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Treatment of Security Interests Under the Insolvency Procedure

Under the Cape Town Convention, an international interest can be exercised even after an insolvency procedure is commenced with the debtor, without being stayed automatically or by an order of the insolvency administrator.[1] All three Protocols provide alternatives that differ in the extent of the power that the creditor can exercise in case of insolvency of the debtor. The rules differ depending on whether the State Party made a declaration choosing either of the alternatives in the relevant provision. However, even under an alternative less favourable to the creditor (Alternative B), the insolvency administrator or debtor in possession shall either cure all defaults and agree to perform all future obligations or give the creditor the opportunity to take possession of the secured object. Alternative C of Art IX of the Rail Protocol seems to be the only exception, which enables the insolvency administrator or the debtor to apply to the court for an order suspending its obligation.[2]

South Africa opted to apply Alternative A of Article XI for all types of insolvency proceedings and the waiting period will be thirty (30) days. Alternative A provides that

upon the occurrence of any insolvency-related event, the insolvency administrator or the debtor, as applicable, shall....give possession of the aircraft object to the creditor no later that the earlier of (a) the end of the waiting period; and (b) the date on which the creditor would be entitled to the possession of the aircraft if this Article did not apply

Under the present Companies Act of 2011, a company in financial distress may be protected from adverse creditor action where there are reasonable prospects of rescuing that company.

During such a business rescue process, the rights of creditors are drastically curtailed and thus in direct conflict with the provisions of the Convention. A business rescue practitioner is appointed to supervise the affairs of a financially distressed company upon application by any affected person, the resolution of the Board of Directors of such a company, or court order.[3]

Section 133 provides that during business rescue proceedings, no legal proceeding concerning the property of the company, including enforcement action, may be commenced with or proceeded with in any forum, except with the written consent of the business recue proceeding or leave of court. In terms of section 134(1)(a) of the Companies Act, a company may, during business rescue proceedings, dispose or agree to dispose of property only in the ordinary course of business, or in bona fide transaction at arm’s length for fair value if approved in advance and in writing by the practitioner. Similarly, the company’s performance obligations under contracts entered into by the company prior to the commencement of business rescue proceedings are suspended or even cancelled.

Alternative A, which South Africa has elected to follow, specifically states that “no remedies permitted by the Convention or this Protocol may be prevented or delayed after the date specified in paragraph 2”, Furthermore, “no obligations of the debtor under the agreement may be modified without the consent of the creditor”. The effect of the relevant provisions in the Companies Act is that a general moratorium on performance obligations and suspension of legal proceedings is in place during the business rescue process in contradiction to the speedy relief provisions contained in the Convention system upon default of a debtor.

  • [1] Art.XI of the Aircraft Protocol; Art.IX of the Rail Protocol; and art.XXI of the Space AssetsProtocol)
  • [2] Prof. Souichirou Kozuka, Chap. 2 of this volume.
  • [3] Section 129, Companies Act of 2009, www.gov.za/pub/Acts, accessed 20 July 2014.
 
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