Privacy and the Sale of Customer Lists in
South African Insolvency Law:
Some Issues Reconnoitred
ALASTAIR SMITH*
University of South Africa
1 Introduction
When a debtor’s estate is sequestrated, then, unless statutory exceptions
apply, all the property of the insolvent at the date of sequestration, or which the
insolvent acquires or which accrues to him during the period of sequestration,
passes to the insolvent estate.1 In administering the insolvent estate, the trustee
is obliged to realize the estate assets and distribute their proceeds among the
creditors.2 The liquidator of a company in winding-up has a similar duty.3
The debtor’s assets may perhaps include a customer list. The debtor may have
collected the details of that list via the Internet, by promising each customer
that his or her information would not be disclosed to other persons without
his or her consent. The trustee or the liquidator may now wish to sell this
valuable list, to increase the free residue distributable among the creditors of
the insolvent estate. However, the customers may wish the promise of privacy
to be upheld. If that promise is upheld, less money may be distributable among
the creditors in insolvency or winding-up.
There are wider implications as well. Customers who suspect that their
privacy might be compromised in these circumstances will not use the Internet
to the full extent possible. Moreover, venture capitalists will avoid investing in
companies whose valuable customer lists ‘are barred from sale or subject to
litigation’. These investors may prefer to back more conservative enterprises
instead.4
2 The Internet, Dot-coms, and Electronic Customer Lists
The Internet provides a method for companies to attract and fi ll customers’
orders, and an environment in which some companies — dot-coms — exist.
598
* BA LLB (Rhodes), PhD (Edin). Professor of Insolvency Law in the Department of Mercantile
Law, University of South Africa, Pretoria. I am grateful to my colleagues in the School of Law for advice
on this article; any errors in it remain mine. For brevity’s sake, I should also state that, unless I have
specifi ed otherwise, I last visited all the web sites mentioned in this article on 24 February 2004.
1 Section 20(2) of the Insolvency Act 24 of 1936.
2 PM Meskin Insolvency Law and its Operation in Winding-up by B Galgut, PAM Magid, André
Boraine, Jennifer A Kunst & David A Burdette (eds) (loose-leaf) ¶ 4.18.
3 Section 391 of the Companies Act 61 of 1973.
4 Farah Z Usmani ‘Information Privacy and Internet Company Insolvencies: When a Business Fails,
Does Divestiture or Bankruptcy Better Protect the Consumer?’ (2003) 8 Fordham J of Corporate and
Financial Law 273 at 322. For a sketch of the issues, see also Kenneth N Klee, Isaac M Pachulski, David
A Fidler, Mette H Kurth, & Eric D Winston Recent Developments Concerning Intellectual Property and
Bankruptcy (2003) 31–34, accessible at <http://www.ibls.com/dl/IP_Paper.pdf>.
(2004) 16 SA Merc LJ 598
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PRIVACY AND THE SALE OF CUSTOMER LISTS 599
The rise and fall of some of these creatures of the Internet, particularly in
the United States of America, have created bankruptcy problems from which,
dot-coms being ubiquitous, South African law may not be exempt. One
of the most valuable assets of a dot-com may be its customer list compiled
with information obtained electronically. A comparative discussion based on
three North American articles5 may throw light on how the confl ict between
insolvency law and privacy law over the customer list should be treated in the
South African law of insolvency and winding-up.
Three kinds of companies are distinguishable by the degree to which they
do business via the Internet.6 Traditional ‘bricks and mortar’ companies may
have web sites for advertising but they do not trade on the Internet. ‘Bricks and
clicks’ companies trade both traditionally and on the Internet. Dot-coms trade
only on the Internet.
‘Bricks and mortar’ companies have for a long time gathered customer
information as part of their trade secrets. Details have been collected without
promises of privacy, and the trade secrets have been sold as part of the assets
of the company.7 Accordingly, one scholar comments that what he calls the
‘technology split’ in treating customer lists, depending on whether they are
compiled by off-line companies or by online companies, is unwarranted,
‘unenforceable and counterproductive’.8
Now that customer lists are far more sophisticated databases of information,
however, which may be created with special software and which may allow
customer profi ling, some people worry far more about privacy than they used
to, particularly when the information includes details such as information about
health and children. A further difference from the old-fashioned customer list is
that electronic information about people ‘can be disseminated globally within
seconds’.9
In South Africa, sections 50 and 51 of the Electronic Communications and
Transactions Act10 protect personal information obtained through electronic
transactions.11 Their weakness is that adopting the relevant principles is
voluntary as part of an agreement between the parties to the transaction.12 So
5 Michael Geist ‘When Dot-Coms Die: The e-Commerce Challenge to Canada’s Bankruptcy Law’
(2002) 37 Canadian Business LJ 34; Usmani op cit note 4; and Walter W Miller & Maureen A O’Rourke
‘Bankruptcy Law v. Privacy Rights: Which Holds the Trump Card?’ (2001) 38 Houston LR 777 (accessible
at <http://www.law.uh.edu/Journals/hlr/downloads/38-3%20pdf%20fi les/HLR38P777.pdf>).
6 Geist op cit supra note 5 at 35–38.
7 Usmani op cit note 4 at 284–285. Compare the statement that ‘[f]or years traditional “brick and
mortar” companies have routinely, and with little public scrutiny, sold their customer lists as assets, in
bankruptcy proceedings and otherwise’ (Deborah S Grieve & Maria Damiano ‘Privacy and Consumer
Confi dentiality Issues in e-Commerce Insolvencies’, paper presented at the American Bankruptcy
Institute 2000 Winter Leadership Conference, 30 November–2 December 2000, Scottsdale, Arizona, p 4;
also at p 22, accessible at <http://www.blaney.com/fi les/article_privacy_and_consumer.PDF>).
8 Alan E Littmann ‘The Technology Split in Customer List Interpretation’ (2002) 69 Univ of Chicago
LR 1901 at 1902. The negative consequences of the technology split, Littmann argues, tend to benefi t
large companies over small (at 1923–1924).
9 Grieve & Damiano op cit note 7 at 22–23.
10 Act 25 of 2002 (‘ECTA’).
11 Section 50(1) of the ECTA.
12 Section 50(2) and (4) of the ECTA.
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