2 February 2021 by , and Dispute Resolution Alert

Absolute or relative: The meaning of void in section 34 (1) of the Insolvency Act

The recent case of CJ Pharmaceuticals Enterprises (Pty) Ltd and Others v Main Road Centurion 30201 CC t/a Albermarle Pharmacy and Another [2020] JOL 49266, has provided some useful clarification on the meaning of the word “void” in the context of section 34(1) of the Insolvency Act 24 of 1956 (Act).

The case concerned whether a transfer of a business by a company in financial distress is void in terms of section 34(1) of the Act. Section 34(1) requires that notice of the intended transfer be published in the Gazette and two issues of an English and Afrikaans newspaper in the district in which that business is carried on, between 60 and 30 days of date of such transfer. Failing this, the transaction is “void against his [the company’s] creditors” for a period of six months after such transfer, and shall be void against the trustee of his estate, if his estate is sequestrated during that six-month period.

The First Respondent, Main Road Centurion 30201 CC t/a Albermarle Pharmacy (Main Road), transferred its business to the Second Respondent, Arrie Nel Pharmacy Group (Pty) Ltd (Arrie Nel) on 30 November 2019. Main Road did not publish a notice as required by section 34(1) of the Act prior to such transfer, although it had offered to sell the business to the Applicants, before offering it to Arrie Nel. The Applicants, being creditors of Main Road, sought an order declaring the transfer to be null and void, thereby setting aside the transfer and ordering the busines to be transferred back to Main Road.

The court was called upon to decide on two very interesting questions. Firstly, on the meaning of “void” in terms of section 34 of the Act and, secondly, on the meaning of “void” in terms of the common law, which will be discussed in more detail below.

The court considered the meaning of void based on whether its meaning in the context of section 34(1) was absolute or relative. Void would have an absolute meaning if the transfer is considered void against all parties for all purposes. Void would have a relative meaning if section 34(1) applied specifically to creditors insofar as they had a claim against the trader whose business had been transferred. Thus, a relative interpretation would mean that the transfer is only void for the purpose of recovering the creditors’ debt, rather than void generally.

This relative interpretation of void is applicable in section 34(3) of the Act which states that any person who has a claim against the trader of the business being sold, who has instituted proceedings against the trader in any court of law, and the transferee in the transaction was aware of the proceedings instituted, or who has instituted proceedings at a division of the Supreme Court with jurisdiction in the area in which the business is conducted, such transaction is void “for the purpose of such enforcement”. This section allows for creditors falling within the aforesaid category to still enforce any judgment in their favour against the assets of the business transferred, irrespective of such assets being in the hands of the purchaser. It is clear that the meaning of void in section 34(3) is limited to creditors specifically enforcing their claims. The Applicants were not creditors in terms of section 34(3) of Main Road but argued that the lack of restrictive wording as in section 34(3) supported an interpretation of void in section 34(1) being absolute.

The Applicants contended that section 34(1) is meant to afford protection to creditors of dishonest traders attempting to dispose of their property without paying their debts, and thereby preferring certain creditors over others. Therefore, the use of the word void in this context should advance that purpose. The wording of section 34(3) clearly limits the meaning of void as being applicable insofar as it covers the amount of the claim the creditor is entitled to. Section 34(1) on the other hand has no such limitation in its wording, thereby suggesting an interpretation that a section 34(1) transaction is void in its entirety.

The court in the case of Galaxi Melodies Pty Ltd v Dally NO 1975 and Rustenburg Kloof Kiosk v Friedland, Hard, Cooper & Novis 1973 relied on an interpretation of section 34(1) that found that the transfer is void for the purpose of any recovery that creditors have against the assets of the business, and not void absolutely. The court thus confirmed that a relative interpretation is applicable to section 34(1).

On these facts, this interpretation means that Main Road’s transfer was not outright invalid, but Main Road’s creditors could have treated the transfer as void for purposes of recovering their debts and possibly levied execution on an asset included in the transfer, irrespective of it was held by Main Road or Arrie Nel. This was however not the relief claimed by the Applicants, which wanted the business to be transferred back to Main Road.

Under the common law, the actio pauliana applies to dishonest dispositions by an insolvent in which there was a transfer wherein the insolvent’s assets were diminished with the intention to defraud creditors and provide an unfair advantage to one creditor over others. On the facts, there was no indication that Main Road intended to defraud the Applicants, especially because the Applicants were given first option to purchase the business. Furthermore, the Applicants were aware of the intended transfer, and there was no indication that the transaction was intended to be a secretive transfer.

The application was accordingly dismissed.

It is clear that the meaning of void vis-à-vis creditors in the context of section 34(1) of the Act applies only insofar as it allows creditors of an insolvent to recover the debt owed to them by treating the transfer as void. This interpretation is an understandable one, as a creditor’s interest in transfers made by a debtor only extends as far as a debt is owed to them. The transfer need not be treated as void in its entirety, particularly if there is no indication of fraud in the transaction, and no other creditors claimed against the insolvent estate in the six-month period. We therefore encourage clients to be aware of the section 34(1) requirements, lest a good deal turns into a void transaction.

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