By Lindokuhle Mashilo, Candidate Attorney and Dominique Lloyd, Senior Associate
The devastating economic effects posed by the Corona Virus Disease 2019 (COVID-19) have left many South Africans wondering whether their jobs are on the line and many business owners fighting against the odds to ensure their businesses’ survival. One way to negate the adverse financial threats presented by the rapid spread of this virus on employers and employees is by placing ailing companies under Business Rescue. Business Rescue is a mechanism provided for in terms of Chapter 6 of the Companies Act 71 of 2008 (“the Companies Act”), which is aimed at restructuring the affairs of a company in such a way that will facilitate the continuance of the company on a solvent basis.
Once a company has adopted a resolution, or a court order is granted, to place a company under Business Rescue and all formalities have been complied with, section 136 of the Companies Act comes into play. This section deals with the protection of the company’s employees during Business Rescue Proceedings. This section specifically provides that employees of the company continue to be so employed on the same terms and conditions as immediately prior to Business Rescue. However, there are exceptions to this general rule, namely:
- Changes which occur in the ordinary course of lawful termination of employment;
- The employees and the company, in accordance with applicable labour laws, agree on different terms and conditions; and
- 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 66 of 1995 (“the LRA”), which provides for a consultative process.
Although the appointed Business Rescue Practitioner is empowered to cancel or suspend any provision of any agreement to which the company is a party, for the duration of the Business Rescue Proceedings, all employment contracts are exempted from this. This means that all conditions of the employment relationship remain in place and unchanged, unless an agreement is reached between the parties to change such conditions.
It is important to note that employees have the same participation rights and rights to information as all of the other creditors of the company. These rights are provided for in section 144 of the Companies Act.
A company’s employees are regarded as preferent unsecured creditors and accordingly, any remuneration, that is due and payable by a company to an employee prior to, or during, Business Rescue Proceedings, will be regarded as “post-commencement financing”. This means that the employee will be paid next in line, after the Business Rescue Practitioner. The “post-commencement financing” takes preference over all other secured and unsecured claims against the Company.
Once a resolution to place a company under Business Rescue has been adopted, employers are urged to consult extensively with employees about what is going on, why it is happening, what the procedures are and what the company plans to achieve through the process of Business Rescue. It is important for employers to engage with their employees in order to facilitate the smooth and successful running of the Business Rescue and to ultimately assist with the continuance of the business. The employer must also ensure that the Business Rescue Practitioner is provided with as much information and assistance in order to devise the most effective Business Rescue Plan.
In the event that retrenchment, as part of the Business Rescue Plan, is unavoidable, employers should note that the Business Rescue Practitioner is required to communicate with employees or their representatives as soon and effectively as possible. Employees need to be provided with: reasons for employee number reduction; all alternatives considered; and business logic why retrenchment is the best option. In this regard, section 189(2) of the LRA is very important, as it states that dismissals for operational reasons require a meaningful joint consensus-seeking process. Accordingly, consultation, discussion, transparency and effective communication around questions of ‘why’, ‘who’ and ‘when’, must be observed, failing which the process can be ruled as flawed and can be disputed. For the employer, the golden rule is to be substantively (“operational” reasons) and procedurally (communication and compliance with law) correct.
Lastly, during a company’s Business Rescue Proceedings, each director of the company must continue to exercise the functions of a director, subject to the authority of the Business Rescue Practitioner. Such director has a duty to the company to exercise any management function within the Company in accordance with the express instructions or directions of the Business Rescue Practitioner, to the extent that it is reasonable to do so. In this regard, it is important to note that the Business Rescue Practitioner cannot, by law, unilaterally remove a director of a Company. An application to the High Court would have to be brought in order to remove the said director. It is of extreme importance that the Business Rescue Practitioner and the directors work together throughout the Business Rescue Process.
In light of the unparalleled level of economic uncertainty presented by the COVID-19 pandemic in South Africa, there will undoubtedly be many companies being placed into Business Rescue and it is important for employers and employees to familiarize themselves with the law and correct processes to be followed.