Cross Border Insolvency; Limitation of Legal Proceedings Against Government Institutions Bills: briefing

Meeting report

JUSTICE AND CONSTITUTIONAL AFFAIRS PORTFOLIO COMMITTEE
18 April 2000
CROSS BORDER INSOLVENCY BILL; LIMITATION OF LEGAL PROCEEDINGS AGAINST GOVERNMENT INSTITUTIONS BILL: BRIEFING

Documents Handed Out:
Cross Border Insolvency Bill [B4-20]
Limitation of Legal Proceedings Against Government Institutions Bill [B65-99]
Submission - Cape Bar Council (Appendix 1)

SUMMARY
The Committee was briefed on the Cross Border Insolvency Bill and the Limitation of Legal Proceedings against Government Institutions Bill by the South African Law Commission (SALC).

Cross Border Insolvency Bill
The committee was concerned over two specific areas of the Bill. First, that there was no reciprocity clause included in the Bill. The clause was deemed essential to ensure that citizens of South Africa would be extended the same rights internationally that foreign citizens would be given in South Africa.

Secondly, the committee questioned the constitutionality of clause 3. Clause 3 deals with international obligations of the Republic. There was some concern that it would create a situation where an Act of Parliament could be circumvented by a Treaty. The matter has been referred back to the SALC for further research.

The submission of the Cape Bar Council on the Bill was dismissed by the Chair as it misunderstood what the Bill was intended to achieve. The Council will be asked to make a further submission.

Limitation of Legal Proceedings Against Government Institutions Bill
The Chair was critical of the SALC for labeling the Bill with such an inappropriate name. It was thought that since the Bill dealt specifically with the restoration of prescription, that mention of prescription should be included in the long title. He further criticized the SALC for making the Bill appear as a "cut and paste" job.

Discussion of the Bill focused on minor technical issues, such as the clarification of some of the definitions.

MINUTES
Adv de Lange (Chairperson) reported to the committee on the draft programme. The Whistleblowers Act is scheduled to be passed on May 16. The Budget Vote is scheduled for June 6. The Chair stated that there were two items on the agenda. A briefing on both the Cross Border Insolvency Bill and the Limitation of Legal Proceedings against Government Institutions Bill by the SALC.

Cross Border Insolvency Bill
The Chair stated the General Assembly of the United Nations had adopted a resolution asking that States give favourable consideration to the Model Law on Cross Border Insolvency of the United Nations Commission on International Trade Law (UNICTRAL). The purpose of the resolution is to create internationally harmonised legislation to govern cross-border insolvency. The Bill emanated from a comprehensive review by the Law Commission on the law of insolvency.

Briefing by the SALC
Mr Tienie Cronje, Researcher for the SALC, stated the Bill dealt with persons or companies that had assets in multiple countries and went bankrupt.

The principal objectives of the Bill include providing greater cooperation between the courts and other authorities of South Africa and foreign States involved in cross-border insolvency, ensuring greater legal certainty for trade and investment, promoting fair and efficient administration of cross-border insolvencies that protect both the creditor and the debtor, protecting and maximizing the value of the debtor's assets, and providing for the rescue of financially troubled businesses including the protection of its investments, thus protecting its investments and preserving employment.

The Bill applies to where assistance is sought in South Africa by a foreign representative in relation to foreign proceedings, and where assistance is sought in a foreign State in relation to proceedings of insolvency in South Africa. The Bill further applies to proceedings of insolvency being held concurrently in South Africa and in a foreign State in respect of the same debtor, and allows for the participation of creditors of foreign States in proceedings of insolvency in South Africa.

The Bill recognizes two types of foreign proceedings. The first, foreign main proceedings, take place in the State where the centre of the debtor's main interests exist. The second, foreign non-main proceedings relate to debtors who carry out non-transitory economic activity.

The Bill clearly stipulates the preconditions that must be met for foreign proceedings to be recognized. These include, among others, that foreign proceedings and the foreign representative fall within the definition specified by the Bill, and that the application meets the necessary requirements outlined in 15(2). In addition, the Bill makes a provision that allows the courts to refuse to take an action governed by this Act, if they deem the action to be contrary to public policy.

The Bill also allows for protection of the debtor and its assets through three types of relief. The first, urgent interim relief, refers to the period between when an application for recognition is filed and when a decision has been made. The court may grant provisional relief in order to protect the assets of the debtor or the interests of the creditors. This relief grants a staying of execution against the debtor's assets, and allows for foreign representatives to administer to the debtors assets for the purpose of preserving the value of the assets, if they are perishable, susceptible to devaluation or otherwise in jeopardy. This relief is terminated when the application for recognition has been decided upon.

The second, Automatic stay relates specifically to foreign main proceedings. It provides that any legal actions against the debtor, or their assets, obligations, or liabilities will be stayed. It also provides that execution of the debtors assets will be stayed, and that the transfer of or disposal of any of those assets are suspended.

The third, discretionary relief relates to both main and non-main foreign proceedings. It is an extension of the relief provided by automatic stay, and includes a provision for the examination of witnesses, the taking of evidence, and the delivery of information connected to the debtor. It further entrusts the administration of all or part of the debtor's assets located in South Africa to a foreign representative, as designated by the court.

Mr Cronje briefly addressed the provisions stipulated in the Bill irrespective of recognition of proceedings, as well as the differences between the Model Law and this Bill.

Discussion
The Chair was concerned that the Bill did not contain a reciprocity clause. He asked whether the Bill would still work if other countries did not pass the Bill. Mr Cronje stated that the Bill could still be implemented since reciprocity was common law. The Chair was uncertain whether common law did in fact cover reciprocity. He was adamant that a reciprocity clause be added to ensure that citizens of South Africa would be extended the same rights internationally, that foreign citizens would be given in South Africa.

The Chair was also very cautious to accept Clause 3 of the Bill. Clause 3 states that if this Bill conflicts with an obligation of any other treaty or agreement between South Africa and one of more foreign States, the treaty or agreement will prevail. It was thought that this clause may not be consistent with s231 of the Constitution. He suggested that if a Minister misread or misunderstood a treaty, and signed it, it would create a circumstance where an Act of Parliament could be circumvented by a treaty. Reference was made to the Western Cape case, whereby the President was limited in his right to make decrees on behalf of Parliament. The ruling had been struck down as being unconstitutional. Mr Cronje was unsure of the unconstitutionality of this clause, but stated such a clause was standard in international agreements. Adv de Lange accepted that it was a standard clause in agreements between constitutional countries, but was more concerned about the agreement in terms of South Africa and countries that were not constitutional states. The SALC agreed to look into the constitutional effects of clause 3.

Mr Schmidt (DP) suggested that reciprocity could be dealt with by adding a schedules section that lists the designated states to which reciprocity would apply. The Chair also suggested that a definition of "state" be added in the Bill. The SALC had previously thought that a definition of State was not necessary, since reciprocity would be a pre-condition to both States. The inclusion of "state" was deemed necessary by the committee.

Submission of the Cape Bar Council (see appendix)
The Chair dismissed the submission of the Cape Bar Council as it misunderstood what the Bill was intended to achieve. The Council's contention that the Bill seeks to codify the established common law was incorrect. The Bill attempts instead to give effect to a Model Law. Since the remainder of their submission flowed from this misconception, it was deemed not useful. The Chair asked the SALC to engage the Cape Bar Council and inform them about the intention of the Bill. The Cape Bar Council will be asked to make a further submission on the "technical drafting deficiencies" that they feel are apparent in the Bill.

Dr Delport questioned why section 9, 11, 12, and 15 made constant reference to applications by foreign representatives, but were not combined under one clause.

The Chair stated that the clauses had been structured in that manner to encompass the different legal systems of the countries that would be effected by the Bill. Since each country has a different legal system, it was imperative that the Bill address and cover them all. Each of the sections deal with different processes by which foreign representatives could apply to commence or participate in foreign proceedings under the laws of the Republic. Mr Cronje added that the clauses did not flow from each other, but rather that each of the clauses should be read separately.

Limitation of Legal Proceedings Against Government Institutions Bill
The Bill seeks to provide for uniform provisions regulating the institution of all legal proceedings against all government institutions. The Bill provides that no legal proceedings for the recovery of a debt arising from a delict shall be instituted against State departments, or against a person whose actions the State or a government body is liable, unless the defendant has been given written notice of the intention to institute such proceedings. The notice to the defendant must be sent within six months from the date upon which the became due to the person cited as the defendant in the proposed legal proceedings.

Discussion
The Chair was critical of the SALC for labeling the Bill with such an inappropriate name. It was thought that since the Bill dealt specifically with the restoration of prescription, that mention of prescription should be included in the long title. He further criticized the SALC for making the Bill appear as a "cut and paste" type of Bill.

The Chair focused on clause 3 of the Bill, Prescription of debts, as being the most significant part of the Bill. This would result in a major extension of the rights of South Africans.

The Chair had two problems with the definitions clause. First, he found the term "traditional authority" to be ambiguous. He asked the SALC to further clarify the term. He also thought that 1(f) which refers to any department contemplated in Schedule 1, and any organizational component in Schedule 2 of the Public Service Act should be listed as the first definition of "government institution."

Discussion also focused on the use of "defendant" and "respondent" in 2(b) and "creditor" and "debtor" in 3(c). It was thought that the terminology was too problematic and confusing, since all the terms referred to government institutions. It was decided that a more comprehensive term be found. The Chair suggested "organ of state" be used as it was defined in s239 of the Constitution. He asked that a new subsection be drafted as an option, and advised Mr Cronje to make sure that Constitutional Courts were excluded from the definition.

In closing, the Chair summarized the discussions of the committee. There was a need to change the long title of the Bill to include mention of the restoration of prescriptions. Technical changes were also needed in the definitions clause, including clarity on "traditional authority", and the addition of "organ of state" as a definition.

The meeting was adjourned.

Appendix 1:
CAPE BAR COUNCIL

MEMORANDUM

CROSS BORDER INSOLVENCY BILL [BS4-2000]

1. The purpose of the Cross-Border Insolvency Bill ("the Bill") is to facilitate cooperation between South Africa and other states in regard to the administration of insolvent estates.

2. Our Courts have over the years consistently entertained and granted applications for the recognition of foreign insolvency orders in order to enable the persons appointed to administer the foreign insolvent estate to take charge of and administer the insolvent's assets situated within South Africa.

See: Insolvency Law, Meskin, paragraph 4.58 at pp 4-66 and 4-67;

Ex Darte Palmer N.O. in re Hahn 1993 (3) SA 359 (C) (as an illustrative example).

3. To the extent that the Bill seeks to codify the established common law it is to be welcomed.

4. The following aspects of the Bill₁ however₁ give cause for concern:

4.1. The Bill contains definitions of foreign proceedings, foreign main proceedings and a foreign representative. The purpose of the Bill is to recognise foreign insolvency orders and appointments made thereunder. The distinctions which have been drawn between, and the definitions of foreign proceedings, foreign main proceedings and foreign representatives are in our view unnecessary and may give rise to much needless litigation in regard to the precise meaning thereof. The Bill should be streamlined to make provision for the recognition of orders of tribunals of competent jurisdiction in relation to insolvency matters and to recognise the persons who have been appointed thereunder to take control of the foreign insolvent's assets in South Africa.

4.2 The Bill, in section 17 thereof, makes it peremptory for the South African Court to recognise foreign proceedings if certain formal conditions have been met. In terms of our existing common law, the Court has a discretion to recognise foreign orders. It appears to us to be extremely dangerous to remove the Court's discretion as not only does it conflict with the established common law but it may also impinge upon the right to a fair hearing.

5. We point out that there are also a number of technical drafting deficiencies in the Bill but we have not analysed same in great detail.

1 March 2000