The Policy Framework Behind Section 34 of the Insolvency Act 2 Of 1936 ("the Act")
The policy of this section of the Act is to afford protection to a trader's creditors against his dispossessing himself of his property without paying his debt before the disposition or from the proceeds thereof. This framework policy is well set out in the case of Paterson vs Kelvin Park Properties CC 1998:
"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".
What Does Section 34 of the Act Say?
Section 34 requires that:
“[The trader who] 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 or a debt) to publish notice of such transfer in the gazette and the press within a period not less than 30 days and not more than 60 days before the date of such transfer".
Examples of Section 34 clauses in agreements include:
The parties agree that the sale of the business will not be advertised in terms of section 34 of the Act and the seller indemnifies the purchaser and agrees to hold the purchaser harmless against all claims, costs, liabilities, losses and damages which the purchaser may incur or suffer as a result of the failure to advertise the sale.
The parties agree that the sale of the business will be advertised in terms of Section 34 of the Act. The seller/purchaser authorises the conveyancers to place the advertisement in terms of the Act. Should any person object (“the objecting creditor”) to the sale of the business or institute proceedings against the seller on placement of the advertisement or claim payment of monies due, then the purchaser will have the right to pay all or any amounts claimed by any objecting creditor and to set off those amounts against the purchase price or the purchaser may, at its option, demand that the seller pays the amount so claimed and furnishes the purchaser with proof of such payment. If either of the parties becomes aware of any proceedings instituted by any person who purports to have any claim against the seller as at the effective date ("the unsatisfied creditor") which, if unsatisfied, may result in the sale of the business in terms of this agreement being void as against such unsatisfied creditor in terms of Section 34(3) of the Act, it will immediately notify the other party in writing. The purchaser will have the right, in adition to any other rights which it may have in law, to cancel this agreement or to pay all or any of the amounts claimed by the unsatisfied creditor and to set off those amounts against the purchase price if on the date that the conveyancers lodge the necessary documents with the Registrar of Deeds for the registration of transfer of the property there remain any unsatisfied creditors:
- Whose claims have not beeen discharged by the seller; or
- Who have not been given a written unconditional undertaking by or on behalf of the seller to discharge their claim or claims in a form acceptable to the unsatisfied creditors;or
- Who have not in writing waived tehir rights under Section 34(3) of the Insolvency Act.
The Word "Trader" is Defined in Section 2 of the Act A as:
Trader means any person who carries on any trade, business, industry or undertaking in which:
- Property is sold;
- Property is bought;
- Property is exchanged;
- Property is manufactured for purpose of sale or exchange;
- Building operations of whatever nature are performed;
- The property is the object of public entertainment;
- The property is used to carry on the business of a hotel keeper or boarding house keeper;
- They act 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.
*This provision does not apply to any person carries on the trade, business, industry or undertaking of selling property, which he produced (either personally or through any servant) by means of farming operations.
Mere absence of trading activity does not mean the entity is not a trader
Paterson vs Kelvin Park Properties CC 1998 is the authority for this proposition and the court stated:
“…That the trading should not be considered as having been completed until all trade debts have been paid".
In this case, the Defendant contended that the insolvent was not a "trader" as envisaged by section 34 at the time of the sales and that the section therefore did not apply and publication of a notice in terms thereof was not necessary. According to the Defendant, the insolvent had ceased to carry on business as a butcher after a fire had caused extensive damage to his business premises in mid- March 1994 and was therefore not a "trader" on 26 April 1994 when the sales were conducted. The court disagreed with this argument, finding that the mere absence of trading activity does not mean the entity is not a trader and that, in particular, a trader who has debts outstanding, after the cessation of trading, remains a trader as defined.
What are the Consequences of the Publication?
Upon the publication of a notice, each of the trader's liquidated liabilities in connection with the business becomes due forthwith even if otherwise is yet to become due, provided only that the creditor demands payment.
What are the Consequences of Not Publishing?
Section 34(1) provides that:
"…The transfer shall be void as against the trader's creditors for a period of 6 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".
A transfer of goods or property cannot be attacked under Section 34(1) unless they form part of the trader's business. Whether particular goods or property formed such a part must be determined in the light of the particular facts of each case.
Why is it So Important for Banks That Section 34 Be Complied With?
If a bank is financing the purchase of a business transaction, the risk is too high if there is non-compliance with Section 34 (in circumstances where there should be compliance with Section 34). When transactions need to take place quickly, the parties often elect not to advertise the sale in terms of the Act and instead accept warranties regarding possible claims against the Seller. In 2011, the Supreme Court of Appeals, in Gainsford NO and 2 others v Tiffski Property Investments and 5 others 2011 (“the Tiffski case”), highlighted the dangers of concluding a transaction in this manner.
In this case, the Seller sold a property, including improvements, from which a ski resort was run. After the registration of transfer (but within six months of the sale of the property), the Seller was liquidated and the liquidators then decided to set aside the sale as void for non-compliance with Section 34. At this time, a mortgage bond had already been registered over the property and the international bank was trying to oppose the liquidators’ application. The Supreme Court of Appeal upheld the liquidators’ contentions that the sale be declared void because:
- The sale was not in the ordinary course of business;
- The seller was indeed a trader as defined in the Insolvency Act;
- The sale took place within six months of the Seller becoming insolvent; and
- The provisions of the Insolvency Act could not be qualified by any constitutional protection which the bank contended it enjoyed pursuant to the registration of the bond over the property.
The mortgage bonds registered by the bank were held to be void (the bank having been involved in the negotiations pursuant to which the sale agreement was concluded).
Is a Sale of a Rental Enterprise a “Sale of a Business” and Thereby Requires Compliance With Section 34?
In the Tiffski case, it was held that:
"The disposal by the company of all its assets (being the immovable property and the movable assets employed by the company in conducting its ski resort business) can by no stretch of imagination be said to be in the ordinary course of business".
In a different case, that of Roos and Another v Kevin and Another 2002, a property holding company earning income from leases of shops and flats on immovable property, its only asset of substance, sold its entire business (including the immovable property) as a going concern and transfer was effected within five months of the company being provisionally liquidated. No notice of intended transfer as required by s 34(1) of the Act was published. The company had two creditors, one of which was a bank holding three mortgage bonds over the property. The purchase was subject to the purchaser obtaining a bond in the same amount as the company`s indebtedness to the bank. The purchase price, which was approximately the equivalent to the company`s debt to the bank, was used to liquidate that debt. The property was registered in the name of the purchaser, and at the same time the bond was registered over the property in favour of the bank. The practical effect of the transactions was such that the purchaser had taken over the company`s bonds. After the transfer of the property the company was an empty shell and not able to pay its other creditor. No notice of the sale was given in terms of s 34(10) of the Act.
In an application by the liquidators of the insolvent company for inter alia an order declaring the transfer of the property void, the Court held that the ordinary business of a property holding company was to hold property and to generate income through the letting of that property. In this case, the company had transferred its whole business as a going concern and was not able to conduct any business thereafter. The transfer of the entire business was an extraordinary transaction which was clearly only in favour of the purchaser and the bank, and prejudicial to the other creditor. The transfer was thus found not to be in the ordinary course of the business of the company as envisaged in s 34(1), and was thus found by the court to be void.
The effect of the declaration of invalidity was that ownership did not pass on to the purchaser, registration of the transfer of the property in the name of the purchaser was void, and as the purchaser could not bind the property, the registration of the bond over the property was also void. On appeal, the matter was remitted back to a Court to deal with whether or not the seller had been a trader. The Appeal Court did not finalize the issue- it remitted the matter back to the lower court and as a result of this there is uncertainty as to whether or not a sale of rental enterprise must be advertised. However, it is usually best when dealing with these matters, particularly if you are acting for a bank, to take a cautionary view and advertise.