Must Sales Of Investment Properties Be Advertised In Accordance With Section 34 Of The Insolvency Act?

22 February 2006

Source: Article by Frans Van Hoogstraten of Werksmans Incorporated

Originally published in Property Werks, Volume 51/January 2006

It can now be accepted that sales of “letting enterprises” do not have to be advertised in terms of Section 34 of the Act.

Section 34 of the Insolvency Act 24 of 1936, as amended (“the Act”) requires a trader who, (in terms of a contract), transfers any business belonging to him, or the goodwill of such business or any goods or property forming part thereof (except in the ordinary course of that business or for securing the payment of a debt), to advertise the proposed transfer in the manner specified in the section. Failure to properly advertise such transfer renders the transfer void as against creditors of the selling trader for a period of 6 months after transfer and renders such transfer void against the trustee of his estate if his estate is sequestrated within such 6 months period.

The Act further defines a “trader” as “any person who carries on any trade, business, industry or undertaking in which property is sold, or is bought, exchanged or manufactured for the purpose of sale of exchange, or in which building operations of whatever nature are performed, … or who acts as a broker or agent of any person in the sale or purchase of any property or in the letting or hiring of immovable property”.

For many years subsequent to the passing of the Act property investors have sold properties owned by them without it being suggested that such sales needed to be advertised in accordance with the provisions of Section 34 of the Act. However since the introduction of Section 11(1)(e) of the Value Added Tax Act 89 of 1991 (“VAT Act”) and the structure of sales of investment properties as sales of “letting enterprises” for purposes of benefiting from the zero-rating provided for in Section 11(1)(e) of the VAT Act, the issue has arisen whether such sales, being sales of “businesses”, are required to be advertised in terms of Section 34 of the Act.

The issue was first brought to a head in Roos NO and Others with Kevin and Lasia Property Investments CC and Others 2002 (6) SA409T. The facts of the case were substantially that a company, van der Lith Family Holdings (Proprietary) Limited (“the insolvent company”), sold a property with a shopping centre thereon to Kevin and Lasia Property Investments CC (“the purchaser”). The sale comprised the sale of a business and was not advertised in terms of Section 34 of the Insolvency Act. Upon liquidation of the insolvent company, the liquidator sought to set aside both the sale to the purchaser and a bond over the property in favour of ABSA Bank Limited.

When the case was first heard in the Transvaal Provincial Division the respondents (as it transpires, incorrectly) admitted that the insolvent company was a trader within the meaning of the Act. What was also at issue was whether or not such sale was in the ordinary course of business of the insolvent company. The court held that the ordinary business of a property holding company was to hold property and to generate income through the letting of that property. The insolvent company had transferred its whole business as a going concern and was not able to conduct any business thereafter. The transfer was not in the ordinary course of the business of the insolvent company as envisaged in Section 34 of the Act and was thus void. The effect of that declaration was that ownership of the property did not pass to the purchaser and that registration of the bond in favour of ABSA Bank Limited was also void.

After an appeal to the Supreme Court of Appeal the matter was referred back to the Transvaal Provincial Division to enable it to consider whether or not the insolvent company was a trader within the meaning of the Act. The Court a quo was also to consider whether the property was disposed of in the ordinary course of business of a company.

The applicants (ie the liquidators and others) contended that since building operations were performed on the property “for purposes of enhancing its letting and hiring business” the insolvent company was rendered a trader. They also contended that the insolvent company acted as an agent for purposes of collecting rental income on behalf of the previous registered owners of the property in accordance with a provision in the relevant sale agreement requiring the purchaser to collect rental income for the benefit of the insolvent company during a period prior to transfer.

In reply, the respondents argued that the introduction of Section 34 of the Act affected and amended the common law and that it should be restrictively interpreted. The respondents also argued that the insolvent company was not an entity that carried on any trade or business or industry or undertaking in which property was sold or exchanged or manufactured for the purpose of sale or exchange. It was neither a broker nor an agent of any person in the sale or purchase of any property or in the letting or hiring of immovable property. They contended further that the insolvent company had bought the property to be held for the purpose of generating income. It did not purchase the property for the purpose of sale. The property was not “stock” as one could expect in a property development company, but could be sold as with any other asset owned by a person.

In his (as yet unreported) judgment His Lordship Mr Justice Patel held that the allegation that the insolvent company “performed building operations” from time to time and that it was “an agent in the letting and hiring of immovable property” was unsubstantiated. The insolvent company did not perform building operations in the sense of “carrying on” such business, instead it contracted other entities that performed building operations from time to time. He also found that the contention that the insolvent company conducted the business of “renting and hiring” was unsubstantiated. It was thus held that, on a proper interpretation, both in logic and law, an investment company was not a trader as envisaged in Section 34 of the Act.

With regard to the question whether the property was disposed of in the ordinary course of business, the Court found that since it was held that the insolvent company was not a trader for purposes of Section 34 of the Act, it was not necessary to determine whether the sale of the property was in the ordinary course of business.

Prior to this decision some financial institutions, had in the past insisted, as a condition for the granting of a loan, that sales of letting enterprises be advertised in terms of Section 34 of the Act. This has led to lengthy delays in the registration of such transfers. These unnecessary delays will now be eliminated, save in circumstances where as a fact a company or other property enterprise is carrying on business within the meaning of Section 34 of the Act.

It can now be accepted that sales of “letting enterprises” do not have to be advertised in terms of Section 34 of the Act.

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