When is an alleged non-trading entity still regarded as a "trader"?

Section 34(3) states: "Voidable sale of business -

(1) If a trader transfers in terms of a contract 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), and such trader has not published a notice of such intended transfer in the Gazette, and in two issues of an Afrikaans and two issues of an English newspaper circulating in the district in which that business is carried on, within a period not less than 30 days and not more than 60 days before the date of such transfer, the said transfer shall be void as against his creditors for a period of six months after such transfer, and shall be void against the trustee of his estate, if his estate is sequestrated at any time within the said period.

(3) If any person who has any claim against the said trader in connection with the said business, has before such transfer, for the purpose of enforcing his claim, instituted proceedings against the said trader -

(a) In any court of law, and the person to whom the said business was transferred knew at the time of the transfer that those proceedings had been instituted; or

(b) In a Division of the Supreme Court having jurisdiction in the district in which the said business is carried on or in the magistrate's court of that district, the transfer shall be void as against him for the purpose of such enforcement."

Opposition claims not a "trader"

The opposition to the Applicant's case, that various dispositions were void against him, was premised on the contentions that Mega was not a "trader" as defined in the Act and that even if it was, the applicant had not shown that its claim was "against the trader in connection with the [said] business".

For purposes of this article, we have focussed only on the first contention, of whether or not Mega was a "trader". The Court investigated certain core facts relating to dispositions made by Mega. In December 2007, Mega sold its business (our emphasis) to Sethaba Power (Pty) Ltd (Sethaba) which at once took possession of the assets, but the sale was cancelled and before Mega could re-possess the assets, First National Bank (FNB) intervened to perfect a notarial bond.

On 14 April, 2007, Mega was placed under a provisional winding up order from which time the liquidator disposed of some assets. On 24 June, 2008, the provisional winding up order was discharged at which time Mega had a secured creditor for R22 million, called What May Come CC (WMC), whose controlling member was a Mr Shepherd (Shepherd). Shepherd was also a co-member of Mega with a Mr Stricker (Stricker). In consultation with WMC, Mega sold the contended assets to Axal and to KBS (both represented by Stricker). This was the contested disposition of 3 July, 2008, to which it was alleged that Mega was not a "trader" on 3 July, 2008, as Mega employed nobody and did not engage in any trading at the time.

The Counsel on behalf of Axal and KBS, pointed to the decisions in Kelvin Park Properties CC vs Paterson NO 2001 (3) SA 31 (SCA) (at [17]), and Bank of Lisbon International Ltd vs Western Province Cellars Ltd 1998 (3) SA 899 (W), which were authority for the proposition that the mere absence of trading activity does not mean the entity is not a trader and that, in particular, a trader who has debts outstanding, after the cessation of trading, remains a trader as defined. But the Counsel contended that the circumstances in the present case differed from the authorities referred to, in that at the relevant time, Mega could not have engaged in trade even if it wanted to and, as such, an "inability to trade" removed an ex-trader from the realm of continuing liability to a creditor. The inability was the supposed de facto destruction of the capacity to trade whilst Mega was in the hands of Sethaba and the liquidator.

A liberal construction of the definition required

The Court stated that the policy purpose of s34 of the Act is important. The point of the protection given to the creditor of a debtor is to prevent a fraud on the creditor by the debtor divesting itself of resources to satisfy the claim. Therefore a liberal construction of the definition of a "trader" is required, otherwise an artful trader would be able to wriggle out of its liabilities.

The Court found that both the law and the facts defeated the contention of being unable to trade as Stricker and Shepherd were in no different a position than the shopkeeper whose lack of working capital forces him to take down his shingle. Furthermore, Stricker had deposed to free Mega from FNB in order to carry on its business and a shortage of ready money induced them not to pursue trading de facto but to sell the assets to two juristic persons controlled by him.

Accordingly, the Court found that Mega was a "trader", as defined in the Act, at all material times and s34 of the Act was applicable to it and the dispositions made were therefore void as against the Applicant.

Although this case deals specifically with the applicability of s34(3) of the Act, the findings relating to the definition of "trader" applies equally to s34(1) of the Act. This is of crucial importance in matters in which parties try to avert complying with s34(1) of the Act on the alleged basis that the seller is not a "trader", especially to financiers that are providing funding to a purchaser pursuant to such sale or disposal.