High Court prescribes clarity for creditors in pharmacy sale matter

High Court prescribes clarity for creditors in pharmacy sale matter
20 Jan 2021

Judgment interprets the meaning of “void” in Subsection 24 (1) of the Insolvency Act

A recent High Court judgment tackled the rationale and purpose of the term “void” as it relates to the procedures in the transfer of a business, and how this meaning would affect the validity of the transaction and the rights of creditors to recover payments of their debts.

In the court case the Applicants (CJ Pharmaceuticals Enterprises (Pty) Ltd, Dis-Chem Distribution (Pty) Ltd and the Local Choice (Pty) Ltd) asked the Court to declare the transfer of a business from the First Respondent (Main Road Centurion 30201 CC t/a Albermarle Pharmacy) to the Second Respondent (Arrie Nel Pharmacy Group Pty) null and void. They contended that the respondents had not complied with the legal procedures of transfer in terms of the Insolvency Act and thus the Court would need to set the transfer of the business aside and order that the business to be transferred back to the First Respondent.

Specifically, the Applicants claimed that the transfer of the retail pharmacy business was void in the absolute sense because of the non-compliance with Subsection 34 (1) of the Insolvency Act, 24 of 1936 – meaning that the transfer of the business to Arrie Nel Pharmacy was null and void.

Subsection 34 (1) says that “a notice of the intended transfer should be published in the Gazette and two issues of an Afrikaans and two issues of an English newspaper circulating in the district in which the business is carried on within a period not less than thirty days and not more than 60 days before the date of transfer, the said transfer shall be void as against his creditors for a period of six months after such transfer”.

And, in addition to subsection 34(1), subsection 34 (3) of the Act says that “if any person who has any claim against the said trader in connection with the said business, has before such transfer, for the purpose of enforcing his claim, instituted proceeding against the said trader –

(a) In any court of law, and the person to whom the said business was transferred knew at the time of the transfer that those proceedings have been instituted; or
(b) In a division of the of the Supreme Court having jurisdiction in the district in which the said business carried on or in the magistrate court of that district, the transfer shall be void against him for the purpose of such enforcement.”

It was common cause between the parties that the First Respondent had not, as required, published a notice of its intended transfer of the business to the Second Respondent prior to the date of transfer of the business.

Due to this non-compliance of subsection 34(1), the Applicants argued, the wording of subsection 34 (3) of the act is relevant in interpreting the word “void” in the phrase “void against creditors” in subsection 34(1).

In handing down judgment, the Court explained that “void” in the absolute sense would entail that the transfer of the business is void against all persons and for all purposes, while “void” in the relative sense would mean that the transfer of the business was only void during the specified six months against persons specified in subsection 34 (1) and for their purposes (i.e. void as against creditors in this instance).

The Court added that the purpose of subsection 34 (1) is to afford protection to creditors from a trader who wishes to dispose of property without paying their debt or who might wish to benefit certain creditors above others. The Court also clarified that the word “void” advances that purpose irrespective of whether it has an absolute or a relative meaning. In the relative meaning, during the six month period, the traders or creditors may treat a relevant transfer as void for purposes of recovering payments of their debts.

Judgement was handed down in favour of the Respondents and the Court held that the fact that the First Respondent’s transfer of its business was, during the specified six month period, void against the First Respondent’s creditors in terms of subsection 34(1), that it does not mean that the transfer made by the First Respondent was/is invalid – meaning that during the six month period the First Respondents’ creditors could have treated the transfer as being void for the purpose of recovering their debts.

It is important to take note that the meaning of “void” in respect of Section 34(1) of the Insolvency Act 24 of 1936 entails that even when a creditor is not notified of the transfer of a business by the trader it does not render the transaction null and void (setting aside the transaction), but rather it provides for a period of six months after the transaction for the creditors to proceed against the trader for the purpose of enforcing their claim.

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(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.)

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