Policy aimed at transforming insolvency sector declared invalid

The above question was recently dealt with by the Supreme Court of Appeal (SCA) in The Minister of Justice v The SA Restructuring & Insolvency Practitioners Association (693/15) [2016] ZASCA 196 (2 December 2016). The court declared a policy that seeks to regulate the appointment of insolvency practitioners intended to form the basis for the transformation of the insolvency industry, unconstitutional and irrational.

The impugned policy

The policy was introduced by the Minister of Justice and Constitutional Development in terms of s158(2) of the Insolvency Act, No 24 of 1936 (Act), which empowers the Minister to determine a policy for the appointment of a trustee by the Master of the High Court in order to promote consistency, fairness, transparency and the achievement of equality for previously disadvantaged by unfair discrimination.

The policy gave the Master the power to appoint an insolvency practitioner regarded as a ‘previously disadvantaged individual’ (as defined in the policy) to act as a co-trustee alongside an experienced practitioner so that he or she could learn from the experienced trustee how properly to administer an estate, in order to gain sufficient experience in the industry. The Master, in accordance with the policy, created a panel of insolvency practitioners divided into various categories based on, among other things, race, gender and seniority. The policy also set out a formula in terms of which the Master must appoint insolvency practitioners across the various categories, and the Master had no power to depart from this save for circumstances where the Master decides that an estate was a complex estate.

The policy was challenged on four bases. These were that:

(a)   it infringed the right to equality provided for in s9 of the Constitution;

(b)   it unlawfully fettered the discretion of the Master;

(c)   it was ultra vires the Act; and

(d)  it was irrational.

Case law on remedial action aimed at redressing past discrimination

In the landmark Constitutional judgment in Minister of Finance & another v Van Heerden 2004 (6) SA 121 (CC), Moseneke ACJ stated that when dealing with remedial measures, it is not sufficient that they may work to the benefit of the previously disadvantaged. They must not be arbitrary, capricious or display naked preference. If they do, they can hardly be said to achieve the constitutionally authorised end. One form of arbitrariness, caprice or naked preference, Moseneke J stated, is the implementation of a quota system, or one so rigid as to be substantially indistinguishable from a quota.

Irrationality of the policy

In so far as the policy aimed to transform and make the insolvency industry accessible to previously disadvantaged individuals, the High Court in the case under consideration stated that the policy needed to do more than increase the numbers. The court took issue with what it found to be a mechanical application of the policy which failed to appreciate and provide any scope allowing the Master to take into account the skills, knowledge, expertise and experience of the practitioner when appointing a trustee.

The SCA, in agreement with the High Court, noted that remedial action intended to redress past discrimination must operate in a progressive manner assisting those who, in the past, were deprived, in one way or another, of opportunity to practice in the insolvency profession. The SCA further stated that the policy prescribes a strict allocation of appointments in accordance with race and gender, and was entirely arbitrary and capricious with no saving discretion.

Where to from here?

This judgment will intensify discussions on the efficiencies and shortcomings of certain affirmative action policies, particularly because practitioners regarded as ‘previously disadvantaged’ remain few and underrepresented in the insolvency industry and other related sectors. Although there is a need to implement policies aimed at redressing the imbalances of the past, policy-makers should find ways to ensure that there is a correlation between the individual’s skill set and the requirements for the role, and the scope for the transfer of skills, within the system provided for by legislation.

As can be seen from the judgment, such policies should provide clear deliverable timelines or targets to determine whether they are likely to achieve the intended objectives within a clearly defined period. Policy makers should look beyond increasing the numbers.

The Minister and the Chief Master have applied for leave to appeal the SCA judgment to the Constitutional Court.
The revelations to be brought about by the appeal and the ultimate decision by the Constitutional Court will soon become known.