A REMINDER : BEWARE SECTION 34 OF THE INSOLVENCY ACT

When a business or any assets of a business are sold, it is important that the provisions of Section 34 of the Insolvency Act, No. 24 of 1936 (“the Act”) are considered. The purpose of Section 34 is to protect the creditors of a business by notifying creditors of the sale and allowing the creditors to object against the sale if required. Section 34 is designed to address attempts by sellers to avoid paying their debts by disposing of their business or its assets to a third party.

Section 34(1) of the Insolvency Act reads as follows: “If a trader 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 of a debt), and such trader has not published a notice of such intended transfer in the Gazette, and in two issues of an Afrikaans and two issues of an English newspaper circulating in the district in which that business is carried on, within a period not less than thirty days and not more than sixty days before the date of such transfer, the said transfer shall be void as against his creditors for a period of six 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.”

From the provision above, it is important to note that Section 34 will only apply if the seller of the business or its assets falls within the definition of the word “trader” as set out in Section 2 of the Act. Although the definition of the word “trader” is convoluted, its essence can be summarised as follows:

A person will be regarded as a “trader” if they carry 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
• Where they carry on the business of a hotel keeper or boarding-house keeper, or
• If 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.

However, a person will not be regarded as a “trader” if they carry on the trade, business, industry or undertaking of selling property which they produced (either personally or through any servant) by means of farming operations.

Section 34 is however silent on whether a person will be regarded as a “trader” if they carry on a trade, business, industry or undertaking in which immovable property is let or hired. This issue was addressed in the case of Kevin and Lasia Property Investment CC & another v Roos NO & others 2004 (4) SA 103 (SCA) where the court confirmed that a business specialising in the letting or hiring of immovable property in the ordinary course of business is not included in the definition of the word “trader”.

When selling your business or any of its assets, which is not in the ordinary course of the business, it is important that the provisions of Section 34 are considered in depth, in particular whether you fall within the definition of the word “trader”, as this will determine whether the sale falls within the ambit and scope of Section 34 of the Act. Material and adverse consequences can ensue for both sellers and buyers should proper attention not be given to this aspect of a commercial transaction involving the transfer by a trader of its business or any of the assets of the business.

It is therefore advisable, when selling your business or any of its assets that you obtain legal advice regarding Section 34 of the Act.