Insolvencies are down: a good or bad sign?
On the face of it, this suggests a recovery of sorts is taking place in the economy (insolvencies refer to court orders against individuals and partnerships unable to pay their debts, liquidations refer to companies in the same position).
Interestingly, individual and partnership (as opposed to corporate) sequestrations are becoming less common, with a 13,9% decrease in insolvencies in the first 11 months of last year compared with 2011.
This is the lowest it has been since the financial crisis of 2008. A few possible explanations present themselves:
- people are becoming more prudent in taking on new debt they cannot service
- banks are more flexible in trying to reach accommodation with borrowers in trouble
- most of the financially distressed individuals have been washed out of the system and banished from the credit market
- the courts are less prone to rubber-stamp sequestration orders in light of the financial hurricane visited on South Africans by the reckless lending spree of the 2000s.
So, perhaps there is greater sensitivity by the courts to those in trouble than was the case a few years ago. The National Credit Act was supposed to bring some relief to individuals in financial distress by introducing mechanisms such as debt counselling.
As we previously reported, a total of 9,3 million South Africans out of 19 million with credit records are now three or more months in arrears on at least one debt. That’s about half the credit-worthy population behind on their bills.
Surely not all of this delinquency can be placed at the feet of the banks’ customers. Surely, somewhere in the miasma of these bland statistics, there lurks a charge of reckless lending against the banks in terms of the National Credit Act (NCA). Is it not the task of the National Credit Regulator to fashion such a charge and present it before the courts? Instead, we have a non-profit group, New Economic Rights Alliance (NewERA), which has valiantly attempted – and failed – to bring a case against the banks.
Who does not remember the frenzied doling out of credit cards and mortgage loans by the banks in the months leading up to the enactment of the NCA in June 2007? Like a drug addict about to enter rehab, the banks wanted one final binge before the party came crashing down.
"Millions are swamped in debt," says Deborah Solomon, a registered debt counsellor and founder of the Debt Counselling Industry portal (www.theDCI.co.za). "But our courts are not swamped by lenders being charged with reckless lending."
"Yet officials air their concerns about possible lending 'abuses' and debt counsellors have regularly raised concerns with the NCR (National Credit Regulator)."
A recent report on the Impact of the NCA on South Africa’s Credit Market points to a lack of alignment between the NCA and the Insolvency Acts: “The interaction between the NCA and Insolvency legislation is explored as courts began considering whether remedies of the NCA had been utilised before voluntary sequestration was applied for. It is noted that legislation could have benefited from a level of alignment between both Acts as it is missing part of the ultimate debt resolution. The NCA, unlike the Insolvency legislation, does not provide any option for a court to cancel (part of) debt and follow a rehabilitation process akin to the insolvency process. Therefore, whilst the NCA aims to restructure debt, it cannot set aside part of it in order to make the restructure work (it only has the ability to set aside debt that is deemed reckless).”
Reading this report, it is clear the banks are luke-warm about the debt review process embodied in the NCA since this allows borrowers to stall their repayments. The problem is that those under debt review do not appear to be fighting their way back to solvency.
Another gem from the above report: in 2009, the judiciary handled just 5% of the 150,000 back-logged debt cases before it. So the courts are massively back-logged and credit providers are not receiving their just dues. Clearly, something else is wrong with the system.
Nowhere is there any exploration of how we arrived at this debt epidemic, other than the “financial crisis”. This is meaningless. It shifts responsibility to extraneous forces in Wall Street or the Federal Reserve, even though research by ETM Analytics in Johannesburg shows our very own banking system, headed by the Reserve Bank, has been expanding the money base on a massive scale over the last three years, making it one of the four worst monetary abusers in the world.
Chris Becker of ETM Analytics says this is likely to lead to serious social unrest, as is now happening in Turkey and Brazil. A huge redistribution is taking place benefitting the government and those first to receive the newly created credit (the banks and credit-worthy borrowers) at the expense of everyone else. Inflation is generally understood to mean a rise in prices. This is false. The rise in prices is a consequence of money printing (actually, most money is just computer entries) by the banking system.
“We must understand that this is an unjust process, as those accessing credit are in effect stealing purchasing power from those who don’t. A huge redistribution is taking place, and it’s usually governments who are the biggest borrowers benefitting most from this process, while the public are getting poorer and they are feeling it in their pockets. Although people can’t identify the exact reason of why they are getting poorer, they know their living standards are falling, and take to the streets in mass across the country to display this distaste and blame anything that’s topical at the time.”
Given the fraught economic times, class action suits against the banks are going to become more commonplace. And these will likely be fought on Constitutional rather than contractual grounds. How is it that banks can foreclose on securitised loans without disclosing to the court that they are no longer have title to the loan? The courts appear willing to accept the banks at their word: trust us because we never lie, because we have laws that govern us and mostly because this is the way it has always been. Perhaps, but that will surely change as public pressure builds.
Section 26 (3) of the Bill of Rights says: “No one may be evicted from their home, or have their home demolished, without an order of court made after considering all the relevant circumstances. No legislation may permit arbitrary evictions.”
In other words, before a court order is granted, all relevant circumstances must be considered. The fact that the loan being foreclosed has been securitised and title has passed to a new owner is surely a relevant circumstance that courts should be forced to consider. Otherwise, it could be argued, the eviction order granted by the court is arbitrary and is furthermore in violation of Section 33 of the Bill of Rights: “Everyone has the right to administrative action that is lawful, reasonable and procedurally fair.”
If the latest insolvency stats for individuals is looking better, the same is not true for companies. Stats for January 2013 show there was a 22,5% jump in company insolvencies which Stats SA says is due to a big increase in voluntary liquidations.
What does that say of the new business rescue mechanisms embodied in the amended Companies Act of 2008? On the face of it, it suggests the new measures are ineffective or are not being applied.
Business rescue, in theory, allows drowning companies to stay afloat in the hope of trading their way back to solvency. Sometimes it works, sometimes it doesn’t. 1time Airlines applied for business rescue late last year, as did Pinnacle Point Group. The latter failed, however, after Pinnacle Point’s bankers declined to provide the necessary financial support.
Business rescue offers an alternative to liquidation for financially distressed companies, allowing them to be stabilised and restructured. However, business rescue always depends on there being a source of funding, which means companies will also need buy-in from their banks and creditors for a business rescue plan to be implemented successfully.
Adam Harris, director of the litigation department at pan-African legal services group Bowman Gilfillan, offer one reason for the recent reversal in insolvency stats: “This trend is concerning, and appears to be contrary to the trend-line which we have been tracking for some time. We have for the last while factored into the equation the increasing usage of the relatively new business rescue mechanisms, and I will be disappointed if this is the gilt wearing off the business rescue gingerbread”.
Business rescue aims at avoiding liquidations and job losses by providing businesses with protection against creditors who may want to file for liquidation. It is an opportunity to reorganise and restructure distressed but viable companies in order to avoid liquidation.
Harris says applying for business rescue can provide companies with the opportunity to access interim liquidity to fund their operations while a rescue package is being formulated. It is important for a rescue package to be implemented as soon as possible.
Given the scale of financial distress afflicting the country, neither the NCA nor the Companies Act are capable of putting it right. Perhaps it is time the banks were held to account for the misery they have brought upon our heads.