Are employees interests overly protected during business rescue proceedings? Striking a balance for all stakeholders

October 1st, 2021

South African Airways SOC Ltd (In Business Rescue) and Others v National Union of Metalworkers and Others 2021 (2) SA 260 (LAC)

The COVID-19 pandemic has seen a lot of businesses closing their doors. South African Airways was already haemorrhaging money prior to the COVID-19 pandemic, which led to its business rescue proceedings.

The Companies Act 71 of 2008 (the Companies Act) affords employees numerous rights during business rescue proceedings. In terms of s 136, employees immediately before the commencement of business rescue proceedings continue to be employed on the same terms and conditions. In addition, s 136 holds that any contemplated retrenchments in the company’s business rescue plan are subject to the Labour Relations Act 66 of 1995 (LRA).

The appellant found itself in an unpleasant financial position and went into business rescue. Subsequently, the business rescue practitioners issued s 189(3) notices to the employees of the appellant before the finalisation of a business rescue plan. The respondents argued that the moratorium on retrenchments during business rescue proceedings barred the appellant from undertaking any retrenchment proceedings and the retrenchment proceedings were premature and unlawful because they were raised before the production of a business rescue plan. In the court a quo, the court premised its decision on s 136 of the Companies Act. The court held that the aforementioned section provides protection to employees during business rescue proceedings and, as such, dismissals are prohibited.

The main contention in the Labour Appeal Court (LAC) was whether a business rescue practitioner could commence with retrenchment proceedings under s 189 of the LRA prior to the adoption of a business rescue plan as contemplated by s 150 of the Companies Act.

Faced with this question, the LC held that ‘there was complete protection against the employees’ dismissal during the business rescue proceedings and found that the present dispute implicated the right to fair labour practices as enshrined in the Bill of Rights’. Emphasis was put on s 136 of the Companies Act, which holds that any need to retrench employees has to be established in a business rescue plan (para 11).

In addition, the court found that there was no explicit provisions in s 136 of the Companies Act that empowered a business rescue practitioner to retrench employees in the absence of a business rescue plan. As such, absent a business rescue plan, the issuing of notices in terms of s 189(3) of the LRA to commence the consultation process was premature and amounted to procedural unfairness (para 12).

Furthermore, the court noted that the primary purpose of a business rescue procedure is not only to save the ailing company or potentially successful parts of the business. The procedure also aims to rescue the whole company or corporate entity, which will include the preservation of jobs (para 29).

The court noted that the replacement of the judicial management system with business rescue was to rescue the ailing company and thus the retention of jobs (para 29). In addition, with reference to interpreting s 136 of the Companies Act, the court referred to its purpose. The purpose of business rescue it held, is as follows:

‘[T]he saving of jobs is a high priority for South Africa and the introduction of an effective and successful business rescue procedure was seen by government as an important measure to prevent further job losses. As was to be expected, the protection of the rights and interests of employees in the new business rescue proceedings were emphasised from the early stages of the corporate law reform process’ (para 29).

Furthermore, the court reiterated on the court a quo’s judgment, which pointed out that employees in the employ of the company immediately before business rescue proceedings continue to be employed on the same terms and conditions (para 30). There are only three exceptions to this general protection afforded to employees, which are contained in s 136 of the Companies Act.

Moreover, the court held that s 150 of the Companies Act makes it clear that the rescue plan must precede any retrenchments and forestalls any suggestions that retrenchments may take place without a business rescue plan (para 32). Also, the business rescue plan is intended to reorganise the company by crafting a roadmap aimed at rescuing an ailing company including preserving jobs (para 33). The court pointed out that s 150(5) provides that retrenchments must be contained in the plan as contrasted to a piecemeal reconstruction of the company, which would allow a decision on retrenchments prior to the plan being published (para 33). In closing, the court held that its interpretation of s 136 is compatible with both the words and purpose employed by the legislature (para 39).

The court concluded by holding that the issuing of s 189 notices, by the business rescue practitioner’s absent a business rescue plan was premature, unfair, and had to be withdrawn (para 40).

The appeal and cross-appeal were dismissed (para 44).

Mapakiso Pita LLB (UFS) is an LLM (Business Entities) student at the University of the Free State.

This article was first published in De Rebus in 2021 (Oct) DR 30.