What happens to employees during business rescue?

What happens to employees when their employer is placed in business rescue? On the one hand, the good news for labour and for unions is that the appointment of the business rescue practitioners has no impact whatsoever on the underlying contracts of employment, and the employment relationships continue with the entity in business rescue as if business rescue had not happened at all.

As such, employees who are employed by a company that is placed into business rescue remain employed, and remain entitled to protection from unfair dismissal, unfair labour practice and other rights guaranteed by the Labour Relations Act, 66 of 1995.

Their employer must also continue complying with the Basic Conditions of Employment Act, 75 of 1997.

Additionally, all other labour laws and protections remain in full effect.

This is unlike the case when a company is placed into court-ordered liquidation, in which case the contracts of employment are immediately suspended by operation of law, employees are not entitled to any payment of salary, and expire within 45 days of the date of being placed into liquidation.

However, there is one large caveat.

According to the newly introduced business rescue provisions of the Companies Act, 71 of 2008, “during business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except with the written consent of the practitioner, or the leave of the court.”

These provisions are referred to as the “breathing space moratorium”, in that the courts recognise it is necessary to give the stressed business breathing space to deal with its operational issues, without having to be exposed to legal claims, including labour claims.

In the recent case of Marques and Others v Group Five Construction (Pty) Ltd and Others (D1051/19) (2019), the courts found that “legal proceedings” include labour claims in the CCMA or labour courts.

It was also found that moratorium did not conflict with the Labour Relations Act (LRA).

As such, while business rescue provisions would need to ensure that, for example, any retrenchments are fair and compliant with the LRA, any retrenched employees would not be able to challenge the fairness of such dismissals or take legal action to compel the employer to make the statutory severance payments – or even salaries, if they go unpaid – for as long as the employer remains in business rescue.

Consolation for employees is that if any remuneration, reimbursement for expenses or any other amount of money relating to employment becomes owed to employees during business rescue, these monies are regarded as post-commencement financing and are preferent above any unsecured claims against the company.

This means they will ordinarily be dealt with in the approved business rescue plan.

The business rescue practitioners have the legal right to direct the affairs of the company in business rescue, and the board of directors and other management lose a significant degree of control and decision making ability.

Coupled with the moratorium against legal proceedings, the business rescue practitioners hold a powerful position to make whatever arrangements they believe are necessary to save the distressed company.

 

Bradley Workman-Davies is a director at Werksmans Attorneys. Views expressed are his own.