Section 34 of the Insolvency Act 24 of 1936 provides that if a business owner transfers their business to someone else – the goodwill of the business or any goods or property forming part of the business except in the ordinary course of business or to secure a debt, the transfer should be advertised. If the notice is not published, the purchaser, despite payment, may not become the owner of the business.
“The purpose of this provision is to prevent sellers from disposing of businesses when they are in financial difficulties and spending the proceeds from that sale as they please to the detriment of creditors,” explains Katherine Timoney, an associate at Gillan & Veldhuizen Inc. specialising in corporate law and dispute resolution.
The Insolvency Act as a whole is designed to ensure that all creditors are treated fairly in the event that a business fails and owes its creditors money. Section 34, like much of the rest of the Act, is trying to ensure that business owners do not attempt to bypass the rules. These rules outline how creditors should be paid out by deciding to give the business’s assets or excess stock to a favoured creditor or even a friend or family member at a discount, at the expense of other creditors, she adds.
Consequences of non-publication
If the transfer is not advertised properly so that potential creditors of the company are made aware of the transfer, then the transfer will be void (as if it never happened) against their creditors for six months after the transfer. This includes the trustee of their estate or liquidator of their company, if they are sequestrated or the business is liquidated, within six months of the transfer.
Creditors and claims
Section 34 allows for a liquidator or creditor (if the company had gone insolvent within six months of the transfer) to recover the assets, property or business and allow the proper sale for the benefit of the general body of creditors. “This would obviously leave the recipient or purchaser of such assets in an unenviable position, as they would lose whatever it was that they purchased from the business owner and then only have a concurrent claim with the other creditors for the purchase price previously paid,” says Timoney.
As a practical example, a retail business in financial difficulty might sell a large portion of its stock to a creditor in the same industry or even a related company. Even if the purchase price was completely fair, if it was not done in the ordinary course of business and it was not properly advertised in terms of Section 34, this transfer could be set aside by a liquidator or another creditor, if the retail business were to be liquidated within six months of the transfer.
Compliance is key
“It is very important to remember, particularly if you are purchasing a business from someone else, or purchasing the stock of a failing company, that you ensure that the proper advertisements are published in the Government Gazette and two issues of both an Afrikaans and English newspaper, for between thirty and sixty days before the transfer. This will ensure you are protected from any repercussions of failure to comply with Section 34,” counsels Timoney.