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Insolvency law often sounds straightforward until assets, creditors and court processes are spread across more than one country.
At first glance, the position seems simple enough. If an insolvent estate in South Africa has paid its claims, costs and charges, and money is left over, that balance appears to be a surplus. Section 116 of the Insolvency Act says that such a surplus must be paid to the Master and placed in the Guardians' Fund, to be claimed later by the rehabilitated insolvent.
But what happens where the insolvent person also has a foreign insolvent estate, and there is still a substantial shortfall in that other country?
That was the issue before the Supreme Court of Appeal in Scheer v Wagner and Another.
The cross-border problem behind the case
The case involved an individual whose estate was sequestrated in Austria in 2017 and in South Africa in 2018. He was domiciled in Austria at the time of the Austrian sequestration, and most of his creditors were based there. The Austrian trustee applied to be recognised in South Africa so that, once South African creditors had been dealt with, any remaining funds in the South African estate could be transferred to Austria for the benefit of creditors there.
The insolvent opposed that relief. His argument was that section 116 is peremptory and does not allow South African Courts with a discretion. On that reading, any surplus in the South African estate had to go into the Guardians' Fund and could only later be paid to him after rehabilitation.
On a narrow reading, that may sound workable. In practice, however, it created a serious problem. There was still a shortfall in Austria, meaning that creditors there had not been paid in full. That raised the real question: Was the South African balance truly a surplus at all?
The SCA decision
The Supreme Court of Appeal rejected the insolvent's argument.
The court held that section 116 does not neatly cater for this type of cross-border situation. It applies in the ordinary course where there is no foreign insolvent estate with an outstanding deficit. Where a shortfall still exists in the insolvent estate in the debtor's country of domicile, the remaining South African balance cannot simply be treated as a section 116 surplus. In that situation, the common law still applies, including the established principles governing the recognition of foreign trustees.
Put differently, the court confirmed that section 116 should not be read in isolation. It must be read alongside the common-law framework that allows South African courts, where appropriate, to recognise and assist foreign insolvency officeholders.
This is important because South African law has long recognised the principle of comity. In simple terms, that means courts in one country may recognise and cooperate with insolvency processes in another country, provided this does not prejudice local creditors or offend South African law or public policy.
Why the money could not simply sit in limbo
A useful part of the judgment is the court's recognition of the practical absurdity that would follow from the insolvent's argument.
If section 116 were applied rigidly in these circumstances:
- " The insolvent could not receive the money unless he was rehabilitated;
- " Rehabilitation would remain difficult while a foreign deficit persisted; and
- " The foreign trustee and foreign creditors would also be unable to access the funds.
That would leave the money in limbo for an indefinite period.
The SCA made it clear that the law should not be interpreted in a way that creates that kind of deadlock where a more sensible and coherent outcome is available.
What this means for creditors and businesses
The practical result is an important one. South African creditors still come first. Their claims must be dealt with before funds move elsewhere. But once that has happened, any balance left in South Africa does not automatically become a personal entitlement waiting in the wings for the insolvent. If creditors in the foreign estate remain unpaid, and the foreign trustee has been recognised in South Africa, that balance may be transferred abroad for the proper administration of the wider insolvent estate.
For businesses, lenders and other creditors, the judgment is a reminder that cross-border recovery cannot be assessed by looking only at the country where a particular asset happens to sit.
A South African asset pool may appear healthy when viewed on its own. It may even look as if a surplus will arise once local claims have been settled. But that does not necessarily mean the balance is truly free for distribution to the insolvent. The wider insolvency position still matters.
In practical terms, creditors should consider at least the following:
- " Where the debtor is domiciled;
- " Whether there are parallel insolvency proceedings in another country;
- " Whether a foreign trustee has been recognised in South Africa; and
- " Whether a supposed South African surplus is in fact still needed to satisfy unpaid foreign creditors.
The broader commercial lesson in Scheer v Wagner is that South African courts will favour a practical and coherent result over a narrow reading that produces stalemate. Section 116 still has an important role, but not every balance left in a South African insolvent estate is a true surplus in the legal sense.
Where cross-border insolvency is involved, the picture is wider, and so is the court's analysis. For creditors, that means recovery strategy should begin with the full insolvency picture, not just the local one.
Practical Implications
For businesses, lenders and other creditors, the judgment is a reminder not to assume that funds left in a South African insolvent estate are automatically available to the insolvent once local claims have been settled. Where there is a foreign insolvency, a recognised foreign trustee and an outstanding shortfall in the debtor's country of domicile, that balance may still form part of the wider creditor recovery process.
In practice, this means recovery strategy should be based on the full cross-border picture, including the debtor's domicile, parallel insolvency proceedings and whether any foreign officeholder has been recognised in South Africa.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
