By Hillary Plaatjies
Due to the increase in International Trade and Investments into the worldwide markets, trade and movement of assets across borders are more frequent and as a result thereof cross-border Insolvencies are becoming more frequent. Cross-border Insolvency law primarily deals with situations where an insolvency procedure is initiated in one jurisdiction, in relation the property of a debtor who is situated in another jurisdiction. The law of insolvency on the one hand, and conflict of laws (Private International law) must be considered
A question which is increasingly imposed are whether an order made by a foreign court, appointing a foreign representative, will be recognized by a South Africa court and what steps must be taken by the foreign representative to deal with assets of the debtor in South Africa.
In South Africa, the common law system dealing with Private International Law and precedent must be applied in cross-border insolvency matters. The statutory position will come into effect, once the cross-border Act, comes into full effect. The Cross-border Insolvency Act was assented to on 28 November 2003. This Act is based on the UNCITRAL Model Law on cross-border Insolvency. The purpose of this UNICITRAL Model Law on Cross-border Insolvency is to provide effective mechanism and to create modern legal framework to effectively address cross-border insolvency proceedings and to regulate co-operation between foreign courts. South Africa build the element of reciprocity into the cross-border provisions. No countries have been designated whose insolvency court orders would be reciprocally recognized in South Africa and the Actcannot be implemented until the Minister of Justice has designated the foreign states to which the Act will apply.
Cross-border insolvency is approached by States using either a territoriality approach or the universality approach. The territoriality approach seeks to protect local assets for the benefit of local creditors. It confines the Insolvency proceedings to the jurisdictional limits of the country in which the assets and debts are located. Universality approach supports co-operation between states when dealing with multinational corporations. Universality approach treat cross-border insolvency as a single matter to ensure equal treatment to creditors from different jurisdictions and to which the courts of other countries would give their assistance.
South Africa is not a party to any international convention or treaty on Cross-border insolvency. Unless the situation is governed by a treaty or legislation, the common law principles and precedent regarding recognition of a foreign representative in South Africa is applicable. The common law regulates recognition of foreign representatives by South African courts.
Property as defined in the Insolvency Act includes all types of property, movable and immovable situated in South Africa. In South African Insolvency Law, the property vests in the trustee in a sequestration as provided for in section 20 of the Insolvency Act. In a liquidation, the company remains owner of its property and the liquidator obtains control of that property. The common law draws a distinction between immovable and movable assets.In the case of movable assets, the principle is that the foreign representative may claim any movable property without first having to obtain recognition. The movable assets are deemed to be vested in the foreign trustee and recognition is deemed to be a formality.
A foreign representative who wants do deal with immovable property, must first obtain recognition by the courts. The law of location of the property (lex rei sitae) principle applies in respect of immovable property and recognition must be obtained by the court where the property is situated.
In Ward v Smit: In re Gurr V Zambia Airways Corp Ltdthe court held that a foreign representative of a juristic person who wants to deal with movable property, immovable property or incorporeal property in South Africa, must apply for recognition to the High Court of South Africa. The court held that a recognition of a foreign liquidator is in the discretion of the court but dependent on considerations of comity, convenience and equity. The South African courts exercise their discretion when hearing such an application based on comity, convenience and equity. If recognition is refused by a South African court, a foreign creditor may apply for a sequestration or winding-up of the estate in the jurisdiction.
REQUEST FOR RECOGNITION BY FOREIGN REPRESENTATIVE TO SOUTH AFRICAN COURTS
Foreign representatives have no locus standi to deal with any property in South Africa belonging to a debtor or sue or defend actions for the company under provisional or final liquidation unless the foreign representative applied to the South African court for recognition.
It has been submitted that a foreign representative, who seeks recognition from a court, must satisfy the court of his appointment, but this will not be submitting a letter of request as required by previous legislation. Application must be made by the foreign representative to a division of the High Court in South Africa with necessary jurisdiction, where the assets are situated.
The discretion of the court as to whether it should grant recognition of a foreign representatives is absolute. However, in practice, the discretion is granted in the interest of comity, convenience and equity. In Ward v Smit: in re: Gurr v Zambia Airways Corporation Ltd it is stated that the court has wide discretion to recognise or not and would strive to protect local creditors if desirable to do so.
In practise, application for formal recognition has been put into a principle. The recognition order in these instances is a declaratory order regarding the foreign representative entitlement to administer the assets as if they were in the relevant jurisdiction where his authority derives from. It is also submitted that a foreign provisional representative should not be recognized where it is uncertain if his appointment will become final but the court has a discretion in these instances. In some instances, the court will be reluctant to grant recognition of foreign representative if he is a provisional trustee and not sure if he is going to be the final trustee. South African courts lean towards the territoriality approach and will protect the interest of local creditors.
The court may impose conditions for example a notice to interested parties to be published in the Government Gazette and local newspapers. It has been submitted that a foreign representative, who seeks recognition from a South African court, must satisfy the court of his appointment, but this will not be submitting a letter of request as required by previous legislation. The court may request the foreign representative to provide appropriate security to the Master of the High Court.
The Cross-border Insolvency Act 42 of 2000 cannot come into effect because of the Minister of Justice’s failure to designate certain states. This act does not provide assistance to a SA insolvency representative or agent who institute insolvency proceedings against a debtor who also has assets or business in a foreign jurisdiction. To achieve such reciprocity, the foreign state would need a similar act in which SA is a designated state.
The Cross-border Insolvency Act, when implemented, will only be applicable to designated countries. Due to this system of designation, the South African law will in future follow a dual approach to recognition of foreign bankruptcy orders in that the foreign representatives of designated countries will follow the procedure of the Cross-border Insolvency Act, whilst those representatives from non-designated countries will still have to follow the general route that is based on common law and precedent.
 Meskin Insolvency Law 17.1
 Cross-Border Insolvency Act 42 of 2000
 By proclamation no R73 of 2003 published in GG 25768 of 27 November 2003
 Cross-Border Insolvency Act 42 of 2000
 Smith & Ailolo (1999) 11SA Merc LJ192
 Section 2 of Insolvency Act, Act 24 of 1936
 Act 24 of 1936
 Section 361 of the Companies Act
 1998 (3) 175 (SCA)
 1998 (3) SA 175
 Michele Oliver and Andre Boraine, University of Pretoria
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.