Section 34 of the Insolvency does not apply to the disposal of a business where such business is being disposed of pursuant to an approved business rescue plan.

Section 34 of the Insolvency Act (“Section 34”) is aimed at protecting creditors from the risk of asset-stripping by financially distressed companies. Specifically, it seeks to prevent such companies from transferring their business, goodwill, or assets to third parties who are not liable for the company’s debts. To mitigate this risk, the section provides that any such transfer—if not preceded by the required public advertisement and notice—will be void as against creditors for a period of six months following the transfer.

While compliance with Section 34 is not mandatory, the risk of non-compliance rests primarily with the acquiror. In the absence of contractual safeguards or security, the acquiror could face claims from creditors or, if the seller is liquidated within the six-month period, could be compelled to return the business to the liquidator—only to rank as a concurrent creditor.

This raises an important legal question: does Section 34 apply to the sale of a business carried out pursuant to an approved business rescue plan under the Companies Act, 2008?

This issue was addressed in the case of Reiscor Two (Pty) Ltd t/a Bootleggers v Anheuser-Busch InBev Africa (Pty) Ltd and Others. The High Court was asked to consider whether the operation of Section 34 conflicted with the business rescue provisions of the Companies Act. The Court’s findings were two fold:

Voluntary waiver of Section 34 claims by creditors:

The Court held that creditors, through the adoption of a business rescue plan, can effectively waive any claims they might otherwise have under Section 34. The rationale is that, if Section 34 were strictly applied in this context, it could undermine the business rescue process, particularly where the success of the rescue hinges on the sale of the business. Creditors who disagree with this approach are entitled to vote against the plan—provided their objection is reasonable and appropriate.

Absurdity of applying Section 34 to approved business rescue sales:

Even assuming that creditors cannot contract out of Section 34 protections, the Court found it would be illogical to apply the section in the context of an approved business rescue plan:

• The purpose of Section 34 is to protect creditors by ensuring they receive notice of an impending sale, allowing them to accelerate claims and prevent asset dissipation before debts are settled. However, Section 134 of the Companies Act explicitly empowers the business rescue practitioner to dispose of company assets as part of an adopted business rescue plan.
• In such scenarios, the creditors (and other affected parties) are not only notified of the proposed disposal but actively participate in the process by voting on the plan itself. It would be inconsistent and counterproductive to apply Section 34 in a situation where the intended protections are already embedded in the business rescue process.