13 July 2021 Dispute Resolution Alert

What should companies bear in mind when selling off assets?

There is no doubt that the current economic climate has led to companies becoming financially distressed and on the brink of insolvency.

On the flip side, this may present an opportunity for the purchase and sale of property as companies sell non-core assets to generate working capital to weather the economic storm. But, what if the sale and transfer of the asset is subsequently declared void because the seller did not publish a notice of the sale and transfer of the asset?

Section 34 of the Insolvency Act requires, among other things, that a “trader” publish a notice of the transfer of property in the Government Gazette and newspapers – before the transfer takes place. This means that the seller must publish a notice about the sale and transfer of the asset before the asset is transferred to the purchaser. The idea behind the publication of the notice is to ensure that companies that are on the verge of insolvency do not covertly sell (or otherwise dispose of) their assets to the detriment of creditors.

Practically, the notice does not need to include every detail of the sale agreement, and the following minimum information may be included in the notice: who the seller is, who the purchaser is, a description and physical address of the asset, and that the transfer will be in terms of a sale agreement.

Failure to publish the notice will result in the transfer of the asset being void as against the seller’s creditors for a period of six months from the date of transfer of the asset. Also, if the seller goes into liquidation within six months from the date of transfer, the transfer will be void as against the seller’s liquidator. Effectively, it will be as if there was never a sale and transfer of the asset. This can have dire financial consequences for the purchaser and bondholder (if a bond was registered as security for a loan used to purchase the asset).

Only a trader is required to publish the notice before selling and transferring its assets. Whether or not the seller of an asset is a trader depends on the facts. The principle is, if what is being sold is part of the core business of the seller, then the seller is a trader and must publish the notice. If what is being sold is ‘incidental to‘ the business of the seller, then there is no need for the notice. 

In K2013046547/07 (South Africa) (Pty) Ltd v Hyde Construction CC (Case no 513/2020) [2021] ZASCA 82 (17 June 2021), the seller sold and transferred a shopping centre to the purchaser. The purchase price was financed by a bank. A mortgage bond was registered over the property in favour of the bank. The seller did not publish the notice. A creditor of the seller’s challenged the validity of the transfer of the shopping centre and registration of the bond, on the basis that the seller is a trader and ought to have published the notice.

The question was whether, at the time of transfer of the shopping centre, the core business of the seller was the buying and selling of immovable property. The court found that the seller’s core business was not the purchase and sale of immovable property. The seller’s core business was buying property as an investment and renting it out. Hence the sale of the shopping centre was incidental to the seller’s business. Accordingly, the sale and transfer of the shopping centre were valid as there was no need for the notice to be published.

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