Brushing up on impeachable dispositions in terms of Section 34 of the Insolvency Act

13 February 2024 ,  Anelmari Truter 793
“Even the most familiar things or concepts are never the worse for renewed scrutiny and for being, figuratively speaking, dusted and tidied” - Van Warmelo -

Here we consider Section 34 of the Insolvency Act which has the proclivity to either slip into commercial contracts where it finds no application, or to be missing from such contracts where its application is essential. Refreshing your memory on the scope and effect of Section 34 is important for legal practitioners, creditors of a business, or anyone buying or selling a business.
 
Section 34 is designed to protect creditors of a business and is aimed at the practice whereby a trader tries to evade his business debts by disposing his business to a third party who is not liable to pay the debts. 

Section 34(1) holds that if a trader, in terms of a contract, without giving notice as prescribed, transfers a business, its goodwill, or any goods or property forming part of it, the transfer is void as against his creditors for six months thereafter, and it is void against the trustee of his estate if his estate is sequestrated at any time within that period. 

In a nutshell, this practically means that if a person qualifies as a trader and his business, its goodwill, or any goods or property forming part of it is disposed of, a notice to this effect has to be published in the Government Gazette and in two issues each of an Afrikaans and English newspaper circulating in the area in which that business is carried on. This notice should be published not more than 60 days and not less than 30 days prior to the date of transfer. 

Upon publication every liquidated liability of the trader in connection with his business which would become due at a future date, falls due immediately if the creditor concerned demands payment. 

It should be noted that Section 34 is only applicable to traders. In terms of the definition in Section 2, a ‘trader’ is a person who carries on any trade, business, industry or undertaking:

in which property is:
sold, bought, exchanged or manufactured for purpose of sale or exchange, or;
in which building operations of whatever nature are performed, or;
an object whereof is public entertainment, or; 

who carries on the business of: 
a hotel keeper or boarding house keeper, or; 
acting as a broker or agent of any person in the sale or purchase of any property or in the letting and hiring of immovable property. 

Importantly, a person does not cease to be a trader simply because he closed his doors and ceased to operate the business. A person is considered a trader for as long as he owns the business or its assets, and owes debts in respect thereof. 

There are certain transactions to which Section 34 will not apply:  

Firstly, Section 34 will not apply to the transfer of goods or property of a business if the transfer is “in the ordinary course of that business”. The question is not whether the transaction would normally have been entered into by solvent business persons, but whether it would normally have been concluded by a solvent business person conducting a business of the kind carried on by the debtor. 

Secondly, Section 34 is also inapplicable where the transfer is to secure the payment of a debt, e.g. the pledge of a movable. 

Thirdly, when an “owner occupier” sells immovable property (occupied by the seller) and no lease agreement exists, Section 34 will not be applicable. 

Lastly, in the case of Kevin & Lasia Property Investment CC and another v Roos NO and Others the Supreme Court of Appeal confirmed that the sale of a letting enterprise (e.g. commercial property that is let by tenants) does not fall within the scope of application of Section 34. The rationale behind this is that a letting enterprise does not qualify as a ‘trader’ in terms of the definition, because the asset being sold is not deemed to be trading stock. The owner is also not involved in a profit-making scheme by selling immovable property. The immovable property being sold is rather a capital investment from which income is generated, meaning the sale thereof amounts to the sale of a capital asset. 

In essence, if a business owner qualifies as a ‘trader’, and one of the above exceptions are not applicable, a notice in terms of Section 34 should be published. The consequences of not publishing is that the transfer shall be void against the trader’s creditors for a period of 6 months after transfer and shall be void against the trustee of the estate, if the estate is sequestrated at any time within that period. Importantly, the meaning of void in this context is relative and not absolute. Practically, this means that although there is a valid transfer, the creditors may treat the transaction as void for the purpose of recovering their debts. The transfer is not void against everyone and for all purposes, but only as against the persons specified in Section 34(1) and for their purpose only. 

Taking the above into account, it should come as no surprise that for a bank financing the purchase of a business, non-compliance of Section 34 is too big a risk. In practice, it sometimes happens that parties agree not to advertise a transaction and instead accept warranties regarding possible claims against the Seller. However, in the case of Gainsford NO and Others v Tiffski Property Investments (Pty) Ltd and Others the Supreme Court of Appeal upheld the liquidator’s contentions that the sale be declared void as against creditors, even though a mortgage bond had already been registered over the property. 

To summarize, when entering into a contract for the sale of a business, its goodwill, or any goods or property forming part of it, it is worthwhile to consider whether Section 34 will find application or not and comply with the provisions -  lest a good business deal turns into a debtor chase. 
 
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