When Section 34 of the Insolvency Act May Apply
Selling a business is a significant transaction, particularly where the business has existing creditors, employees, contracts, stock or other assets.
One of the legal requirements that may need to be addressed before the transaction can be completed is section 34 of the Insolvency Act 24 of 1936.
Section 34 is designed to protect creditors where a trader transfers a business, or property forming part of the business, outside the ordinary course of that business.
Section 34 may apply where a business, its goodwill, or goods or property forming part of the business is being transferred outside the ordinary course of that business.
The important question is therefore not simply whether a business or asset is being sold, but whether the transaction is one that would ordinarily be undertaken in the normal operation of that particular business.
A sale of a business as a whole will generally require careful consideration under Section 34, as will an extraordinary disposal of significant business assets.
The purpose of Section 34 is to protect creditors.
Where a business is sold, the seller may receive the purchase price while the business's creditors remain unpaid. The statutory notice process gives creditors an opportunity to become aware of the intended transfer and to protect their interests.
The Supreme Court of Appeal has confirmed that the purpose of Section 34 is to prevent traders in financial difficulty from disposing of their business assets to a third party without proper notice to creditors. (SAFLII)
Where Section 34 applies, notice of the intended transfer must be published in the Government Gazette and in the newspapers prescribed by the Act.
The statutory period is important. The required publications must take place not less than 30 days and not more than 60 days before the date of transfer. (SAFLII)
This means that Section 34 compliance should be considered at the beginning of the transaction, rather than shortly before the intended transfer date.
A failure to allow sufficient time for the statutory advertising can delay the transaction.
Failure to comply with Section 34 can have serious consequences.
A transfer falling within the section, where the required notice has not been published, may be void as against the seller's creditors for a period of six months after the transfer and may also be void against the trustee of the seller's estate if the seller's estate is sequestrated during that period.
This is not merely a technical advertising requirement. The consequences can affect both the seller and purchaser.
In Gainsford NO and Others v Tiffski Property Investments (Pty) Ltd and Others, the Supreme Court of Appeal confirmed the significant consequences of non-compliance, including in circumstances where immovable property forming part of the business had been transferred and mortgage bonds had subsequently been registered. (SAFLII)
The Court emphasised that compliance with Section 34 cannot simply be replaced by informal knowledge on the part of creditors that a transaction is taking place. The statutory notice serves a specific legal purpose. (SAFLII)
A purchaser should not assume that responsibility for Section 34 compliance rests solely with the seller.
If you are purchasing a business, the transaction should be reviewed at the outset to establish:
Where immovable property forms part of the transaction, the Section 34 requirements should also be considered alongside the requirements applicable to the conveyancing and registration process.
The fact that a business is operated through a company or trust does not, by itself, answer whether Section 34 applies.
The nature of the entity's activities and, importantly, the nature of the transaction must be considered.
For example, a trust that merely holds an investment property is not automatically subject to Section 34 simply because it is disposing of that property. Conversely, where an entity conducts a business and disposes of the business or assets forming part of that business outside its ordinary operations, Section 34 may become relevant.
The same principle applies to corporate transactions. The particular structure and circumstances of the transaction should therefore be assessed before any assumption is made that Section 34 either does or does not apply.
Section 34 compliance is one of the matters that should be addressed before the agreement is implemented and well before the intended transfer date.
A transaction may involve several separate timelines, including:
Failure to identify the Section 34 requirements at the outset can result in unnecessary delays and potential exposure for the parties.
If you are selling or purchasing a business, our attorneys can assess the transaction and advise whether Section 34 of the Insolvency Act applies.
We can assist with:
If you are considering selling or purchasing a business, obtain legal advice before the transaction is finalised. Early consideration of Section 34 can prevent avoidable delays and protect both parties from unnecessary legal exposure.
Get in touch