Aspects of tax pertaining to insolvency law in South Africa

This paper seeks to briefly analyse the somewhat convoluted provisions contained in South African tax legislation that apply to insolvent entities in South Africa. While South Africa has modern and effective taxation laws, the provisions, when applied to insolvent entities, are often exposed as cumbersome and ineffective. Tax legislation in South Africa does not take proper cognisance of the unique nature of insolvency, often placing a heavy burden on the trustee or liquidator who is required to administer the estate as speedily and effectively as possible. In addition, there are different rules that apply to consumer and corporate insolvency regarding the assessment of income tax pre‐ and post‐liquidation. The recent introduction of a capital gains tax has placed an additional burden on insolvency practitioners, especially considering the lack of clarity as to how these provisions should be applied in practice. Although the Value‐Added Tax Act was introduced more than a decade ago, its provisions continue to pose problems for insolvency practitioners during the administration process of insolvent estates. Despite these difficulties, the South African revenue authorities are to be lauded for the sensible manner in which problems are addressed in practice. Copyright © 2005 John Wiley & Sons, Ltd.     

Insolvency law reform in Australia and Singapore: Directors' liability for insolvent trading and wrongful trading

This article compares reforms to directors' liability for insolvent trading in Singapore and in Australia. We analyse the law in these two countries because they are important Asia‐Pacific trading partners and their laws were originally largely the same—Singapore's law on insolvent trading reflected the law in Australia from the 1960s. However, the law in the two countries has now diverged substantially. The comparison of these two countries therefore represents an interesting case study in how countries differ in their approaches to balancing the competing interests evident in laws that impose personal liability on company directors for insolvent trading. Reform of the prohibition against insolvent trading was a focus of Australia's insolvency law reforms in 2017, which led to the introduction of a safe harbour for directors from liability. Singapore's omnibus insolvency law reforms of 2018–19 include amendments to update Singapore's fraudulent and insolvent trading provisions by introducing a concept of “wrongful trading.” The article finds that there are some areas of convergence between these two jurisdictions when it comes to debates about such provisions but concludes that the different contemporary legislative histories in Australia and Singapore have affected their approaches to reform. Reformers in both jurisdictions have attempted to find an appropriate balance between protecting creditors, discouraging director misconduct, and encouraging entrepreneurship and innovation; however, this comparison suggests that the weight that reformers place on creditor protection compared with the concern that excessive personal liability can make directors unduly risk‐averse is influenced by their existing legislative framework and experience of those laws. Although Australia has shifted away from a strict focus on creditor protection, to give directors more opportunities to engage in restructuring, Singapore's amendments may provide a more creditor‐friendly regime.     

Set‐off under the European insolvency regulation (and English law)

This paper addresses critically the meaning and effect of the set‐off provisions in the European Insolvency Regulation. The Regulation sets out the authority of EU Member States to open insolvency proceedings and provides that, subject to exceptions, the law of the State that opens insolvency proceedings shall apply to those proceedings. Setoff is one such exception for the opening of insolvency proceedings does not affect the rights of creditors to demand the set‐off of their claims against the insolvent debtor. Set‐off is intended to perform a guarantee type function for creditor claims. Nevertheless, the Regulation does not define what is meant by set‐off nor clarify whether set‐off rights under the law of a third country (such as English law) may be relied upon. The paper provides valuable clarification and critical analysis.     

NINA/LILA debtors under the Portuguese Insolvency Act: A hidden problem in plain sight?

No income, no assets (NINA) and low income, low assets (LILA) debtors are a non‐negligible part of the increasingly ‘financialized’ market economy. Falling outside the financial market or accessing it through low quality financial products, NINA/LILA debtors appear to be under prioritized by both legal and judicial regimes and public policies. Focusing on the legal and judicial dimension, and taking as an illustration the Portuguese context, we discuss how preinsolvency and insolvency solutions still remain ill‐adjusted for such cases. In spite the existence of some legal provisions aiming at fostering access to law and courts regardless individuals' financial conditions, they do not perform very well with insolvent debtors lacking a regular income. Addicionally, there are non‐legal barriers that prevent those with less economic means to fight properly for their social and economic rights.     

Treatment of a Debtor's Home in Insolvency: Comparative Perspectives and Potential Developments in South Africa

A debtor's home is frequently a source of conflict between the debtor and his family members and his creditors. Treatment of forced sale of a debtor's home is not uniform. Some legal systems provide for formal, statutory ‘homestead exemptions’ the monetary limits of which are in many cases capped. In a number of jurisdictions, statutory provisions regulating, inter alia, the civil process, family law, bankruptcy law, or the recognition of human rights afford a measure of protection to the debtor and his family. This occurs either through the imposition of procedural requirements before forced sale is allowed or protecting the interest in the home or the occupational rights of a spouse or partner of the debtor against creditors' claims, or by delaying the forced sale of the home in certain circumstances. Recently, in South Africa, recognition by the courts of every person's constitutional right to have access to adequate housing has impacted upon the substantive and procedural requirements for execution against a debtor's home. However, no consideration has been given to whether realisation of an insolvent debtor's home by the trustee of an insolvent estate in terms of the Insolvency Act 24 of 1936 involves similar constitutional imperatives. Consideration of the treatment of a debtor's home, especially in the context of insolvency, in various jurisdictions may provide valuable guidance for future developments in South Africa. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd.     

The composition of the debtor's estate on insolvency: A comparative study of exemptions

This article examines one aspect of the issue of the composition of the debtor's estate on insolvency, namely the exemption of certain assets from the debtor's estate. It sets out the responses to a questionnaire completed by leading scholars in selected jurisdictions (Australia, Canada, France, Italy, New Zealand, South Africa, The Netherlands and the USA) on the exemptions available in those jurisdictions, makes preliminary observations on those responses, considers the prospects for harmonisation of this area of law in the light of those observations and puts forward some tentative proposals for the development of model provisions and/or legislative principles in the area of exemptions for comment and discussion. Copyright © 2011 John Wiley & Sons, Ltd.     

Directors’ share dealings and corporate insolvencies: evidence from the UK

This paper investigates the relation between insider trading and the likelihood of insolvency with a specific focus on the directors’ sale and purchase transactions preceding insolvency. We use a unique data set on directors’ dealings in 474 non-financial UK firms, of which 117 filed for insolvency, over the period 2000–2010. We show that the directors of insolvent firms increase their purchase transactions significantly as the insolvency approaches. The results also reveal a significant relation between three different measures of insider trading activity and the likelihood of insolvency, which is observed to be positive only during the last six-month trading period. The relation is negative for the earlier trading periods. While the earlier purchase transactions appear to be motivated by superior information held by insiders, the purchase trades closer to the insolvency date are possibly initiated by directors’ motives to influence the market's perception of the firm in an attempt to avert or delay insolvency.     

Various Aspects to Consider with Regard to Special Insolvency Rules for Small and Medium‐Sized Enterprises in South Africa

The notion of special insolvency rules for small and medium‐sized enterprises (SMEs) has attracted attention in international spheres, and within the ambit of some international and comparative approaches, same is considered in this article with particular focus on the South African position. In particular, we show that the South African insolvency regime does not, at present, cater for financially distressed small businesses in a specific and viable manner. In South Africa, although attention has been paid to the development and support of small businesses, similar considerations have not been observed with regard to the insolvency side of small business concerns. No comprehensive and focused process of dealing with financially distressed small businesses exists in the South African insolvency framework. This scenario prevails, notwithstanding that there are existing foreign and international policy guidelines, rules and regimes in developed jurisdictions that can serve as pointers in this regard. The purpose of this article is to first highlight the need for special treatment of small businesses by focusing on the shortcomings in the South African system, and, as a natural sequential development, policy proposals as unavoidable foundations to address these shortcomings. In the premises, the focus is on the principles and policies that are relevant to any discussion regarding insolvent businesses that fall within the scope of the SME category. Therefore, this paper deals with the concept of the small business, the South African insolvency regime and the international position pertaining to small businesses. In particular, the need for special treatment of SMEs under insolvent circumstances is discussed, consideration is given to the existing South African mechanisms available to small businesses in distress and the lack of suitable contextual provisions for small businesses in distress is noted. A core component of this article is the position in South Africa viewed against the backdrop of some international developments, international documents and principles that are relevant to an insolvency and rescue/rehabilitation regime within the context of the small business. As a logical conclusion, recommendations for reform of the South African regime are made. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd     

Asset Sales and Secured Creditor Control in Restructuring: A Comparison of the UK,US and Canadian Models

The primary insolvency restructuring mechanism in the UK is administration under the Insolvency Act 1986, as amended by the Enterprise Act 2002. In an administration, an insolvency professional known as an administrator, who is accountable to the insolvent company's creditors as a whole, is appointed to oversee the restructuring. The administration process was designed to rehabilitate distressed but viable companies and businesses and to maximize creditors' recoveries. Increasingly, however, insolvent companies are using this process to sell substantially all of their assets through pre‐packaged administrations or ‘pre‐packs’. In a pre‐pack, the insolvent company and its senior creditors negotiate the terms of the sale prior to initiating administration proceedings and appointing an administrator. The administrator then implements the deal, often with little or no input from junior creditors or other stakeholders. Both the US Bankruptcy Code and the Companies' Creditors Arrangement Act in Canada permit insolvent companies to sell substantially all of their assets under the auspices of the restructuring legislation. This article compares pre‐packs with these US and Canadian processes, arguing that they are all functionally equivalent in that they facilitate quick realizations for secured creditors by bypassing traditional restructuring processes. This analysis suggests that pre‐packs may give too much control over the restructuring process to secured creditors, encouraging rent‐seeking and other value‐destructive behaviours that undermine the fundamental goals of insolvency law. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.     

Comment on: “When does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims

A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.     

Perpetuating Uncertainty: The Anti‐Deprivation Principle and Contractual Rights in the Post‐Lehman World

This article considers the anti‐deprivation principle under English insolvency law, an issue which has received significant attention in the courts over the past couple of years, culminating most recently in the Supreme Court decision in Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited [2011] UKSC 38. The article begins by observing that the evolution of the anti‐deprivation principle has resulted in the precise nature and scope of the rule becoming confused, particularly when applied to property comprising contractual rights. In response to this confusion, the article outlines a three‐pronged framework for the anti‐deprivation principle, derived from an empirical study of the case law up to and including Belmont. First, it is necessary to identify the asset that is being deprived. This involves two subsidiary questions, namely the extent to which individual contractual rights may constitute property capable of being deprived and determining whether specific contractual provisions either define the scope of the right or constitute dealing with the right. The second element involves determining whether there has been a deprivation. In the context of contractual rights, this includes any action that results in the insolvent company being deprived of the benefit of the right, whether that is by way of transfer, extinguishment or modification of the right. Finally, consideration must be given to whether there are any defences which apply to validate that deprivation. Four such defences are postulated — where the insolvent company receives fair value for the deprivation; where the deprivation is an unavoidable consequence of some other valid action; where the asset deprived is the quid pro quo for some other unperformed obligation of the insolvent company; and where the arrangements were entered into in good faith for a bona fide commercial purpose and without any intention to avoid the insolvency law. Copyright © 2011 John Wiley & Sons, Ltd.     

McGrath v Riddell: A flexible approach to the insolvency distribution rules?

The rules relating to the division of the insolvent estate assume considerable importance in the field of international insolvencies, where different legal systems interact. International instruments including the European insolvency regulation and the UNCITRAL Model Law on Cross‐Border Insolvency have provided a framework which governs the relationship between local and foreign distribution schemes. For English lawyers, questions remain however regarding the future role of the courts' statutory power to cooperate with the courts of ‘relevant’ countries or territories, and of the common law principle of universalism. An important issue connected to the determination of such questions is the established judicial approach to the pari passu rule, in the application of domestic law. This paper examines the manifestation of this tension in the litigation arising from the collapse of the HIH Casualty & General Insurance group of companies. It notes the scope which remains for continued resort to the statutory power of cooperation, and the potential for the Cross‐Border Insolvency Regulations 2006 to encourage a more flexible approach to resolving differences between distribution schemes. Copyright © 2010 John Wiley & Sons, Ltd.     

Political Influence and Declarations of Bank Insolvency in Japan

This paper investigates how politics affects bank supervision by examining determinants of bank failures in Japan during 1999–2002, a period during which bank regulators were called upon to resolve insolvent banks in preparation for the lifting of a blanket deposit guarantee. The empirical results suggest that Japan's bank regulators had tendency to delay declarations of insolvency in prefectures that supported senior politicians of the ruling Liberal Democratic Party (LDP). This result, which is robust to a host of bank-level and prefecture-level controls, suggests that bank supervision is prone to political influence that delays efficient resolution of insolvency.     

Household insolvency: A review of household debt repayment,delinquency, and bankruptcy

This review paper explores the issues related to the meaning and measurement of insolvency within the domain of household finances. Conceptual and empirical evidence to explain the onset of insolvency is reviewed. Predictive models and financial ratios are presented as techniques for identifying insolvent households. Implications for monitoring of solvency by households and responses to insolvency are presented.     

The effectiveness and efficiency of corporate insolvency law—part two

Little empirical research has been done in the Netherlands (or internationally) into the effect of corporate insolvency proceedings. The Dutch legislature has made several attempts in the past decades to revise the current Dutch Bankruptcy Act (Faillissementswet) of 1893, while almost nothing is known about the effectiveness and efficiency of the Dutch corporate insolvency law. I have studied the effectiveness of the current Dutch insolvency law and of European Directive 2001/23/EC which is incorporated in this law, on the basis of theoretical and large‐scale empirical research. The study concerned all 4167 of the corporate insolvencies that ended in 2004. In the first part of this Article (International Insolvency Review, Volume 17, 3, Winter 2008, pp. 189–209), the research results showed that the Dutch Bankruptcy Act achieved the goals set on it only to a limited degree and that the informal restructuring procedure is of great social importance. In this second part, I concentrate on the conditions imposed by European Directive 2001/23/EC on the European national legislatures to protect employees' rights: automatic transfer of employment contracts in the event of transfers as part of insolvency proceedings, together with measures to prevent misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this European Directive. The study shows that, in the Netherlands, not applying automatic transfer of employment contracts when an undertaking or business is transferred as part of an insolvency proceeding does not result in large‐scale misuse of insolvency law. It appears that automatic transfer of employment contracts outside insolvency proceedings can actually impede the informal restructuring of financially unsound companies. These surprising results are interesting for corporate insolvency proceedings worldwide. Copyright © 2009 John Wiley & Sons, Ltd.     

Insolvency proceedings from a sustainability perspective

Sustainability is a wide concept including environmental, economic, social/culture, and political dimensions. Currently, sustainability research is a rich scientific discipline producing a significant number of research papers. However, sustainability in the context of insolvency proceedings has attracted little research compared with, for example, how much attention corporate social responsibility has received in company law research. This article studies sustainability in the context of liquidation and restructuring proceedings and the preservation of different kinds of resources (natural, manufactured, human, and social capital) in insolvency procedures. The purpose of insolvency proceedings may prevent the full implementation of sustainability. In bankruptcy, the administrator must maximise the selling price for creditor satisfaction, and there are few possibilities to promote sustainability. When facing an acute environmental hazard, in the name of public interest, a bankruptcy estate with assets usually has to act unless the law stipulates that society is responsible for taking care of the problem. In restructuring proceedings, the main purpose is to continue the debtor's business. It depends on the markets how sustainable the debtor company must be to achieve profitability. If becoming a profitable company in a “green” or otherwise sustainable market requires costly efforts, creditors' interests may require the sale of the assets. The author views through sustainability lenses EU Restructuring and insolvency Directive (2019) and finds there is not much of a sustainability approach included.     

Corporate assets as a trust: for whom are corporate officers trustees in insolvency? the role of incentives in maintaining the trust

Uncertainty is a constant theme when corporations are in financial distress. Yet any successful restructuring of an insolvent corporation requires numerous stakeholders, including creditors, employees and suppliers, repose some degree of trust in those corporate officers who are trying to continue to operate the firm while restructuring it into a viable entity. This article looks at the issue of the positive and negative incentives that can be generated for corporate officers and directors from both their continuing control of corporate assets and their potential personal liability arising from corporate activity both before and after the corporation became insolvent. The potential role these incentives can play in providing a basis for the trust needed to meet the other governance challenges that arise in a restructuring is reviewed in the context of recent developments in Canada concerning the duties of corporate directors to creditors during insolvency. Also reviewed is the role of directors' insurance and indemnification in altering the incentives' effects on directors' behavior. Finally a critical appraisal is given of the present legal regime's provision for compromise of claims against corporate officers during restructuring, as well as the proposal to amend the law to allow complete exoneration of corporate directors from certain liabilities on insolvency. The article urges caution in altering the effects of incentives that may create the necessary basis for trust in the distressed corporation's officers amongst those stakeholders whose co‐operation is crucial to restructuring. Copyright © 2003 John Wiley & Sons, Ltd.     

The insolvent subsidiary and liability of the parent corporation in the USA,Argentina, and UNCITRAL

The increasing unacceptability of the concept of entity law and the emergence of the doctrine of enterprise law with respect to many aspects of the legal relationships of parent and subsidiary corporations particularly in insolvent situations is a very interesting issue. This change is very significant because it reflects a growing unwillingness on the part of the courts and legislatures to continue accepting the traditional view of corporate law when it no longer corresponds to the economic reality of the modern business enterprise in a complex industrialized international society. This paper examines the American case law and in particular the decisions that have imposed liability where a company is liable for the obligations of an insolvent subsidiary and by contrast the decisions that have denied liability. The paper also examines the position in Argentina within the Argentine law and the UNCITRAL recommendations in respect of liability issues within corporate groups in insolvency. Copyright © 2010 John Wiley & Sons, Ltd.     

Consumer insolvency in Australia

This paper seeks to identify and assess the features of Australian bankruptcy regulation as they apply to consumer insolvency. Although Australian bankruptcy law makes no explicit recognition of ‘consumer bankruptcy’ as a regulatory target in itself, the Australian legislation nevertheless has a number of features that impact on what would generally be seen to be consumer bankrupts. After providing an outline of the legislative framework within which consumer bankruptcy operates, the paper examines the consumer insolvency aspects of this legislation, together with an assessment of proposed reforms. Some brief comparisons of the ‘consumer’ features of Australian regulation with that of the more fully developed consumer provisions of the Canadian and the United States bankruptcy legislation, are made in order to highlight the Australian position. The Australian Act has historically drawn heavily on English bankruptcy legislation but inevitably Australia has to some extent developed along its own path. Notable is the reasonably vigorous approach to discharge from bankruptcy. The proposed reforms to the Bankruptcy Act, which have followed a detailed consultative process, are largely directed to consumer debtors. Some of these reforms are directed against a perceived debtor abuse of the bankruptcy system. Other reforms, such as increasing the availability of debt agreements, are more generous to insolvent debtors. On the whole the reforms appear to be based more on political than empirical grounds.     

The role of stakeholders on rejection of bankruptcy applications in the case of “poverty” of the estate: A Polish case study

The aim of this article is to supplement the Law and Economics area of science with regard to the scope of the ex ante effectiveness of bankruptcy law using the example of Poland. Bankruptcy law is effective in the ex ante stage when it eliminates from the market insolvent entrepreneurs who cannot even afford to cover the costs of bankruptcy proceedings. In these cases, the bankruptcy court should dismiss the petition for bankruptcy because of “poverty” of the insolvent estate. As a result, the insolvent debtor should be liquidated and deleted from the register of companies. This paper investigates entities whose bankruptcy petition has been rejected due to “poverty” of the insolvent estate. The study shows that, after the filing has been dismissed, the majority of these entities are not liquidated. To determine who is responsible for this state of affairs, the article identifies the stakeholders at the time that applications are filed for bankruptcy proceedings and also after the bankruptcy petition has been rejected. The article highlights stakeholders' diverging interests, strengths, and weaknesses to assess their potential impact on bankruptcy procedures that should be dismissed due to “poverty” of the insolvent estate.