Tension between labour and insolvency law
The main purpose of the Companies Bill 2008(1) is to acknowledge changes in South Africa's economy since 1973 and to bring its corporate legislation into line with internationally recognised standards. The introduction of the bill is, in part, a response to the global economic recession and aims to help to counteract the negative effects that ordinary citizens face on a daily basis.
'Business rescue' refers to any proceedings which facilitate the rehabilitation of a company that is financially distressed - that is, when it appears reasonably likely that the company will be unable to pay all its debts as they fall due and payable within the next six months, or that it will become insolvent in the immediate future.
The procedure to be implemented during business rescue proceedings is set out in Chapter 6 of the bill. The procedure recognises the rights and interests of shareholders, creditors and employees by providing a framework within which interested parties can participate in the development and approval of an appropriate business rescue plan.
In Section 136 of the bill, employees are specifically included when rights are afforded to affected persons during business rescue proceedings. Therefore, employees enjoy the same rights as other affected persons. The definition of 'affected persons' includes any registered trade union that represents company employees, as well as employees that are not represented by a registered trade union. Section 144 of the bill sets out the rights afforded to employees during business rescue proceedings.
An employee is a preferred secured creditor. Any amount relating to an employee's employment which becomes due and payable by the company to the employee during business rescue proceedings, but is not paid to the employee, will be regarded as post-commencement financing and will be paid to the employee after payment of remuneration and costs. Therefore, such payments will be preferred to payments to all other secured and unsecured creditors of the company.
During business rescue proceedings, employees must continue to be employed on the same terms and conditions of employment, subject to certain exceptions. Employees are also entitled to:
- engage in consultations regarding the development of a business rescue plan, view and prepare submissions and vote with creditors on any motion to approve the plan;
- receive notice of each court proceeding, decision, meeting or other relevant event concerning the business rescue proceedings;
- participate in any court proceedings arising during business rescue proceedings; and
- propose an alternative plan or offer to buy the interest of any creditor that votes against the proposed plan, in the event that the business rescue plan is rejected.
These rights are in addition to those afforded by other laws, contracts or collective agreements.
Tension between labour and insolvency law
The relationship between labour law and insolvency law in circumstances where a company becomes insolvent has not been harmonious. The main purpose of the labour law is to protect the employment relationship, whereas the law of insolvency aims to ensure the effective distribution of an insolvent company's assets between the creditors.
The first attempt to remedy this situation was Section 197A of the Labour Relations Act,(2) which regulates the employment relationship between employees and their insolvent employer. This section states that in the event that a company becomes insolvent, the transfer of employees' employment contracts to the new employer will not affect the continuity of the employment relationship.
Section 136 of the Companies Bill will expand the protection afforded to employees when a company becomes insolvent. It states that:
- during business rescue proceedings, those employed by the company immediately before the beginning of proceedings continue to be so employed on the same terms and conditions, subject to certain exceptions; and
- any retrenchment of such employees as contemplated in the company's business rescue plan is subject to Sections 189 and 189A of the Labour Relations Act and other applicable labour legislation.
The Companies Bill strengthens the protection already afforded to employees by the Labour Relations Act in circumstances where companies become insolvent. Employers should consider carefully the interests of their employees during insolvency proceedings, not just those of creditors and other parties. A core principle of South African labour legislation is the protection of employees and job security, as reiterated by the provisions of the bill.
For further information on this topic please contact Fritz Malan or Michelle Smit at ENSafrica by telephone (+27 21 410 2500), fax (+27 21 410 2555) or email ([email protected] or [email protected]).
(1) Although an updated Companies Bill was issued in 2010, it does not affect any of the issues dealt with in this update.