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”

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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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