Unethical Liquidation Practises In South Africa

It is no secret that historically and up and until now ‘some’ liquidators, banks and auction houses have resorted to unethical, fraudulent or corrupt business practices in order to generate benefits from liquidations.  One of these methods include the use of the “kickback” payment scheme which is an illegal payment intended as compensation for preferential treatment or to gain work or benefits from the liquidation. The kickback may be money, a gift, credit, or anything of value.

More and more we see that influential creditors persuading liquidators to make use of their service providers.

The independent role of the liquidator..

How is any liquidation process fair for any debtor or creditor when before or after the appointment of a liquidator, he/she is persuaded to conclude an agreement or make arrangements with a debtor or creditor of the estate which is prejudicial to others?

The independence of a liquidator is critical to ensure a properly discharge his/ her duties and for public confidence in the liquidation process.

Who should be disqualified from acting as liquidator?

Persons who have an interest opposed to the general interest of the creditors of the insolvent estate or who have been a party to an agreement or arrangement described above. Persons granting or endeavouring to grant or obtain benefits for a debtor or creditor not provided for, by law should be disqualified from being elected or appointed as liquidator.

The biggest role players, are sometimes the problem..

At the first meeting of creditors of an insolvent estate, the creditors who have proved their claims against the estates may elect one or two liquidators.  Any person who has obtained a majority in the number and value of votes of the creditors shall be elected as liquidator.

Due to the lengthy period between the date on which a company or close corporation is placed into liquidation and the date on which the Master convenes the first meeting of creditors, it is common practice for the Master to appoint a provisional liquidator to administer the company’s affairs prior to the appointment of the final liquidator at the first meeting of creditors.

Practically, the appointment of a provisional liquidator is done through the creditors signing requisitions in support of a specific liquidator, known as the “requisition system”.

The trouble with the requisition system is that it is very easy for a liquidator to be appointed if he/she has “friends within the bank” (who are often the largest creditors).

It was recently learned that banks are being asked to do more than just complete requisitions to appoint liquidators. They have been requested to insist that that the liquidator use a certain security bond provider.

Removal of a liquidator by Master

The Master may remove a liquidator from his/her office if his/her election or appointment was illegal or if the Master is of the opinion that the liquidator is no longer suitable to be the liquidator of the estate concerned. Liquidators should therefore be cautious about concluding agreements or engaging in arrangements which favour one party over another.

Removal of a liquidator by Court

Any interested person may apply to Court to have a liquidator be declared disqualified from holding the office in a particular mater or for the duration of his/her lifetime if:

  • he/she has expressed any willingness to accept benefits from persons in exchange for allowing them to perform any work on behalf of the company in question;
  • in order to induce a creditor to vote for him/ her as liquidator or in return for such vote he / she promises them a benefit or enters into any arrangements which are unlawful or biased.

Gaining support from financial institutions

Any liquidator who accepts support from financial institutions on the understanding that he/she will reciprocate by using the financial institution’s brokerage services to provide security to the Master, is in violation of Section 55 of the Insolvency Act and would be a basis to have the liquidator removed from office by court under section 59 of the Act.

The Master should be made aware of such unfair practices to ensure that the fraternity of liquidators remains independent and suitably qualified to be on the panel of approved liquidators.

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