DealMakers - Q2 2023 (released August 2023)
Business Rescue Practitioners beware: Publish or prison
by Brian Jennings and Sasha Schermers
Section 34 of the Insolvency Act, 24 of 1936 (Insolvency Act) is an important creditor protection mechanism ensuring that when a trader transfers a business or any goods or property forming part of the business, creditors will either (if the notices were published) be alerted and have their liquidated liabilities become due or, if the notices were not published, have recourse against the purchaser within a period of six months from the date of transfer.
It is trite that, leaving aside the difficulties of print media’s slow demise, notice of the intended transfer must be published in the Government Gazette, two issues of an English newspaper and two issues of an Afrikaans newspaper circulating in the district in which the business is carried on, within not less than thirty days and not more than sixty days before the date of transfer.
In practice, because this section is not peremptory, and for a variety of commercial reasons notices of the sales of businesses are not always published in terms of s34 of the Insolvency Act. It is obvious that sellers would prefer to avoid their liquidated liabilities becoming due, or due to the time periods involved, it may not be practical to publish.
The rise of the modern business rescue proceedings on the back of the Companies Act, 2008 (Companies Act) has resulted in a conflict with the ancient Insolvency Act.
The trigger for a company to enter into business rescue proceedings is when it is considered ‘financially distressed’, where:
it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
One of the tools available to a business rescue practitioner to realise value for creditors (and shareholders, if there is any residue), is to sell the business of the company in business rescue proceedings. If a business rescue practitioner, pursuant to a business rescue plan that has been adopted by the necessary majority of creditors, sells a business of a company, must that practitioner publish a notice under s34 of the Insolvency Act? At first glance, this seems nonsensical. The very body of creditors who approved the sale pursuant to the business rescue plan do not need to be alerted to the fact that the sale is now taking effect. S129(4) of the Companies Act already provides that a company must publish a copy of the notice appointing a business rescue practitioner to any shareholder or creditor of the company, registered trade union representing employees of the company, and to each employee (if such employee is unrepresented), thereby notifying them that the company is undergoing business rescue. In addition, what is the purpose in publishing, and purportedly accelerating one's liquidated liabilities, when one's creditors' claims are regulated pursuant to the rules governing business rescue?
At this stage, unfortunately, delving deeper brings more questions than answers. What is the position if a business rescue practitioner, on behalf of the selling company, does not publish and the sale is completed, but within six months of the sale, the business rescue proceedings are converted into liquidation proceedings? Does the liquidator become entitled to regard such sale as being void pursuant to s34? Would a purchaser find comfort then in the aforesaid "nonsensical" argument?
Another caution is that if the "nonsensical" argument is incorrect, then assuming that the liabilities of the company in business rescue exceeded its assets at the time of the sale, or where the business rescue proceedings were converted to liquidation proceedings within six months of the sale, the business rescue practitioner may have exposed him or herself to the risk of criminal prosecution. This is because s135(3)(b) of the Insolvency Act prescribes that an insolvent person is guilty of an offence and liable to imprisonment for a period not exceeding two years if, prior to the sequestration of his estate:
"at a time when his liabilities exceeded his assets or during the period of six months immediately preceding the sequestration of his estate, he … alienated any business belonging to him, or the goodwill of such business or any goods or property forming part thereof not in the ordinary course of that business, without publishing a notification of his intention so to alienate in the Gazette and in a newspaper, in terms of the provisions of subsection (1) of section thirty-four" (our emphasis).
Obviously, one would need to consider whether, by virtue of the adoption of a business rescue plan which contemplates the disposal of a business, it could then be said that the sale of that entire business becomes "in the ordinary course of that business". That would be the saving grace to avoid this rigmarole, but we are not aware of any judgment on this point as yet.
Our thoughts, in conclusion, are that business rescue practitioners should be mindful of publishing s34 notices when disposing of a business in the context of a business rescue plan, and ought to do so where the company's liabilities exceed its assets, so as to avoid the possible commission by the business rescue practitioner of an offence in terms of s135(3)(b) of the Insolvency Act.
Jennings is a Director and Schermers a Candidate Attorney in the Corporate & Commercial practice | Cliffe Dekker Hofmeyr.