cross border insolvency law

Introduction 

South Africa has a mixed legal system because its common law – the Roman-Dutch law – has been significantly influenced by English law. Mercantile law, in particular insolvency and company law, has a strong English character. 

The Insolvency Act 24 of 1936 remains the principal source of insolvency law in this jurisdiction, but some provisions relating to corporate insolvency are found in the Companies Act 61 of 1973 and the Close Corporations Act 69 of 1984. Insolvency provisions of the Insolvency Act and the general law (i.e., common law) will nevertheless apply to corporate insolvency in the absence of a particular provision in the relevant legislation. 

The estates of natural persons are sequestrated and companies are wound up or liquidated in terms of the applicable legislation. (For purposes of this discussion the term “sequestration” will be used in both instances, unless indicated otherwise.) 

With regard to the recognition of foreign appointments, the Foreign Trustees and Foreign Liquidators Recognition Act of 1907, being the first statutory enactment that applied in the former Cape Colony, provided that the then Supreme Court could recognize the appointment of a foreign representative. Although this Act no longer forms part of South African law, some of its principles survived through precedent. [Ex parte Steyn 1979 2 SA 309 (O).] 

At present there is no legislation in force that deals with cross-border insolvency in South Africa and therefore the general law and precedent must be applied in this regard. Based on comity, convenience and equity a South African High Court is thus still entitled to recognize the appointment of a foreign representative. [Ex parte BZ Stegmann 1902 TS 40; Ex parte Steyn, supra; Ward v Smit & Others: In re Gurr v Zambia Airways Corporation Ltd 1998 3 SA 175 (SCA).] The principles of international private law (conflict of laws) will be applied in such an instance with regard to the treatment of property situated in this jurisdiction.

South Africa adopted the UNCITRAL Model Law on cross border insolvency as the Cross Border Insolvency Act 42 of 2000 on 8 December 2000. However, it must be noted that although being adopted as an Act of Parliament, this Act will thus only apply to designated countries but no countries have been designated as yet. 

In view of the introduction of the principle of reciprocity, this jurisdiction will in future follow a dual approach to the recognition of foreign bankruptcy orders in that representatives from designated countries will follow the procedure of the Cross Border Insolvency Act whilst those from non-designated countries will still have to follow the general law route. 

Property and cross border rules in terms of the South African general law 

The definition of “property” in the Insolvency Act includes all types of property, both movable and immovable, situated in South Africa. With regard to property situated in a foreign jurisdiction, the principles of private international law apply. These rules apply in the case of property situated outside the borders of South Africa (outward bound situation) as well as in the case of a request by a foreign representative to be recognized in South Africa (inward bound situation). 

Apart from property in the Republic, movable property of the insolvent in a foreign country will vest in the insolvent estate if the estate is sequestrated by the court where the insolvent is domiciled [Viljoen v Venter NO 1981 2 SA 152 (W)]. In principle this means that the foreign representative will be able to lay claim to any such property outside his or her jurisdiction without first obtaining such recognition. 

In case of immovable property, the lex forum rei sitae principle applies and recognition must be obtained from the foreign jurisdiction. If the representative fails to obtain this recognition, the immovable property remains vested in the insolvent [Mavromati v Union Exploration Import (Pty) Ltd 1947 4 SA 192 (A); Hymore Agencies Durban (Pty) Ltd v Gin Nih Weaving Factory 1959 1 SA 180 (D)]. 

Contrary to the situation with movable property where such recognition is deemed to be a mere formality, the recognition in case of immovable property is a necessity and the courts have an absolute discretion to reject or approve such an application [Ex parte Palmer NO: In re Hahn 1993 3 SA 359 (C)]. In Ward v Smit: In re Gurr v Zambia Airways Corp Ltd supra, the court held that it is imperative for the foreign representative of a juristic person to apply for recognition where the trustee has to deal with either immovable property or movable property in South Africa.

After recognition has been obtained the foreign representative may deal with local assets. A South African court may impose conditions on the foreign representative in order to safeguard the rights and interests of local creditors. If recognition is refused by a South African court, or not applied for, a foreign creditor may apply for the sequestration of the estate in this jurisdiction. 

Procedural and Related Matters 

Inward bound request 

Application for recognition by a foreign representative 

In order to be recognized as such in South Africa, the foreign representative must apply to a local High Court for recognition and assistance. When the rights of a third party (i.e., a local creditor) may be affected by the application, such person must be notified of the application [see Clegg v Priestley 1985 3 SA 950 (W)]. 

The discretion to recognize foreign orders and appointments 

Granting recognition to a foreign administrator to deal with an insolvent’s immovable property in South Africa is within the local court’s discretion. This discretion is absolute but recognition is usually granted in the interests of comity and convenience. In Ex parte BZ Stegmann supra, Innes JP, while accepting the above rule, went on to state: 

“But on the other hand, the same court, acting from motives of comity or convenience, is equally justified in allowing the order of the judge of the domicile to operate within its jurisdiction, and in assisting the execution or enforcement of such order. The matter is entirely one for its own discretion. [See also Ex parte Palmer NO: In re Hahn, supra.] 

The effect of recognition 

The effect of recognition is that the local assets will be treated as if the foreign debtor is an insolvent in terms of South African law, although he or she will not be an insolvent in terms of this jurisdiction. [Ex parte Steyn, supra.] However, our courts will not adjudicate foreign offences or tax claims. [See Priestly v Clegg 1985 3 SA 955 (T).]

The contents of the order 

The court will describe the mode of notice of the order to interested parties. The order should deal with the following: 

  •   Recognising the appointment of the foreign representative; 
  •   Duration of the order; 
  •   General powers of the foreign representative; 
  •   Security to be afforded by the foreign representative to the satisfaction of the Master of the Supreme Court; 
  •   The service of the order to relevant parties; 
  •   Supervision by the Master and practical arrangements regarding the administration of the order and submittal of estate accounts; and 
  •   Special conditions regarding meetings of creditors; proof, admission and rejection of claims; plans of distribution and the rights and powers of the foreign representative. These procedures will be gleaned from the Insolvency and the Companies Act. [See Moolman v Builders & Developers (Pty) Ltd 1990 10 SA 954 (AD); Ex parte Steyn, supra.] 

South African courts will protect the interests of local creditors and orders will sometimes state that “[p]roperty can only be transferred once administration costs and local debts have been paid before assets may be transferred” [Ex parte Steyn, supra]. However, a foreign creditor should receive preferential treatment if he or she holds a security acknowledged by the local forum. 

Outward bound request 

In case of a South African sequestration order, the local representative will seek to recover all assets situated in a foreign jurisdiction. In this respect the laws and procedures of the foreign jurisdiction must be complied with. [South Africa is not a party to any international treaty in this regard but it is a relevant country for the purposes of recognition in terms of section426 of the Insolvency Act 1986 (England).]

Although not compulsory, local representatives sometimes apply for a letter of request at a local court before approaching the foreign court. In Ex parte Wessels & Venter NNO: In Re Pyke-Nott’s Insolvent Estate 1996 2 SA 677 (O) the court denied such a request by considering the merits of the representative’s request to pursue assets situated in England. The court disapproved of this approach in Gardener and Another v Walters NNO 2002 2 SA 796 (C) and stated that the court is not asked to approve or sanction the actions of the representative in the foreign jurisdiction. 

Application for a local proceeding 

The courts have expressed a preference for a single forum of administration where the main proceeding is directed by the forum domicilii. [See Re Estate Morris 1907 TS 657; Ex parte Palmer NO: In re Hahn, supra.] Nevertheless, if an application for recognition fails, foreign creditors may always apply for the opening of a local procedure in terms of local law. Where the local statutory requirements can be met, the local estate of a foreign natural person debtor may for instance be sequestrated in South Africa. However, it is important to take note of section 149 of the Insolvency Act in terms of which the South African court has a discretion to refuse such an order in case of sequestration based on the principle of convenience where the debtor comes from a non-designated country. The local court has no such discretion in case of a foreign debtor from a designated country. When exercising the discretion, the local court will rather be lead by what will happen after the granting of the order than the convenience of the local courts as such [Morley v Pederson 1933 TPD 304; Goode, Durrant & Murray (SA) Ltd and Another v Lawrence 1961 4 SA 329 (W); Deutsche Bank AG V Moser and Another 1999 4 SA 216 (C).] 

The Cross Border Insolvency Act 42 of 2000 

This Act applies to states designated by the Minister of Justice by notice in the Government Gazette. The minister may only designate a state if he or she is satisfied that the recognition accorded by the law of such a state justifies the application of the Act to foreign proceedings in such state. This requirement has introduced the principle of reciprocity. [See sections 2(a) and (b) of the Act.]

This Act applies: 

  •   Where a foreign court or representative seeks South African assistance in a foreign proceeding; or, conversely, 
  •   where such assistance is requested in a foreign court in a proceeding under the laws of the Republic relating to insolvency (a “local proceeding”); 
  •   where a foreign and a local insolvency proceeding run concurrently in respect of the same debtor; or 
  •   where creditors or other interested (foreigner) persons apply to commence or to participate in a local insolvency proceeding [s 2(1)]. 

The Act will afford certain advantages to representatives and creditors from foreign jurisdiction of designated countries. These advantages include: 

  •   The Act will provide direct and speedy access and recognition to foreign representatives or creditors. 
  •   The Act also provides clarity with regard to the ranking of foreign creditors by stating that their ranking will not be lower than non-preferent claims of local creditors. 
  •   Foreign creditors are entitled to similar notifications as (local) creditors. 
  •   Local courts will not have a discretion based on convenience to refuse a local sequestration order [see discussion supra]. 

As far as the application for recognition is concerned, the Act clearly states that a foreign representative may apply to the High Court for recognition of the foreign proceeding in which he or she has been appointed. Such application must be accompanied by the relevant documentary evidence, including a statement of all foreign proceedings that he/she knows relate to the debtor [section 15]. After recognition has been granted, the foreign representative may take part in a local proceeding [ss 11 and 12] and may intervene in any proceeding to which the debtor is a party [ss 11, 12 and 24]. Upon registration of a foreign proceeding, the foreign representative acquires locus standi to initiate legal action to set aside any disposition that is available to a South African trustee or liquidator [ss 23].

Please do not hesitate to contact me for further information.

Allen West
TONKIN CLACEY PRETORIA 
012 346 1278

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