Buyers must beware of transfer loopholes

South African law aims to protect the creditors of traders or sellers in the event of a sequestration or liquidation by requiring that the transfer of any business be advertised in the Gazette and relevant newspapers.

However, prospective buyers of business assets or fixed property, which form part of a business should take note that any irregularities in this process could lead to the transfer being declared void.

In terms of Section 34 of the Insolvency Act, No 24 of 1936, if a trader has not published a notice of intended transfer of a business in the Gazette and two issues of an Afrikaans and two issues of an English newspaper circulating in the district in which that business is carried on, within a period of not less than thirty days and not more than sixty days before the date of such transfer, that transfer shall be void against the trader’s creditors for a period of six months after such transfer, and shall be void against a trustee of his estate if a sequestration occurs in this same period.

Roelof Grové, a partner at legal firm Adams & Adams, says this legislation was enacted to ensure that outstanding debts be paid prior to the disposition of the business, or that arrangements be made for payment thereof from the proceeds of the sale.

“The drawback is that purchasers need to be careful when concluding a deed of sale for a fixed property which is being bought as part of acquiring a business. Such purchasers run the risk that if the notices have not been published, the transaction will be void for six months after the property is transferred into their name, without the necessity of a court order being obtained.

“Banks, who finance such deals, will usually ensure that such notices be published because they have a vested interest. Cash buyers will need to take on the responsibility of insisting that this is done. A further point to consider is that even if the notices are published, there could still be problems with the date of transfer,” he adds.

Purchasers should do everything in their power to ensure that the date of effective transfer falls within the stipulated two-month period. “In most cases the date of registration of the fixed property at the deeds office is taken to be the effective date – the date upon which the buyer becomes operational and takes control of the business.

“Delays in the deeds registration process can occur, which could mean that the registration date falls outside of the maximum sixty-day period. This difficulty in accurately predicting or setting the registration date could lead to a defective or void transfer,” says Grové.

Grové’s advice to buyers is to monitor the transfer process as closely as possible.

“The registration process can be influenced by factors such as the period it takes for finances to be approved, the time taken to obtain clearance certificates from the local authority and the transfer duty certificate from SARS. To prevent buyers from being unduly prejudiced if the transaction is not registered within the required timeframe, they should insist upon being informed of the status of the transaction throughout the conveyancing process.

“One way of removing the element of uncertainty is to agree upon a specific date for the transfer of the business. Purchasers should not rely on the seller’s attorney or accountant, but should rather obtain independent legal advice before entering into an agreement of sale for such a business.”

If the transfer is declared void, the purchaser will have no choice but to return the asset. “The purchaser will not be entitled to immediate repayment of the purchase price once it has been attached, but will merely have a concurrent claim against the seller’s estate,” warns Grové.

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