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Avoid the “chase” following the purchase of a business

When you intend to buy a business from a seller as a going concern, it is important to do your homework in respect of the business you intend to acquire to make sure that no unpleasant surprises await you after the fact. Notwithstanding the obvious research about the good name, the turnover, the customer base, and the growing potential of the business, it is also of paramount importance to know all the details about the liabilities of the business. This includes, inter alia, the creditors and, more importantly, the creditors who have instituted legal proceedings or judgment creditors.

At the risk of stating the obvious, a creditor is a person or entity to whom a sum of money is owed for, inter alia, goods delivered, monies lent, or services rendered.  If a business or any part thereof is transferred in terms of a contract (i.e. a sale of business), the seller has an obligation to publish the sale of the business in the Government Gazette and two issues of Afrikaans and two issues of English newspapers circulating in the district in which that business is carried on, in terms of the Insolvency Act 24 of 1936 (“the Act”). This should be done not more than 60 days and not less than 30 days prior to the date of transfer. The rationale is to notify all creditors of the transfer of business to prevent business owners from avoiding their liabilities to the prejudice of its creditors. The seller is defined in the Act as a “trader” – a definition that should be carefully considered in cases like this.

However, there are instances where the parties agree to not adhere to the obligations of section 34 of the Act. This comes with great risk as section 34(1) provides that if a seller of a business does not publish the intended transfer, said transfer is void against the creditors for a period of six months. This means that a creditor can institute legal proceedings against the seller of the business within six months of the transfer and invoke section 34(3) of the Act, which will be considered shortly.

The flipside of that coin is that if a seller indeed published in the Government Gazette and the four newspapers, as per the Act, all liquidated liabilities in connection with the business that would have become due on a future date, will fall due forthwith upon demand of the creditors. Special provision is made regarding amounts due subject to interest. The transfer will take place as intended and creditors will have to pursue the seller regarding their claim.

Section 34(3) is important when regarding legal proceedings against a seller of a business for the following reasons:

If a creditor instituted legal proceedings against a seller of a business–

  1. before the transfer of the business;
  2. of which the claim is in connection of the said business;

the transfer will be void as against the creditor for the purpose of enforcing his/her claim if–

  1. the purchaser knew at the time of the transfer that those proceedings were instituted; or
  2. if proceedings were instituted in a Division of a Supreme Court or Magistrate’s Court having jurisdiction in the district in which said business is carried on.

So, what does “void as against the creditor” mean? It means that for the purposes of the creditor’s claim, the transfer of the business never took place. Consequently, the purchaser could be in an extremely vulnerable position as the creditor can enforce a judgment against the assets of the purchaser as these assets still “belong” to the seller of the business for purposes of that specific creditor’s claim.

The purchaser can claim that money back from the seller, provided that the seller is still in a financial position to satisfy the claim. If the seller was sequestrated after the transfer of business took place, the purchaser will suffer the loss.

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. Errors and omissions excepted (E&OE)

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