The main purpose of the Companies Bill 2008 is to acknowledge changes in the South African economy since 1973 and to bring South Africa’s corporate legislation up to internationally recognized standards. The Companies Bill has also come at a time where the global economy has been crippled by an unsympathetic recession and measures are needed to counteract the negative effects that ordinary citizens struggle with on a daily basis.

business rescue

Business rescue refers to any proceedings which facilitate the rehabilitation of a company that is financially distressed. A company is financially distressed when it appears reasonably unlikely that the company will be able to pay all its debts as they fall due and payable within the next 6 months; or likely to become insolvent within the immediate future.

The procedure to be implemented during business rescue proceedings is set out in Chapter 6 of the Companies Bill. The procedure recognizes the rights and interests of shareholders, creditors and employees by providing a framework within which these interested parties can participate in the development and approval of an appropriate business rescue plan.

Employee protection during business rescue proceedings

In terms of section 136 of the Companies Bill, employees are specifically included when rights are afforded to affected persons during business rescue proceedings. Therefore, employees enjoy the same rights as those that are awarded to affected persons in this Chapter. It’s important to note that, included in the definition of affected persons, is any registered trade union that represents employees of the company as well as employees that are not represented by a registered trade union.

Section 144 of the Companies Bill sets out the rights that are afforded to employees during business rescue proceedings and for purposes of this discussion, the most important include:

  1. An employee is a preferred secured creditor. This means that any amount relating to an employee’s employment which becomes due and payable by the company to an 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, any amount due and payable during business rescue proceedings to any employee will get preference over all other secured and unsecured creditors of the company.
  2. During business rescue proceedings employees must continue to be employed on the same terms and conditions of employment, subject to certain exceptions.
  3. Employees are also entitled to:
    1. engage in consultations regarding the development of a business rescue plan, to view and prepare submissions and to vote with creditors on any motion to approve the plan;
    2. notice of each court proceeding, decision, meeting or other relevant event concerning the business rescue proceedings;
    3. participate in any court proceedings arising during business rescue proceedings; and
    4. propose an alternative plan or offer to buy any interest of any creditor whom voted against the proposed plan, in the event that the business rescue plan is rejected.

These rights are in addition to any other rights afforded in terms of any other law, contract or collective agreement.

Relationship between the Companies Bill and current labour legislation

The relationship that exists between the South African labour law and the law of insolvency in circumstances where a company becomes insolvent has not been harmonious. The tension that exists between these two areas of law is because the main purpose of labour law is to protect the employment relationship whereas the main purpose of the law of insolvency is to ensure the effective distribution of assets of the insolvent company amongst creditors.

The first attempt to remedy this situation came in the form of section 197A of the 1995 Labour Relations Act. Section 197A of the LRA regulates the employment relationship between the employer and employees of an insolvent company. This section states that, in the event that a company becomes insolvent, the transfer of employees’ employment contracts to the new employer will not alter the continuity of the employment relationship.

Section 136 of the Companies Bill will now expand the protection afforded to employees in circumstances where a company becomes insolvent. Section 136 states that:

  1. During a company’s business rescue proceedings employees of the company immediately before the beginning of those proceedings continue to be so employed on the same terms and conditions, subject to certain exceptions.
  2. Any retrenchment of any such employees as contemplated in the company’s business rescue plan is subject to section 189 and section 189A of the LRA, and other applicable labour legislation.

Therefore, the Companies Bill now strengthens the protection already afforded to employees in terms of the LRA in circumstances where companies become insolvent. This sends out a clear message to employers to carefully consider the interests of their employees during insolvency proceedings, and not just the interests of creditors and other interested parties. A core principle of the South African labour legislation is the protection of employees and job security, which is once again reiterated by the provisions of the Companies Bill.