10 Dec 2013

Corporate & Commercial Law Update, Transactions that may be voided by a liquidator

Practice Area(s): Corporate & Commercial |

In terms of the Insolvency Act, certain types of transactions may be set aside by the executor of the sequestrated estate of an individual or the liquidated estate of a juristic entity that has been wound up because it is unable to pay its debts.

These so-called "impeachable transactions" include:

  • a disposal to any person for no consideration where, after the disposal, the disposer's liabilities exceed its assets;
  • a disposal to a creditor (including a surety) which has the effect of preferring that creditor over the others where, after the disposal, the disposer's liabilities exceed its assets;
  • a disposal to a creditor (including a surety) made with the intention of preferring that creditor over the others and at a time when the disposer's liabilities exceeded it assets;
  • a disposal made to any person which involved any collusion between the parties and which had the effect of prejudicing creditors;
  • a sale of a business or assets by a "trader" without publishing the advertisements required by section 34 of the Insolvency Act.

It is important to note that the concept of disposal is very wide.

For each of these transactions, there is a different time period within which the disposal must have occurred, relative to the liquidation or sequestration, for the relevant provision of the Insolvency Act to apply.  Some of these provisions have no time limit. 

In addition, some of the tests are subjective, based on the particular intentions of the insolvent, while others are objective, based on whether a particular transaction would be considered "anomalous" or "unbusiness-like" by reasonably astute business people.

Importantly, the requirement to advertise a sale of business or assets in accordance with the provisions of section 34 of the Insolvency Act in order to avoid that sale being voided by a liquidator of the seller only applies to sale of businesses and assets by "traders".  This term is given a very specific definition in the Insolvency Act and does not include any service businesses other than those specifically mentioned, being building service providers, public entertainers, hotel-keepers, boarding-house keepers, brokers and agents.  The onus is on the person alleging he is not a trader to prove it.

It is therefore critical for anyone entering into any transaction with a party that could be sequestrated or liquidated as a result of being unable to pay its debts to assess whether that transaction falls into one of these impeachable categories.

Erika Petersen-Holmes Contact: 031 575 7410 and petersen@wylie.co.za