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Voidable Sales: The Insolvency Act and the Sale of Your Business
28 September 2018  | Lloyd Bell
 

Introduction:

Section 34 of the Insolvency Act No. 24 of 1936 (“the Act”) provides that  if a trader sells in terms of a contract any business belonging to him, or the goodwill of such business, or any goods or property forming part thereof (except in the ordinary course of that business or for securing the payment of a debt), and such trader has not published a notice of such intended transfer, the sale shall be void against his creditors for a period of six months after such transfer, and shall be void against the trustee of his estate, if his estate is sequestrated at any time within the said period.

 

Purpose of the Provision:

The purpose of the publication of the notice is to provide creditors of the business with notice of the sale (transfer) of the business, enabling them to claim any debts due to them from the seller before the transfer takes place.  

In Paterson v Kelvin Park Properties CC (1998) 1 All SA 22 (E), the court set out that "The purpose which the legislature wished to achieve in enacting Section 34(1) was to prevent traders in financial difficulties from disposing of their business to third parties who are not liable for the debts of the business, without due advertisement to all other creditors and in so doing, from dissipating the purchase price or using the purchase price to pay certain creditors regardless of the claims of others".  

The intention of the legislature in the creation of the section is accordingly to afford greater protection to creditors, who would otherwise be placed in a precarious position.  

 

Ambit of the Provision:

Section 34 is only of application to traders.  In terms of section 2 of the Insolvency Act, a trader is defined very broadly.  

While the definition in Section 2 extends broadly, there are however instances where the application of the section is limited. An example of this is set out in Kevin and Lasia Property Investments CC & another v Roos NO & others 2004 (4) SA 366 (SCA), where the court held that certain activities are excluded, such as an enterprise that consists of a letting and hiring of immovable property, which is not included in the definition of a trader.  

In McCarthy Ltd v Gore NO 2007 (6) SA 366 (SCA) the court held that the test to determine if the person should comply with section 34 or not, is whether or not the person carries on the relevant activity as part of his or her core business. By implication, a person will not fall within the definition of the section if the activity is merely an incidental one in relation to his or her primary business.

 

Procedure and Potential Consequences:

The Section 34-notice must be published in the Government Gazette and two issues of an English and Afrikaans newspaper which are circulated in the district in which the business is carried on and must be published not less than 30 days and not more than 60 days before the date of transfer.

The effect of publishing the notice is that all liquidated liabilities in connection with the business becomes due and payable. Creditors are then entitled to demand immediate payment thereof.

The effect of not publishing the notice is that the disposition that was made is void against creditors for a period of six months after the disposition and is void against the trustee of an estate, in the event that estate is sequestrated, within the six month period.  The seller’s creditors could accordingly claim the seller’s debts against the assets of the business notwithstanding that these assets were sold to the purchaser.  

 

Conclusion:

From the above information, it is clear that the decision to be made as to whether to publish a notice or not is thus not one that should be taken lightly and should be determined on a case by case basis on advice from a legal professional.   

 
 
 
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