The importance of regulation in building institutional capacity
Dr Luis Mejan, International Association of Insolvency Regulators Chairperson
Mr Terry Gallagher, International Association of Insolvency Regulators Executive Director
Mr Sumant Batra, President of INSOL International
Mr Mahesh Uttamchandani of the World Bank
International Association of Insolvency Regulators delegates
Distinguished guests
Ladies and gentlemen
Allow me to convey the greetings and best wishes of Mr Jeff Radebe, Minister of Justice and Constitutional Development. We wish you a very warm South African welcome. We note with pleasure that South Africa seems to have become somewhat of a destination of choice for the International Association of Insolvency Regulators (IAIR). You held a workshop in Cape Town in 2007, and now in 2009 you are holding your annual general meeting (AGM) and conference in Johannesburg.
We must, however, point out that there are many other South African cities waiting eagerly to host you and that they might feel a little affronted if their hospitality is not accepted. We sincerely hope that you break with your cycle of visiting South Africa only every second year and that you will hold an event here next year to coincide with the 2010 Fifa World Cup.
I have been requested to address you on the importance of regulation in building institutional capacity in the insolvency environment. In other words, the thrust of my address should be to motivate delegates to work toward this. Fortunately, my task is made easy. I cannot imagine any person present arguing that this is a non-issue. Nonetheless, allow me to share a few thoughts on this very important aspect with particular reference to the South African situation.
We have an insolvency legislative framework dating back to 1936. This framework provides very little on how insolvency practitioners should go about their business. Our Insolvency Act of 1936 should have been replaced a long time ago. We also cannot escape the fact that there have been negative reports regarding the insolvency industry in South Africa. We are also alert to the fact that an efficient and effective insolvency legislative framework, with particular reference to the regulation of the insolvency industry, will contribute to releasing “frozen” money and assets back into the economy, which, in turn, can be put to good use in working for a better life for all.
Questions might therefore be raised why we, in South Africa, since 1994 have not addressed this crucial issue. Why, the question might be asked, have we not moved with the speed as, some might argue, we should have. The answer lies in the fact that, due to our painful past we needed to write a new constitution and dismantle the entire legal edifice of apartheid. During the first few years of our democracy our Parliament was passing more than 120 Acts of Parliament per year to give effect to our Constitution by repealing apartheid legislation and enacting legislation to give effect to progressive policies. The focus has subsequently shifted to ensuring that these new laws are implemented.
Addressing some of these issues has been easier than others. The rationalisation of legislation and institutions has, to a large extent, been completed. However, there are some areas which still require our attention. It is no coincidence that the areas which still require our attention have a bearing on different professions, where there are vested interests and numerous sensitivities which require careful consideration. We are, not surprisingly, still grappling with the rationalisation and revision of a number of professions; the legal profession, the sheriffs’ profession and, of course, the insolvency profession.
We want to get these crucial issues right first time round. There is simply no room for mistakes. As in the case with the other professions, an enormous amount of preparatory work has been done regarding the regulation of the insolvency industry. We are still trying to ensure that the approach we are about to adopt is the correct approach for South Africa, bearing in mind common international practices, of which there are many, and also bearing in mind South Africa’s history, particular needs, and socio-economic sensitivities.
A further reason why it is so crucial to regulate the liquidation industry in South Africa can be advanced in the following words of our former Minister of Finance in his budget speech on 11 February this year: “The storm that we spoke of last year has broken and it is more severe than anyone anticipated. Confronted with the prospect of an economic cataclysm, world leaders have announced huge supportive interventions. A transformation of the world economy is in progress, which we trust will tame the excesses of unregulated financial markets. A restructuring of global trade and incomes is underway which we hope will bring greater opportunities to the world’s poor. But for now the transition has brought sizeable interruptions.”
Referring to the effects of this storm in the South African context, he goes on to say that “When a global motor company cuts back on making cars, it cancels its orders to catalytic converters. The firm making catalytic converters is not in Detroit or in Shanghai; it is here in the Eastern Cape. The mine producing the platinum that goes into the converter is near Rustenburg. The worker in the factory in Uitenhage and the mineworker in Rustenburg are now without work. And the woman who runs the little stall selling vegetables outside the mine is taking less money each passing week. And the families, all of them, face a future made more precarious by the vagaries of global finance”.
It is against this backdrop that this annual general meeting and conference are taking place. It is against this backdrop that we talk about the need to regulate the liquidation industry in South Africa. The current economic climate dictates that we have an industry that is regulated properly and regulated soon.
It is therefore appropriate that South Africa has been approached to host this annual general meeting and conference, at this particular stage of global economic uncertainty.
The exchange of ideas by regulators from all over the globe in our formal discussions in this venue and during informal networking outside this venue when we break for tea and dinners, will enrich our further deliberations on the issues with which are confronted. Of course, our further deliberations on the way forward will also be informed by best, or shall we say, common international practices which are contained, for instance, in the World Bank principles for effective insolvency and creditor rights systems. These principles recommend, among others, that the bodies responsible for regulating or supervising insolvency representatives should:
* be independent of individual representatives
* set standards that reflect the requirements of the legislation and public expectations of fairness, impartiality, transparency and accountability and
* have appropriate powers and resources to enable them to discharge their functions, duties and responsibilities effectively.
Although various ad hoc administrative steps have been taken in an attempt to address challenges in the South African liquidation industry, they have unfortunately proved to be inadequate. Most of the proposed solutions have not yielded the desired results. Why? Simply because they were put in place to deal with the symptoms, rather than addressing the root causes. What are the root causes? They are, in my opinion, largely due to the lack of a comprehensive and holistic regulatory framework for the insolvency industry which has the required institutional capacity to carry out its mandate.
The current South African insolvency and liquidation legislative framework focuses more on processes and not enough on the institutions and role players in the industry. There is general agreement among relevant role players and stakeholders on the need for the statutory regulation of the insolvency industry, with a strong focus on institutional reform and capacity building. Many institutions or stakeholders are involved in the administration of insolvent estates, but major players such as the courts, insolvency practitioners and the regulator perhaps require more attention than they are getting at the moment.
The courts
South Africa does not have insolvency or bankruptcy courts as is the case in some other jurisdictions. The high courts play a limited role in the processes of insolvency and regulation. They do not have a direct regulatory function to oversee the whole administration process. They have no direct role to supervise and control the conduct of insolvency practitioners. Cases where applications are made to the court to remove insolvency practitioners from office are few and far between. It happens from time to time that the high courts are called on to review the remuneration of insolvency practitioners.
The question has been raised in some quarters whether the role of the courts should not be expanded to give them more power to control and oversee the administration of insolvent estates. It has, for instance, been suggested that there could be special superior courts, bankruptcy courts, designated to deal with insolvency matters, presided over by judicial officers who are specially trained to deal with insolvency matters, including business rescue and restructuring processes.
Our magistrates’ courts could also play a role, for instance in facilitating pre-liquidation compositions, thereby providing a viable alternative to liquidation where the assets and income of a debtor do not justify the costs of litigation in our high courts. However, bearing in mind that we are also in the midst of rationalising our court structures and the judiciary and bearing in mind our capacity constraints, the possibility of creating bankruptcy courts might be a longer term vision.
Insolvency practitioners
Of greater urgency and relevance at the moment is, however, the role played by insolvency practitioners and their regulation in dealing with insolvent estates. Currently, anyone and everyone can be an insolvency practitioner in South Africa. There are no special or statutory requirements dealing with their qualifications, training, and admission to the profession or licensing. I am convinced that the capacity of insolvency practitioners to do their work efficiently and professionally will only be addressed when there is such statutory regulation.
The current legislative framework only provides a list of disqualifications for persons to act as insolvency practitioners, but it does not specify any qualifications. There is an urgent need to lay down qualifications for insolvency practitioners. A balance must be struck between qualifications which will ensure that only capable and suitable persons qualify to be insolvency practitioners, on the one hand, and setting the bar too high, on the other. Based on international common practice there are various proposals with regard to the qualification of insolvency practitioners. These include, among others, the following:
* Insolvency practitioners should be officers of the court. Advocates and attorneys are admitted by the high court to practise as such. A corollary of such a proposal is that the qualifications and other conditions for admission to practise as an insolvency practitioner must be clearly set out in primary or secondary legislation
* Insolvency practitioners should only be accountants or practising lawyers, in which case there will be no need for a special regulatory framework for the insolvency practice because these professions are already regulated
* Insolvency practitioners should undergo special training after obtaining a basic degree in law. The training should be at a post graduate level and should focus not only on liquidations but also on business rescue and restructuring.
Although the legal and accounting qualifications may be viewed as logical requirements, a firm grasp of business and commercial principles and practice are also valuable. More often than not, the complexity of some of the matters dealt with in insolvency and liquidation proceedings suggest that no single academic qualification will ensure that people are qualified to deal with the administration of these estates. It would seem as if a specialised qualification, over and above general legal and accounting qualifications for the administration of insolvent estates, is possibly the way to go.
While there seems to be general agreement that insolvency practitioners must be members of a properly regulated professional body, there is some debate on the question whether membership of an existing profession should be required or whether a new profession should be created, bearing in mind the substantial costs involved. There is also debate on whether a self-regulated profession is appropriate. However, there is agreement on the requirements for a recognised professional body. Such a professional body must:
* ensure that members who practise as insolvency practitioners have the necessary qualifications, experience and integrity
* ensure that admission to the profession is dealt with efficiently and fairly
* ensure that members continue to be properly qualified to practise
* ensure that provision is made for the training and transfer of skills to persons who aspire to enter the profession, especially previously disadvantaged individuals in the South African context
* ensure that there are proper measures in place and accompanying capacity to deal with complaints against and discipline of members and, where appropriate, that membership be suspended or even cancelled.
The regulator
At present, regulation of insolvency processes in South Africa is overseen mainly by the masters of the high courts. The master is responsible for the appointment of insolvency practitioners and the supervision of their work. Ideally, if the master were to play a full regulatory function, or if some other body were to do this, it would include licensing, training and capacity building, disciplining and removal of insolvency practitioners. However, the reality of the situation in South Africa is that the master does not have full authority to fulfil all these functions.
Moreover, the master does not have the capacity to execute all these functions. Unlike some other jurisdictions where the insolvency function is given full attention by dedicated institutions, in South Africa, this function has been given to the master who also has other regulatory functions relating to deceased estates, curatorships and the administration of the guardian’s fund, which take up much of the master’s time and resources. The Master also has administrative and quasi judicial functions to fulfil. At times there are tensions between the regulatory and other functions of the master. Various proposals on how to best address this problem have been made. These include among others, the following:
* The establishment of an ombud to deal independently with complaints and decisions regarding the administration of insolvent estates
* The creation of an independent statutory body to exercise oversight and control over insolvency practitioners and to regulate the entry into and exit from the industry
* The statutory recognition of the existing voluntary associations to enable the industry to self-regulate
* the adoption of a dual administration process in terms of which the insolvency regulator (in this case the master) attends to the administration of small estates while the administration of big and complex estates is attended to by the insolvency practitioners.
Although all the above mentioned proposals have advantages, funding, training and capacity building would still remain a challenge. The World Bank has correctly found that the capacity to enforce and apply legislation, is often more important than the statutory provisions which are in place.
Conclusion
The need for a well functioning insolvency system which is properly regulated with capacitated institutional support structures cannot be over-emphasised. We have acknowledged the urgent need to address the regulatory and institutional set-up. The current institutional arrangement needs to be strengthened and empowered to deal with the many challenges around insolvency and liquidation matters. It is hoped that by the end of the year 2010, there will be a statutory regulatory body for the insolvency and liquidation industry and the administration process will be simplified and modernized accordingly. This is our aim.
Part of the mission of the Department of Justice and Constitutional Development is improved accessibility and quality of service in the administration of insolvent estates. The statutory regulation of the insolvency industry can make a substantial contribution to fulfil this mission.
We wish to thank Mr Luiz Mejan for the able manner in which he has steered the affairs of the association during his term of office as Chairperson and we wish him well in his future endeavours. We wish you well in your deliberations. We are confident that you will start scoring goals here in Johannesburg at this conference while the rest of the world waits for the 2010 Fifa World Cup to do so.
I thank you.
Issued by: Department of Justice and Constitutional Development
12 October 2009
Source: Department of Justice and Constitutional Development (http://www.doj.gov.za/)
