By Sifiso Msomi
The policy framework behind Section 34 of The Act
The policy of the law 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) 1AII SA 22 (E) where it was held:-
“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 say?
Section 34 requires 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”.
In essence, the notices have to be published if a trader as defined in Section 2 of the Insolvency Act:-
Transfers under a contract;
Any business belonging to him, or the goodwill of the business, or goods or property forming part of the business.
There are basically two exceptions allowed in terms of Section 34(1). Basically, no notices need be published if :-
The intended transfer takes place in the ordinary course of the particular business; or
Is for securing the payment of a debt.
Very interestingly in the case of Roos No. Vs Kevin and Rasia Property Investments the liquidators tried to argue that “the ordinary course of a property holding company’s business was buying and selling properties and that letting them was an accessory aspect. Therefore the decision to sell the property with leases was what a normal business person would have decided to do in similar circumstances”. The Court disagreed. It held that the business of a property holding company was to keep the property and generate income by letting it. Instead, this company had disposed of and transferred its whole undertaking as a going concern, and afterwards, it could not conduct any business. So the sale and transfer of the property did not occur in the ordinary course of the business of the company.
Examples of Section 34 clauses in the agreements
Example 1 – “The parties agree that the sale of the business will not be advertised in terms of section 34 of the Insolvency Act, 24 of 1936 (“the Insolvency 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“; or
Example 2 – “The parties agree that the sale of the business will be advertised in terms of Section 34 of the Insolvency Act. The seller/purchaser authorises the conveyancers to place the advertisement in terms of the Insolvency Act. Should any person (“the objecting creditor”) object 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 Insolvency Act, it will immediately notify the other party in writing. The purchaser will have the right, in addition 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 been 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 their rights under Section 34(3) of the Insolvency Act“.
The word “Trader” is defined in S2 of The Act in the following terms:
Trader means 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 an hotel keeper or boarding house 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; and any person shall be deemed to be a trader for the purpose of this Act (except for the purpose of ss (10) of s 21) unless it is proved that he is not a trader as hereinbefore defined: Provided that if 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, the provisions of this Act relating to traders only shall not apply to him in connection with his said A trade , business , industry or undertaking.
In the case of McCarthy vs Gore 2007 (6) SA366(SCA) it was held that the question then is not whether the company carried on any trade, business, industry or undertaking at all but whether it carries on such a trade falling into one of the specified categories. Once this question is answered, you then move on to having regard to the nature of the undertaking and determining whether such undertaking is part of the core business of the company or incidental thereto. Once it is established that these undertakings are incidental activities, then that is the end of the matter.
The definition sought to “identify those types of trade, business, industry or undertaking which, by reason of the fact that they engage in specified activities, attract the obligations of traders in terms of the Act”.
Therefore, “trader” means 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 an hotel keeper or boarding-house 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.
The case of Paterson vs Kelvin Park Properties CC (1998) 1AII SA 22 (E) is the authority for the proposition which says “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.
What are the consequences of the publication?
Upon the publication of a notice, each of the trader’s liquidated liabilities (claims based on an acknowledgement of debt, cheque, goods sold and delivered, etc) 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 that there is compliance with Section 34 from a bank’s point of view?
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.
Held – It is trite that no legal consequences flow from a void jural act. As Tiffski did not acquire ownership of the company’s immovable property on account of the voidness of the transfer, it must logically follow that Tiffski could not in turn grant any rights, let alone real rights, in the immovable property to the bank (See Gainford No and Others vs Tiffski Property Investments (Pty) Ltd and Others 2011 ZASCA 187).
The question that most people ask is – Is a sale of a rental enterprise a sale of a business thereby requiring compliance with Section 34?
An attempt to answer the above question arose in Roos and Another vs Kevin and Another 2002(6) SA409(T) where 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 thus 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 casu, the company had transferred its whole business as a going concern. It 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 not in the ordinary course of the business of the company as envisaged in s 34(1), and was thus 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. (At 419D – I and 421H – 422B/C).
However, on Appeal (2004(4) SA 103SCA) – the Appeals Court turning to Counsel on behalf of liquidators who argued that the definition of “trader” can be interpreted as meaning “any person who carries on any business in the letting, or hiring of immovable property”, the Court found that there were several problems with this submission. The Court held that the enterprise consisting of a letting and hiring of immovable property is simply not included in the definition of a trader. The above matter was remitted back to the Court to deal with whether or not the seller had been a trader.
Conclusion: What does the above mean?
Selling of a rental enterprise does not occur within the ordinary course of the business of the owner of the entity which does so.
The definition of a trader does not include the enterprise of a letting and hiring of immovable property. On this basis, there appears to be no need to advertise such a sale in terms of Section 34(1) of the Insolvency Act. However, a word of caution to clients would be for them to seek legal advice as each case must be looked at on its own merits.