators must be made within 48 hours and must be supported by a list of names of creditors and their liquidated claims. According to NUMSA, approximately 80% of its requisitions are disregarded since it is unable to comply with all the requirements in the limited 48-hour period.

The nature of employment contracts means that the amounts owed to workers change from day to day and vary from worker to worker, taking into account the VARIOUS claims possible such as salaries/wages, leave pay, severance pay, overtime pay etc. This process gets even more complicated when a trade union has to investigate whether the employer has unlawfully helped itself to an “interest free loan” by dipping into workers’ pension and medical aid fund contributions.

Taking into account the capacity constraints and the limited time it is unfair to require trade unions to liquidate claims and provide a full list of names of workers, neither of which remains constant. We do not believe that this would be alleviated by imposing an apparently less stringent requirement of “estimating” claims, as proposed in the Policy. This would still have the effect of excluding trade union requisitions since they would nevertheless have to consult with each individual worker on the nature of the amounts, and all within a space of 48 hours.

Claims of workers should not be considered in the same light as those of other creditors whose claims are generally based on business contracts. The nature of these contracts in most instances relates to liquidated amounts that remain consistent.

Naturally, we are not arguing for a complete exemption of the requirement to liquidate claims, but merely a relaxation of the rule during the 48-hour period specifically for the purpose of making requisitions. Ideally, we believe trade unions should be allowed to lodge liquidated claims at the first creditors meeting.

2.1.2 Suspension of Employment Contracts
In terms of the recent amendments to the Insolvency Act, employment contracts are no longer automatically terminated but merely suspended once a business is subject to liquidation. Masters, when considering requisitions, have generally interpreted this to mean that claims for severance pay should only be considered in respect of terminated contracts and not those that have been suspended. The Master of the Pretoria High Court went even further by disregarding trade union requisitions completely, although claims extended beyond severance pay to areas such as salaries/wages, leave pay etc.

Under section 38(5) of the Insolvency Act, liquidators are required to consult with trade unions and workers before terminating employment contracts. However, rather than go through a process of consultation, liquidators prefer to wait out the 45-day period after which suspended contracts terminate automatically. The irony here is that with the automatic termination claims for severance pay become applicable anyway. However, in spite of this these are not factored in when considering requisitions.

We strongly believe that requisitions based on claims for severance pay must be considered even where these relate to suspended contracts. Further, we believe that suspended workers are in a similar position to other creditors (including secured creditors) who have liquidated claims, which though valid are not due and payable on the date of the requisition. Allowing requisitions based on these claims may constitute unfair discrimination on the grounds of creditor status. Consequently, we are seeking further legal advice to assess the possibility for a legal challenge on this basis.

2.1.3 Requisition by Individual Workers

Workers who are suddenly faced with the prospect of losing jobs are subject to considerable strain. Employers and large creditors have been quick to exploit this by deliberately bypassing trade unions and approaching individual workers directly, pressurising them to sign their requisitions on the pretext of urgency. In this way many workers(both members and non-members) have been misled to support biased liquidators who do not even bother to consult with them after they have been appointed. With all of this happening before trade unions have been informed of the liquidation process there is little chance to intervene.

While it may appear on the surface to be fair to allow individual workers to nominate liquidators, the practice above clearly illustrates how this has been abused to undermine workers rights. We believe strongly that anyone seeking support for specific liquidators must only do so through the relevant trade unions and should only be allowed to approach workers directly if there is no trade union at the relevant workplace. This should not in any way be interpreted to mean the removal of the duty to inform both workers and trade unions immediately about the liquidation process.

2.2 Consultation with trade unions and Workers

As pointed out earlier, many liquidators, rather than consult with workers, prefer to wait out the 45-day period for automatic termination of employment contracts. This means that certain liquidator duties are being deliberately disregarded, thereby undermining the aims of recent insolvency law amendments and unfairly discriminating against specific creditors, in this case workers. This points to the need both for further insolvency law reform as well as shaping the Policy to regulate this conduct.

As a separate issue we believe that the liquidator, once appointed, serves in a fiduciary capacity to the employer and as such incurs certain labour law obligations that the employer is no longer allowed to exercise. This includes consultation with trade unions and workers when considering the carrying out of retrenchments. It may be argued that deliberately waiting for the automatic termination of employment contracts constitutes dismissal. The failure to consult therefore may constitute unfair dismissal, which has implications for additional claims for compensation. We are currently seeking further legal advice in this regard to assess the possibility of using this as a basis for a legal challenge.

3. COSATU’S Overall Cconcerns with the Draft Policy

We strongly believe that there is a need for a policy to regulate the appointment and conduct of liquidators as well as the conduct of Masters. The Department’s own investigations have revealed incidents of collusion between liquidators and secured creditors as well as discriminatory conduct by Masters. Therefore, we are extremely disappointed to note that the Policy falls far short of our initial expectations. The overwhelming emphasis in the Policy is to promote the appointment of PDIs (previously disadvantaged individuals). In principle we support the emphasis on promoting PDIs, especially taking into account the dominance of long established liquidation firms, which are overwhelmingly white and male in nature. However, this should not be at the expense of implementing much needed broader reforms required to address the substantial irregularities in the liquidation process.

While we acknowledge that some attempt has been made to take into account workers’ interests, insufficient provision has been made to meaningfully address the abuses they suffer. There appears to be limited understanding of the practical difficulties trade unions face when engaging with liquidation processes.

A major shortcoming of the policy is that it is limited to the appointment of liquidators. As such it does little to address the conduct of liquidators once appointments have been made, especially with regard to how they interact with trade unions and workers. Considering that the Policy notes the importance of the proposed unified insolvency/business recovery Bill, it is disappointing that it is not more forward thinking in the approach adopted. There needs to be a meaningful effort to address current attitudes and bias prevalent in the industry, which is likely to impact upon the success of business recovery principles.

Regulating liquidator conduct may appear to fall outside the scope of the policy allowed for under the Judicial Matters Amendment Bill. If this is found to be the case, then this should be dealt with through regulations. In this regard both the Insolvency Act and the Companies Act authorise the Minister to make regulations in connection with the practice and procedures relevant to liquidations.3

4.Comments on Specific Provisions in the Policy

This part of the submission focuses on the specific proposals in the Policy. Our comments here are largely based on our concerns raised above.

4.1 Policy Objectives
Paragraph 2 outlines the objectives of the policy, which includes:

We are generally supportive of the principles outlined above and believe special emphasis should be placed on the creation of a uniform procedure in order to curb undue discretion exercised by Masters in the appointment process.

Further, we are of the view that there is a need to insert the following additional objectives:

4.2 Definition of PDIS
Under paragraph 4, the Policy proposes two possible definitions of the term PDI. In terms of the first definition a PDI “means a black (African, Coloured and Indian) insolvency practitioner”. The second proposal is to merely incorporate the definition of “designated groups” under section 1 of the Employment Equity Act(EEA).

From our experience there is a need to promote the appointments of PDIs considering the extent of dominance of white males in the industry and discrimination PDIs experience by the Master’s Division. Thus far there has been considerable efforts to undermine transformation. A common trend is to use white women to show compliance with the PDI requirement. This highlights the problem of simply incorporating the EEA definition without qualification. Further, in order to secure PDI appointments long established white firms are appointing token black practitioners, without meaningfully changing the conservative management and ownership structure.

On the basis of our concerns above we propose the following definition:
“ A PDI means an insolvency practitioner who is black (African, Coloured and Indian) or is a person with a disability and includes women belonging to these groups”. Provision should also be made to take into account the ownership and management structure when deciding whether a specific liquidation firm qualifies as a PDI.

4.3 Long-Term Proposals

Paragraph 5 outlines the long-term proposals on the proposed combined insolvency/business recovery bill and the creation of a regulatory body for liquidators. We note that these proposals will only be implemented at a much later stage through a separate process, the time frames in respect of which need to be clarified. Taking into account the need to promote overall insolvency reform, we believe that consideration should be given to accelerating these processes.

4.3.1 Combined Insolvency and Business Recovery Legislation

Under paragraphs 5.1. and 5.3. the Policy correctly recognises the urgency to promulgate the combined insolvency and business recovery legislation. Insolvency has devastating implications for the already high rates of unemployment and the economy as a whole. Current legislation only allows for judicial management of certain businesses, which in most cases is implemented far too late to rescue the business from insolvency. The emphasis on the more holistic approach of business recovery has considerable potential to address these shortcomings. There is a need for such legislation to take into account the destructive role often played by financial institutions in triggering liquidations.

Further, we strongly believe that in developing and implementing business recovery mechanisms due consideration must be given to the role of labour. This is key to turning around insolvencies. In the first instance this would entail dealing with the current attitudes to trade union participation in decision making and would include for example addressing resistance to consultation processes.

Secondly, the legislation should be broadened to cater for workers to participate in collective forms of ownership, for example co-operatives. Provision should also be made for financial and technical support to ensure viability. The relevance of this proposal may be illustrated by considering an example in the Western Cape where farm workers have turned a previously insolvent farm into a productive business.

4.3.2 Statutory Body to Regulate Liquidators
We strongly support the proposal under paragraph 5.2. to establish a regulatory body for liquidators in order to address corruption and bias in the industry. However, we have several concerns about the model that is being proposed.

Firstly, the structure proposed is a self-regulatory one to be structured along the same lines as the Law Society. The persistent abuse and corruption in the industry is evidence there will be little commitment within the industry to transform itself. Furthermore, the example of the Law Society is a bad one, taking into account the significant number of irregularities committed by attorneys dipping into trust funds and defrauding the Road Accident Fund.

Provision should be made for a body comprising both relevant government role-players and representatives of civil society, which must include organised labour. Only this type of structure would give due recognition to the fact that proper regulation of liquidators is in the public interest, ensuring protection from regulation based on narrow self-interest.

Thirdly, there is a need to review the mechanism for remuneration of liquidators. Currently, they receive a percentage-based commission for every asset realised, resulting in exorbitant amounts being paid out of insolvent estates. We believe that these amounts should be capped.

Further, a problematic trend has developed especially where co-liquidators are appointed. Often in such cases one or only some of the co-liquidators are actively involved in the liquidation process. Despite this each appointee nevertheless receives a proportion of the commission, which in some instances amounts to millions of rands.

This constitutes a serious abuse of the rights of other creditors, especially workers who despite being preferred creditors often receive nothing or minimal payouts at best. Provision needs to be made allowing remuneration to be made to only those actively involved in the liquidation. Furthermore, penalties should be imposed against those who fraudulently attempt to claim remuneration despite this. Finally a liquidator’s track record in this respect should count against receiving further appointments.

i) Regulation of Standards and Qualifications
The Policy proposes that the statutory body be responsible for setting standards with regard to qualifications and training of liquidators. We are concerned that in all likelihood the emphasis on qualifications would be limited to pure technical legal training without addressing the question of ethical conduct.

Further, we believe it should be made compulsory for qualifications to include training on labour obligations to ensure the understanding and sensitivity to workers rights. This is based on our understanding that a liquidator acts in a fiduciary capacity to the employer, and consequently incurs certain labour law obligations, some of which continue even after an employment contract is terminated.

4.4 Uniform Code
Paragraph 6.2. provides for the implementation of a uniform code applicable to the consideration of requisitions, urgent appointments, joint appointments, PDI appointments, disclosure of conflict of interest. We support the implementation of a uniform code, which would fetter the discretion of the various Masters and provide certainty and transparency in relation to the requisition procedure. The current lack of certainty in terms of requirements is consistently used to disregard trade union requisitions.

4.4.1 Requisition
Paragraph 6.2.1. sets out detailed guidelines that are to be followed by the Masters Division when considering requisitions for the appointment of provisional liquidators. A number of related or similar proposals are dealt with under different subparagraphs. In these cases we have grouped these together when commenting to avoid unnecessary repetition.

i) Liquidating Claims and Submission of Workers Details
Provisions under subparagraphs (b), (d), (e) and (p) list the requisition requirements regarding liquidating claims and the submission of names of workers. Subparagraph (q) provides that the full name, address and telephone number of the creditor must appear on the requisition. An exception will be made in the case of individual worker requisitions as they might not have telephone numbers or proper addresses.

Generally requisitions must comprise of liquid claims sounding in money reflected in words and numbers. However, the policy proposes that trade unions or workers be allowed to estimate the amounts of the claims “as accurately as possible”. The Policy proposes two alternatives in relation to the listing of names. The first requires trade unions to furnish a list of the employees that they represent; while the second proposes that they only be required to submit the number of employees that they represent.

We have outlined our concerns on this matter earlier in our submission. The complexity of estimating the various possible claims and providing an accurate list of the names of worker within 48 hours will place excessive demands on trade unions. This in our experience will only lead to the continued exclusion of trade union requisitions. We believe that for the purposes of requisitions allowances should be made allowing trade unions to merely state the number of employees that they represent with claims in excess of R500.

Accordingly our proposal entails including the following statement in their requisitions:
“ We represent […number…] of workers each with a claim in excess of R500”.

We believe that subparagraph (q) should be qualified so that a trade union is only required to submit its name, address and contact details and not that of each individual worker it represents.


Disregarding Worker’s Claims that are Below Stipulated Amount
Taking into account our proposals above we wish to register our concern about the common practice by Masters to disregard those requisitions based on claims for amounts below R1000. The policy is silent on this issue, which creates the impression that this will be allowed to continue.

There is no legal justification in the Insolvency Act requiring requisitions to be based on claims exceeding R1000, which therefore leaves it open to legal challenge. We believe that this amounts to unfair discrimination not only between workers and other larger commercial creditors, but also between workers themselves of different occupational levels. This amounts to the denial of the rights of more vulnerable lower-paid workers, who consequently are more likely to have claims amounting to less than R1000. Further, with the proposed exclusion of severance pay claims based on suspended contracts (which we are strongly opposed to), the value of workers’ claims will be artificially reduced.

Accordingly we believe that the policy must be amended prohibiting Masters from disregarding requisitions based on claims lower than R1000.

ii) Processing of Requisitions by Trade Unions on Behalf of Workers
Subparagraph (c) proposes that requisitions by trade unions on behalf of workers only be considered where it is supported by a letter from the registered trade union stipulating that it represents workers from a particular workplace. Priority would be given to a letter supported by the national office of the trade union, followed by a letter from a regional office and lastly to a letter from a local office.

We support this proposal since it will ensure that there is effective national oversight when acting on behalf of workers. This will also give the Masters Division clear guidelines on the correct approach to processing trade union requisitions. Most COSATU unions already have in place a policy that requisitions be facilitated through national offices.
iii) Cause of Action
Subparagraph (r) provides generally that the cause of debt must be specified. Under subparagraph (e) this requirement is extended to trade unions acting on behalf of workers.

This proposal is extremely problematic since various causes of action are possible and likely with each individual worker, especially if one takes into account that claims for severance pay, wages, leave pay all constitute different causes of action. As with liquidating claims and supplying a list of workers’ names, this is far too onerous a requirement for trade unions to be able to fulfil in the limited time available for lodging requisitions. Furthermore, this runs counter to the provisions of the Insolvency Act, which does not require workers to prove claims at this stage.

Accordingly COSATU is strongly opposed to the imposition of this requirement upon trade unions at the requisition process. We believe that the requirement of specifying claims should be applied only to processing workers’ claims. For this purpose we are prepared to specify the causes of action AFTER the requisition process provided that this is within a reasonable stipulated time.

iv) Proposals to Disregard Certain Requisitions

Claims for Severance Pay Based on Suspended Contracts
Subparagraph (e) provides that requisitions for severance pay are to be disregarded where claims are based on suspended employment contracts. Further, subparagraph (u) provides that conditional claims should be ignored.

In line with our concerns outlined earlier in this submission, we cannot support the exclusion of requisitions based on severance pay linked to suspended contracts. We believe that this amounts to an artificial separation between workers’ claims and those of other creditors whose claims are based on debts due after the date of liquidation.

The Department introduced the principle of suspending of employment contracts in order to protect workers. However, this is now being used opportunistically to deny workers their rights. We believe that the Department should be using its authority to counter this trend rather than reinforce it.

Accordingly, subparagraphs (e) and (u) should be amended to allow these requisitions, which should be treated as an exception to the rule of disregarding conditional claims.


Claims by Directors or Members of Companies and Close Corporations
Subparagraph (f) proposes that requisitions be disregarded in the case of companies or close corporations where this relates to claims in respect of Directors or Members loan accounts.

We strongly support this proposal, since this will prevent abuse by the appointment of biased or “friendly” liquidators.


Two or More Requisitions in Respect of the Same Claim
Subparagraph (h) proposes that where requisitions are duplicated (ie. two or more requisitions in respect of the same claim), they should be disregarded.

We believe that this is the incorrect approach to adopt since this will have the effect of rejecting legitimate requisitions. There should be a duty on the Master to investigate the matter to determine the appropriate claim.

Requisitions by the Land Bank
We strongly support the proposal under subparagraph (x) that requisitions by the Land Bank be disregarded since it is not a part of the liquidation process. As a creditor the Land Bank is virtually exempt from the provisions of the Insolvency Act as set out in section 90. In the light of this it refuses to prove its claims against the estate. This means that its powers to repossess property belonging to an insolvent estate remain unaffected by the liquidation process.

While we have noted our support above, we do not believe that this constitutes an adequate long-term solution. We believe that amendments are necessary to ensure that the Land Bank is made subject to the Insolvency Act as with all other creditors.

v) Verification of Requisitions
Random Inspections
Subparagraph (k) requires random inspections to be conducted periodically and states that “in cases of doubt” the authenticity of faxed requisitions should be verified.

We strongly support the introduction of this proposal. However, we believe that it needs to be more prescriptive in order to be effective in countering abuse. This leaves far too much to the discretion of the Masters Division. Accordingly provision should be made stipulating the minimum number of inspections to be carried out and must include detailed reporting on the process.


Requisitions that are Disputed
Subparagraph (cc) provides that requisitions will only be verified to the extent that they are prima facie in order. Where a requisition is disputed, a Master “may” (ie has the discretion) to call for further proof in substantiation of a claim.

We believe that this provides insufficient provision to ensure protection from abuse from larger creditors. Furthermore, with the prevailing bias in the Masters Division towards commercial creditors, they are less inclined to investigate problems with their requisitions. Accordingly, we propose that Masters be obliged to call for further proof whenever a requisition is disputed.
vi) The Right of Creditor to Nominate a Liquidator of Choice
Subparagraph (m) provides that the right of a creditor to nominate a liquidator of his/her choice should not be interfered with.

We have already noted our concerns earlier concerning the practice by employers and large creditors misleading individual workers to support specific liquidators. Therefore, we believe that subparagraph (m) should be amended as far as it relates to workers’ claims. Workers’ individual requisitions should only be considered where no nominations are received from a trade union.

Touting
In this respect we note that an earlier discussion document proposes that liquidators be allowed to “tout” for requisitions. We believe, on account of concerns raised above, that this should be qualified with liquidators only being allowed to approach trade unions and not individual workers directly.

vii) Amendment of Requisitions after 48-Hour Period
Subparagraph (z) requires creditors to ensure that their requisitions are correct. There will be no opportunity to amend incorrect requisitions after the expiration of the 48-hour period and after an appointment has been made.

We do not believe that this provision adequately takes into account the practical difficulties that a trade union and workers face during a liquidation process, especially considering that they have to work with approximate figures. We believe that exceptions should be made based on the merits of each case.
viii) Requisition Form
Subparagraph (bb) provides that a requisition should be substantially in the same form as that provided under annexure A.

We believe that the proposed form does not factor in practical requirements relevant to trade unions acting on behalf of a number of workers. In most instances our concerns relate to comments earlier in respect of the requisition process. Accordingly we propose that the form be amended to take into account instances where a trade union is acting in a representative capacity for a number of workers. In this respect provisions should be made for an exemption to furnish a list of names, liquidate/estimate claims, specify the cause of action and provide individual contact details.

4.4.2 Urgent Appointments

Paragraph 6.2.2. sets out the guidelines for the Masters Division when considering a request for an urgent appointment of a provisional liquidator. In accordance with subparagraph (b) a Master must consider the various factors before deciding the urgent appointment. These include potential prejudice to creditors if the appointment is not made, whether there are assets to take charge of and whether there is imminent business to do.

The process allowing for urgent appointments is regularly abused by commercial creditors and in turn unnecessarily granted by Masters without adequate justification. Creditors often approach the Master on the pretext that the insolvent debtor is a flight risk even when this is not necessarily the case. The Policy in effect provides little to address abuse of this process with the Master still possessing too wide a discretion.

Since having to comply with the various complex requirements within the usual 48-hour period is already extremely difficult for trade unions, the reduction of this time period only adds to the existing barriers.

We believe that urgent appointments should only be granted in exceptional cases when absolutely necessary and must be stringently regulated. This would require the Master to consider the following factors, which are currently not listed in the policy:

Further we note and support the proposal that liquidators lodge a report with the Master on what was done directly following an urgent appointment. However, we believe that the duty to report should likewise be extended to Masters, who must give reasons informing the making of a particular decision.

4.4.3 Joint Appointments
Traditionally, the practice of making of joint appointments has been directed at dealing with conflict of interest. More recently this has been extended to facilitate the entry of PDIs into the field as well.

Paragraph 6.2.3. sets out the guidelines applicable to the making of joint appointments. New members of a proposed panel for PDI liquidators will only be allowed to take joint appointment for the first year. Restrictions are placed on the sole appointment of liquidators who are not resident in a specific province. In matters where there is an allegation of a possible conflict of interest the Master has the discretion to appoint a joint liquidator.

Currently there appears to be no uniform rules on when a sole or joint appointment should be made. This has been left largely to the discretion of the various Masters, with some taking into account factors such as the value and the nature of the assets of the estate. On this basis we welcome the proposal to introduce guidelines on joint appointments. However, the guidelines still allow far too wide discretionary powers.

For example, it is unclear what informs a decision determining the minimum or maximum number of joint appointments that may be made in respect of a specific matter. Joint appointments can often be in excess of ten. Whereas there have been instances where trade union requisitions has been refused as this would have a fifth appointment. This issue needs to be clarified in order to prevent the arbitrary refusal of specific requisitions.

i) Specific Provision for Trade Union Requisitions
Joint appointments have been used to counter problems of conflict of interest. However, as illustrated in various high profile liquidation matters in many instances this has not in itself provided an adequate safeguard. The underlying reason for this is that it has not been implemented in a manner that addresses the inherent narrow commercial bias in the appointment process as a whole.

We believe that this would be significantly addressed by giving preference to including a trade union nomination when making joint appointments. Here we note that the promotion of PDIs and the value and nature of assets have considerable influence when deciding a joint appointment. Surely the rights of workers should be given at least the same consideration, if not more, as that of the asset value of an estate.

4.4.4 Conflict of Interest
Paragraph 6.2.4. proposes that an insolvency practitioner be required to lodge an affidavit of non-interest before s/he can be appointed as a liquidator. Caution is to be exercised in the appointment of liquidators who have a track record of association or a particular prior interest in the matter. For this purpose any interest, however small or insignificant should be disclosed to the Master. The form for the affidavit is proposed under annexure B.

It has long been a concern that liquidators were being appointed despite there being a considerable conflict of interest, with significant abuses being revealed most recently in the high profile cases involving the liquidation of the Retail Apparel Group(RAG) and Syltek. These appointments in many instances are supported by the major banking and financial institutions, illustrating the hold that commercial creditors have over liquidation processes generally. On this basis COSATU strongly supports the proposals to address and prevent the appointment of liquidators who have a conflict of interest in a matter. However, we believe that there is need for the strengthening of the provisions.

Firstly, this would entail an amendment to clause 6 of the proposed affidavit, which requires a declaration that none of the creditors have shares or an interest in the liquidator’s business. We believe that the reverse should also be applicable, with liquidators having to declare that they do not have any interest in the business of any of the creditors.

Secondly, it is unclear what will happen in relation to future appointments after it has been established that a liquidator has failed to disclose an interest in a past matter. We believe that, as a disincentive, liquidators who fail to disclose should not be appointed in further matters. A special register could be set up for this purpose.

Thirdly, there should be a duty on the Master to investigate and report on allegations of conflict of interest.

4.4.5 PDI Appointments

Paragraph 6.2.5. sets out detailed guidelines that Masters are to follow in order to promote the appointment of PDIs, which we support in principle. As we have responded earlier in this submission to the issue of the promoting PDIs, our comments here are brief.

The need to provide for a specific policy to promote PDIs reflects the general reluctance of commercial creditors to support their requisitions. A substantial proportion of PDI appointments are in fact based on trade unions requisitions. However, with trade unions having to overcome numerous practical barriers in the requisition process, the opportunities for the promotion of PDIs are greatly reduced. On this basis we believe that special consideration should be given to trade union requisitions.

4.5 Master's Role in Promoting Afirmative Action Appointments

The purpose of paragraph 7.3.1. is to set out detailed guidelines on the Master’s role in promoting affirmative action appointments. However, its provisions extend beyond affirmative action to other areas such as the consideration of trade union requisitions and the required records that a Master is to keep.

4.5.1 Trade Union Requisitions
Subparagraph 7.3.1.1. notes that “workers or employees are also creditors and their wishes as expressed by their representatives, should be given due weight”. We believe that the fact that this has been included in the guideline reflects the lack of recognition that workers have experienced in the liquidation process.

The provisions in this part go on to raise the question of whether requisitions by individual workers should be disregarded in favour of that by a trade union regardless of whether these workers are their members.

We have already commented at length on this issue, and so our comments in this section are limited to the concerns raised around the constitutionality of the denying individual workers their rights to nominate a liquidator of choice. We are firmly of the opinion that such a limitation would be constitutionally valid taking into account the value it plays in countering the potential abuse that individual workers experience in the requisition process.

Further, the emphasising of an individual worker’s rights would have to be balanced against the potential impact that this has collectively for all other workers. Finally, we note under section 23(6) of the Constitution the recognition of union security arrangements is allowed. This is an acknowledgement of the fact that trade unions almost inevitably represent all workers (including non-members) especially on areas affecting collective interests.

4.5.2 Records that Masters are Required to Maintain
Subparagraph 7.3.1.6. requires each Master to maintain a record of liquidation matters, including the details of the insolvent estate, names of liquidators appointed, and whether a PDI was appointed.

For the purposes of promoting all round transparency and accountability, we support the idea of maintaining such a record. However, we are concerned about the narrow scope that has been proposed, which will limit the review of problematic appointments and subsequent investigation into irregularities. Accordingly, we propose that records of the following must also be kept:

5.Other Concerns Falling Out of the Policy Process

This part of the submission focuses on areas of insolvency reform that is required but falls outside this process. Nevertheless we believe that it is important to note these taking into account the parallel process on the combined insolvency and business recovery Bill.

Some of our key concerns may be summarised as follows:

6. Conclusion
A culture has developed in relation to insolvency, which essentially negates the rights of certain creditors to the advantage of others. This is in response to the same underlying commercial bias that presupposes liquidation as the preferred option to saving businesses. In the main this means that little thought is given to the devastating socio-economic impact suffered by workers and neighbouring communities, the costs of which are often left to be picked up by our public social system, if at all. This is a wholly unsustainable situation, which continues to undermine the long-term objectives of promoting broad-based socio-economic development and empowerment in our country.

We appreciate that the Department has attempted to address the specific situation facing trade unions and workers. However, as we have pointed out, this does not go far enough. On the basis of the number of concerns that remain to be addressed, we believe that there is a need for an additional process allowing for direct bilateral engagement with the Department.

 

Footnotes

1 In this submission, references to liquidators include both liquidators and trustees as well as provisional appointments made in respect thereof.
2 A secured creditor is one who holds security over property (for example, a bank that holds land or buildings as security in terms of a mortgage bond). The proceeds from the realisation (for example, sale) of this property will first be used to settle a secured claim. Thereafter, any proceeds from the estate will be used to settle preferred claims, being those amounts owed in respect of salary/wages, severance pay and statutory contributions owing in terms of UIF, COIDA and income tax. Only once these have been settled will concurrent claims(All other claims, which are neither secured nor preferred) be settled.
3 See sections 158(1) and 15(1) of the Insolvency Act and Company Act respectively.