In the context of business sale agreements in South Africa, a key early consideration before any agreement is signed involves making a decision in relation to Section 34 of the Insolvency Act, 1936.
Section 34 mandates that any company intending to sell its business must publish a notice in the Government Gazette and newspapers 30 to 60 days before the intended disposal.
The purpose is to inform creditors about the impending sale, allowing them to demand immediate payment of any liquidated claims.
Failure to publish the notice renders the disposal void against the selling company's creditors for six months, giving them the right to claim against the sold business or assets in the hands of the purchaser, who may have already paid the seller for the business or assets.
To avoid potential disruptions to the business and cashflow concerns, sellers often propose waiving the notice requirement with an indemnity clause, holding them (the seller) responsible for any claims against the purchaser.
In cases where the seller is transferring all or most of its business, the purchaser may request an indemnity from the seller’s parent or sister company or other security such as guarantee, suretyships and co-principle debtorships from persons of substance. This is because the seller often distributes the proceeds of sale as a dividend and repayment of loan accounts and is then wound up after the business is transferred.