Labour Court finds against SAA BRPs and workers may ultimately bear the brunt of the decision
Director at Klopper Attorneys Inc.
On Friday, 8 May 2020, the Labour Court handed down judgment in the case of NUMSA and Another v SAA and Others (Case No: J424/20) which will have far-reaching consequences for business rescue proceedings and the viability thereof as a tool to enable the rescue of financially distressed companies.
SAA’s business rescue practitioners had initiated the consultation process for the retrenchment of its employees after the commencement of SAA’s business rescue proceedings. In response, certain unions representing the SAA employees had averred that, because of their interpretation of section 136 (1) of the Companies Act 71 of 2008, any notice to commence retrenchment consultations in terms of section 189 (3) of the Labour Relations Act 66 of 1995 is invalid unless and until a business rescue plan has been presented; or alternatively that such a notice issued in the absence of a business rescue plan during business rescue proceedings is procedurally unfair. NUMSA and the South African Cabin Crew Association had accordingly launched an application on behalf of their members to the Labour Court to force the BRPs to withdraw the notices.
In coming to its decision, the Labour Court had to interpret section 136 (1) of the Companies Act, which reads as follows:
136 Effect of business rescue on employees and contracts
(1) Despite any provision of an agreement to the contrary-
(a) 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, except to the extent that-
(i) changes occur in the ordinary course of attrition; or
(ii) the employees and the company, in accordance with applicable labour laws, agree different terms and conditions; and
(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, 1995 (Act 66 of 1995), and other applicable employment related legislation.
In interpreting the above provision, the Court took cognisance of section 39 (2) of the Constitution which imposes an obligation on courts to promote the spirit, purport and objects of the Bill of Rights when a fundamental right is at stake. In this case, the right to fair labour practices was quite clearly at stake and accordingly, the Court held that if there is an interpretation of section 136 (1) that better promotes the preservation of work security, that interpretation ought to be preferred.
The Court surmised that this implied that section 136 (1) should be construed so as to provide continuity of employment in business rescue proceedings and to provide for the right to terminate employment for reasons related to operational requirements only in terms of a business rescue plan.
The Court held, therefore, that a business rescue practitioner may not give any notice to commence a consultation process for retrenchments in terms of section 189 or 189A of the Labour Relations Act, except if done in terms of a business rescue plan and ordered that the BRPs’ issuing of consultation notices had been procedurally unfair and that the notices had to be withdrawn.
An unfortunate effect of this judgment is that the requirements to commence the retrenchment procedure are now more onerous under business rescue than outside of business rescue – it is impossible to dismiss employees based on operational requirements during business rescue proceedings until a business rescue plan has been developed. As the SAA example illustrates, it is often (or even usually) not possible for a business rescue plan to be developed within 25 business days as envisaged in the Companies Act.
Therefore, it would now not make any sense for a financially distressed company to enter into business rescue proceedings if it is considering reducing its labour force to alleviate financial difficulties. Instead, businesses which are facing financial difficulties may be forced to consider commencing retrenchment procedures before or instead of entering into business rescue and accordingly, rather than promoting work security for employees of financially distressed firms, this judgment may have precisely the opposite effect.
In addition, voluntary liquidation proceedings may now be seen as a more suitable “tool” to be used by financially distressed companies that need to, inter alia, cut down on employment costs. Under voluntary liquidation proceedings, a liquidator, although still bound by the Labour Relations Act, can retrench employees free from the additional burden imposed by this judgment. This is exactly the opposite to what the legislature envisaged when the Companies Act was promulgated in 2011, being to prevent companies from being liquidated with a view to saving jobs.
Unions and other some other commentators will undoubtedly laud this decision as being “pro-labour”. But, without even considering the various legal arguments that could be raised to counter the Court’s interpretation of section 136 (1) in this judgment, as indicated above, it is highly questionable whether this decision will in fact promote work security of employees. Furthermore, it is likely to also make business rescue a less viable option for businesses under financial distress, which directly contradicts the spirit and purposes of the Companies Act.
Addition: The BRPs brought an appeal to the Labour Appeal Court which was dismissed.