The purpose of the section is to prevent financially distressed traders from disposing of their businesses or their business assets to purchasers who are not liable for the debts of the business, without properly informing their creditors in advance. It is, however, not a peremptory provision. On the contrary, it operates to give the trader a choice to either comply or face the consequences provided for in the section itself. As the consequences of non-compliance with the provision are draconian, a cursory reading of the law reports proves that it continues to generate litigation.

The concept of business rescue was introduced into our law for the first time in Chapter 6 of the Companies Act 71 of 2008, which came into operation on 1 May 2011. It was a compete reinvention of South Africa’s corporate insolvency law. Since then, there has been an ongoing question amongst turnaround and restructuring practitioners as to the application of section 34 to business rescue proceedings.

The issue came to the fore in the case of Reiscor Two (Pty) Ltd t/a Bootleggers v Anheuser-Busch Inbev Africa (Pty) Ltd and Others (2022/2731) [2024] ZAGPJHC 363; [2024] 2 All SA 902 (GJ); 2025 (1) SA 315 (GJ) (11 April 2024) (Bootleggers). One of the thorny issues in Bootleggers was whether section 34 applies to the disposal of a business by a company which is a trader in terms of an approved business rescue plan.

Findings

At the first level, the court in Bootleggers found that creditors, by means of an adopted business rescue plan, can contract out of a section 34 claim. This, the court reasoned, is because if section 34 applies, a resort by a creditor or a liquidator to section 34 will nullify any business rescue which depends on the sale of a business by a trading company for its success. The court held that it is not only appropriate but necessary that the business rescue plan should protect the business rescue process in this manner. If the creditors are unsatisfied with that position, they are at liberty to vote against the business rescue plan, provided their vote is reasonable and appropriate, as required.

At the second level, the court found that, even if creditors cannot contract out of a section 34 claim and, using the trite principles of interpretation, the provision cannot apply to a disposal in business rescue because its purpose is to afford protection to a trader’s creditors against it dispossessing itself of its property without paying its debts before the disposition or from the proceeds thereof, leaving it insolvent and unable to meet his debts. The idea is that by giving prior notice, creditors can take the necessary steps to protect themselves, and they have the benefit of the acceleration of debts that were not due once publication ensued.

The court further reasoned that once a company has been placed in business rescue, various consequences follow including, but not limited to, the general moratorium on legal proceedings i.e. that creditors may not enforce their claims; the business rescue practitioner is required to formulate a business rescue plan and put it to the vote of creditors; the business rescue plan may inter alia compromise creditor’s claims; and upon the plan being approved, if it so provides, the claims are extinguished in law.

At the third level, the court found that the business rescue process empowers the business rescue practitioner to dispose of the company’s property (which would include its business), inter alia, in a transaction that forms part of a business rescue plan. In this context, it would be absurd to suggest that section 34 continues to operate and apply to a company in business rescue because the very persons called upon to vote in terms of the business rescue plan are the persons who would ordinarily receive or require notice in terms of section 34, and they are thus notified of the proposed disposal and, in fact, vote on it as affected persons.

Conclusion

Ultimately, the court in Bootleggers concluded that the simultaneous application of section 34 to a company in business rescue would lead to anomalies and absurdities that could not have been intended, and any reasonable and commercial construction means that it does not find operation in the context of a business rescue and business rescue practitioners are not constrained by section 34. The upshot of the finding is that contracting out of the consequences of section 34 is competent where the necessary element of publicity required by section 34 is achieved via notice to affected parties in business rescue and on a proper construction of the applicable legislation.

The finding that section 34 does not pose an obstacle to the acceptance of the business rescue plan and does not apply to a company in business rescue provides much needed clarity to the turnaround and restructuring community and should be welcomed.