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Improving insolvency stats may point to other mechanisms being favoured

Improving insolvency stats may point to other mechanisms being favoured

24th June 2014

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Improvements in the liquidation and insolvency figures released yesterday by Statistics SA, which revealed a welcome declining trend, do not necessarily indicate that the economy is strengthening.

Adam Harris, Director of pan-African corporate law firm, Bowman Gilfillan, noted that while there were fewer bankrupt companies being liquidated and fewer individuals and partnerships being declared insolvent as a result of unpaid debt, the fall in official figures may be due to the financially constrained using alternative mechanisms.

According to figures released by Stats SA, there was a decrease in liquidations of 24.9% in the first five months of 2014 compared with the first five months of 2013. Insolvencies were down 1.0% in the first four months of 2014 compared with the same period last year, although the declining trend is showing signs of slowing.

Harris commented that, “Where liquidations are concerned, it is significant that there has been a healthy trend of declining numbers since 2009 when liquidations totalled 4 133, against 2 374 last year.

“While this trend is comforting, other factors at work in the liquidation and insolvency market may be influencing the numbers.

“In particular, changes to the way in which insolvency practitioners are appointed are expected to shift the focus away from liquidations and sequestrations to other mechanisms like informal workouts and business rescue proceedings.

“That will of course have an effect on the statistics, and the reduction in numbers of insolvencies and liquidations will not necessarily indicate that there is an improvement in the performance of the economy.”

Harris noted that there had been a large measure of scepticism on the part of the lender community following the announcement by the Department of Justice that a new policy governing the appointment of insolvency practitioners would be implemented.

Although implementation has been delayed following the granting by the Cape High Court of a temporary interdict against Government, the policy establishes a “next-in-line” or “cab-rank” rule where creditors will have no say in the nomination of the provisional liquidator or trustee.

Presently, creditors submit “requisitions” indicating their support for the appointment of a particular practitioner. The new policy will regulate the appointments on a strictly rotational basis.

“This has made creditors understandably nervous. Objections raised are that there could be a large matter, within a specific niche area, such as mining or farming, to which a practitioner who has only ever attended to a handful of simple, standard matters gets appointed.

“Practitioners are also unhappy because their work-flow will be dependent upon the roll of the dice as to what the next matter in line may be,” said Harris.

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