One of the requisites of selling a business is that the trader must publish a notice of the intended sale of the business in the Government Gazette and in two Afrikaans and English newspapers circulating in the district where the business is conducted. This is prescribed in Section 34 of the Insolvency Act 24 of 1936 (“the Act”).
The notice must be published between 30 days and 60 days before the date of transfer. The publication is required where the trader transfers under a contract of business or the goodwill of the business and/or goods or property forming part of the business. A trader broadly defines and includes any person who carries on any trade, business or undertaking in which property is sold, bought, exchanged or manufactured for purposes of sale or exchange, or in which building operations of any nature are conducted or an object whereof public entertainment or who carries on a business of hotel keeper or boarding house keeper or who acts as a broker or agent of any person in the sale or purchase of any property or the letting or hiring of immovable property.
There are two circumstances in which a notice is not required in terms of the Act. The first is if the sale was in the ordinary course of business and the second is if the sale was for purpose of securing payment of a debt.
The purpose of Section 34 of the Act is to protect the creditors of the business by notifying the creditors of the sale. Section 34(2) of the Act states that every liquidated claim against the business immediately becomes due and payable by virtue of the notice, even if the claim would have become due at a later stage. This means that all the creditors can claim payment before the transfer of the business. The Act therefore serves to prevent business owners in financial distress from selling their businesses as a way to avoid making payments to their creditors.
The consequence of not publishing a notice in terms of the Act is that the sale of the business is void against the creditors and liquidators of the business within 6 months of the transfer. This means that if the transfer of the business was not advertised as is required by section 34 of the Act a creditor is entitled to institute legal proceedings against the trader for the recovery of the monies owed to it before the transfer.
A failure to publish the notice of transfer does not affect the validity of the sale between the seller and purchaser. After the lapse of the 6 months the new owner may be liable for the debts of the business, which is why as a buyer of a business as a going concern it is important that you insist that the sale of the business be advertised. A clause may be inserted in the sale of business agreement requiring publication and/or the seller can indemnify the purchaser from any claims, costs, liabilities and/or damages arising out of a failure to publish the transfer.
Should a business be transferred without compliance with section 34 of the Act and there is no clause in the sale agreement indemnifying the purchaser against claims from creditors by the seller, the purchaser could be liable for all the debts of the business from the date of transfer.