Retrenchments and business restructuring

November 1st, 2020
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SA Airways (SOC) Ltd (In Business Rescue) and Others v National Union of Metalworkers of SA on behalf of Members and Others (2020) 41 ILJ 2113 (LAC)

The previously discussed case of NUMSA and Another v SAA and Others (LC) (unreported case no J424/20, 8-5-2020) (Van Niekerk J), discussed by Moksha Naidoo ‘A precondition for a business rescue practitioner issuing s 189(3) notices’ 2020 (July) DR 41, was taken on appeal to the Labour Appeal Court (LAC). Therein the conundrum created by the consolidation of company law and labour law was once again a source of great contention between the opposing parties. The court had to consider whether a business rescue practitioner could embark on retrenchment proceedings under s 189 of the Labour Relations Act 66 of 1995 (the LRA) ahead of the publication and adoption of a business rescue plan as contemplated in s 150 of the Companies Act 71 of 2008 (the Act).

The decision was contingent on the interpretation of s 136(1) of the Act. Whether the section entitles a business rescue practitioner to retrench employees solely against the backdrop of a business rescue plan, or if a retrenchment process may commence in the absence thereof.

Facts

The background to this question is the publicly displayed financial distress, which the South African Airways (SAA) has been exposed to, giving rise to the need for management and supervision of business rescue practitioners. In an effort to rescue the business, the business rescue practitioners issued s 189(3) notices, which alerted employees that the employer was contemplating dismissals based on its operational requirements. The notice called on the affected employees to consult with SAA on a predetermined list of topics, inter alia, measures to avoid the retrenchments. Section 189 of the LRA placed a deferment on SAA from dismissing any employee for operational reasons for a 60-day period in which the consultation process would ensue.

The National Union of Metalworkers of South Africa (NUMSA) declined to take part in the consultation process and lodged an application before the Labour Court (LC). The union sought a declarator that the business rescue practitioners issuing the s 189 notices to the employees was unlawful or alternatively unfair, as it came before the production of a business rescue plan as contemplated in s 150 of the Act. Withal NUMSA called on the notices to be withdrawn and the consultation process halted pending the execution of a business rescue plan. The end of the 60-day consultation period coincided with the day on which the application was heard. The LC ruled in favour of NUMSA.

The SAA appealed the decision of the LC before the LAC on the grounds that the court had incorrectly interpreted s 136 of the Act and the effect of such an interpretation was an imposition of rights and obligations on the employer and employees far beyond the scope envisaged by the LRA.

Decision

Therein, the LAC agreed with the court a quo and held that the issuing of s 189 of the LRA retrenchment notices by the business rescue practitioners, prior to the formulation of a business rescue plan contemplating such retrenchments was premature and procedurally unfair. Thus, it had to be withdrawn. The LAC too considered the matter in view of the constitutional right to fair labour practices, which is effected by the LRA. In so doing, the court followed the approach of the LC by opting for an interpretation of s 136(1)(b) of the Act, which sought to promote the preservation of work security and the overall interests of the employees during business rescue proceedings.

The LC held, that a business rescue plan need not be finalised nor adopted, it found that a mere draft form of the business rescue plan was sufficient for a s 189 process to ensue. In this regard, the LAC departed from the LC as it did not clarify the status of completion of a business rescue plan to invoke the commencement of the s 189 process. It follows that the approach adopted by the court a quo sets precedent.

Previously, the issuing of the s 189(3) notices was at the discretion of an employer contemplating retrenchment in terms of s 189. Following this judgment, the commencement of a consultation process in business rescue proceedings is now entrenched in a business rescue plan, which contemplates retrenchments. The approach adopted by the court in this regard has its consequence in that an employer may find itself in contravention of its s 189 obligations. In addition, the LAC confirmed that a business rescue practitioner may offer voluntary severance packages to avoid retrenchment before the business rescue plan is published. The reason being that such an exercise did not require the invocation of a s 189 of the LRA process.

Conclusion

The jurisprudence advanced in this case is pertinent to the business rescue procedure in the context of retrenchments. Business rescue practitioners may not begin with retrenchment proceedings prior to the adoption of a business rescue plan, which contemplates retrenchments. It is only then that a s 189 notice to start consultation processes may be issued. Hence, the period required to initiate a retrenchment is significantly extended. While the court sought to protect the constitutionally enshrined right to fair labour practices, the judgment inadvertently attached dire consequences to business rescue proceedings.

A moratorium is set on retrenchments in a business rescue proceeding prior to the adoption of a business rescue plan. All the while business rescue practitioners are still expected to balance the rights of creditors, employees and shareholders. At a time where many businesses are on the brink of insolvency, while struggling with the effects of the COVID-19 pandemic, it is difficult to fathom the success of most business rescue proceedings.

Tinotenda Mparutsa LLB (UJ) is a tutor and LLM candidate at the University of Johannesburg.

This article was first published in De Rebus in 2020 (Nov) DR 35.