Restructuring and insolvency in South Africa: overview

A Q&A guide to restructuring and insolvency law in South Africa.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and insolvency Country Q&A tool.

This Q&A is part of the PLC multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.

Ian Lindsay, Knowles Husain Lindsay Inc
Contents

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. The most common form of security is a mortgage bond over immovable property. A mortgage bond must be:

  • Executed in the presence of the Registrar of Deeds (Registrar) by the owner of the immovable property therein described or by a conveyancer duly authorised by such owner by power of attorney executed in the area in which the property is situated.

  • Attested by the Registrar.

This is the only way in which valid security is conferred over immovable property.

Effects of non-compliance. In the event of non-compliance with the formalities, the lender does not have an enforceable real right and is therefore unable to rely on the mortgage bond to prove a secured claim if the debtor is liquidated.

Movable property

Common forms of security and formalities. The following are the common forms of security:

  • A special notarial bond offers real security (a statutory pledge) over assets specifically described in the bond.

  • A general notarial bond is security over all movable property of the debtor. The registration of a general notarial bond gives a creditor preference only over unsecured claims in respect of the free residue of the estate. If, however, a creditor perfects its security before liquidation by taking possession either with the consent of the debtor or pursuant to a court application, the creditor becomes a secured creditor. In the event of a liquidation, the receivables subject to an unperfected cession continue to vest in the liquidated company. In practice the liquidator will realise the security and pay the proceeds to the creditor.

  • Pledges of shares and loan accounts. In the event of liquidation the assets subject to the pledge continue to vest in the liquidated company and in practice the liquidator will realise the security and pay the proceeds to the creditor.

  • Suretyships and guarantees. These are not real security (that is, a creditor who holds a suretyship or guarantee will merely have a concurrent clam against such surety or guarantor).

Only special and general notarial bonds must be registered in the Deeds Office. There are no other specific formalities for the other forms of security other than properly drawn up and executed documents.

Effects of non-compliance. A notarial bond which is not registered gives no preference against other creditors.

 

Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency?

When a company is liquidated the order of preference is as follows:

  • Liquidation costs.

  • Secured creditors. Payment is made from the proceeds of the sale of the secured asset. Where a secured creditor's claim is not satisfied in full, the unpaid balance gives rise to a concurrent claim.

  • Preferent creditors. These are creditors who do not hold security for their claims, but are ranked above concurrent creditors. They are paid from the proceeds of unencumbered assets in a pre-determined order as set out in the Insolvency Act 1936. Preferent creditors include employees' remuneration (up to a prescribed amount) and the South African Revenue Service. The holder of a general notarial bond who has not perfected its security by obtaining possession of the asset is the lowest ranked preferent creditor.

  • Concurrent creditors. These creditors are paid from any proceeds of unencumbered assets (the free residue of the estate) that remain after preferent creditors have been paid in full. They are paid in proportion to the amounts owing to them.

Any monies that are left over after all claims have been paid in full must be used to satisfy the interest on concurrent claims from the date of liquidation to the date of payment, in proportion to the amount of each concurrent claim.

If all creditors and costs of the liquidation are paid in full, any amounts remaining must be distributed among the shareholders according to their rights and interests in the company. Where shareholders are creditors by means of loan accounts, they are treated like any other creditor. In this regard, shareholders may hold security for their loan account claims and in doing so are treated as other secured creditors, failing which they are treated as concurrent creditors.

 

Unpaid debts and recovery

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

Trade creditors can use all the forms of security referred to in Question 1. Other than that, a reservation of ownership clause is commonly used. If a reservation of ownership clause is validly incorporated in the agreement between the trade creditor and the debtor, the trade creditor is treated as a secured creditor for the property over which ownership has been reserved. The property is sold in the liquidation and proceeds are allocated to the trade creditor. Any surplus remaining after the trade creditor has been paid in full is distributed to concurrent creditors.

Where a creditor takes security when the debtor company is already insolvent, the security may be voidable.

 
4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

Creditors can use standard debt recovery procedures through court actions or applications to recover debts.

 

State support

5. Is state support for distressed businesses available?

No state support for distressed businesses is available.

 

Rescue and insolvency procedures

6. What are the main rescue/reorganisation procedures in your jurisdiction?

Liquidation

Objective. A liquidation places a company under judicial protection. The rights of creditors as at the date of liquidation are suspended to prevent certain creditors from being preferred and/or enhancing their position at the expense of others. Additionally, a liquidator is appointed to realise and distribute the assets to creditors. The prospects of recovery are wholly dependant on the amounts realised from the liquidation.

Initiation. A liquidation can be used for any company and is commenced by an application to the court on notice to the company after a copy of the application and of every affidavit confirming the facts stated therein is lodged with the Master of the High Court (Master). This can be done by creditors, shareholders or the company itself. When an application is made to the court, the applicant must furnish a copy of the application with every registered trade union that, as far as the applicant can ascertain, represents the employees of the company, the South African Revenue Service and the company itself.

Alternatively, a voluntary winding-up can be initiated by the company itself by way of special resolution of the company.

A liquidation application can be made and granted urgently, where there are grounds of urgency. However, in normal circumstances, an order can be granted within two weeks of the issue of the court application if unopposed. If the application is opposed, it can take several months to resolve.

A first liquidation and distribution account can be prepared within six months of the liquidation order. Subsequent accounts are prepared until all the proceeds of the asset realisations have been distributed.

Substantive tests. A company can be wound-up when (item 9, Schedule 5, Companies Act 71, 2008 as read with section 344, Companies Act 61 of 1973):

  • The company has by special resolution resolved that it be wound up by the Court.

  • The company commenced business before the Registrar certified that it was entitled to commence business.

  • The company has not commenced its business within a year from its incorporation, or has suspended its business for a whole year.

  • In the case of a public company, the number of members has been reduced below seven.

  • 75% of the issued share capital of the company has been lost or become useless for the business of the company.

  • The company is unable to pay its debts.

  • In the case of a foreign company, that company is dissolved in the country in which it has been incorporated, or has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs.

  • It appears to the Court that it is just and equitable that the company should be wound up.

The most common form of winding-up relates to an inability to pay debts (which includes a "deemed" inability to pay where the company is indebted in a sum of not less than ZAR100 (as at 1 March 2012, US$1 was about ZAR7.5) and if it had failed to settle the debt within three weeks of written demand for payment by the creditor).

"Just and equitable" is not a limitless, catch-all phrase for winding up a company. It is used in specific circumstances, such as where:

  • The main object for which the company is in existence cannot be achieved.

  • The objects of the company are illegal.

  • There is a lack of confidence in the management of the company.

  • The voting power results in a deadlock that cannot be resolved.

Supervision and control. In any winding-up by the court, all the property of the company concerned must be deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed and has assumed office. As soon as a winding-up order has been made in relation to a company, or a special resolution for a voluntary winding-up of a company has been registered, the Master appoints a provisional liquidator. Generally, after the first meeting of creditors the final liquidator is appointed. The liquidator must realise the assets of the company and distribute the proceeds to creditors. Liquidators act on the directions of creditors, which are given at formal meetings. Alternatively, urgent directions can be obtained from court.

Protection from creditors. At any time after the presentation of an application for winding-up and before a winding-up order has been made, the company or any creditor or member thereof may, if there is any action pending or there is about to be an action instituted by or against the company in South Africa, apply to such court for a stay of the proceedings or an order restraining further proceedings. After a winding-up order, proceedings are suspended until the appointment of a liquidator, every person who intends to institute legal proceedings for the purpose of enforcing any claim against the company which arose before the commencement of the winding-up must, within four weeks after the appointment of the liquidator, give the liquidator not less than three weeks notice in writing before continuing or commencing the proceedings.

Length of procedure. The length of the entire winding-up process depends on the nature of the matter. Proceeds to creditors can generally only be paid after confirmation of a liquidation and distribution account, which is only prepared once assets are realised and cash is available for distribution.

Conclusion. Following receipt of the winding-up order from the court, the Master must give notice of the winding-up of the company in the Government Gazette. Any company that has voluntarily placed itself in winding-up by special resolution must give notice of the voluntary winding-up in the Government Gazette. The winding-up of the company is complete when the liquidator has realised all the assets and completed his investigations (including any action that has arisen through this) into the affairs of the company. The liquidator produces a final liquidation and distribution account and makes the final dividend payment to creditors (if any). The Registrar then de-registers the company. Alternatively, a company can be discharged from liquidation by the court where creditors enter into a compromise or arrangement with the company under the Companies Act 2008.

Business rescue

Objective. The primary objective of the business rescue procedure is to:

  • Prevent the demise, through winding-up, of viable companies by the implementation of a plan for possible rescue.

  • If such plan cannot be devised, implement a plan that would achieve a better return for the company's creditors than that which would ensue following the winding-up of the company.

Initiation. Business rescue may be initiated in one of two ways. Firstly, the board of directors can, by special resolution, voluntarily begin business rescue proceedings if it has reasonable grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. This resolution cannot be adopted if liquidation proceedings have been initiated by or against the company and it is of no force or effect until it has been filed. Furthermore, within five business days after the company has adopted this resolution it must both:

  • Publish a notice of the resolution and its effective date in the prescribed manner.

  • Appoint a business rescue practitioner.

This time period is quite inflexible, although a company can make an application to the Companies and Intellectual Property Commission (CIPC) for an extension of time.

If a company fails to comply with any of the notice and publication requirements relating to the business rescue resolution or the notice and publication requirements relating to the appointment of a business rescue practitioner, the resolution to initiate business rescue proceedings and place the company under supervision lapses and is a nullity. In addition, the company cannot file a further resolution initiating business rescue proceedings for a period of three months.

Secondly, an "affected person" may apply to the High Court at any time for an order placing the company under supervision and commencing business rescue proceedings. An "affected person" is defined as one of the following:

  • A shareholder.

  • A creditor.

  • Any employees or their representatives.

  • Any registered trade union that may represent an employee of the company.

Business rescue is applicable to any company that is financially distressed.

Substantive tests. Business rescue is a procedure to facilitate the rehabilitation of a company that is financially distressed by providing for the following:

  • A temporary supervision of the company, and of the management of its affairs, business and property.

  • A temporary moratorium on the rights of claimants against the company, or in respect of property in its possession.

  • The development and implementation, if approved, of a plan to rescue the company or, if that is not possible, a plan that would achieve a better return for the company's creditors than the payment they would have received if the company had simply been liquidated.

The test is therefore whether the company is financially distressed. For that to be proved, one of the following must exist:

  • The company appears to be reasonably unlikely to be able to pay all of its debts as they become due and payable within the immediately ensuing six months.

  • It appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

Supervision and control. A business rescue practitioner is appointed, or two or more persons are appointed jointly to oversee the management and control of the company during its business rescue proceedings. The functions and terms of appointment of the business rescue practitioner are contained in Part B of Chapter 6 of the Companies Act 2008. During business rescue proceedings the business rescue practitioner, as an officer of the court, must report to the court in accordance with any applicable rules or orders made by the court. The practitioner also has the responsibilities, duties and liabilities of a director of a company as provided for in sections 75,76 and 77 of the Companies Act 2008 and must act in accordance therewith. Therefore, when the practitioner is appointed, he has full management control of the company in substitution for its board and pre-existing management. 

As soon as possible after having been appointed, the practitioner must investigate the affairs, business, property and financial situation of the company and, after having done so, consider whether there is any reasonable prospect of the company being rescued. If the business rescue practitioner concludes after his investigation that the company should be rescued, he must develop a business plan and see it through to finality and comply with the notification requirements as set out in regulation 125(6) of the Companies Regulations 2011. Alternatively, if it is concluded that the company should not be rescued, a notice of termination is filed with the CIPC.

Protection from creditors. A general moratorium on legal proceedings (including any enforcement action) against a company (or in relation to any property belonging to the company, or lawfully in its possession) while the company is subject to business rescue proceedings occurs. The moratorium is designed to provide the company with breathing space while the business rescue practitioner attempts to rescue the company by designing and implementing a business rescue plan. Although this moratorium is broad, there are certain exceptions, namely that:

  • Legal proceedings against a company can be commenced or proceeded with:

    • when the business rescue practitioner gives written consent;

    • the leave of the Court; or

    • as a set-off against any claim made by the company in any legal proceedings irrespective of whether those proceedings commenced before or after the commencement of business rescue.

  • Criminal proceedings against the company or any of its directors or officers can be brought or proceeded with.

  • Proceedings concerning any property right over which the company exercises the powers of a trustee or proceedings by a regulatory authority in the execution of its duties after written notification to the business rescue practitioner can be brought or proceeded with.

Length of procedure. The duration of business rescue proceedings varies. In the case of the voluntary initiation of business rescue proceedings by a company, the business rescue proceedings commence at the time the company files the resolution with the CIPC or at the time the company applied to court for consent to file a (further) resolution. In the case of the compulsory initiation of business rescue proceedings by an affected person, the business rescue proceedings commence at the time the application is made to court. Where a court makes a business rescue order in respect of a company that is subject to liquidation proceedings, or proceedings to enforce a security interest against the company, the business rescue proceedings will commence at the time the court makes the order.

Business rescue proceedings terminate on the occurrence of one of the following:

  • The court sets aside the resolution or order that has commenced those proceedings, or converts the business rescue proceedings into liquidation proceedings.

  • The business rescue practitioner files a notice of the termination of business rescue proceedings with the CIPC.

  • A business rescue plan has been:

    • proposed and rejected, and no affected person has taken any steps to extend the proceedings; or

    • adopted, and the business rescue practitioner has subsequently filed a notice of substantial implementation of that plan.

If the business rescue proceedings of a company have not terminated within three months after they have commenced, or such longer time as the court on application by the business rescue practitioner may allow, the practitioner must both:

  • Prepare a report on the progress of the business rescue proceedings.

  • Update such report monthly until the termination of the business rescue proceedings.

Conclusion. The procedure is formally concluded when the practitioner files a notice of substantial implementation of the business rescue plan, which means that the company is no longer financially distressed and is now able to meet its debts.

Therefore, if the business rescue plan is successful in restoring the business to operational level, the business will continue as a viable entity; alternatively the plan may be successful in that a better return was received for the company's creditors than the payment they would have received if the company had simply been liquidated immediately. If the plan was unsuccessful, the subsequent liquidation of the company is undertaken.

Compromise (arrangement)

Objective. The primary objective of a compromise is, where the company is placed in a winding-up, the effecting of a compromise between the company and its creditors in the context of the acquisition by a third party of control of the company on the footing that its creditors' claims should be eliminated or their rights in respect of such claims should be ceded to the third party to continue trading.

A compromise can be entered into irrespective of whether the company is financially distressed or not, but cannot be used if the company has been placed under business rescue (section 155, Companies Act 71 of 2008).

Initiation. The board of a company (or the liquidator if it is being wound-up) can propose a compromise concerning its financial obligations to all of its creditors, or to all of the members of any class of its creditors by delivering to every creditor of the company and the CIPC:

  • A copy of every proposal.

  • Notice of meeting to consider the proposal.

This proposal must contain all information reasonably required for creditors to accept or reject the proposal, which must include various items, for example (section 155(3)):

  • A complete list of all the material assets of the company.

  • Secured assets.

  • The nature and duration of any proposed debt moratorium.

  • Projected balance sheets.

Substantive tests. The compromise should be more advantageous to creditors than if the company was placed in final liquidation.

Supervision and control. The board or liquidator (depending on the circumstances) proposes the arrangement or compromise. Thereafter, the majority of creditors choose to accept or reject the proposal and a receiver is appointed to supervise the process.

Protection from creditors. There is no protection from creditors while the process is underway, but the creditors ultimately make the final decision. Further, any interested party could launch an application to court to allow the process to take its course and the court would then decide.

Length of procedure. The Act does not stipulate a time frame. However, in practice, the entire procedure takes approximately eight to ten weeks.

Conclusion. If the proposal is adopted by the creditors or class of creditors (it must be supported by a majority in number; at least 75% in value of the creditors or class) the company can apply to the court for an order approving the proposal and the court may sanction the compromise as set out in the adopted proposal if it considers it just and equitable to do so. A copy of an order of the court sanctioning the compromise must be filed by the company within five business days with the CIPC and must be attached to each copy of the company's memorandum of incorporation that is kept at the company's registered office. This order is final and binding on all of the company's creditors or all of the members of the relevant class of creditors, as the case may be, as of the date on which it is filed. Furthermore, a compromise or arrangement is binding on all the creditors or class of creditors, but only when it is filed with the CIPC. If a company was previously in liquidation, the court will discharge the company from liquidation on sanction of the compromise or arrangement.

Notably, arrangement or compromise cannot in any way affect the liability of the company's surety to any creditor. A surety for the company remains liable to the company's creditor notwithstanding that the creditor's claim against the company is subject to the novation resulting from the sanctioned compromise.

Depending on the proposal, a compromise can comprise:

  • An agreement with the various creditors.

  • An alternative means of winding up a company.

  • An agreement for takeover of a company and the termination of the process of the winding-up on the basis of, for example, an acquisition of all its issued shares and its creditors claims.

The effect of a proposal is therefore set out in the particular compromise or arrangement adopted.

 
7. What are the main insolvency procedures in your jurisdiction?

For insolvency procedures, see Question 6.

 

Stakeholders' roles

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?

Creditors generally have the most important role but the employees, the Master, shareholders and liquidators or rescue practitioners also play a significant role.

 

Liability

9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

This can occur in circumstances where an insolvent company has traded recklessly and the director (or parent company) has been knowingly a party to such reckless trading.

 

Setting aside transactions

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

Liquidation

Certain types of transactions can be set aside where a company in financial difficulties is subsequently placed in liquidation. The liquidator may challenge the following transactions:

On application by a liquidator, a court can set aside a transaction where it is shown that a disposition was not made for value. This applies where the liquidator proves that:

  • More than two years before the company was liquidated it disposed of a major asset and thereafter the company's liabilities exceeded its assets and the disposition was not one of value; or within two years of liquidation the company disposed of an asset not for value.

  • Within six months before liquidation and immediately after the disposition, the liabilities of the company exceeded its assets (unless the person to whom the disposition was made proves it was done so in the ordinary course of business and did not prefer one creditor over another).

  • After the disposition, the company's liabilities exceeded its assets and the disposition was made with the intention of preferring a creditor, after which the company was subsequently liquidated.

  • An asset was disposed of in a manner that had the effect of prejudicing creditors or preferring one creditor over another and the disposition was effected by the company in collusion with another party.

Where a company disposes of any business or goodwill belonging to it and the sale is not properly advertised to creditors under the Insolvency Act, the sale will be void against creditors for six months after disposition and will be void if the company is liquidated any time within that period.

A third party's rights will be affected, however, the liquidator may choose to stand by a certain disposition.

Business rescue

Despite any provision of an agreement to the contrary, during business rescue proceedings the business rescue practitioner has the following powers (section 136(2), Companies Act 71 of 2008):

  • Suspend (entirely, partially or conditionally) for the duration of the business rescue proceedings, any obligation of the company that arises under agreement to which the company was a party as at the commencement of the business rescue proceedings and would otherwise have become due during those proceedings.

  • Apply urgently to court to cancel (entirely, partially or conditionally) on any terms that are just and reasonable in the circumstances, any obligation of the company in terms of that contract.

The provisions of section 136(2) therefore allow the company, through the business rescue practitioner, to extricate itself, whether temporarily or permanently, from onerous contractual provisions that are preventing it, or may prevent it, from becoming a successful concern. Therefore, third party rights in this situation may well be affected.

The only remedy for a party to an agreement that has been suspended or cancelled is to assert a claim for damages against the company.

 

Carrying on business during insolvency

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

Circumstances

Liquidation. A company in liquidation can continue to trade if the court consents thereto and, in all probability, the major creditors. It should be noted, however, that in most circumstances the liquidators would require funding to continue to trade.

Business rescue. A company placed under business rescue will continue to trade. With regards to property, while a company is subject to business rescue proceedings, the company can only dispose of, or agree to dispose of property in the normal course of business, such as:

  • In a bona fide transaction at arm's length and for fair value, approved in advance and in writing by the business rescue practitioner.

  • In a transaction contemplated within and undertaken as part of the implementation of a business rescue plan that has been approved.

Any person who, as a result of an agreement made in the ordinary course of the company's business prior to the commencement of the business rescue proceedings, is in lawful possession of any property owned by the company, can continue to exercise any right in respect of that property as contemplated in that agreement, subject to the provisions of section 136 of the Companies Act 71 of 2008 (see Question 9, Business rescue).

Despite any provision of an agreement to the contrary, no person can exercise any right in respect of property in the lawful possession of the company (irrespective of whether the property is owned by the company) except to the extent that the practitioner has consented in writing.

If a company wishes to dispose of any property during its business rescue proceedings which is subject to the security or title interest of another person, the company must both:

  • Obtain the prior consent of the holder of the security or title interest (unless the proceeds of the disposal are sufficient to fully discharge the company's indebtedness).

  • Promptly pay to the holder of the security or title in interest the proceeds of that sale up to the amount owed.

Compromise (arrangement). In cases where a compromise or arrangement is used, the company cannot be in liquidation or under business rescue at all and therefore can continue trading under the supervision of the usual management.

Authority/supervision

Liquidation. After the court has consented to the company trading, the liquidator will supervise the continued trading which is subject to the restrictions imposed by the court or creditors.

Business rescue. The business rescue practitioner supervises and has the authority to carry on the company's business.

Compromise (arrangement). No restrictions apply unless the company is in liquidation or under business rescue.

Intellectual property licences

An intellectual property licence is the property of the company in liquidation; it is therefore an asset and strictly speaking it can be sold.

 

Additional finance

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

A company that is placed under business rescue can obtain post-commencement finance to continue trading. There is a statutory provision in place conferring preferential claims for post-commencement financing. Any such financing that can be obtained can be secured using any asset of the company to the extent that it is not otherwise encumbered. Furthermore, the post-commencement finance provisions of the Companies Act 2008 make specific provision for employee entitlements (for the period after business rescue has commenced) to be treated also as part of the post-commencement financing. However, claims by lenders for post-commencement financing will only be paid after the business rescue practitioner's claim for remuneration and expenses, and the employees' claims, if any, have been paid in full, even if the lender's claim is secured.

 

Multinational cases

13. What are rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to file claims in a local restructuring or insolvency process?

Recognition

In South African law, a foreign trustee is automatically vested with the insolvent's movable property, wherever situated, if, at the date of the sequestration order, the insolvent was domiciled in the area of jurisdiction of the court that granted such order, but this is not the case in respect of immovable property. However, the fact that the debtor was vested with movable property situated in the court's jurisdiction, does not eliminate the necessity of the foreign trustee having to obtain recognition by such court for the purposes of the administration of such property. Therefore, to be recognised as such in South Africa, the foreign representative must apply to a local High Court for recognition and assistance. In essence, the protection accorded to local creditors consists of the imposition on the foreign representative of a duty to furnish security to the Master's satisfaction for the proper conduct of the administration, affording creditors the opportunity of proving their claims, and the rendering of the law applicable in the Republic mutatis mutandis, to such administration and the payment of such claims. Once the Cross-Border Insolvency Act 42 of 2000 (Cross-Border Insolvency Act) takes effect (by the designation of states to which the Act will apply, which has not yet occurred), its provisions will apply to the recognition of foreign trustees and other representatives from states designated in terms of section 2(2) of the Act (see below, International treaties).

The South African court has the discretion to recognise a foreign liquidator as if he were a liquidator appointed in South Africa. Such recognition is usually granted where it is in the interests of comity and convenience to do so. It is clear that a foreign liquidator cannot be allowed to act in South Africa until his appointment has been recognised by a local court. The effect of recognition is that the local assets will be treated as if the foreign debtor were an insolvent in terms of South African law and the recognition order may also allow the foreign liquidator to conduct a local interrogation or pursue claims against funds held in South Africa.

In granting a recognition order, South African courts will, in general, protect the interests of local creditors who must be notified of the intention of the foreign liquidator to deal with local assets. The court may also make an order that property be transferred only once the administration costs, as well as the costs of the application and local debts have been paid.

Concurrent proceedings

The Cross-Border Insolvency Act, Chapter 4 prompts local courts to co-operate to the maximum extent possible with foreign courts or foreign representatives. Courts can communicate and seek information or help directly from foreign courts or representatives and with the High Court's supervision, local representatives are expected to act in similar fashion; section 26 grants them the same right of direct communication with foreign courts and representatives.

Chapter 5 deals with concurrent proceedings by enabling the launch of local insolvency proceedings once a foreign proceeding has been recognised by a South African court. The effects of the local proceeding will then be limited as prescribed and directions as to the administration of the concurrent proceedings are provided. Provision is made for any relief already granted in foreign non-main proceedings to conform to a foreign main proceeding that is later recognised. Once the foreign main proceeding is recognised by the High Court, the debtor is rebuttably presumed to be insolvent for the purposes of institution of a local proceeding.

International treaties

South Africa does not have any cross-border treaty with any other jurisdiction and is not a party to any convention in this regard. South Africa did, however, adopt UNCITRAL Model Law on Cross-Border Insolvency 1997 (UNCITRAL Model Insolvency Law) by means of the Cross-Border Insolvency Act, which came into force on 28 November 2003. However, in practice, the Act is not yet in operation as its operation is dependent on the designation by the Minister of Justice of states to which the Act will apply. As yet, no states have been designated, but once such designation occurs, South African law will follow a dual approach to the recognition of foreign bankruptcy orders in that representatives from designated states will follow the procedure envisaged by the Act, while representatives from non-designated states will still have to follow the procedure based on the common law and precedent.

Procedures for foreign creditors

No special procedures apply to foreign creditors except that they may be required to give security before starting legal proceedings.

Foreign civil judgments can also be recognised in South Africa under the Enforcement of Foreign Civil Judgments Act 1998. In this case:

  • The judgment must be final.

  • The foreign court must have jurisdiction over the matter under South Africa Private International Law.

  • The judgment cannot contravene South African public policy or natural justice.

  • The judgment must not be contrary to section 1 of the Protection of Businesses Act (certain orders need the consent of the Minister of Trade and Industry).

 

Reform

13. Are there any proposals for reform?

Insolvency law in South Africa is currently governed by the Insolvency Act of 1936 and according to item 9, Schedule 5 of the Companies Act 71 of 2008, in terms of the Companies Act 61 of 1973. This means that the Companies Act 1973 is to remain in force in respect of liquidations and winding-up of insolvent companies until the Minister, by notice in the Gazette, determines a date on which item 9 ceases to have effect and a new Insolvency Act is introduced.

Currently there is no bill pending before the Parliament; therefore it is unknown when this is likely to occur.

 
{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247243604982", "objName" : "Restructuring and insolvency in South Africa overview", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/6-385-1966?source=relatedcontent", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "2-5e12d5a8:1459368dd67:5798", "analyticsSessionCookie" : "2-5e12d5a8:1459368dd67:5799", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }