Online Reporter
Godknows Hofisi-Business Law
In this article, I address the effect of corporate rescue proceedings on employees and contracts.
This is regulated by section 129 of the Insolvency Act (Chapter 6:07), “the Insolvency Act” or “the Act”.
Corporate rescue proceedings
In terms of section 121(1)(b) of the Insolvency Act (Chapter 6:07) (“the Insolvency Act”), corporate rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
the temporary supervision of the company, and of the management of its affairs, business and property.
a temporary moratorium on the rights of claimants against the company or in respect of property in its possession and the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
Types of corporate rescue proceedings
There are basically two types of corporate rescue proceedings, namely:
Voluntary corporate rescue proceedings in terms of section 122 of the Insolvency Act and
Involuntary corporate rescue proceedings in terms of section 124 of the Insolvency Act.
The main difference is that voluntary corporate rescue proceedings are done at the instance of the company, whereas involuntary or forced corporate rescue proceedings are caused by affected persons such as creditors through securing a court order. According to section 122(1) the board of a company may resolve that the company voluntarily begin corporate rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that:
the company is financially distressed and there appears to be a reasonable prospect of rescuing the company.
Effect of corporate rescue proceedings on employees
This is covered by section 129(1) of the Insolvency Act. It states that, despite any provision of an agreement to the contrary:
(a) During a company’s corporate rescue proceedings, employees of the company immediately before the beginning of those proceedings, continue to be so employed on the same terms and conditions, except to the extent that:
changes occur in the ordinary course of attrition; or
The employees and the company, in accordance with applicable labour laws, agree on different terms and conditions;
(b) Any retrenchment of any such employees contemplated in the company’s corporate rescue plan is subject to the Labour Act [Chapter 28:01] and any other applicable employment-related legislation.
Effect of corporate rescue proceedings on contracts
According to section 122(2) of the Insolvency Act, subject to section 129(3), and despite any provision of an agreement to the contrary, during corporate rescue proceedings, the practitioner may:
(a) entirely, partially or conditionally suspend, for the duration of the corporate rescue proceedings, any obligation of the company that:
arises under an agreement to which the company was a party at the commencement of the corporate rescue proceedings and would otherwise become due during those proceedings, or (b) apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated in paragraph (a).
Restrictions
Section 129(3) has restrictions to sections 129(1) and (2) above. It provides that when acting in terms of section 129 (2):
(a) A corporate rescue practitioner must not suspend any provision of:
an employment contract; or a financial contract to which the provisions of section 35 (Securities Market
Transactions) or 36 (Agreement providing for termination and netting) would have applied had the company been liquidated.
(b) A court may not cancel any provision of:
an employment contract,
An agreement to which the provisions of section 35 or 36 would have applied.
In terms of section 129(4), any party whose agreement has been suspended or cancelled, or any provision which has been suspended or cancelled, in terms of section 129 (2), may assert a claim against the company only for damages.
According to section 129(5), if liquidation proceedings have been converted into corporate rescue proceedings, the liquidator is a creditor of the company to the extent of any outstanding claim by the liquidator for any remuneration due for work performed or compensation for expenses incurred before the corporate rescue proceedings began.
Conclusion
Section 129 regulates the effect of corporate rescue proceedings on employees and contracts, including exceptions thereto.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He sits on the Board of the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or gohofisi@ gmail.com. Visit www:hofisilaw.com for more articles.
