South Africa: Post-Insolvency Set-Off: South Africa Moves Towards International Best Practice

Last Updated: 1 December 2003

Article by Clinton Van Loggerenberg and Shawn Barnett

Globalisation and the rapid expansion of international trade has highlighted the need for uniform and consistent insolvency legislation across international markets. South Africa will take a further step towards such international best practice with the passing of the Judicial Matters Second Amendment Bill making provision for certain technical changes to Section 35B of the Insolvency Act.

There is an inherent tension between set-off and the provisions of many jurisdictions’ insolvency regimes which often provide for a "freezing" of estates upon insolvency. In this regard South Africa is no exception. In terms of South African insolvency law, the liquidator of an insolvent estate may elect to have any set-off which occurred up to 6 (six) months prior to insolvency set aside, in circumstances where such set-off did not occur within the ordinary course of business. In addition, upon insolvency, the insolvent estate vests in the liquidator, with no set-off being possible in respect of any debt owing between the insolvent and creditors. The only exception to this general prohibition against post-insolvency set-off, is contained in Section 35B of the Insolvency Act. Section 35B provides for post-insolvency set-off in respect of certain types of "agreements". The definition of "agreement" in Section 35B has been the subject of much debate, and can hardly be regarded as having a clear and accepted meaning. The memorandum which originally introduced Section 35B referred to the Section as being designed to protect the financial markets and financial market participants. This aim was to be achieved by defining "agreement" as including only those agreements for the delivery, exchange, settlement or payment of certain specific currencies, indices, instruments or commodities. Any agreement in respect of assets not listed in Section 35B does not qualify for post-insolvency set-off. Various views have developed over the years as to how Section 35B should be interpreted. Some market participants favoured a literal approach (including all agreements for the future delivery, exchange, settlement or payment of permissible assets, notwithstanding the nature of the transaction), while others favoured a more purposive approach focusing on whether the agreement in question is of the type originally intended to be covered by the Section (i.e. transactions on the information financial markets).

The uncertainty surrounding the interpretation of Section 35B has lead to many market participants not being able to reflect their counterparty positions on a net basis, and consequently having less scope to effect further transactions with certain counterparties. In addition, uncertainty surrounding the enforceability of certain collateral arrangements and the interaction between collateral arrangements and Section 35B, has left the South African financial markets in dire need of reform. The International Swaps and Derivatives Associations, Inc ("ISDA") has, for many years, been involved in the promotion of law reform in many jurisdictions, with the aim of ensuring that the netting provisions of the documentation which is most commonly used in the privately negotiated derivative markets are enforceable. ISDA has also become a driving force behind the clarification and, to the extent possible, standardisation of the laws applicable to collateral arrangements commonly used in international financial transactions. ISDA documentation has become widely used in South Africa and, together with the South African collateral and netting opinions, confirmed the need for legislative intervention to clarify the South African position in respect of post-insolvency set-off.

This intervention will come shortly with the passing of the Judicial Matters Second Amendment Bill. The Bill substitutes the current Section 35B of the Insolvency Act with a new Section 35B. The new Section 35B will contain an amended definition of "agreement", which if passed into law in its current form, will widen the type of transactions capable of post-insolvency set-off. For purposes of the new Section 35B, "agreement" will include any agreement which provides, upon the insolvency of a party to that agreement, for all unperformed obligations to be terminated, valued and set-off. Accordingly, "agreement" is defined based on whether the parties to such agreement have specifically provided for set-off and not with reference to the specific obligations in respect of specific underlying assets. The new Section 35B also specifically provides that security arrangements effected by way of a title transfer as an obligation capable of post-insolvency set-off (pledges and cessions in security are however excluded). Upon the amended Section 35B being passed into law, it will be important for parties to any agreement to include close-out set-off provisions in their agreements, especially in circumstances where various agreements are entered into between the same counterparties, or collateral arrangements are put in place.

The new Section 35B is indeed a significant amendment to South African insolvency law, but must be considered in the light of international developments. A number of jurisdictions have adopted laws that protect the enforceability of netting and set-off agreements upon the insolvency of one of the parties. Netting legislation, which began in the United States, has spread to other jurisdictions throughout the world and continues to do so. Since 1989, laws expressly protecting the enforceability of set-off for privately negotiated derivative transactions in local insolvency proceedings have been enacted in many jurisdictions, including Belgium, Canada, the Cayman Islands, Denmark, France, Germany, Ireland, Luxembourg, Sweden and Switzerland. However, what is notable about international netting legislation is that the validity of post-insolvency set-off often only applies to certain specified types of transactions. Those specified transactions are described in a list of enumerated transactions. The new Section 35B is however wider, and is not, as its predecessor, limited to specified types of transactions, but to all transactions specifically providing for the termination and post insolvency set-off of unperformed obligations. With South Africa increasingly becoming part of a larger global community and attempting to attract international trade, it is vital for local insolvency laws to adhere to international best practices. Further, clear netting and set-off legislation provides additional benefits to banks, insofar as banks, can, in terms of the second Basle Accord, rely on set-off in calculating their credit exposures for capital adequacy purposes. However, in order to rely on set-off for capital adequacy purposes, banks must obtain legal opinions confirming that the set-off arrangement will be upheld in all relevant jurisdictions. Obtaining such opinions will be greatly simplified in circumstances where clear unambiguous legislation is in place.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions