Intricacies of cross border insolvency and its application in South African courts

The facts of the matter concerned an insolvent of Irish descent who resided in the USA and conducted business through an intricate web of holding and subsidiary companies registered in different parts of the world, including tax havens. However, the insolvent’s immense wealth was short-lived as he was first declared bankrupt in USA on 23 March 2013 and thereafter declared bankrupt in Ireland. Pursuant to the two bankruptcy orders, a trustee was appointed in USA (American trustee) and a another was appointed in Ireland (Irish trustee).

One of the particular assets that the insolvent held was an interest in the Lagoon Beach Hotel (Pty) Ltd (Lagoon Beach Hotel), situated in Cape Town. In fulfilling his duties, the Irish trustee, acting with the support of the American trustee, uncovered two handwritten contracts entered into between the insolvent and his wife wherein the shareholding of the Lagoon Beach Hotel was transferred by the insolvent to his wife for purposes of frustrating the insolvent’s creditors. According to the Irish trustee’s investigations, he believed that the insolvent had been insolvent at the time that he concluded the handwritten agreements and made the dispositions to his wife. The Irish trustee therefore instituted proceedings in Ireland to have the dispositions made under these handwritten agreements set aside and in effect to recover the Lagoon Beach Hotel as an asset in the insolvent’s estate.

Apart from the written agreements between the insolvent and his wife, a sale was underway for Lagoon Beach Hotel to a third party. As such, the Irish trustee applied to the Western Cape High Court (WCC) for an order recognising him as a foreign trustee in South Africa (SA) and further interdicting the proposed sale. Yekiso J in the WCC granted the interdict and further granted Lagoon Beach Hotel leave to appeal to the SCA, which it did.

The SCA ultimately had to decide whether the Irish trustee had the authority to act given that the USA bankruptcy order was granted first and whether the Irish trustee should be afforded recognition within SA to effectively deal with the assets of the insolvent that were situated in SA.

Lagoon Beach expressed the view that the effect that the USA bankruptcy order was to bring about a worldwide stay which applies extraterritorially. This worldwide stay operates to bar any person from obtaining possession of, or commencing action to obtain control over property falling within the bankrupt estate of the insolvents.

The SCA found against this and noted that it was important to consider the fact that the American and Irish bankruptcy officials were “working hand in glove to attempt to recover assets for the benefit of the insolvent’s creditors” and the Irish trustee’s efforts in seeking a preservation of the assets, was to ensure the integrity of the legal process in both Courts in the USA as well as in Ireland. In any event, the SCA found that the USA worldwide stay can be lifted and is not absolute.

Pertinent to the issue of recognition as a foreign trustee within SA, was the question of the insolvent’s domicile. The SCA reiterated the established principle that a foreign trustee who seeks to deal with assets present in this country, must first obtain the active assistance of a South African Court by obtaining recognition of the foreign bankruptcy order. The grant of recognition by a South African Court to deal with that insolvent’s immovable property situated in this country is permissible only where the insolvent was domiciled in the foreign state, the Court of which sequestrated his estate and the foreign trustee was appointed pursuant to the sequestration order.

However, the SCA stated that this was not a law set in stone. In exceptional circumstances, the requirement of domicile will not be strictly insisted upon. The SCA therefore concluded that given the uncertainty as to the insolvent’s domicile and the fact that the American Courts have invoked the justice system of Ireland to assist in tracing assets and administering bankruptcy proceedings, there are in any event exceptional circumstances present that justify a South African Court also rendering assistance by taking the necessary steps to recognise the Irish trustee in order to protect the interests of the insolvent’s creditors.

Accordingly, the SCA found that there was no reason to interfere with the Court a quo’s recognition of the Irish trustee as a foreign trustee within SA and further that the Court a quo properly exercised its discretion to grant an interim interdict to preserve the assets of the insolvent pending the litigation in Ireland.