Business Buyers: Don’t drop this ball!

BusinessBuyersBefore you buy any business, its goodwill or its assets, take legal advice as to whether or not the sale must first be advertised in terms of the Insolvency Act.

Bye-Bye Business

If the Act requires the sale to be advertised and it isn’t, you risk losing everything – both the business and your purchase price.  Your risk is that if an unadvertised sale is challenged by a liquidator/trustee (or by a creditor if there is no liquidation/sequestration) within 6 months of the sale, it is likely to be declared void.  In that event, you will be lucky to get even a portion of your purchase price back – with the seller in financial difficulty your concurrent claim is probably worthless.

The sale to you will only be valid without advertisement if –

  • The sale  was made “in the ordinary course of business” (unlikely where the business subsequently fails), or
  • It was made for “securing the payment of a debt” (unlikely to be under your control as buyer), or
  • The seller wasn’t a “trader”.  As “trader” is widely defined in the Act, and as the onus of proof here is squarely on you, that’s not going to be easily proved.

In general therefore it’s probably safest to insist on the sale being properly advertised before you pay a cent of the purchase price, but there are grey areas and pitfalls here so take specific advice.

Note also that the Act’s requirements for the timing and manner of advertisement are strict and must be followed to the letter.

Don’t drop the ball here, it will cost you!

Creditors – your protection and its limits

The advertising requirement is of course there to protect you as a creditor of the business being sold – otherwise you could suddenly find yourself claiming from a worthless shell which has surreptitiously sold away its business and/or assets beyond your reach.

But as a recent Supreme Court of Appeal decision illustrates, not every creditor of a business can take advantage of this protection – you must be able to prove that your claim is one “in connection with” the trader’s business.  In the case in question, the creditor’s claim was for brokerage due on the sale of a membership interest in the trader (a close corporation).  That, held the Court, was “not a claim that arises in connection with the primary or core business of [the trader]”.  The sale was accordingly valid, and the creditor lost out. 

Ashersons Attorneys

Ashersons Attorneys

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