Comparative Notes on the Operation of Some Avoidance Provisions in A Cross-Border Context
| Jurisdiction | South Africa |
| Date | 25 May 2019 |
| Pages | 435-469 |
| Author | André Boraine |
| Published date | 25 May 2019 |
Articles
Comparative Notes on the Operation of Some
Avoidance Provisions in a Cross-Border Context
ANDRÉ BORAINE*
University of Pretoria
1 Introduction
1.1 General
In administering a bankrupt estate, the insolvency representative will
examine transactions in which the debtor was involved before the onset of
bankruptcy, to ascertain whether any of the debtor’s property or assets that
should be available for distribution among all creditors were disposed of
improperly. These transactions may usually be contested with the aim
of reclaiming those assets from the recipient or beneficiary for the benefitof
the creditors as a group – hence the notion of claw-back provisions or the
swelling of the assets of the estate.
In this article, it is therefore intended to provide a general comparison of
the law that regulates transactions entered into prior to bankruptcy in a
number of jurisdictions. This is an appropriate study for several reasons. In
the first place, the issue of the avoidance of pre-bankruptcy transactions is
often central to problems involving cross-border issues: eg, a bankrupt may
have disposed of property in countries other than the one in which he became
bankrupt, and so considering how the different countries involved deal with
the matter of pre-bankruptcy transactions can be helpful. Second, the legal
systems of countries are not identical, and it is instructive to see how different
systems, some traditional common law and others civil law, deal with the
issue at hand. Third, the global context that has become a part of modern
commercial law, and in particular bankruptcy law, may need to be reformed to
deal with these matters more effectively. Finally, the fight against commercial
fraud is also growing in importance.
1
* B Iuris LLB (UP) LLM (Wits) LLD (UP). Professor, Department of Procedural Law, Faculty of
Law, University of Pretoria. This article is based on a technical report prepared for Insol International
during 2008, available at http://www.insol.org/TechnicalSeries/pdfs/TechnicalSeriesIssue7.pdf. Permis-
sion has kindly been granted by Insol International to publish it as a research article. This article amends
and updates the initial report in some respects.
1
See the agenda of the United Nations Commission on International Trade Law (UNCITRAL)
Working Group V of 29 July 2008.
435
(2009) 21 SA Merc LJ 435
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The jurisdictions that will be considered in this article include England
2
and
the United States of America representing the common-law approach, the
Netherlands and Germany as civil-law jurisdictions, and South Africa and
India, both two former British colonies, representing developing countries
with expanding economies. South Africa has a mixed legal system with its
roots in both civil law as well as common law, while India follows the
common-law approach.
The article will thus first provide a basic theoretical framework regarding
the notion of voidable transactions, followed by some comparative notes
on the basic elements for avoiding certain transactions in the jurisdictions
mentioned above. This comparison will be followed by a discussion of this
topic within the context of cross-border insolvency, and then some final
remarks regarding the way forward will conclude the article.
All the jurisdictions included in the study provide a number of remedies to
deal with voidable transactions. However, it must be stressed that because of
limitations of space this article will concentrate on the avoidance of the
traditional core or main pre-bankruptcy transactions. The article therefore
does not purport to present a comprehensive discussion of all the possible
avoidable transactions provided for by each one of the jurisdictions included.
These core or main transactions are fraudulent conveyances (of which the
transaction at an undervalue is a species) and preferential transactions or
preferences. Both the fraudulent conveyance transaction and the transaction at
an undervalue relate to the situation in which the debtor disposes of an asset
either without receiving value in return or without receiving adequate value.
Whether a transaction becomes fraudulent or merely remains a transaction at
an undervalue usually turns on the knowledge of the debtor’s dire financial
situation and the concomitant subjective intention to prejudice creditors by
putting assets beyond their reach for the purposes of judicial execution. In the
case of a fraudulent transaction of this kind, there is thus usually an actual
intention to defraud, whilst there is not necessarily such an intention in the
case of the mere transaction at an undervalue. Fraudulent conveyance
provisions usually apply in bankruptcy as well as in the individual
debt-collecting procedure. The reason for such provisions is that these
transactions will cause the debtor to dissipate the estate assets to the detriment
of his creditors when he already cannot pay all his debts in full.
In the case of a preferential transaction, an existing creditor receives a
benefit either in the form of a pre-bankruptcy settlement of the debt in full or
by an improvement in his status as a creditor in that he is elevated from being
an unsecured creditor to the rank of a secured creditor on the eve of
bankruptcy, thus escaping the ordinary queue provided for payment in
bankruptcy. Many systems limit the setting aside of this kind of provision to
2
Although England is referred to, this is actually a reference to both England and Wales.
(2009) 21 SA Merc LJ436
© Juta and Company (Pty) Ltd
bankruptcy, but some make it available outside bankruptcy as well.
3
In
essence, preference law is aimed at maintaining equality among the creditors
as far as possible.
Since there may be different dispensations for individuals and corporate
debtors in this regard, the article will also be limited to the position of
corporate debtors in liquidation; in other words, under formal bankruptcy.
1.2 Preliminary Remarks Regarding Avoidance Rules and
Terminology
When analysing a topic in an international framework, it is important to
consider and establish the requisite terminology.
4
In the context of bankruptcy
law there are different approaches in various countries. In many instances,
principles dealing with certain aspects are more or less the same, but the
terminology used will differ – even among English-speaking countries
steeped in the common-law tradition. In some instances, there are also
differences in approach with regard to the treatment of debtors who are
natural persons (individuals) and debtors that are corporate debtors. Some
systems have unified bankruptcy legislation that deals with the various
categories of debtors, while other systems have separate legislation for the
different categories of debtors.
5
It is also important to note that lately much
effort is being put into the ideal of establishing international norms – both for
the purposes of cross-border insolvency rules and to harmonise domestic
insolvency laws.
6
Many terms are used to refer to avoidance provisions in general, such as
voidable or impeachable transactions, or dispositions, or claw-back provi-
sions; but the terms ‘avoidance provisions’ or ‘avoidable transactions’will be
used here to refer to those legal transactions that occurred before the effective
or relevant date of bankruptcy and that may be set aside or otherwise be
rendered ineffective.
Avoidance provisions in bankruptcy usually relate to an effective or
relevant date established by statute, or a judicial ruling that indicates the
formal commencement of bankruptcy proceedings. The effective date is
extremely important in order to calculate relevant time periods for the
3
See, eg, s 3 of the amended German Gesetz über die Anfechtung von Rechtshandlungen eines
Schuldners auβerhalb des Insolvenzverfahrens, the Anfechtungsgesetz (‘the AnfG’).
4
See Jay Lawrence Westbrook ‘Choice of Avoidance Law in Global Insolvencies’ (1991) 17
Brooklyn Journal of International Law 499 at 504 ff, where the author established a framework to
analyse various legal systems in this regard. This system is also acknowledged and used as a point of
departure for this article. See also Philip R WoodPrinciples of International Insolvency Law 2 ed (2007)
at 458 ff.
5
On these and other differences, see Bob Wessels ‘Insolvency Law’ in: Jan M Smits (ed) Elgar
Encyclopedia of Comparative Law (2006) at 294 ff.
6
The UNCITRAL Legislative Guide on Insolvency Law 2004 (http://www.uncitral.org/uncitral/en/
uncitral_texts/insolvency/2004Guide.html) and the World Bank Principles and Guidelines for Effective
Insolvency and Creditors Rights 2001 and 2005 (http://web.worldbank.org/WBSITE/EXTERNAL/
TOPICS/LAWANDJUSTICE/GILD/0,,contentMDK:20196839~menuPK:146205~pagePK:64065425~pi
PK:162156~theSitePK:215006,00.html) may be mentioned as two prime documents in this regard.
SOME AVOIDANCEPROVISIONS IN A CROSS-BORDER CONTEXT 437
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