Purchasers beware when acquiring a business without advertising the sale

When a natural or juristic person sells assets comprising a business or a substantial part of that person’s business, Section 34 of the Insolvency Act renders such sale void as against any creditor of that person if the sale is not advertised as prescribed in such section in the Government Gazette and 2 English and Afrikaans newspapers.

In practice, especially when transactions need to take place quickly, the parties often elect not to advertise the sale in terms of the Insolvency Act and instead accept warranties regarding possible claims against the Seller. The recent Supreme Court of Appeal case of Gainsford NO and 2 others v Tiffski Property Investments and 5 others [Gavin Cecil Gainsford NO v Tiffski Property Investments (Pty) Ltd (874/2010) [2011] ZASCA 187 (30 September 2011)] highlights the dangers of concluding a transaction in this manner.

Briefly in that case, the Seller sold a property with improvements, from which a ski resort was conducted. After the registration of transfer but within six months of the sale of the property, the Seller was liquidated and the liquidators then decided to set aside the sale as void for non-compliance with Section 34 of the Insolvency Act. At the time, a mortgage bond had already been registered over the property by an international bank, which tried in vain to oppose the liquidators’ application.

The High Court dismissed the application by the liquidators to declare the sale void but an appeal to the Supreme Court of Appeal upheld the liquidators’ contentions that:

  • the sale was not in the ordinary course of business;
  • the seller was indeed a trader as defined in the Insolvency Act;
  • the sale took place within six months of the Seller becoming insolvent;
  • the provisions of the Insolvency Act could not be qualified by any constitutional protection which the bank contended it enjoyed pursuant to the registration of the bond over the property.

Even the mortgage bonds registered by the bank over the property were held to be void, the bank having been involved in the negotiations pursuant to which the sale agreement was concluded.

The only remedy, which a purchaser would normally have in these circumstances, is to pay the creditor and then, via the liquidators, to try and recover from the former directors of the Seller who have misappropriated funds. Where the Seller is insolvent, however, this recovery will be a long process. The liquidator, once appointed, would have to investigate the circumstances of the insolvency and then institute proceedings against former directors. Should the company not have enough funds to finance the litigation and necessary enquiries, the purchaser and any other interested creditor of the insolvent would have to make funds available before these proceedings can even be instituted.

The case of Tiffski Property Investment should therefore be a lesson to those who think that compliance with Section 34 of the Insolvency Act is not worth the effort.

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