All your life you dreamt of being your own boss, finally you are presented with a good offer to buy a well-established business that is also perfectly located for future business growth.  You managed to save some money and you also qualify for a substantial amount of money at the bank as a result of all this, you offer your house as security for the loan obtained from the bank and the business is transferred to you.  However, a few months down the line you receive the shocking news that the transfer of the said business had no legal effect because at the date of transfer the business was in fact bankrupt.

Section 34 of the Insolvency Act of 1936 (the Act) thus becomes the topic of discussion. Section 34 of the Act provides for the following:

“If a trader transfers 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 in the Gazette, and in two issues of an Afrikaans and two issues of an English newspaper circulating in the district in which that business is carried on, within a period not less than thirty days and not more than sixty days before the date of such transfer, the said transfer shall be void as 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 section 34 of the Insolvency Act

The aim of a publication in terms of section 34 is to provide creditors of the business with notice of the sale or transfer of the business, thus enabling them to claim any debts due from the seller before the transfer takes place.  In previous court judgments, the courts held the mischief this provision aims to circumvent to prevent traders in financial difficulties from disposing their business to third parties who are not liable for the debt of the business, without due advertising to all their creditors, and, in so doing, from dissipating the purchase price or using the purchase price to pay certain creditors regardless of the claim of others.

In many instances, the seller would (for various reasons, time-constraints normally being the most common one) suggest that a clause to be included in the contract with the effect of indemnifying the purchaser against any claims and losses the purchaser may suffer as a result of a failure to advertise.  Irrespective of the sanctity courts place on contracts, such an agreement between the parties would have no legal effect and such a clause would be void ab initio.

Consequences for non-compliance with section 34 of the Act 

Should section 34 be applicable to a transaction and the parties agree to not comply with section 34, the purchaser would be left in a precarious position especially if the seller is thereafter declared insolvent.  In case of insolvency of the seller, the liquidator or trustee appointed by the court can demand that the purchaser return the business and all assets sold as part of the business to the liquidator or trustee and failure to do so, would enable the liquidator / trustee to approach the court for a declaratory order to have the said property attached in execution.

Courts have previously held that if a situation arises where the purchaser is no longer in possession of the said business or assets so sold, the purchaser may be obliged to pay the value where delivery has become impossible for some reason. The purchaser, having paid the purchase price to the seller, would also end up having only a concurrent claim against the insolvent estate, this means that they will only be paid out of the remaining proceeds, if any is left.

Conclusion

In considering whether a prospective seller of a business has to comply with the requisite publication of such a sale in terms of section 34 and whether the sale is affected by the exclusion as contained in the provision or not, depends on whether the seller falls within the definition of a ‘trader’ and whether the intended sale is in the ‘…ordinary course of that business or for securing the payment of a debt…’ or not.

To avoid any unpleasant surprises where you can be held accountable for the debt of someone else it is best to consult your attorney for advice.