In today's increasingly globalised and internet-driven commercial landscape, the likelihood of legal proceedings crossing borders, and attracting the complexities of cross-border disputes, is higher than ever. It has become crucial for businesspeople and attorneys to anticipate this possibility and, where appropriate, prepare accordingly.
Liquidation proceedings are a prime example of this. Liquidators in South Africa may have to address claims from and against creditors and debtors in different jurisdictions when winding up companies that conduct business outside of the country. In matters such as the now-notorious collapse of South-African headquartered Mirror Trading International (MTI), where unlawful practices precipitated the company's collapse, liquidators may also face competing enforcement and recovery proceedings by foreign authorities in their respective jurisdictions – each following their own rules and mandates to recover funds on behalf of victims or impose penalties.
In such cases, successful proceedings depend on thorough preparation and the appointment of liquidators and lawyers who are skilled and experienced in cross-border insolvency matters
A case in point: Mirror Trading International
MTI opened in 2019 as an online cryptocurrency trading and investment platform with its headquarters in Stellenbosch in the Western Cape. It promised investors high returns on cryptocurrency investments and, prior to its collapse, garnered an estimated 300 000 investors from over 200 countries and handled around USD 1,7 billion (ZAR 32 billion). MTI collapsed between 2021 and 2023. The Western Cape High Court placed it into final liquidation, finding that it had in fact operated as an unlawful ponzi/pyramid-type scheme, and its founder fled South Africa as a fugitive from the law.
As a consequence of MTI's unlawful business model, the High Court ruled that all transactions between MTI and its investors were void from the outset. In other words, investors who lost money to MTI, misled into believing they had made genuine investments, could claim for the return of their funds. By the same token, investors fortunate enough to have made a profit (in essence, those who called up their investments much earlier) were liable to receive claims by MTI's liquidators for the return of those profits.
According to standard industry practices, the MTI liquidators adopted the basic strategy that funds recovered from those investors who profited from the scheme, classified as 'net winners', together with the funds recovered from other relevant debtors of MTI, would be used to shore up its deflated estate for controlled distribution to fulfil claims by those who lost funds to the scheme (the 'net losers') as well as to service other relevant expenses and debts.
Cross-border claims
As alluded to above, MTI's international reach meant that many of its net winners and net losers were located outside of South Africa. The South African liquidators endeavoured to identify and make claims against, and receive claims from, investors in the United States, the United Kingdom, Australia, Belgium, and other countries, in addition to those in South Africa. This introduced several complications associated with the operation of foreign law. In the United States, independently of the efforts of the liquidators in South Africa, the Commodity Futures Trading Commission (CFTC) instituted proceedings against MTI and its erstwhile CEO in the Bankruptcy Court of the Southern District of Florida. There, it sought more than USD 3 billion in reparations to investors and administrative penalties. In Australia, the process of identifying and instituting claims against net winners was threatened by the approach of a three-year deadline for claims in respect of voidable transactions under local company laws. Similar obstacles arose in other jurisdictions. In each case, these developments threatened to interfere with, or even potentially derail the South African-run liquidation process.
The Model Law on Cross-Border Insolvency
An important tool in international insolvency practice is the Model Law on Cross-Border Insolvency (the Model Law). It was adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1997, following a rise in international insolvency matters during that decade. The premise of the Model Law is to provide member states with a standard, uniform set of rules for managing and coordinating insolvency proceedings that cross borders. The objectives set out in its preamble include fostering cooperation between courts and authorities in different states, providing greater certainty for trade and investment, and ensuring the fair and efficient administration of cross-border insolvencies to protect all interested persons, including both creditors and debtors.
In the context of MTI's liquidation, the United States, United Kingdom, Australia, and South Africa are all parties to the Model Law. and its provisions were largely availed to MTI's liquidators, who duly took up the opportunity to use them. An important concept under the Model Law is the recognition of 'foreign main proceedings' – a process whereby local courts recognise and afford credence to foreign-based liquidation proceedings overseen by foreign courts and afford a degree of recognition to the foreign liquidators under domestic law.
In the United States, the liquidators instituted proceedings in the US Bankruptcy Court, Southern District of Florida under Chapter 15 of the United States Bankruptcy Code (which domesticates the provisions of the Model Law into American federal law). There, they secured an order that, among other things, stated:
"1. The South African Proceeding is granted recognition as a “foreign main proceeding" under 11 U.S.C. § 1517.
2. The South African Proceeding and the Orders of the South African Court [being the Western Cape High Court] shall be given full force and effect and be binding on and enforceable in the United States against all persons and entities. This includes without limitation the Orders of the South African Court (1) placing the Debtor into an involuntary provisional liquidation, (2) placing the Debtor into an involuntary final liquidation, and (3) appointing the Liquidator and certifying that he is a liquidator of the Debtor…"
Additionally, all persons and entities seeking to recover claims from MTI were temporarily stayed from doing so. Consequently, in the proceedings instituted by the CFTC, an order was made awarding the latter its claim but imposing a temporary stay on part of its recovery to accord with the Bankruptcy Court's recognition of the foreign main proceeding.
A similar process unfolded in the Federal Court of Australia where the South African liquidation was recognised as a foreign main proceeding in two separate orders under the Cross Border Insolvency Act, 2008, which is Australia's equivalent to Chapter 15 of the US Bankruptcy Code. Additionally, the time limit for bringing claims against net winners was extended for 12 months to allow the South African liquidators more time to carry out their work (a step known in Australian insolvency law as a 'shelf order'). Among other things, the Federal Court acknowledged that the South African liquidators had by that stage already secured similar orders in Belgian and Canadian courts. In December 2023, the Insolvency and Companies Court of England and Wales in the United Kingdom made a similar order in favour of the liquidators, further adding to this list.
Notably, the Belgian order was secured despite the fact that Belgium is not a party to the Model Law. This demonstrates that, although the Model Law is a helpful tool for liquidators, the absence of the Model Law's adoption in a particular jurisdiction is not an absolute bar to the coordination of insolvency proceedings.
The MTI case highlights the complexities of navigating cross-border insolvency proceedings in today's globalised commercial environment. The successful coordination between jurisdictions, facilitated by instruments like the Model Law on Cross-Border Insolvency, underscores the importance of skilled and experienced liquidators and attorneys. These professionals must adeptly manage the intricate web of international legal frameworks to protect creditors' interests and maximise the debtor's assets. As global commerce continues to evolve, the lessons learned from MTI's liquidation will serve as a valuable guide for future cross-border insolvency cases, emphasising the need for preparedness, expertise, and international collaboration.
