Introduction
Section 34 of the Insolvency Act1 (hereinafter referred to as “the Act)” can be defined as a safeguard for the interests of South African creditors. Section 34 mandates that, before a business or its assets are sold, public notice must be given in the form of Gazette and newspaper publications, for creditors to be afforded the opportunity to assert their claims against the Seller before transfer occurs.2
Notwithstanding the above, parties to an Agreement of Sale of Business or Assets, more often than not, agree to not comply with section 34(1) of the Act, due to several factors, such as ensuring that an Agreement is concluded due to a favourable purchase price for the Purchaser; or the Seller’s desperation to sell a business, which generally coincide.3
In agreeing to not comply with Section 34(1), the parties, especially the Purchaser, exposes itself to considerable risks, as further explained below.
Section 34 of the Act
Section 34(1) of the Act states:
“If a trader has alienated any business belonging to him or the goodwill or any property belonging to such a business (except goods sold in the ordinary course of that business), and his estate is sequestrated within six months of such alienation, the alienation shall be void as against the trustee of his estate, unless, not less than ten days and not more than thirty days before such alienation, he published a notice of such intended alienation in two issues of the Gazette and in two issues of a newspaper circulating in the district in which that business was carried on.”
Risk of Non-Compliance
If the parties agree not to comply with Section 34(1) of the Act, the transfer of a business, or the goodwill or any property belonging to said business, from a Seller to a Purchaser, will be void against the creditors of the Seller for a period of six months after the date of transfer.4
If the Seller is liquidated during the six-month period, despite the fact that the Purchaser duly performed in terms of the Agreement and paid the purchase price to the Seller, ownership of the business and its assets will, from date of liquidation, vest in the liquidator.5 The risk of non-compliance is however not solely subject to the liquidation of the Seller. During the six month-period, an individual creditor may institute legal proceedings and obtain Judgment against the Seller. The creditor can subsequently proceed with executions steps against the business and its assets, notwithstanding the fact that said business and assets are in the possession of the purchaser.6
Conclusion
Although the Purchaser will normally insist that the Seller agree that it indemnifies and hold the Purchaser harmless against all claims, costs, liabilities, losses and damages which the Purchaser may incur or suffer as a result of not complying with Section 34, if the Seller is liquidated in the six-month period, the liquidator will take possession of the business and/or assets from the Purchaser, and the Purchaser will only be left with a concurrent claim against the estate of the insolvent.7
It is thus essential for a Purchaser to understand and take into consideration the risks of non-compliance of Section 34, before agreeing thereto in a Sale of Business or Assets Agreement.
Article by Clifton Smit (BCom LLB), Candidate Legal Practitioner at Malan Lourens Viljoen Inc.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.
1 Section 34 of the Insolvency Act 24 of 1936.
2 Levenstein and Mackechnie 2024 A Shift in Creditor Protections The application of Section 34 of the
Insolvency Act during Business Rescue Proceedings
3 Rhoodie 2019 Section 34 of the Insolvency Act: A ticking time bomb https://www.cliffedekkerhofmeyr.com/news/publications/2019/Dispute/dispute-resolution-27-march- section-34-of the-insolvency-act-a-ticking-time-bomb.html (hereinafter referrenced as Rhoodie 2019).
4 Smith 2023 The extraordinary in the ordinary De Jure (Pretoria) vol.56 n.1.
5 Rhoodie 2019.
6 Rhoodie 2019.
7 Rhoodie 2019.