When buying a business, the purchaser may approach a bank for finance. The purchaser as well as the financial institution that may finance the transaction need to determine whether compliance with Section 34 of the Insolvency Act is required.
Section 34 of the Insolvency Act provides that when a trader (as defined in Section 2 of the Act) sells or transfers its business, the goodwill thereof, or goods or property forming part of such business, such trader is required to publish a notice to that effect. The notice must be published in the Government Gazette and in two issues of an English and two issues of an Afrikaans newspaper circulating in the district in which the business is conducted. Such advertisement must be published not less than 30 days and not more than 60 days before the date of such transfer. The exception is where such sale or transfer is done in the ordinary course of business or for securing the payment of a debt.
The purpose of the publication is to provide creditors of the business with notice of the sale or transfer of the business, thus enabling them to claim any debts due from the seller before the transfer takes place.
In cases where Section 34 applies, the publishing of the notice is important for the protection of the purchaser as well as the financial institution that finances the purchase of the business.
The crux is that should the seller transfer his business without having complied with the aforementioned provisions, such transfer shall be void (invalid) as against his creditors for a period of 6 months after the transfer and shall be void (invalid) against the trustee of the seller’s estate if sequestrated within the 6 month period. This implies that the seller’s creditors can claim against the assets of the business even though these have been sold to the purchaser. The only remedy available to the purchaser will be to note a concurrent claim against the insolvent estate of the seller.
Financial institutions granting finance to a purchaser will call for proof of publication of the sale of the business within the correct time periods to ensure compliance with the Act prior to releasing any funds.
The question that begs an answer is whether a Section 34 publication is required where the seller of a business comprising immovable property sells that business to a purchaser when the property is used as a letting enterprise?
It was confirmed by the Supreme Court of Appeal (in the case of Kevin & Lasia Property Investment CC vs Roos) that the sale of a letting enterprise (such as immovable commercial property which is let to tenants) will not need to be advertised as is required with other businesses as the seller is not deemed to be a “trader” as defined in the Act. The proviso is that the seller should have only received income from the letting of the assets (immovable property) and not from any other source. The assets so sold is not deemed to be trading stock, but rather a capital investment.
Should the seller derive its income from additional income earning activities, it will most likely qualify as a trader and consequently fall within the ambit of the provisions which requires the sale of its business to be advertised as required by Section 34 of the Insolvency Act.
However, each case must be determined on its own merits and obtaining the necessary legal advice is prudent.