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The sale of a business that has not been advertised in the Government Gazette and a local newspaper

Individual business people and trading companies who are facing bankruptcy often adopt desperate measures to try to salvage something for themselves before creditors descend and strip the business bare of its money and assets. For example, a quick cash sale of the near-insolvent's business or its assets, or a sale of the business or its goodwill or assets at a discount to a friend, family member or associated company.

Where the near-insolvent has sold a business or asset (as opposed to the company that owns the business or asset), the purchaser does not become liable for the past debts of the business – those debts remain the liability of the seller.

To protect creditors in such situations from finding that they have a claim against a person or company with no assets, the law requires advance notice to be given of the impending sale of businesses by way of an advertisement in the Government Gazette and in a local newspaper, so that creditors who would be prejudiced by the sale have the opportunity to bring legal proceedings to try to prevent the sale from going ahead.

Section 34(1) of the Insolvency Act, 1936, provides that –

"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 30 days and not more than 60 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."

In other words, if the sale of a business or its assets was not advertised in the prescribed manner, creditors would be able, for a period of six months after the sale, to compel the purchaser to return the subject matter of the sale and to execute any judgment obtained against the seller of the business against the assets of that business.

THE SECTION ONLY APPLIES TO A "TRADER"

It is clear that this section applies only to a “trader” and to a sale otherwise than in the ordinary course of business. Where a person other than a “trader” sells his business or its assets, his creditors do not enjoy the protection afforded by the section.

The Insolvency Act defines a "trader" as –

"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".

Is any businessperson or company who or which conducts a business "in which property is sold", no matter how seldom or sporadically sales occur, a "trader"? If so, then virtually every individual business person or company will fall within the scope of section 34(1) of the Insolvency Act.

The recent decision of the Supreme Court of Appeal in McCarthy v Gore 2007 (6) SA 366 SCA has now provided an authoritative answer to this question.

A TRANSPORT HAULIER SOLD A LARGE PART OF ITS FLEET OF TRUCKS

In this case, a transport company was in financial difficulty and sold 28 trucks in its fleet to McCarthy Ltd for R2 million without advertising the sale in the prescribed manner. The purchase price was paid to one of the seller's associated companies and accordingly was not available to the company’s creditors.

The transport company then went into liquidation and the liquidator invoked section 34(1) of the Insolvency Act in an attempt to void the sale on the basis that (i) the transport company fell within the definition of a "trader", (ii) the sale was not in the ordinary course of the transport company's business and (iii) the disposal of the trucks had not been advertised in advance.

If the sale was void, then the liquidator would be able to compel McCarthy to return the trucks, sell them and distribute the proceeds amongst the creditors.

In the Cape High Court, Davis J held that the road haulage company was indeed a "trader" and hence that section 34(1) was applicable and the sale of the trucks was void.

However, the Supreme Court of Appeal set aside that judgment and held that the transport company did not fall within the definition of a trader because it could not be said that its "core business" was that of selling property. Accordingly, it was not required to comply with section 34(1) and the liquidator's claim was dismissed with costs.

In order to enjoy the remedy afforded by section 34(1), a creditor/liquidator must be able to show that:

If the seller is not a trader or if the sale of the asset falls within the ordinary course of the trader's business, failure to advertise as prescribed by section 34(1) does not assist the creditors and or liquidator of the seller. However, they may have remedies under other provisions of the Insolvency Act which will enable them to set aside the sale.

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