COSATU Memorandum on the

Cross Border Insolvency Bill

Presented to the Portfolio Committee on Justice and Constitutional Development, 19 April 2000

Table of Contents

  1. Introduction
  2. Ranking of claims
  3. Failure to exclude certain institution from the Bill
  1. Reciprocity
  2. Duty to Inform Workers and Other Creditors
  3. Conclusion



  1. Introduction

    2. The United Nations Commission on International Trade Law introduced a Model Law on Cross-Border Insolvency, which was adopted by the General Assembly in December 1997. The purpose of this legislation is to provide a uniform approach across states in dealing with the phenomenon of cross-border insolvency and bankruptcies. The Model Law is a guide to member states on how to deal with cross-border insolvency in their national insolvency laws. It sets out specific provisions to be followed by enacting states. In order to achieve greater uniformity, States are expected to make as few changes as possible. The objective is to ensure fair treatment of investors, lenders and borrowers across all borders. It is aimed at creating certainty with respect to the recoverability of loans in foreign countries by facilitating smooth recoverability of loans through inter alia direct access to domestic courts by foreign representative of investors and so forth. In broad terms the Model Law among others:

    COSATU has called for radical reform of Insolvency Law in its notice to NEDLAC in terms of section 77 of the Labour Relations Act. For this reason, we welcome the opportunity to comment on the Cross-Border Insolvency Bill (hereafter the ‘Bill’). We hope that this submission will be given due attention by the Portfolio Committee.

    There are a number of problems that workers face when a business is liquidated. Often employers do not inform workers of their financial plight timeously or at all. In fact, provisional liquidation applications are not even served upon workers or their unions. They often only get to know of the situation after the provisional liquidation order has been granted. Workers therefore have no way of intervening to save the business.

    The Courts have interpreted section 38 of the Insolvency Act No. 24 of 1936, as amended, to mean that a provisional liquidation order terminates workers’ contracts of employment by operation of law (1). This means that the employer and the provisional liquidator are not required to comply with section 189 of the LRA or section 41 of the BCEA. (Section 41 of the BCEA deals with the minimum severance pay where a worker is dismissed for operational reasons). These are some of the examples in which current Insolvency Laws adversely affect workers.

    Recent amendments to the Insolvency Act 24 of 1936, introduced by the Judicial Matters Second Amendment Act 122 of 1998 have slightly improved the ranking of workers’ claim. The Judicial Matters Second Amendment Act inserts a new section 98A in the existing Insolvency Act of 1936. Section 2 of the inserted section 98A to the Insolvency Act will increase the extent of protection of workers’ claims in the event of insolvency. In terms of section 98A(2)(a) the Minister may determine the maximum amounts which will be paid to workers as preferent claims. This is to ensure that assets remaining after secured creditors are paid are distributed in an equitable manner. Nevertheless, the amendment to the Insolvency Act was not intended as a comprehensive review of insolvency law to address substantial concerns raised by the labour movement.

    Against this background, we believe that the Bill is premature. Cross-border insolvency must be dealt with as part of the overall review of insolvency legislation. In addition, South Africa is under no compulsion to expedite this legislation. Before it can be passed, we believe that there are issues that need to be discussed and resolved with regard to South Africa’s insolvency laws such as the ranking of preferent claims.

    In addition, many countries have either not passed legislation on cross-border insolvency or are in the process of introducing legislation as per the requirements of UNICITRAL. According to the South African Law Commission report, New Zealand’s Law Commission is currently considering the need to pass cross-border legislation but no legislation has yet been finalised. On the other hand, the introduction of cross-border insolvency awaits the reconsideration of other bankruptcy reform in the United States (2). The United States has not enacted a separate Bill in this regard but has included the Model Law provisions in Bill H.R. 833 together with other issues on bankruptcy.

    This indicates that many countries have prioritised clarifying national insolvency law as a precursor to the Model Law. This approach would, amongst others, achieve certainty on what the laws of a particular State are with regard to both the foreign and local creditors, including the position of workers.

    South Africa should follow this approach by firstly completing the task of reviewing its domestic insolvency laws before passing this Bill. Secondly, since there is no country that has already passed this law, it is advisable to observe how this law evolves in those countries in order to learn from these experiences.

    With regard to the content of the Bill we have concerns with:


  2. Ranking of claims

    3. In terms of the current insolvency laws, employees’ claims for salary and wages rank in preference after:

    Section 13 of the Bill states that the claims of foreign creditors may not be ranked below non-preferent claims. The problem with this provision is that it will affect the laws dealing with ranking in South African in that all foreign claims would be preferrent claims even though in terms of our laws they may be concurrent claims. This is despite the assurances in this section that it will not affect the ranking of claims. COSATU is concerned that elevating foreign claims will adversely affect workers’ claims. In most instances, workers do not receive any money in the event a company is liquidated. As a general rule there is little free residue left after the payment of secured claims and this means workers would have to compete with foreign claims for payment.

    For this reason, it is important that the ranking of preferent claims be resolved, particularly with regard to workers claims. This should take into account the amendment to the Insolvency Act through the insertion of section 98A. COSATU would oppose any measure that worsens the position of workers.


  3. Failure to exclude certain institution from the Bill

    4. The Model Law on Cross Border Insolvency suggests that States may in their Acts, exclude certain institutions from the application of the Act. Examples of such institutions are financial institutions and insurance companies. The United States has excluded a number of institutions including banks, certain categories of individuals, building and loan associations, small business investment companies, insurance companies, etc. New Zealand on the other hand is of the view that insurance companies do not pose a sufficient threat of systemic financial failure to warrant exclusion from the scope of the Model Law.

    The purpose of excluding these institutions from the Model Law is to protect a State against systemic financial failure should these institutions be liquidated. Failure to exclude institutions like financial institutions from the Cross Border Insolvency law may negatively affect the economy of the Republic. It is therefore imperative that certain institutions be excluded from the scope of this Bill, especially national financial institutions, which are regulated by separate legislation.

    At the moment the Bill, does not explicitly exclude any institution from its purview. It is recommended that there should be a clause to explicitly exclude institutions such as financial institutions or any institution that poses significant systemic risks.


  4. Reciprocity

    5. The Bill does not have a reciprocity clause and this is cause for concern to COSATU. The consequence of this, as stated in the Law Commission’s interim report, is that assistance and protection would be given to foreign creditors and liquidators when local creditors and liquidators would not have a reciprocal right of access to the same assistance in the jurisdiction where the foreign proceedings takes place. This would be unfair to local creditors and liquidators and contrary to the intentions of the Bill to protect local creditors.

    If the Bill remains as it is, local creditors will be prejudiced. This is the case because a foreign creditor’s claim will be allowed to enjoy a preference, that it would otherwise not enjoy in the country of origin or other countries, and our local creditors will not be allowed to enjoy the same preference in those countries that have not adopted this law. COSATU therefore believes that there should be a reciprocity clause in the Bill.


  5. Duty to Inform Workers and Other Creditors

    6. It is not a requirement in terms of the Bill that the local creditors, including unions and/or employees, must be notified about the application for recognition of foreign proceedings. Whereas this is a requirement with local creditors in insolvency proceedings. As noted above workers as a rule are not given information in time on the financial plight of the company. The problem with lack of notification to the creditors in the Republic is that a ruling may be granted to the detriment of local creditors including employees, without their knowledge. This concern is deepened, when one takes into account the discretion given to the High Court on the granting of applications for recognition of foreign proceedings in the Republic.

    In terms of the Bill, the High Court will grant the recognition of the foreign proceedings if the requirements in section 15(2) of the Bill are complied with except if the Court is of the view that the action will be manifestly contrary to public policy. The requirements in section 15(2) are procedural requirements and it is therefore up to the local creditors to challenge the granting of the order on public policy grounds. However, they will not be able to challenge the proceedings if they are not informed of the proceedings. Therefore, the Bill must include a duty to notify local creditors.


  6. Conclusion

    7. COSATU has raised substantive concerns regarding the process and content of the Bill. In the light of the significance of insolvency issues we believe it is prudent to either delay the finalisation of this Bill or to amend it to address some of the concerns raised in this submission.


Footnotes:

  1. Ndima and others v Waverly Blankets LTD (1999) 20 IJL 1563 (LC)

  2. See page 5 of the South African Law Commission interim report on review of the law of insolvency; the enactment in South Africa of the UNCITRAL 's Model Law on cross border insolvency, June 1999.


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