CHAPTER 11
RESOLVING FINANCIAL PROBLEMS IN MUNICIPALITIES

Part 1: Identification of financial problems

Primary responsibility for resolution of financial problems
88.
(1) The primary responsibility to avoid, identify and resolve financial problems in a
municipality rests with the municipality itself.

A municipality must meet its financial commitments.

(3) If a municipality encounters a serious financial problem or if it is in serious or persistent breach of its financial commitments it must immediately –
(a) seek solutions for the problem;
notify the MEC for local government in the province; and
where appropriate, notify organised local government.

Part 2: Provincial interventions
Decisions on provincial interventions
89.
(1) If the MEC for local government in a province becomes aware that there is a serious financial problem in a municipality or that a municipality has committed a serious or persistent material breach of any of its financial commitments or has admitted that it is unable to meet any of its financial commitments, the MEC must promptly

(a) consult the mayor of the municipality to determine the facts;
(b) assess the seriousness of the situation and the municipality’s response to the situation; and
(c) determine whether the situation justifies or requires an intervention in terms of section 139 of the Constitution.

(2) If the financial problem has been caused by or resulted in a failure by the municipality to comply with an executive obligation in terms of legislation or the Constitution and the conditions for an intervention in terms of section 139 (1) of the Constitution are met, the provincial executive must promptly decide whether or not to intervene in the municipality. If the provincial executive decides to intervene, section 90 applies.

(3) If the municipality has failed to approve a budget or any revenue raising measures necessary to give effect to the budget, as a result of which the conditions for an intervention in terms of section 139 (4) of the Constitution are met, the provincial executive must intervene in the municipality in accordance with section 23A.

(4) If the municipality is in serious or persistent material breach of financial commitments as described in section 93 or has admitted that it is unable to meet any of its financial commitments as a result of which the conditions for an intervention in terms of section 139 (5) of the Constitution are met, the provincial executive must intervene in the municipality in accordance with section 92.

Discretionary provincial interventions
90.
(1) If the conditions for a provincial intervention in a municipality in terms of section 139 (1) of the Constitution are met and the provincial executive decides in terms of section 89 (2) to intervene in the municipality, the MEC for local government in the province may take any appropriate steps referred to in section 139 (1) of the Constitution, including

(a) assessing the financial problem in the municipality;
(b) seeking solutions to resolve the financial problem in a way that would be
sustainable and would build the municipality’s capacity to manage its own financial affairs;
(c) determining whether the financial problem, singly or in combination with other problems, is sufficiently serious or sustained that the municipality would benefit from a financial recovery plan and, if so, requesting any suitably qualified person

(i) to prepare an appropriate financial recovery plan for the municipality;
(ii) to recommend appropriate changes to the municipality’s budget and revenue raising measures that will give effect to the recovery plan; and
(iii) to submit the recovery plan and any recommendations referred to in subparagraphs (i) and (ii) to the MEC within a period determined by the MEC; and
(d) consulting the mayor of the municipality to obtain the municipality’s co-operation in resolving the financial problem, and if applicable, implementing the recovery plan.

The MEC must submit any assessment in terms of subsection (1) (a), any
determination in terms of subsection (1) (c) and a copy of any request in terms of subsection (1) (c) to the municipality and the Minister responsible for local government.

This section does not apply to a provincial intervention which is unrelated to a
financial problem in a municipality.

Criteria for determining serious financial problems
For the purposes of section 90, in determining whether a financial problem is serious, all relevant facts must be considered, and the following factors, singly or in combination, indicates a serious financial problem –
the municipality has failed to make payments as and when due;
the municipality has defaulted on financial obligations for financial reasons;
(c) the actual current expenditure of the municipality has exceeded the sum of its actual current revenue plus available surpluses for at least the two consecutive financial years;
(d) the municipality had an operating deficit in excess of 10 per cent of revenue in the most recent financial year for which financial information is available;
(e) the municipality is more than 30 days late in submitting its annual financial statements to the Auditor-General in accordance with section 68;
(f) the Auditor-General has withheld an opinion or issued a disclaimer due to inadequacies in the financial statements or records of the municipality;
(g) any of the above conditions exists in a municipal entity under the municipality’s sole ownership control, or in a municipal entity for whose debts the municipality is liable; or

(h) any other material condition exists which indicates that the municipality or such municipal entity is likely to be unable for financial reasons to meet its obligations.

Mandatory provincial interventions
92. (1) If a municipality commits a serious or persistent material breach of financial commitments as described in section 93 or admits that it is unable to meet its financial commitments, the MEC for local government in the province must promptly

(a) request the Municipal Financial Recovery Service
(i) to determine the reasons why the municipality is in a serious or persistent material breach of its financial commitments or is unable to meet its financial commitments;
(ii) to assess the municipality’s financial state;
(iii) to prepare an appropriate recovery plan for the municipality;
(iv) to recommend appropriate changes to the municipality’s budget and revenue raising measures that will give effect to the recovery plan; and
(v) to submit to the MEC

(aa) the determination and assessment referred to in subparagraphs (i) and (ii) as a matter of urgency; and
(bb) the recovery plan and recommendations referred to in subparagraphs (iii) and (iv) within a period determined by the MEC; and
(b) consult the mayor of the municipality to obtain the municipality’s co-operation in implementing the recovery plan, including the approval of a budget and legislative measures giving effect to the recovery plan.

(2) The MEC for local government in the province must submit a copy of any request
in terms of subsection (1) (a) and any determination and assessment received in terms of subsection (1) (a) (v) (aa) to

(a) the municipality;
(b) the Minister responsible for local government; and
(c) the Minister

(3) An intervention referred to in subsection (1) supersedes any discretionary provincial intervention referred to in section 90, provided that any financial recovery plan prepared for the discretionary intervention must continue until replaced by a recovery plan for the mandatory intervention
.

Criteria for determining serious or persistent material breach of financial commitments
93.
For the purpose of section 92
a serious material breach of financial commitments

includes

a failure to make any payment to a lender or investor as and when due,
unless such failure is explicitly waived by the lender or investor;
a failure to meet a contractual obligation providing security in
terms of section 27;
a failure to make any other payment as and when due, which individually
or in the aggregate is over an amount as may be prescribed or, if none is
prescribed, over 2 per cent of the municipality’s budgeted operating
expenditure; and
such other failures as may be prescribed; and
excludes obligations as to which there are pending legal disputes between the municipality and the creditor, provided that such disputes are not instituted to avoid an intervention; and
a persistent material breach of financial commitments includes any recurring or continuous failure to meet financial commitments which substantially impairs the municipality’s ability to procure goods, services, or credit on usual commercial terms.

Preparation of financial recovery plans
94.
(1) Any suitably qualified person may, on request by an MEC for local government, prepare a financial recovery plan for a discretionary provincial intervention referred to in section 90.

(2) Only the Municipal Financial Recovery Service may prepare a financial recovery plan for a mandatory provincial intervention referred to in section 92.

(3) In preparing a financial recovery plan, the person referred to in subsection (1) or the Municipal Financial Recovery Service must
(a) consult

(i) the relevant municipality;
(ii) the municipality’s principal suppliers and creditors; and
(iii) the MEC responsible for local government in the province
;
(b) take into account
any financial recovery plan that has previously been prepared for the municipality; and
any financial recovery plan, or proposals for a financial recovery plan, that may be advanced by the municipality or any creditor of the municipality;
(c) at least 14 days before finalising the plan

(i) submit the plan for comment to

(aa) the municipality; and
(bb) any supplier or creditor of the municipality, on request; and
(ii) publish a notice in a newspaper of general circulation in the municipality

(aa) stating the place, including any website address, where copies of the plan will be available to the public free of charge or at a reasonable price; and
(bb) inviting the local community to submit written comments in respect of the plan.

(4) The person charged with preparing the financial recovery plan or the Municipal Financial Recovery Service must
(a) take into account any comments received pursuant to subsection (3) (c);
(b) finalise the financial recovery plan; and
(c) submit the final plan to the MEC responsible for local government in the province for approval in terms of section 96
.

Criteria for financial recovery plans
95.
(1) A financial recovery plan must
(a) be designed to place a municipality in a sound and sustainable financial condition as soon as possible;
(b) identify the financial problems of the municipality;
(c) state the principal strategic objectives of the plan, and ways and means for achieving those objectives;
(d) set out a specific strategy for addressing the municipality’s financial problems, including a strategy for reducing unnecessary expenditure and increasing the collection of revenue, as may be necessary;
(e) identify the resources needed, and where those resources will come from;
(f) describe the anticipated time frame for financial recovery, and milestones to be achieved; and
(g) identify what actions are necessary for the implementation of the plan, distinguishing between actions to be taken by the municipality and actions to be taken by other parties.

(2) A financial recovery plan may
(a) provide for the liquidation of specific assets, excluding those needed for the provision of the minimum level of basic municipal services
;
(b) provide for debt restructuring or debt relief in accordance with Part 3;
(c) provide for special measures to prevent unauthorised, irregular or fruitless and wasteful expenditures and losses through criminal conduct;
(d) include spending limits and revenue targets;
(e) provide budget parameters which bind the municipality for a specified period or until stated conditions have been met;
(f) identify specific tax rates, tariffs and revenue collection measures that are necessary for financial recovery; and

(g) identify any other actual and potential revenue sources.

Approval of financial recovery plans
96.
(1) On receipt of a financial recovery plan pursuant to a discretionary intervention, the MEC for local government in the province may approve the recovery plan with or without amendments, as the MEC considers appropriate.

(2) On receipt of a financial recovery plan pursuant to a mandatory intervention, the MEC for local government in the province must verify that the process set out in section 94 has been followed and that the criteria contained in section 95 are met; and --
(a) if so, approve the recovery plan; or
(b) if not, direct what defects must be rectified.

(3) The MEC must submit an approved recovery plan to

(a) the municipality;
(b) the Minister and the Cabinet member responsible for local government; and
(c) the Auditor-General.

Amendment of financial recovery plans
97.
(1) The MEC for local government in the province may at any time, but subject to section 94 (1) and (2), request any suitably qualified person or the Municipal Financial Recovery Service to prepare an amended financial recovery plan in accordance with the directions of the MEC.

(2) Section 94, read with such changes as the context may require, apply to the amendment of a financial recovery plan in terms of this section.

(3) No amendment of a recovery plan may impede the implementation of any court order made or agreement reached in terms of the plan before the amendment.

Implementation of financial recovery plans in discretionary provincial interventions
98.
(1) If the financial recovery plan was prepared in a discretionary provincial intervention referred to in section 90, the municipality must
(a) implement the approved recovery plan; and
(b) report to the MEC for local government in the province on the implementation of the plan in such manner, and at such intervals, or upon the attainment of such objectives, as the plan may determine.

(2) The financial recovery plan binds the municipality in the exercise of its executive authority.

(3) If the municipality cannot or does not implement the approved recovery plan, the provincial executive may in terms of section 139 (1) of the Constitution take further appropriate steps to ensure implementation of the plan
.

(4) Sections 34 (3) and (4) and 35 of the Municipal Structures Act apply if an MEC for local government dissolves a municipal council in terms of subsection (3).


Implementation of financial recovery plans in mandatory provincial interventions
99.
(1) If the recovery plan was prepared in a mandatory provincial intervention referred to in section 92
(a) the municipality must implement the approved recovery plan;
(b) all revenue, expenditure and budget decisions must be taken within the framework of, and subject to the limitations of, the recovery plan; and
(c) the municipality must report to the MEC for local government in the province on the implementation of the plan in such manner, and at such intervals, or upon the reaching of such objectives, as the plan may prescribe.

(2) The financial recovery plan binds the municipality in the exercise of both its
legislative and executive authority, including the approval of a budget and legislative measures giving effect to the budget.

(3) If the municipality cannot or does not implement the approved recovery plan, the provincial executive must assume responsibility for the implementation of the plan, including the exercise of any powers of the municipality which are necessary to implement the plan.

(4) If the municipality cannot or does not approve a budget and other legislative measures giving effect to the recovery plan within the timeframes specified in the plan, the MEC for local government in the province must in terms of section 139 (5) of the Constitution
(a) dissolve the council of the municipality;
(b) appoint one or more administrators until a newly elected council has been declared selected; and
(c) approve a temporary budget and other legislative measures giving effect to the recovery plan to provide for the continued functioning of the municipality
.

(5) Sections 34 (3) and (4) and 35 of the Municipal Structures Act apply when an MEC for local government dissolves a municipal council.

Regular review of provincial interventions
100.
(1) The MEC for local government in a province must at least every three months (a) review any discretionary provincial intervention referred to in section 90 or any
mandatory provincial intervention referred to in section 92, including

(i) progress with resolving the municipality’s financial problems and its financial recovery; and
(ii) the effectiveness of any financial recovery plan; and
(b) submit progress reports to

(i) the municipality;
(ii) the Minister of Finance;
the Cabinet member responsible for local government; and
the provincial legislature.

(2) The MEC may request the person who prepared the recovery plan, or the
Municipal Financial Recovery Service, to assist the MEC in complying with subsection (1).

Termination of provincial interventions
101. (1) A discretionary intervention referred to in section 90 must end when

(a) the municipality is able and willing to fulfil the executive obligation in terms of legislation or the Constitution that gave rise to the intervention; and
(b) the financial problem that has been caused by or has caused the failure by the municipality to comply with that obligation is resolved.

(2) A mandatory intervention referred to in section 92 must end when the
municipality’s ability to meet its financial commitments is secured.

(3) When a provincial intervention ends, the MEC for local government in a
province must notify –
(a) the municipality;
(b) the Minister, in the case of a mandatory intervention;
(c) the Cabinet member responsible for local government;
any creditors having pending litigation against the municipality; and
the provincial legislature.

Access to information, records and documents of municipalities
102.
If a provincial executive intervenes in a municipality in terms of section 139
of the Constitution, the provincial executive and its representatives have access to such information, records and documents of the municipality or of any municipal entity under the sole or joint ownership control of the municipality as may be necessary for the intervention, including for identifying or resolving the financial problem of the municipality.

National interventions
103.
(1) If the conditions for a provincial intervention in a municipality in terms of section 139 (5) of the Constitution are met and the provincial executive cannot or does not comply with that section, the national executive may comply with that section in the stead of the provincial executive.

(2) If the national executive intervenes in a municipality in terms of subsection (1), the Minister of Finance assumes for the purposes of the intervention the functions and powers of an MEC for local government in terms of this Chapter.

Part 3: Debt relief and restructuring
Legal rights
104.
Except as expressly provided for in this Part, nothing in this Chapter limits or affects
(a) the rights of any creditor or other person having a claim against a municipality;
(b) any person’s access to ordinary legal process in accordance with the common law and relevant legislation; or
(c) the rights of a municipality or municipal entity, or of the parties to a contract with a municipality or municipal entity, to alternative dispute resolution mechanisms, notice procedures, and other remedies, processes or procedures
.

Application for stay of legal proceedings
105A.
(1) If a municipality is unable to meet its financial commitments it may apply to the High Court for an order to stay, for a period not exceeding 90 days, all legal proceedings, including the execution of legal process, by persons claiming money from the municipality or a municipal entity under the sole ownership control of the municipality.

Notice of an application in terms of subsection (1) must be given to –
the MEC for local government in the province;
the Minister;
(c) the Cabinet member responsible for local government; and
(d) to the extent that they can reasonably be contacted, all persons to whom the municipality or the municipal entity owes an amount in excess of a prescribed amount, or if no amount is prescribed, in excess of R100 000.

An application in terms of subsection (1) must for the purposes of section 139 of
the Constitution be regarded as an admission by the municipality that it is unable to meet its financial commitments.


Application for extraordinary relief
105B.
(1) A municipality may apply to the High Court for an order
(a) to stay, for a period not exceeding 90 days at a time, all legal proceedings, including the execution of legal process, by persons claiming money from the municipality;
(b) to suspend the municipality’s financial obligations to creditors, or any portion of those obligations, until the municipality can meet those obligations; or
(c) to terminate the municipality’s financial obligations to creditors, and to settle claims in accordance with a distribution scheme referred to in section 105D.

(2) The Court may make an order in terms of subsection (1) only if
(a) the provincial executive has intervened in terms of section 92 and a financial recovery plan to restore the municipality to financial health has been approved for the municipality;
(b) the financial recovery plan is likely to fail without the protection of such an order;
(c) section 105C has been complied with, in the case of an application for an order referred to in subsection (1) (b); and
(d) section 105D has been complied with, in the case of an application for an order referred to in subsection (1) (c).

(3) Notice of an application in terms of subsection (1) must be given to
(a) to the extent that they can reasonably be contacted, all creditors to whom the municipality owes an amount in excess of a prescribed amount, or if no amount is prescribed, in excess of R100 000;
(b) the municipality;
(c) the MEC for local government in the province;
(d) the Minister;
(e) the Cabinet member responsible for local government; and
(f) organised labour
.

Suspension of financial obligations
105C.
Before issuing an order in terms of section 105B (1) (b) for the suspension of a municipality’s financial obligations to creditors, the court must be satisfied that
(a) the municipality cannot currently meet its financial obligations to creditors; and
(b) all assets not reasonably necessary to sustain effective administration or to provide the minimum level of basic municipal services have been or are to be liquidated in terms of the approved financial recovery plan for the benefit of meeting creditors’ claims.

Termination of financial obligations and settlement of claims
105D.
(1) Before issuing an order for the termination of a municipality’s financial obligations to creditors in terms of section 105B (1) (c), the court must be satisfied that
(a) the municipality cannot meet its financial obligations to its creditors and is not likely to be able to do so in the foreseeable future;
(b) all assets not reasonably necessary to sustain effective administration or to provide the minimum level of basic municipal services have been liquidated in terms of the approved financial recovery plan for the benefit of meeting creditors’ claims; and
(c) all employees have been discharged except those affordable in terms of reasonably projected revenues as set out in the approved financial recovery plan.

(2) If the court issues an order referred to subsection (1) the MEC for local government in the province must appoint a trustee to prepare a distribution scheme for the proportional settlement of all legitimate claims against the municipality as at the date of the order. Those claims must be settled against the amount realised from the liquidation of assets referred to in subsection (1) (b).

(3) A distribution scheme must
(a) determine the amount available for distribution;
(b) list all creditors with claims which qualify for the purposes of a distribution scheme, indicating which of those are secured and the manner in which they are secured; and
(c) provide for the distribution of the amount available amongst creditors in the following order of preference:
(i) first preference must be given to the rights of secured creditors as to the assets with which they are secured in terms of section 27, provided the security in question was given in good faith and at least six months before the mandatory provincial intervention began;
(ii) thereafter the preferences provided for in the Insolvency Act, 1936 (Act No. 24 of 1936), read with the necessary changes as the context may require, must be applied; and
(iii) thereafter non-preferent claims must be settled in proportion to the amount of the different claims;


(4) A distribution scheme may not be implemented unless approved by the court.

Matters to be prescribed
105E. The National Treasury must by regulation in terms of section 106

(a) provide for an equitable process for the recognition of claims against a municipality for the purposes of sharing in a distribution scheme, provided that rejection of any claim does not prevent a creditor from proving the claim in a court; and
(b) provide for public access to a distribution scheme.


Part 4: Municipal Financial Recovery Service
Establishment
105F.
(1) A Municipal Financial Recovery Service is hereby established as an
institution within the public service.

(2) The Municipal Financial Recovery Service forms part of, and functions within, the National Treasury.

Functions and powers
105G.
(1) The Municipal Financial Recovery Service

(a) must perform the duties and may exercise the powers assigned to the Service in terms of this Act;
(b) must, on request by an MEC for local government, prepare a financial recovery plan for a municipality or instruct any suitably qualified person to prepare the plan in accordance with the directions of the Service;
(c) may monitor the implementation of any financial recovery plans that it has prepared, and may recommend such amendments and revisions as are appropriate;
(d) may on request by any municipality that is experiencing financial problems, and in co-ordination with any other provincial or national efforts, assist the municipality to identify the causes of, and potential solutions for, these financial problems;
(e) may, with the approval of the Director-General of the National Treasury, obtain the services of any financial expert to perform any specific work for the Service; and
(f) may collect information on municipal financial problems and on best practices in resolving such problems.

(2) The National Treasury may recover any costs and expenses incurred by the
Treasury in connection with the preparation and implementation of a financial recovery plan from a relevant municipality
.

Appointment of Head
105H.
(1) The Minister must appoint a person as the Head of the Municipal Financial Recovery Service, subject to subsection (2) and legislation governing the public service.

(2) A person appointed as the Head of the Recovery Service holds office in the
National Treasury on terms and conditions set out in a written employment contract which must
include terms and conditions setting performance standards.

Responsibilities of Head
105J.
(1) The Head of the Municipal Financial Recovery Service
(a) is responsible for the performance by the Service of its functions and the
exercise of its powers; and
(b) takes all decisions of the Service in the performance of its functions and the exercise of its powers, except those decisions of the Service taken in consequence of a delegation in terms of section 105L.

(2) The Head of the Service performs the functions of office subject
to the directions of the Director-General of the National Treasury.


Staff
105K.
The staff of the Municipal Financial Recovery Service consists of
(a) the Head of the Service;
persons in the service of, or contracted by, the National Treasury and designated by the
Director-General for the work of the Service; and
(c) persons seconded to the Service by agreement between the Director-General and that organ of state or organisation.


Delegation
105L.
(1) The Head of the Municipal Financial Recovery Service may delegate, in writing, any of the powers or duties of the Service to a member of the staff of the Service.

(2) A delegation in terms of subsection (1)
(a) must be in writing;
(b) is subject to the limitations or conditions which the Head of the Service
may impose; and
(c) does not divest the Head of the Service of the responsibility concerning the
exercise of the delegated power or the performance of the delegated duty.

(3) The Head of the Service may confirm, vary or revoke any decision taken in consequence of a delegation in terms of subsection (1), provided that no such variation or revocation of a decision may detract from any rights that may have accrued as a result of the decision.