Insolvency Law Research Articles

DO SEQUESTRATION PROCEEDINGS FALL WITHIN THE OVERALL AMBIT OF “ANY PROCEEDINGS” AS STIPULATED IN SECTION 130(3) OF THE NATIONAL CREDIT ACT 34 OF 2005?* Naidoo v Absa Bank Limited [2010] 4 All SA 496 (SCA)

Naidoo v Absa Bank Limited is one of the few cases by a court in which the interface between the insolvency law and the National Credit Act 34 of 2005 arose since the commencement of the latter in 2006. Other cases highlighting this interface include Investec Bank Ltd v Mutemeri (2010 (1) SA 265 (GSJ)) and Ex Parte Ford (2009 (3) SA 376 (WCC). The enactment of the National Credit Act has had significantconsequences for the scope of remedies available to both debtors and creditors in terms of the insolvency law. The National Credit Act did not change the Insolvency Act 24 of 1936 dramatically. Section 84 of the Insolvency Act, which deals with goods delivered in terms of an instalment agreement to a debtor whose estate became subsequently sequestrated, was one section which was changed by the National Credit Act. However, the National Credit Act is now dealing exclusively with certain debts and the enforcement of those debts. These are debts arising out of credit agreements and therefore excluding the application of insolvency law when dealing with such debts. Section 4 of the National Credit Act determines when the Act is applicable. The National Credit Act provides sophisticated measures during a situation when consumers who are parties to credit agreements, which are not exempted from the application of the National Credit Act, are unable to pay their debts. These measures include debt reviewing, the declaration of a credit agreement as reckless credit and debt restructuring (see s 86(7) of the National Credit Act for the recommendations which a debt counsellor maymake after reviewing a consumer’s debts). In all other instances, normal civil remedies such as a garnishee order, sale in execution, an order for payment in instalments and the measures of the insolvency law are still means of redress available to a creditor. It issubmitted that this will not be the only time in South Africa where a possible overlap of remedies available under both insolvency law and under the National Credit Act will be adjudicated. Future motions will either try to enforce the application of the insolvency law or question its application, arguing for the application of the more specialized National Credit Act as seen in Naidoo v Absa Bank Limited.

Directors' duties to prevent insolvent trading in a crisis: Responses to COVID‐19 in Australia and lessons from Germany

This article considers relief from directors' duties to avoid trading whilst insolvent during the COVID‐19 pandemic in Australia and Germany. Comparative insolvency law literature traditionally compares Australia to jurisdictions such as the United Kingdom and New Zealand. However, Germany has a track record of using insolvency law to manage social and economic crises. The German approach suggests solutions to critical issues not dealt with in the Australian safe harbour legislation, such as the failure to suspend other statutory duties to provide clear guidance to directors on the balancing of various interests, and the treatment of potential voidable transactions and new monies (i.e., new funding or credit). The responses in both jurisdictions suggest a change in priorities away from creditor protection, a key raison d'être for these types of duties, during a crisis. Similar to the German approach of turning the obligation to file for formal insolvency proceedings off and on, the further safe harbour adopted in Australia as part of a new restructuring procedure for small businesses, which commenced on January 1, 2021, suggests that the use of safe harbours could become a permanent crisis‐management tool in Australia too, with potential consequences for the balance between debtor and creditor interests.

Kayode Akintola, Creditor Treatment in Corporate Insolvency Law

Kayode Akintola, Creditor Treatment in Corporate Insolvency Law

Rights of Secured Creditors under Indian Insolvency Law

Credit is the lifeblood of an economy. Additionally, secured credit holds further importance as it enables a borrower to seek credit even in a weak cashflow situation. This is because, in a secured credit transaction, lenders have recourse to the assets of the borrower, as opposed to merely relying on the borrower’s ability to service debt. Considering the underlying advantage in the form of rights over the borrower’s assets which significantly affects the creditor’s credit decision it is important to look at how these rights change when the borrower undergoes corporate restructuring? In this paper, the authors provide an analysis of such creditors in insolvency and liquidation proceedings of companies under India’s relatively nascent Insolvency and Bankruptcy Code, 2016. In this background, the authors trace the rights of secured creditors across different stages of the proceedings under the law, and reviews evolving case law pertinent issues such as validity of differential pay-outs to secured and unsecured creditors, treatment of competing security interests and inter-creditor agreements in insolvency and liquidation proceedings under the IBC.

STATE REGULATION OF SOUTH AFRICAN INSOLVENCY LAW – AN ADMINISTRATIVE LAW APPROACH

Although the Constitution must inform the way legislation is interpreted by the courts, there is currently no Constitutional Court decision or secondary source which deals directly with the application of the Constitution to state regulation in South African insolvency law. With regard to the role and function of the Master as well as any future state regulation in insolvency law, certainly the most significant development within the context of the Constitution is the enactment of the Promotion of Administrative Justice Act (PAJA) which gives effect to the principles envisaged in section 33 of the Constitution. The aim of this article is not to provide a detailedexposition or comprehensive overview of constitutional and administrative law, but rather to highlight the relevance and potential impact of certain administrative law aspects on the functioning and day-to-day operation of a regulatory institution in South African insolvency law.

Globalized Cross-Border Insolvency Law: The Roles Played by China

This study empirically investigates China’s participation in the globalized cross-border insolvency collaboration system. It is the first time for the development of China’s cross-border insolvency law to be examined against the background of private international law on foreign judgment recognition and enforcement. The findings of this article reveal that foreign bankruptcy representatives face considerable difficulties in satisfying the treaty and reciprocity requirements when seeking judicial assistance from China, and that local protectionism in favour of China’s state-owned and state-linked companies undermines foreign bankruptcy representatives’ confidence in approaching China’s courts for support. Although there are several court recognitions of foreign bankruptcy judgments in China, this article finds that they are only used to acknowledge the legal status of foreign bankruptcy representatives to meet the demands of government authorities; Chinese courts have not taken a substantial step in recognizing a foreign bankruptcy judgment so as to bar individual creditors’ action in the interest of a foreign bankruptcy proceeding. On the contrary, for Chinese bankruptcy representatives seeking assistance abroad, they could take advantage of the liberal judicial infrastructure, especially of some advanced jurisdictions, to obtain recognition and relief.

Implementing an insolvency framework for micro and small firms

AbstractMicro‐, small‐, and medium‐sized enterprises (MSMEs) represent the vast majority of businesses in most countries around the world. Despite the economic relevance of these firms, most insolvency jurisdictions do not provide adequate responses to MSMEs. Moreover, with a few exceptions, the academic literature on insolvency law has not traditionally focused on the treatment of MSMEs in insolvency. This article seeks to contribute to the debate by exploring the primary features and problems of MSMEs in insolvency as well as the weaknesses of the ordinary insolvency framework to deal with MSMEs. It also provides a general overview of the primary reforms and policy recommendations taking place around the world to deal with MSMEs in insolvency. The article concludes by suggesting several strategies to design an efficient insolvency framework for MSMEs.

The European Restructuring Directive and stays on creditor enforcement actions

AbstractThe European Restructuring Directive is Europe's answer to Chapter 11 of the US Bankruptcy Code. Under the Directive, debtors will have access to early warning tools that enable them to detect a deteriorating business and this should lead to more restructurings at an early stage. The debtor will benefit from a time‐limited ‘breathing space’ from enforcement action in order to facilitate negotiations on a restructuring plan. This article analyses in critical detail the stay or moratorium on actions against the debtor during the restructuring process. The stay is a fundamental part of the Directive. The paper highlights the importance of the stay and locates the stay in the context of the Directive and also in the light of the international parallels found in the US Bankruptcy Code and the UNCITRAL Legislative Guide on Insolvency Law.

Insolvency, Competition, and the Theory of the Firm

The paper examines the recent developments in the field of business crisis management, with a focus on the European and US legal cultures. The main argument is the need for a consistent framework between insolvency and competition law in the theory of the firm. The present analysis reveals the need for a proper balance between the principle of competition on the merits and the philosophy of business-rescue in order to avoid dysfunctions in the application of insolvency and antitrust statutes. After an overview of the main contact cases between the two disciplines, the article addresses the main lawmakers’ responses to this problem. In this context, the regulation on banking crises management represents a first attempt to strike a proper balance between the (apparently compelling) goals underlying insolvency and competition law. This article aims at providing some guidance for a systematic reading of the two disciplines. Moving from a holistic understanding of the theory of the firm, it suggests assigning competition law a pivotal role in order to pursue efficiency in the market and consistency in legal theory. Investment funds, reserved AIFs, share classes, fair treatment, seniority privilege, minimum interest privilege, non-contagion principle, preferential treatment, shift of wealth

Taking Directors Seriously: A Silver Bullet for Triggering the Creditors’ Interest Duty—Part II

Directors of solvent companies owe a fiduciary duty to shareholders qua the company. If a company becomes technically insolvent, the duty switches to the company’s creditors. This is uncontroversial. However, the duty is also said to switch some point before, i.e., in the ‘vicinity of insolvency’. Therefore, directors must be able to make decisions which do not prejudice shareholders, in a way that is free from exposure to claims by creditors. This uncertainty stems from the case law, where the rules of company law have been confused with the policies underlying insolvency law. The two bodies should be considered separately despite their interrelationship in practice. Doing so reveals the proper and fair function of the duty. Its application should be limited to cases of technical insolvency only. While special cases may be made for irresponsible or negligent risktaking by directors, this should be the exception – not the rule. This article is the second of two parts examining this issue, focussing on the current trigger for the duty and exploring possible solutions. Company law, insolvency law, directors’ duties, fiduciary duties, agency costs

Status Report on the Regulation of Insolvency Law at an EU Level and Its Trends of Transformation and Development

In the last almost one decade, a number of initiatives were launched in the European Union to reinforce the development of treating cross-border insolvency cases in a unified manner and to strengthen cooperation in the field. The primary aim of this study is to review the results of legislation in the field of insolvency law and to provide an analytical assessment of the level of cooperation based on the legal sources in force. Beyond a critical appraisal, the author intends in this status report to foreshadow a comprehensive picture of the anticipated trends for development too.

The Rise of \u2018Group Solution\u2019 in Insolvency Law and Bank Resolution

This article traces the emergence of the concept of ‘group solution’ and its manifestations in insolvency law and bank resolution as an alternative to the rigid entity-by-entity approach. The rise of this concept can be linked to the recognition of the specificity of problems related to the insolvency of multinational enterprise groups, arising from group operational and financial interconnectedness. This has not happened at once, but has resulted from the evolution of views and ideas, evident in hard and soft law instruments of the 2000s and the 2010s. In light of this important development the article explores the concept of a group solution, its rationale, scope of application and limitations. It concludes that despite the gradual acceptance of the group phenomenon, a group solution has not been formed as a coherent and well-defined legal principle. Instead, it represents a variety of approaches, tools and practices, which pursue different policy objectives underpinned by different societal values. Among them are asset value maximization, business rescue, the protection of financial stability and the preservation of banks’ critical functions. With all its flexibility, a group solution has one pervasive limitation—it cannot trump the interests of individual group members and their creditors. At the same time, in order to realize the full potential of a group solution, it is necessary to embrace the group-sensitive and forward-looking interpretation of creditors’ interest, facilitating commercially sensible and practical group solutions.

Cross‐border insolvency law in Hong Kong: Recognition of foreign schemes of arrangement

AbstractHong Kong has no statutory cross‐border insolvency regime. Hong Kong courts have to resort to common law principles in circumstances where they are requested to recognise foreign insolvency proceedings and grant assistance. The nature and scope of these principles have been the subject of extensive debate in common law jurisdictions. In Re CW Advanced Technologies Ltd [2018] HKCFI 1705, Harris J identified the uncertainties associated with the common law position in Hong Kong. These uncertainties include whether a Hong Kong court may recognise a Singapore moratorium granted to facilitate a scheme of arrangement and, if so, whether the court may grant recognition where Singapore (i.e., the foreign jurisdiction) is not the country of incorporation. Harris J also noted the ‘urgent need to enact a statutory cross‐border insolvency regime’. This article examines the scope of the common law powers in Hong Kong and seeks to clarify the possibility for members within a corporate group located outside Singapore, where the holding company has its centre of main interests in Singapore or is otherwise eligible to use the Singapore scheme regime, to obtain recognition and assistance in Hong Kong.

Distressed acquisitions: Evidence from European emerging markets

We analyze factors behind 23,213 distressed acquisitions in European emerging markets from 2007 to 2019. Besides the impact of financial ratios, legal form, ownership structure, firm size, and age, we emphasize the role of institutions and channels of their propagation. We show that the quality and enforcement of insolvency laws are linked with the lower probability of distressed acquisitions, followed by corruption control and progress in banking reforms. The impact of institutions is larger in less-advanced countries as compared to economically stronger ones. The effect of institutions increased after the financial crisis but declined as the economic situation improved.

Eliminating zombie companies through insolvency law in China: striking a balance between market-oriented policies and government intervention

ABSTRACT Zombie companies emerged in China for economic and social reasons, particularly as a result of earlier expansionary economic policies. Having been kept alive through subsidies for social and political reasons more recently zombie companies have been the target of ambitious elimination policies in China. Local governments have been given targets for zombie company elimination and there have been significant achievements in zombie market exits. Yet an examination of case law reveals limited usage of insolvency laws in the processes used and this is unsurprising given the nascent state of insolvency law and supporting institutions necessitating administrative approaches. In recognising existing limitations this paper advocates the development of a hybrid approach towards zombie company elimination, using market based exit approaches while recognising that administrative approaches are needed to provide social services and an enabling environment for these cases. Using a steel industry case study it considers how a greater role for creditors and independent administrators can aid in market based approaches, as well as improvements to judicial and court capacity to handle insolvency cases.

Trade and credit reallocation: How banks help shape comparative advantage

AbstractInnovative production is driven by creative destruction. High turnover requires frequent reallocation of capital. Banks play a major role in capital reallocation by withdrawing funds from nonviable firms and redirecting credit to scale up the most productive firms. Structural parameters of the banking system thus affect a country’s comparative advantage in innovative sectors. Using a Heckscher–Ohlin model with banks, this paper shows how insolvency laws, investor protection, and bank capital regulation shape reallocation, specialization, and trade patterns.

Breaking Up Is Hard to Do – What Brexit Means for UK Insolvency and Restructuring Law

Abstract This paper asks whether the UK can maintain its insolvency and restructuring pre-eminence post Brexit i. e. after Britain’s departure from the European Union (EU). In the past 20 years or so, the UK is said to have become the insolvency and restructuring capital of Europe or in less politically correct terms, the bankruptcy brothel of Europe. In part, this is because of the European Insolvency Regulation which provides for automatic recognition of insolvency proceedings opened in a EU Member State in the other EU Member States. Such proceedings may make provision for the discharge of debts and the restructuring of financial obligations.The specific insolvency law regime is part of a more general European Private International Law framework. With Brexit, the UK has now left this framework without any negotiated replacement agreement, a so-called ‘skinny’ Brexit. The loss of the ability to deal with insolvencies and corporate restructurings through a single process, with automatic recognition across the EU, may make it more complex, lengthy and expensive to resolve cross-border cases. It gives rise to the prospect of parallel proceedings in different jurisdictions. The paper also addresses how any disadvantages associated with the ‘skinny’ Brexit may be alleviated.

Forum-Shopping in Insolvency Law through the Example of Mr. Kekhman’s Case

Forum-Shopping in Insolvency Law through the Example of Mr. Kekhman’s Case

Taking Directors Seriously: A Silver Bullet for Triggering the Creditors’ Interest Duty—Part I

Directors of solvent companies owe a fiduciary duty to shareholders qua the company. If a company becomes technically insolvent, the duty switches to the company’s creditors. This is uncontroversial. However, the duty is also said to switch some point before, i.e., in the ‘vicinity of insolvency’. Therefore, directors must be able to make decisions which do not prejudice shareholders, in a way that is free from exposure to claims by creditors. This uncertainty stems from the case law, where the rules of company law have been confused with the policies underlying insolvency law. The two bodies should be considered separately despite their interrelationship in practice. Doing so reveals the proper and fair function of the duty. Its application should be limited to cases of actual insolvency only. While exceptions may be made for cases of irresponsible or negligent risk-taking, this should be the exception – not the rule. This essay is the first of two parts, and examines the emergence of the duty and possible justifications. company law, insolvency law, directors’ duties, fiduciary duties, agency costs

Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution

In the aftermath of the global financial crisis the EU bank resolution regime went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. The same cannot be said of insolvency rules applicable to non-financial enterprises. Unlike bank resolution with its macroprudential and proactive focus, insolvency law has largely remained microprudential and reactive. Admittedly, unlike bank failures, corporate insolvencies usually do not pose systemic risk. However, in practice this may not hold true for significant non-financial enterprises (SNFEs). Such enterprises oftentimes play a major role in national economies and serve important public functions. Their failure may trigger contagion and cause disruptive consequences. Insofar as insolvency of SNFEs raises concerns common to bank failures, the question arises whether certain strategies and tools embraced within the EU bank recovery and resolution framework should be extended to regulate SNFE insolvency. This article explores the feasibility of such an extension. Bank resolution, insolvency, significant non-financial enterprises, enterprise groups, Carillion, early intervention, recovery and resolution planning, living wills, public interest, systemic risk, critical functions.