22 OCTOBER 2022

The seminar began with the introduction of what cross border insolvency entailed and I
was asked to defined, cross-border insolvency regulates the treatment of financially
distressed debtors where such debtors have assets or creditors in more than one
country. However, due to each state determining its own procedures in terms of
insolvency, problems arise as to how the various participants are to be treated

We also detailed the main problems of cross border insolvency which I will brief list as:

 The globalization of international business.

 Limitations on state power.
 Lack of international instruments for dealing with cross-border insolvency law.
 Conflict between the universalist and the territorialist approaches to cross-border
insolvency law.
 Equal treatment of similar classes of creditors.

Cross border insolvency, in essence, can be distilled down to three key questions:
which law should be applied; who has jurisdiction to administer the insolvency process;
and how are judgments asserting control over assets enforced?

The treatment of financially distressed debtors, with assets across jurisdictions has two
main theoretical approaches, and a third, more practical model.

Firstly, there is the territorial approach, which broadly sets out that each jurisdiction
applies its own laws over assets located in that jurisdiction, to the exclusion of other
jurisdictions.

Secondly, there is the universalist approach, with a single administrator applying a

single global regime over assets, across borders.

Thirdly, there is the hybrid approach, where jurisdictions try and work out the most
relevant center for conducting the proceedings, with co-operation from other
jurisdictions in relation to assets that may be located there.

The UNCITRAL Model Law on Cross-Border Insolvency and the Cross Boarder
Insolvency Act 42 of 2000 which were discussed in the invitational lectures by the Prof
Andre Boraine of the University of Pretoria, have been discussed in the previous
journal. The aspect cover in the different lectures were covered again for our seminar.

The common law as the current CBI position in South Africa

Since there is no global insolvency law or any treaties between South Africa and other
jurisdictions that address this situation, South Africa relies on two possible sources,
namely the common law and the CBI Act (which is not yet operative as the the Act
depends on the Minister designating the specific states to which it applies). South Africa
therefore currently utilises the common law in order to deal with CBI issues. This is due
to the absence of any statutory provisions, as the CBI Act remains inoperative.

It is perhaps important to establish a point of departure when dealing with CBI issues.
Firstly, it is paramount for the foreign representative who wishes to deal with the assets
in another jurisdiction, to ensure he has locus standi to approach the court. This will be
determined either in terms of legislation, a treaty or in the absence of the former
methods, rely on the common law to establish locus standi. Secondly, the court, to
which the foreign representative is applying, should have the necessary jurisdiction and
this is once again determined by the common law in South Africa. It is significant to note
that movable and immovable property is dealt with differently when it comes to CBI
issues in South Africa.

Once the above requirements have been met, the foreign representative may approach
the court and ask for recognition as well as the relief sought. Once the foreign
representative is recognised, the court must clothe him/her with the necessary powers
in order to operate effectively within South Africa. These powers include: attaching
assets and disposing of them, taking the proceeds and distributing to the foreign
creditors, attending meetings of creditors or interrogating creditors; however, these
powers could be subject to certain conditions and since South Africa follows a
territorialist approach such conditions and restrictions will most likely be imposed.

If a recognition order is not granted, a foreign representative may choose to bring a

sequestration order instead; and consequently a concurrent procedure would then be
opened in South Africa. The above requirements however, are all subject to the courts
discretion and this once again reiterates territorialism.
Approaches to CBI: Universalism vs Territorialism

The universality model deals with the debtor’s assets and liabilities in one set of
proceedings and aims to treat creditors from various legal regimes equally. This
approach would enable the court, where the debtor is domiciled or where COMI is, to
obtain all of the debtor’s assets, movable as well as immovable and deal with it in the
foreign jurisdiction. The effect of this is that it would prevent claims from being
duplicated and litigation being multiplied, as the distribution of the debtor’s estate will
have an international effect. The main advantage of the universal approach is that the
various states would cooperate and creditors abroad as well as local creditors will be on
an equal footing. However, the disadvantage of this is that local creditors will have to
adapt to the differences in law, as all local assets will be dealt with by a foreign
jurisdiction.

The territoriality model, on the other hand, stresses state sovereignty, as the
proceedings are limited to the states’ jurisdiction where the assets or liabilities are
situated. The states apply their domestic law to the assets and liabilities in their
jurisdiction and thus seek to protect the local creditors’ interests. This poses a great

disadvantage to foreign creditors as foreign insolvency laws are ignored and these
creditors are left with a slim chance of recovering their claims. This has led to a
decrease in international transactions as companies and individuals abroad are unable
to predict the outcome of an insolvency matter which adds to the risk as well as the cost
of their transactions.

Defining property

Property can be defined as movable or immovable property, wherever situated, within

the Republic. When dealing with movable property an important aspect to consider is a
person’s domicile, as an insolvent’s movable assets, wherever situated, will
automatically vest in the trustee where the court of his domicile has granted such an
order. In terms of the insolvent’s immovable property, the foreign property will remain
vested in the insolvent’s estate since the lex situs governs this position. This means that
the law of the location of the immovable property will govern the property.
Recognition of foreign representatives

In terms of the common law, in order to recognise the foreign representative, the
application must comply with certain requirements. Although the court has discretion to
recognise foreign representatives, the court must be satisfied that the foreign court has
appointed them as such, meaning that they have the necessary locus standi. Once such
a recognition application is granted the court will entrust the representative with the
powers of a trustee or liquidator in terms of South African law. If a recognition order fails
for some reason, or the foreign representative chooses to do so, a sequestration order
may be instituted in South Africa, resulting in a concurrent procedure to the
sequestration order opened in another jurisdiction

The different perspectives on insolvency law, where also looked at and can be
summaried as follows:

 Spatial Justice

The central claim of spatial justice is that the organization of space – a set of material
and ideological relations that act on, yet are formed by, social relations – influences the
fair ordering of human relations. Spatial justice is best understood as an analytic lens
that illuminates the ways in which “space” - a term denoting the location of things
relative to each other – participates in the formation of justice claims.

 Feminist

With regard to this perspective, the article by L Jacobs, titled Legal Feminism and
Insolvency Theory: A Woman’s Touch? was looked at. This theory can be described as
a woman-centred approach to issues.

 Human Rights

This is a perspective that Lindokuhle Gwala identified during our seminar. A close look
at the relationships between and among the stakeholders of the corporation would
reveal that there are serious human rights implications when a business fails. This is
especially true for big corporations with global operations as their failure affects the
business of their trade partners and creditors.

 Critical (Neoliberal)
 Decolonial
 Transformative constitutionalism

The transformative context of the new South African democracy constitutional

supremacy was implemented against the background of a history characterised by
inequality and injustice, and the constitution must be seen as an explicit attempt to
transform legal and social institutions and power relationships towards greater equality
and justice. Transformative constitutionalism can best be described as a long-term
project of constitutional enactment, interpretation, and enforcement committed to
transforming a country's political and social institutions and power relationships in a
democratic, participatory, and egalitarian direction.

WORK SHOP BY THE UNIVERSITY OF PRETORIA

Prescribed reading for the UP invitation lecture on the 20th of October:

The question as to whether business rescue proceedings are available to

foreign companies, including those registered in South Africa as external
companies, was settled by the High Court in CMC Di Ravenna SC and
others v Companies and Intellectual Property Commission and others 2020
(2) SA 109 (GP) and recently confirmed by the Supreme Court of Appeal
(“SCA”) in CMC v CIPC and Others (1325/2019) [2020] ZASCA 151 (20
November 2020).

The facts of this case were briefly as follows: the board of an external
company, duly incorporated in terms of the laws of the Italian Republic,
resolved to place the company under voluntary business rescue in terms of
section 129 of the Companies Act 71 of 2008 (“Act”). However, the
Companies and Intellectual Property Commission (“CIPC”) then withdrew
the business rescue proceedings on the basis that an external company
cannot legally commence business rescue proceedings as envisioned under
Chapter 6 of the Act, since business rescue is only available to a company
as defined in the Act. The company and the appointed business rescue
practitioners took an opposing view and sought a declaratory order that the
company was validly placed under business rescue.

The main issue for determination was whether an external company is

subject to business rescue proceedings in terms of the Act. To this end, the
court had regard to the definition of the term “company” in section 1 of the
Act and held that the definition of “company” pertinently excludes an
external company. Likewise, section 129 of the Act also does not expressly
include an external company. On this basis, the court found that external
companies may not be validly placed under voluntary business rescue in
South Africa and cannot make use of the business rescue provisions
contained in Chapter 6, as external companies are excluded from the
definition of a “company”. As a result, the court declared that the company
was not validly under business rescue.

On appeal, the SCA confirmed that a foreign company, even if it is

registered as an external company, is expressly excluded from the
definition of a “company” and is not incorporated in terms of the Act, as
required by the definition of a “company”. Accordingly, the court held that
the inevitable conclusion is that an external company may not be placed
under business rescue proceedings.

In view of the above, the findings of both the High Court and the SCA go
some way in providing certainty on the options available to external
companies in financial distress. It is clear that on the reasoning provided
by both the High Court and the SCA, a compromise between a company
and its creditors, in terms of section 155 of the Act, will similarly not be
available to external companies. As a result, external companies ought to
consider alternative mechanisms, such as informal voluntary arrangements
and creditor workout procedures, when navigating challenging trading
conditions and financial distress. The question as to whether business
rescue proceedings and section 155 compromises are to be afforded to
external companies is an issue of policy that ought to be properly decided
upon by the legislature. However, in the interim, business rescue
proceedings continue to be an attractive option for distressed companies,
although it remains an exclusive preserve of companies that fall within the
definition as set out in section 1 of the Act.

AJVH Holdings (Pty) Ltd and Others v Steinhoff International Holdings N.V. and
Others unreported case no 7978 of 2021 (WCC) 6 September 2021

We were provided with a summary of the case and the case discussed at great length
during the workshop by Prof Boraine and Katherine van der Linde (of the University of
Johannesburg). I will not be discussing what was discussed during the workshop but will
provide a shot of the notes I was able to jot down the workshop.

Steinhoff International Holdings N.V

- The company is a South African-German-Dutch international retail holding

company that is dual listed on Johannesburg and Frankfurt stock exchanges
- Steinhoff deals mainly in furniture and household goods, and operates in Europe,
Africa, Asia, the United States, Australia and New Zealand. As of 12 May 2020,
Steinhoff International Holdings NV is headquartered in Amsterdam
- Was a top 10 company in South African in market cap

- Furniture /clothing company

- Steinhoff's South African brands include Ackermans, Buco, Dunns, Flash, HiFi
Corp, Incredible Connection, John Craig, Pennypinchers, Pep, Refinery, Russels,
Shoe City, Tekkie Town, Timbercity and Unitrans
- As at August 2016, Steinhoff held retailing activities in 30 countries, counting
6,500 retail outlets belonging to 40 different brands, and employing about 90,000
employees.
- 60% of the company's revenue, and two-thirds of its benefits, are made in
Europe.
 - 76-year-old Christo Wiese South African Billionaire, Public Investment
Corporation, Government Employee Pension Fund are the major shareholder
and biggest losers as a result of the scandal

The CEO

- Markus Jooste, the billionaire face of Steinhoff, is a Charatered Accountant by

profession, perhaps the reason why he was able to manipulate accounting
records.
- He ran the company for 30 years
- He is known for horse racing and gambling. He also owns the largest number of
thoroughbred racehorses in the country
- Resigned

What happened

- In late November 2015, Steinhoff Europe Group Services (SEGS) offices

in Westerstede were raided by German law authorities and in December 2015
German tax authorities began an investigation. Documents signed by the
Austrian Andreas Seifert of XXXLutz were seized but he said that documents and
his signature had been forged. Andreas Seifert of Poco and Conforama was
associated with Steinhoff since 2010 when Steinhoff had acquired the French
firm Conforama. It came out when German investigators started in 2015 to
investigate the company for doctoring information to mislead markets.
- On 5 December 2017 the CEO Markus Jooste, who had been under investigation
by German authorities at Oldenburg, resigned after the company announced
accounting irregularities. The share price immediately plunged 66% and went on
to fall by over 90% as it emerged that the company had overstated profits and
assets by nearly $12 billion
- Four current and former managers are under suspicion of having overstated
revenues at subsidiaries
- Steinhoff is reviewing the validity and recoverability of assets amounting to about
6 billion euros mainly in Europe
 - The allegation against Steinhoff International Holdings NV include earnings
manipulation, uncontrolled acquisition sprees, tax fraud, off balance sheet
companies set up to hide losses, not obtaining forex control approvals for
swapping PSG shares for a Frankfurt listed Steinhoff

Consequences of the scandal

- In December 2017, the Standing Committee on Finance of the Parliament of the

Republic of South Africa condemned Steinhoff and called for investigations of the
company by regulatory bodies including the Financial Services Board (FSB) and
the South African Reserve Bank (SARB)
- 90% of the market cap of the company was wiped out –nearly $12B
- Danie van der Merwe took over as chairman of company after Christo Wiese quit
- CEO Markus Jooste resigned
- Government Employee Pension Fund and the Public Investment Corporation
owned R28bn in Steinhoff; The Govt has given an assurance that the pensions of
civil servants will not be affected as it formed only 1% of total assets of the fund.
- Deloitte is the auditor and is being probed by South Africa’s Independent
Regulatory Board for auditors (IRBA) and Dutch Financial Authority for the
Financial markets (AFM)
- $2.8B of Christo Wiese’s wealth wiped out. He had brought in PWC to do the
investigation. the PricewaterhouseCoopers investigation, requested by Christo
Wiese, reported in March 2019 that "A small group of Steinhoff Group former
executives and other non-Steinhoff executives, led by a senior management
executive, structured and implemented various transactions over a number of
years which had the result of substantially inflating the profit and asset values of
the Steinhoff Group over an extended period" and went on to state "it appears
that the Steinhoff Group entered into a number of transactions (some of which
were fictitious or irregular) with allegedly independent third party entities which
resulted in the inflation of profits and asset values." The report revealed irregular
transactions with eight firms not tied to the Steinhoff group from 2009 and 2017
amounted to $7.36 billion
 - Global banks are facing substantial write offs (exposure $18B euros)
- Banks have sold around 98M shares pledged as security by Christo Wiese
- Johannesburg stock exchange has also started investigations

Latest news

- Billions of rands in assets linked to Markus Jooste – including his house in

Voëlklip, Hermanus; the Stellenbosch wine farm Lanzerac; as well as assets held
by the Silveroak Trust – were attached by the South African Reserve Bank
(SARB) on Tuesday afternoon, 18 October.
- This follows the Western Cape High Court granting the SARB an ex parte
application last week to attach all assets linked to Markus Jooste.