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2016-04-doc1 Supreme Court of South Africa – Lagoon case

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On 21 December 2015 the Supreme Court of South Africa had to deal with an insolvency case parts of which already had been heard and decided about by courts in the USA and later in Ireland. See Lagoon Beach Hotel v Lehane (235/2015) [2015] ZASCA 210. The case involves the (once very wealthy) Irish business man Sean Dunne.

In 2013, before the courts in Ireland the question was: can Dunne’s voluntary bankruptcy under Chapter 7 U.S. Bankruptcy Code and a bankruptcy proceeding in Ireland against him co-exist in parallel? The question was decided by the High Court of Ireland in its judgment of 6 December 2013 [2013] IEHC 583 (In the matter of Dunne (a bankrupt)). McGovern J observed that ‘[T]he courts in this jurisdiction must have regard to principles of comity and should be slow to ignore the express wishes of the US trustee which were accepted by the US court in granting the stay which was sought’.

The judge underlines that the principle of unitary bankruptcy is one that should be followed, save in exceptional circumstances. He admits however that in this particular case, there are exceptional circumstances. The solution is, that there are two parallel insolvency proceedings in which the American trustee supports the Irish bankruptcy co-existing with the Chapter 7 bankruptcy in the US ‘… and proposes that a protocol be set up to ensure the efficient administration of the bankrupt’s estate’.

In this case, the Irish court also seems to invite the courts to communicate: ‘… although the US and Irish courts will have to determine what laws govern the rights of creditors and priorities. But the US bankruptcy trustee has already stated that Irish law will govern significant issues in the bankruptcy and will have a significant impact on the validity and allowance of priority claims against the estate so it would appear that, on a practical level, there is likely to be little disagreement as to what law will apply to many of the issues in the bankruptcy’.

In its December 2015 judgment the South African Supreme Court presents the facts before it, from which I take: Dunne is living in the USA and was (see above) declared bankrupt first in the USA and thereafter in Ireland. He had carried on business ‘… through an intricate web of holding and subsidiary companies as well as trusts, registered in different parts of the world, including tax havens.’ His Insolvency Office Holder (the Irish Official Assignee on Bankruptcy, Mr Lehane), acts with the support of the US trustee of Dunne’s estate, and had identified the Lagoon Beach Hotel in Milnerton, Cape Town, as an asset held by a company the shares of which had been transferred by Dunne to his wife Mrs Gayle Dunne. Basis of the transfer were two handwritten contracts which Lehane contends were not genuine and had been designed to frustrate Dunne’s creditors. Evidently, Lehane instituted proceedings in Ireland to have the dispositions made under these agreements set aside and, in effect, to recover the Lagoon Beach Hotel as an asset in Dunne’s bankrupt estate.

In the interim, Lehane applied to the Western Cape High Court and obtained an order recognising him as the Official Assignee and interdicting the proposed sale of the hotel to a third party pending the outcome of his claim in Ireland. He succeeded, but the judgment was appealed to the Supreme Court of Appeal. This Court applies ‘… a practical and common sense approach’ [15] in cases of this nature Dunne, the appellant, contended that Lehane ought not to have been recognised as Official Assignee by reason of the US order having predated that of the Irish Court declaring Dunne bankrupt. His main argument is that the effect of the US order was to provide a worldwide stay that vested all assets all over the world in the US trustee, so that an Irish official could not recover any of Dunne’s assets. The Supreme Court of Appeal however held that the precise effect of the USA’s stay (effect all over the world?) is disputed [19]. I am indeed in the camp of those authors that argue against the global effect of a stay, see my blog, document 2011-03-doc5 (In Chapter 15 cases a “global” stay has limitations).

The Court also considers that it would be inappropriate for the court to interfere with the process which is more conveniently dealt with by the Irish Court ‘… rather than ours’[20], but most importantly ‘… sight cannot be lost of the fact that the American and Irish bankruptcy officials are working hand in glove to attempt to recover assets for the benefit of Mr Dunne’s creditors. Indeed the American trustee of Mr Dunne’s estate, Mr Coan, states in his letter of 12 September 2014 that he is working “in collaboration” with Lehane and that, after reviewing the order of the court a quo, he concurs that “the interdict is appropriate to protect the Irish and American bankruptcy estates.” This goes to the very nub of the matter. All that is being sought is an anti-dissipation order that seeks to protect Mr Dunne’s creditors and ensures the integrity of the legal process, both in the United States and in Ireland’ [21].

A solid cross-border cooperation between insolvency office holders in asset tracing and recovery for the benefit of the creditors is seen by the Court of Appeal as a strong signal not to endanger the ongoing process. Moreover [31] ‘… while I accept that ordinarily a foreign trustee seeking recognition in South Africa must establish that the insolvent party was domiciled within the jurisdiction of the foreign court that appointed him, this is not a law set in stone. It has been accepted that in exceptional circumstances the requirement of domicile will not be insisted upon. As pointed out by Berman J in Ex parte Palmer South African courts have recognised a foreign trustee at times where the order pursuant to which the trustee was appointed was issued by a court other than that of domicile, but added the proviso that those cases ‘are certainly not authority for the contention that a South African court may, simply on the basis of comity and convenience, grant recognition to a foreign trustee, regardless of any consideration given to the insolvent’s domicile’.

In the case at hand there is indeed uncertainty about Dunne’s domicile in Ireland: ‘… [32] … But because of that uncertainty, and the fact that the American Courts have invoked the justice system of Ireland to assist in tracing assets and administering bankruptcy proceedings, there are in any event exceptional circumstances present that justify a South African court also rendering assistance by taking the necessary steps to recognise the Irish Official Assignee in order to protect the interests of Mr Dunne’s creditors. But it is not simply a matter of comity and convenience to do so. It is also intimately bound up with the prima facie case made out against Mr Dunne for his being domiciled in Ireland.

The strict legal test of finding ‘domicile’ is an importance milestone in applying insolvency rules, yet, in exceptional circumstances where insolvency practitioners work together, supported by their courts for the benefit of creditors, the Court rightly did see no reason to interfere with the lower court’s recognition of Lehane: [33] ‘It had the discretion to exercise whether or not to do so, and in my view such discretion was properly exercised. It also properly exercised its discretion to grant an interim interdict to preserve assets in respect of which Lehane had established a prima facie right … the appeal must fail.