Retrenchments during business rescue

Business Rescue has enjoyed substantial media coverage during the COVID-19 pandemic as it is one of the mechanisms that can be utilised by a business to proverbially weather the storm. Business Rescue is often times accompanied by retrenchment proceedings in an effort to restructure the affairs of the company in such a way that the company can continue to trade on a solvent basis, alternatively that the company can provide a better return to its creditors than it would have done under liquidation.

Section 140(1)(a) of the Companies Act, 71 of 2008 (hereinafter referred to as “the Act”) provides that during a Business Rescue the Practitioner, in addition to any of his/her other powers and duties, has the full management control of the company in substitution for its board and pre-existing management. The aforesaid powers and duties does in our opinion, and has in practice, included the ability to commence with retrenchment proceedings in terms of Section 189 or 189A of the Labour Relations Act, 66 of 1995.

On 08 May 2020 the aforesaid position was not adopted by the Labour Court as it upheld an urgent application by the National Union of Metal Workers of South Africa (“NUMSA”) and the SA Cabin Crew Association against South African Airways (“SAA”) and it’s Business Rescue Practitioners. The Court ordered that it was procedurally unfair to retrench employees before a Business Rescue Plan contemplating such retrenchments have been published and adopted.

The Court indicated that the constitutional right to fair labour practices as embodied in the Labour Relations Act had to prevail and as such held that the interpretation of Section 136(1)(b) should be of such a nature that work security is promoted.

Section 136(1)(b) of the Act states as follows:

“(1) Despite any provisions of agreement to the contrary –

(b) Any retrenchment of any such employees contemplated in the company’s Business Rescue Plan is subject to Section 189 and 189A of the Labour Relations Act, 95 (Act 66 of 1995), and other applicable employment related legislation.”

We are of the opinion that the Honourable Court has taken a considerably broad interpretation of Section 136(1)(b) as the Act merely states that retrenchment proceedings is available to the company and the Business Rescue Practitioner during Business Rescue Proceedings especially if read in conjunction with Section 136(1)(a) of the Act.

In practice, it is often abundantly clear that the reason for a company’s financial distress is due to an excessive amount of its capital being spent on salaries in relation to its income. In order to place the company in a better position and provide a better dividend to creditors and present such a potential dividend in a Business Rescue Plan, Business Rescue Practitioners are often necessitated to commence with retrenchment proceedings shortly after Business Rescue Proceedings have been commenced with.

Business Rescue Proceedings and retrenchments are completely separate remedies in law and is in fact regulated by different Acts.

Employees are protected against unfair retrenchments in terms of the relevant provisions of the Labour Relations Act and it can with respect not be argued that Business Rescue Proceedings automatically prejudices employees.

The aforesaid judgment can respectfully have a severely negative impact on the success of various Business Rescues. It has been reported in the media that SAA and its Business Recue Practitioners are considering appealing the abovementioned judgment which in our opinion would be in the interest of thousands of companies across South Africa.

Should you require any assistance, you are welcome to contact one of the following attorneys at our offices:

Pieter Walters                                                              Nel de Jager
Cell: 0828583817                                                           Cell: 0826856212
E-mail: pieter@nvsinc.co.za                                         E-mail: dejager@nvsinc.co.za