AIIFL Symposium on
Corporate Rescue In China:
Chinese and Comparative Perspectives
7 October 2002
Insolvency Experts’ Local Questionnaire – South Africa
David Burdette, André Boraine and Alastair Smith
Senior Lecturer & Professor, University of Pretoria and Associate Professor, University of South Africa
- Background Information
A)Briefly provide an overview of your country’s economic environment, in particular the relevance and significance of any political, social or cultural influences.
Multi cultural, mix of European, African and to a lesser extent Indian. Constitutional basis and mixed economy. To some extent third world with first world influences.
B)Is there systemic insolvency of the banking and/or corporate sectors?
Yes.
C)Is there ongoing or recent law reform activity in the areas of commercial and insolvency law? If so, please describe.
Yes, we are in the process of adopting a uniform Act dealing with all types of debtors in the same Act – corporations and individuals. Unified Act makes provision for Banks, but they are resisting inclusion. Proposed unified Act currently being considered at Cabinet level.
D)Is the judiciary effective? Respected by insolvency practitioners?
The High Courts are respected, yes. The lower courts are not as efficient as they should be, although this does not have a great influence on formal insolvency.
- Structure of Business Organizations
A)What are the main forms of business organizations in your country?
Companies, close corporations, partnerships and business trusts.
B)What is the usual size of business organizations?
A few large international corporations such as Anglo American, otherwise small to medium. Some Transnational enterprises such as car manufacturers.
C)Briefly describe the usual forms of management and ownership of these organizations (eg, public v. private ownership, extent of family control, etc.)
Mainly privately owned, with smaller companies and close corporations frequently under family control. Also a number of state owned companies such as Telkom (telecommunications) and Eskom (electricity supply Commission). Management of companies: Board of directors and shareholders.
D)Comment briefly on the accounting standards adopted by these organizations and whether independent, outside accountants are employed.
Companies must have annual independent audits and publication of financial statements in case of public companies.
E)Are there any statutory or regulatory bodies that monitor or supervise these organizations?
Yes, but to a limited extent only.
F)Overall, is there a strong ethos of corporate governance and disclosure?
Not strongly developed, but new proposals have been made to improve corporate governance (King Report).
3.Nature of Financing for Business Organizations
A)What are the main sources of financing for these organizations?
Trade creditors; Bank loans and overdrafts; debentures and shares.
B)What are the common types of financing (eg, debt v equity)?
Debt and to lesser extent equity.
C)In relation to each type of financing, briefly describe in particular:
i)the duration: trade debt: usually up to a year.
ii)the usual parties; company and trade creditor.
iii)the types of expenditure usually funded by such financing; at least 30% of external capital.
iv)whether there is a developed legal regime governing such types of financing. Yes
D)Briefly describe bank lending practices (eg, cash flow v asset lending).
Cash flow: commercial insolvency
E)Briefly describe bank monitoring procedures.
Submit financial statements; financial monitoring by banks.
F)Which is the most commonly employed type of financing, and why?
Trade creditors – little security. Surety.
4.Secured Creditors
A)Briefly describe the usual forms of security.
Real security: Mortgage, pledge, liens and hypothecs.
Personal: Guarantee (surety) and sometimes reservation of ownership.
B)Which is the most commonly employed type of security, and why?
Real security: Mortgage bond – gives the best security upon insolvency. Personal security: surety.
C)Is there a system of registration for any types of security?
Yes. Mortgage bonds are registered by a central Deeds Registry.
D)How are the priorities regulated between competing types of security?
Prior est in tempore. First in time – first in right.
E)Briefly describe the available options open to a security holder to enforce its security interest.
In certain instances may creditor attach and sell without court order.
Obtain judgment and execute property of defaulter.
Sequestrate individual or liquidate corporate debtor.
F)Can security holders self-enforce their interests?
To a limited extent.
G)Does the legal system provide an effective means for the enforcement of secured rights by security holders and also provide adequate protection of their rights?
Yes.
H)Overall, is it more common for secured creditors to enforce their rights against the security when the corporate debtor is in financial difficulty or to attempt to negotiate a suitable arrangement?
Depends on circumstances – both routes are used in practice.
5.Unsecured Creditors
A)Briefly describe the options available to an unsecured creditor to collect debts owed.
Obtain judgment and execute (individual collection)
Sequestrate individual or liquidate company or close corporation (collective measure)
B)May unsecured creditors pursue self-enforcement?
Not as a rule.
C)Does the legal system provide an effective means for the collection of debts by unsecured creditors and also provide adequate protection of their rights?
Yes.
D)Overall, is it more common for unsecured creditors to pursue legal remedies when the corporate debtor is in financial difficulty or to negotiate a suitable arrangement?
Both routes will be used depending on circumstances.
6.Overall Insolvency Law Regime
A)What are the principal laws governing insolvency in your country?
i)Are there separate insolvency laws for individuals and corporate enterprises? Yes, Insolvency Act of 1936 and Companies Act of 1973. Are there separate laws for liquidation and reorganization? No. Companies Act makes provision for liquidation and reorganization.
ii)Is the insolvency law a separate piece of legislation, or is it part of the general company law?
Separate, but some provisions included in Companies Act.
iii)Is there separate insolvency legislation for regulated industries such as banks, investment banks, insurance companies, etc? Yes.
B)Briefly summarize recent insolvency statistics for your country.
Not readily available.
C)Which courts are competent to exercise jurisdiction in insolvency matters? Is there any specialized court to hear insolvency matters?
In most cases the High Court. There are no special insolvency courts.
D)Is there a sufficient pool of professionals competent and experienced in handling insolvency matters?
Yes, but there is currently no formal licensing. At present the Master of the High Court has the discretion to appoint any fit and proper person that is not disqualified in terms of the relevant legislation. Master must at present apply affirmative action when making appointments.
E)Please advise on the identity of the relevant government authority and their role in the insolvency process.
Master of The High Court. Supervisory role.
- Liquidation and Formal (Court-Based) Restructuring
A)What types of insolvency proceedings are available against a corporate debtor?
Liquidation (winding up) and judicial management.
i)In relation to each type of insolvency proceeding:
a)Who may commence the proceeding?
Creditor, members, a member; the minister of Trade and Industries the Master of High Court.
b)What are the procedures for commencing the insolvency proceeding?
Court application or voluntarily by special resolution.
c)What is the usual time gap between the commencement of the proceeding and the final distribution to creditors in a liquidation and the approval of a plan in a reorganization? First part: roughly 6 months to a year. In many cases much more than that.
Reorganizations: not available.
d)What claims are recognized?
Secured, statutory preferent (priorities) and concurrent (unsecured non-preferential) claims.
e)What percentage of their debts do creditors generally recover?
Secured creditors: Depends on circumstances. First priorities very often recover full amount, but generally a rough estimate would be between 60-80%. Unsecured: 5-10 % in 28% of the cases.
B)Powers to recover assets. In relation to each type of insolvency proceeding:
i)What kinds of avoidance powers will be triggered by the commencement of the insolvency proceeding?
Statutory in terms of Insolvency Act (ie dispositions without value; voidable preferences; undue preferences; collusion) or actio Pauliana (fraudulent conveyance) in terms of South African common law (Roman Dutch Law).
ii) Who exercises the avoidance powers?
The trustee. If trustee fails to exercise the creditors will very often do so.
iii)How frequently are avoidance powers exercised and are they effective?
They are effective and used quite often.
iv) Describe the procedures for examination and against whom they are applicable.
Public (general) examinations and secret examinations. Applicable against any person who has material information regarding the estate in question. Provisions have been constitutionally challenged on a number of occasions, but generally have generally been found to be constitutional (only selected aspects found to be unconstitutional). Persons to be questioned summonsed by means of subpoena. Master of the High Court, Magistrates and specially appointed commissioners act as presiding officers. Examinees examined under oath / affirmation.
v)Describe any additional powers that may be used to increase the pool of assets available for distribution to creditors.
Attach assets that belongs to insolvent and in possession of third party.
C)Rights and liabilities of specific classes of parties.
i) In relation to each type of insolvency proceeding, how does the commencement of the proceeding affect the following classes of parties:
a)Corporate directors and officers
- Are there any civil/criminal liabilities (eg, fraudulent trading or wrongful trading)?
Yes, although there are benefits for directors and officers who voluntarily commence the proceeding.
- Are their powers of management curtailed?
Yes, normally totally.
- Other effects
b)Secured Creditors
- Are their rights to realize their security subject to a stay or moratorium?
In insolvency, yes.
- Is the priority of their claims adversely affected?
Only subject to certain charges against the security (administration expenses).
- Other effects
c)Unsecured Creditors
- Are their rights to commencing legal actions or to collect their claims subject to a stay or moratorium?
Yes.
- Is the priority of their claims adversely affected?
Subject to charges such as estate costs of administration and statutory preferences.
- Other effects:
Risk to be liable for contribution toward costs if creditor claims against the estate and no sufficient free residue to pay administration costs.
d)Workers: Preferential claims for salary bonuses etc in arrears as well as severance pay.
General (concurrent) claim for compensation due to untimely termination of contracts of employment. They however have right to be transferred to new employer if business is transferred as going concern to new employer. Arrear salary preferences for 3 months, leave pay, severance packages (all subject to maximum amounts).
e)Other specific type of creditors in your country:
Basically 3 classes:Secured, unsecured preferential and unsecured non preferential (concurrent). Some have special rights and preferences in terms of separate legislation.
D)Matters specific to formal court-based reorganizations
i)Who is responsible for formulating the plan or scheme?
The applicant in case of companies( s 311).
ii)What are the main sources of funding for the debtor during the formal workout process and what protection is given to the providers of such funds?
Cash injection by applicant.
iii)Are there any time limits within which a plan or scheme must be formulated?
Yes.
iv)Describe the voting procedures and approval requirements.
a)Are creditors divided into separate classes? Yes.
b)For approval, what percentages of amount of debts and of creditors are required? (eg. 2/3 of amount, majority in number); 75%.
c)Is court approval necessary? Yes.
v)Is the approved plan or scheme binding on all creditors?
Only particular targeted class.
vi)What are the rights of those who voted against the scheme?
Can apply to court to set aside.
vii)What happens when a plan or scheme is not approved? Liquidation may follow.
8.Out-of-Court Workouts
A)Are out-of-court workouts common? More common than formal court-based reorganizations?
No.
B)What are the incentives/disincentives for using out-of-court restructuring mechanisms rather than formal court-based mechanisms?
In theory may save costs but more difficult to meet with diverse interest groups.
C)Are out-of-court mechanisms controlled/administered by the private sector or the public sector? Private sector
i)Are asset management companies (“AMCs”) involved in the process? If so, what are their roles?
Not very much in SA
ii)Are there any specific procedures mandating governmentor any public body intervention in certain workouts (eg, for banks or where fraud is discovered?)
Registrar of Banks; Registrar of Financial Institutions; Office of Serious Economic Offences.
iii)Is there a sufficient pool of professionals competent and experienced in handling out-of-court workouts?
We have professionals but extent of expertise not well-known.
D)Are the out-of-court mechanisms formal or informal? Informal.
i) Are there any structured informal workout guidelines or procedures that exist in the country (eg, the London Approach?)
No – banks may have own policies.
E)Who the parties are to out-of-court restructuring agreements? Company and target group.
F)What are the carrots (incentives) and sticks (disincentives) for negotiating and reaching a consensus? Dividend may be better, consensus may be difficult to achieve.
G)What are the frequently used devices for facilitating rescue (eg, debt/equity swaps, delayed payment, etc.) or for providing exit strategies for creditors (eg, debt trading)? Subordination; debt trading; securitisation; capitalize debt.
H)What are the main sources of funding during the out-of-court workout process and what protection is given to the providers of such funds?
The offeror.
I)To what extent do secured creditor remedies (eg, receivership) lead to out-of-court rescues?
J)What options are available to creditors should the out-of-court workout negotiations ultimately collapse?
Liquidation or judicial management.
K)Are there any specific legislative provisions that give effect to the out-of-court workout plan in a formal judicial restructuring proceeding (eg, a “prepack”)?
Not for companies.
L)Please give an assessment of the overall effectiveness and fairness of the out-of-court workout procedures.
Unknown.
- Cross-Border Insolvency
A)Outbound issues – Describe the problems that may arise in formal court-based reorganizations or in out-of-court workouts when the debtor company in your jurisdiction has assets outside the jurisdiction.
South Africa Liquidator must apply for recognition at foreign jurisdiction.
B)Inbound issues – Describe the problems that may arise in formal court-based reorganizations or in out-of-court workouts when the debtor company in another jurisdiction has assets in your jurisdiction.
Foreign representative must apply for recognition at SA Court.
In general the SA common law of international private law will apply but South Africa has adopted UNCITRAL model law which is not in operation yet. Designated countries will enjoy benefits of Cross Border Insolency Act of 2000.
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