Do the requirements of Section 34 of the Insolvency Act have to be complied with in a transfer during business rescue proceedings?
20 May 2013
We all know that if a trader intends transferring any business that belongs to him, its goodwill or the goods or property that form part of that business, a fundamental step in the process is to publish a notice of this intended transfer in the Government Gazette and in two Afrikaans and two English newspapers in the district where that business is carried on.
Although this is a step that many take in the process, it is just that to them, a step. They have no inclination of what the reasons for taking the step are or even what the implications are if the step is not taken.
The ramifications of not publishing this notice, or simply not publishing it within the strict time periods as set out in section 34 of the Insolvency Act 24 of 1936 (the Act) are, simply put, that the transfer that took place will be void against the creditors of the entity and against the liquidator if the business is liquidated within six months following the transfer.
The purpose behind section 34 of the Act is to protect the entity’s creditors. Through publication of the notice, the creditors become aware of the impending transfer and are then in a position to utilise the protection afforded to them in section 34(2) which states that as soon as the notice is published, every liquidated liability of the entity (even if it were to only become due and payable at a later date) becomes immediately due, owing and payable if the creditor demands payment of that liability.
The wording in section 34(1) implies that the protection afforded by the section is applicable to both creditors and the liquidator if the entity should be liquidated. What is important to note here is that the “protection” provided through section 34(1) stating that the transfer would be void “against the trustee of the estate” is in actual fact there to protect the creditors of the estate once again. This is because the liquidator would then be in a position to determine whether he thinks it is in the best interests of the estate (in other words, could create a larger pot of money to be distributed between the creditors) to see the transfer as void or not.
Thus the sole purpose of section 34 would seem to be the protection of creditors in a sale of business.
The question now arises, if a company which is a trader (i.e. sells goods) is placed into business rescue in terms of Chapter 6 of the Companies Act 71 of 2008 (the Companies Act) and an approved business rescue plan provides for the sale of the business concerned, its goodwill or the goods and/or assets that form part of that business, is it then a requirement for section 34 of the Insolvency Act to be complied with and if so, what would the consequences be if it were not complied with?
In terms of section 152 of the Companies Act, the creditors and, if applicable, the shareholders are called to a meeting in terms of section 151 of the Companies Act by the business rescue practitioner for consideration of the business rescue plan that was published in order to vote for the acceptance or rejection of that plan. The plan will be preliminarily accepted if it is supported by the holders of more than 75% of the creditors voting interests that voted and if those votes include at least 50% of the independent creditors voting interests that were voted. Thus it is possible that certain creditors may vote against the plan but the plan will still be accepted and become binding on them because the required majority was met.
When considering whether it is a requirement for section 34 of the Act to be applied to a transfer of business that is included in an approved business rescue plan, it is important to note that there is no rule that has come to the fore in this regard and thus at this stage the question remains an issue for interpretation.
As stated earlier the purpose of section 34 of the Act is to protect creditors and they are protected through this mechanism by the fact that they are made aware of an impending sale of business and thus are able to act in accordance with the benefits afforded to them by section 34(2) prior to the sale occurring. The main benefit for creditors is that they are made aware of the sale and thus have the opportunity to demand payment of the full outstanding debt owed to them, in some cases, even before it would normally have become due and payable.
Thus if the main purpose of section 34 is to give the creditors this “heads-up”, is this purpose not already fulfilled by the fact that they are the very persons whom are called upon to vote on a business rescue plan which documents a sale of business as a step that needs to occur in order to ensure that the prospects of rescuing the entity are increased.
If this is the case, then there is no need to comply with section 34 of the Act as the protection which it affords to creditors would have already been afforded to them through their knowledge of the contents of the business rescue plan on which they are called to vote. If they approve the plan with the knowledge that the business will be sold, it would be seemingly pointless to comply with section 34.
In addition to the general protection that section 34 of the Act is to provide to creditors, the more specific protection given by section 34(2) wherein creditors may demand payment for the full debt owing even if payment is not yet due as soon as the notice in terms of section 34(1) is published, can also be rendered purposeless by the fact that even if section 34 was abided by and the notice was published, the entity is in business rescue. Section 133 of the Companies Act creates a general moratorium over any enforcement action, including a demand for payment of liability, so the creditors would not be in a position to utilise the benefit given to them by section 34 in any event.
On the other hand, if the business rescue proceedings fail to bring the entity into a state wherein it can continue trading on a solvent basis, in other words it cannot rescue the entity, and the business rescue practitioner in terms of section 141(2)(a)(ii) brings an application to court to discontinue business rescue proceedings and place the entity into liquidation, then a second question arises, namely: if the transfer of business took place in terms of the business rescue plan within six months prior to the date of liquidation, can the liquidator exercise a discretion to decide whether the transfer is void?
I have mentioned above that the liquidator is given a discretion to decide whether or not a transfer which has occurred within six months prior to the date of liquidation, wherein there was no notice published in accordance with section 34(1), is void or not. Section 34(1) gives the liquidator this election which he must use to ensure that the best interests of the creditors are upheld.
The problem which arises is if the notice was not published in accordance with the requirements of section 34(1), the business rescue fails and the entity is placed in liquidation, the liquidator now has the election to state that the transfer was void.
While there is no definite answer to this problem posed, the best approach until there is clarity provided by case law or the like, is firstly to include a clause in the business rescue plan prior to its consideration that states that the creditors have considered the plan, are aware of the proposed sale of business, are satisfied that it is in their as well as the entity’s best interests for the sale of business to go ahead and they thus consent to waive the protection granted to them by section 34 of the Act and agree that there is no reason to publish a notice alerting creditors to the intention to sell the business as they are already aware of this intention.
Secondly, should there be no pressing circumstances that require that the sale of business happen immediately, the business rescue practitioner should consider together with the creditors and other affected persons whether it is not worth delaying the sale of business so that the requirements of section 34 of the Act can be complied with, ie. the transfer can be advertised, and thereafter the transfer can occur. If this is possible, it is advisable to follow this route as then there can be no issues raised at a later stage by the liquidator should the entity have to be liquidated in terms of section 141(2)(a)(ii) of the Companies Act as described above.
If after consideration of the time delays the relevant persons are of the view that it would be more prejudicial to the business rescue proceedings if the sale were delayed than it would to the liquidation proceedings if the sale had to be set aside, then it is possible to ask the creditors to waive the requirements of section 34 as set out above and not to comply with the requirements of section 34, but this will be done at the risk that should the entity be liquidated in terms of section 141(2)(a)(ii) of the Companies Act, the liquidator will be in a position to utilise the discretion given to him by section 34(1) of the Act in the interest of the estate and the concursus creditorum to void the sale.
If the route of safety, thoroughness and clarity is to be followed, it is advisable to comply with the requirements of section 34 of the Act in any sale of business, whether it be part of an accepted business rescue plan or not, so as to avoid the problem as raised above and the resultant uncertainty.(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)