Article by listed Attorney: Mzo Tshaka
Section 34(1) of the Insolvency Act No. 24 of 1936 (the Act) regulates a situation where a business owner (referred to as a “trader” in the Act) disposes of that business, its goodwill or any goods or property forming part thereof (except in the ordinary course of that business or for securing the payment of a debt).
Section 34(1) of the Act provides that in the absence of the specified publication of a “trader’s” intention to transfer any business or any goods, or property, forming part of the business in terms of a contract (except in the ordinary course of that business or for securing the payment of a debt) such transfer shall be void as against his creditors for a period of six months after the transfer, and against the trustee of his estate, if his estate is sequestrated at any time within such period. In short, a failure to publish notices in terms of Section 34(1) results in the transfer of the business being void, for a period of six months after the transfer, against all of the creditors of the trader, to ensure compliance with the requirement of notification.
Section 34(2) of the Act provides that as soon as such notice is given, every liquidated liability of the trader “in connection with the said business” which would become due at some future date, shall fall due forthwith, if the creditor concerned demands payment of this liability. In other words, this sub-section provides for an accelerated due date for payment of any claims on demand by creditors after publication because the business (or goods belonging to the business) is alienated.
Section 34(3) of the Act provides that the transfer shall be void as against any creditor who has a claim against the trader “in connection with the said business” and has before transfer instituted proceedings for the purpose of enforcing his claim, in a division of the high court having jurisdiction in the district in which the business is carried on, or in the magistrate’s court of that district. If proceedings are instituted in any other court, it is necessary that the persons to whom the business was transferred knew at the time of transfer that the proceedings had been instituted.
The Act, in Section 2, defines a “trader” as "any person who carries on any trade, business, industry or undertaking in which property is sold, or is 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 who acts as a broker or agent of any person in the sale or purchase of any property or in the letting or hiring of immovable property...".
In the case of Axal Properties 2 CC v Kotze, delivered by the Supreme Court of Appeal on 16 September 2013, the Court stated that the object of Section 34 of the Act is to protect the rights of creditors by ensuring that traders are prevented from disposing of their businesses, or assets of their businesses, to their creditors’ prejudice.
The facts of the case were briefly that the respondent, Mr Kotze, was a judgment creditor of Mega Super Cement CC (Mega). Mega had disposed of an immovable property to the applicant, Axal Properties 2 CC (Axal) and moveable property to the second appellant, KB Stricker Holdings CC (Stricker Holdings). Mr Kotze’s claim fell within the meaning of the phrase “in connection with” the business of Mega, as contained in Section 34(3) of the Act at the time it disposed of the said assets.
The Court stated that Axal and Stricker Holdings bore the onus of proving that Mega was not
a “trader” at the relevant time (which the Court found was not discharged because the Court further stated that no distinction can be drawn between a situation where a “trader” voluntarily ceases trading because of financial difficulties and where the “trader” is compelled to do so by the financial collapse of the business – which was the issue raised by Axal and Stricker Holdings) but Mr Kotze bore the onus of proving that his claim is one “in connection with” the business of Mega. In deciding whether Kotze had discharged his onus, the Court had to decide on the meaning of the words “in connection with the said business” as those words appear in Section 34(3). The Court stated that in order to decide whether the creditor’s claim arose “in connection with the business” of the seller the nature of that business has to be determined.
On the facts of this particular case the Court found that Mr Kotze failed to discharge the onus placed on him because, on the evidence, his claim was a brokerage fee for the sale by Stapelberg of his member’s interest in Mega to Shepherd. This was not a claim that arose in connection with the primary or core business of Mega.
When a business is sold, it is important to, for both the seller and the purchaser, that the sale is advertised as prescribed in the Act if such sale falls within the category contemplated in section 34. It is however worth noting from the judgment that a creditor will not be able to invoke the provisions of Section 34(3) if that creditor cannot prove that its claim is “in connection with the business” of the seller.
It is imperative that legal advice be sought before a sale agreement is concluded to avoid the potential risks that may come as a result of non-compliance with the provisions of the Act.
Mzo Tshaka, Schoeman Tshaka Attorneys (Cape Town)
Tel: +27 (0) 21 425 5604
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Twitter: @ mzotshaka- Mzo Tshaka