South Africa: Can A Retrenchment Process Start Before A Business Rescue Plan Has Been Approved?

Last Updated: 11 May 2016
Article by Audrey Johnson and Mehnaaz Bux

Most Read Contributor in South Africa, September 2016

In a recent case, the Labour Court needed to consider the interplay between section 136 of the Companies Act, 2008 and section 189 of the Labour Relations Act, 1995 ("the LRA"). The latter section enables an employer to terminate an employee's employment based on operational requirements.

Section 136(1)(a) of the Companies Act provides that, during business rescue proceedings, employees will continue to be employed by the employer on the existing terms and conditions of employment. This means that their contracts of employment are not suspended, as in the case of insolvency or liquidation. The Companies Act does however provide for an exception in cases where "changes occur in the ordinary course of attrition or different terms and conditions of employment are agreed to in accordance with the applicable labour law".

Section 136(1)(b) of the Companies Act further provides that the retrenchment of any employees arising out of the business rescue plan must comply with sections 189 and 189A of the LRA.

This begs the question: Does the wording of section 136(1) of the Companies Act mean that where an employer is in business rescue, employees cannot be retrenched except as provided for in the business rescue plan, which must first be approved by creditors? In other words, can the employer (or the business rescue practitioner) embark on a section 189 process based on the employer's immediate (and often pressing) operational needs before the business rescue plan has been approved?

Organised labour often adopts the position that section 136 of the Companies Act precludes this. However, in cases of severe financial distress, this interpretation may have dire consequences. Ultimately, it may lead to greater job losses as a result of the delay in effecting retrenchments and the impact on the business's cash-flow.

The Vanchem case

The above question was considered for the first time in Solidarity Obo BD Fourie & Others v Vanchem Products (Pty) Ltd and Others; In re: National Union of Metalworkers (NUMSA) Obo Members v Vanchem Vanadium Products (Pty) Ltd and Another (J385/16 & J393/16 [2016] ZALCJHB 106, 22 March 2016) ("the Vanchem decision"). In this case, The Vanchem decision. The National Union of Metalworkers of South Africa ("NUMSA") initially sought an order from the Labour Court stating that Vanchem's retrenchment procedures were procedurally unfair and that its members were to be reinstated pending a fair consultation process. However, in its replying affidavit, NUMSA raised another argument, stating that the retrenchments were also unlawful as they were not effected in terms of an approved business rescue plan and were therefore undertaken in breach of section 136(1)(a) of the Companies Act. It sought the consent of the Labour Court to introduce this new cause of action.

The Labour Court found that the employer had not acted in a procedurally unfair manner. It then proceeded to deal with NUMSA's application to introduce the new cause of action. The Labour Court refused to grant NUMSA's application on the basis that NUMSA had not complied with certain procedural requirements. It went on to indicate that, if it was wrong in refusing the application, it would nevertheless have dismissed the claim based on the merits of the case. 

The court's analysis

The court stated that section 136(1) of the Companies Act consists of two distinct parts:

(a) it affirms the continuity of existing terms and conditions of employment; and

(b) it imposes an obligation on the business rescue practitioner to effect any retrenchments in compliance with the LRA.

The court noted that the construction of section 136(1)(a)(i) of the Companies Act, particularly the reference to the words "the ordinary course of attrition", could arguably be interpreted as providing a guarantee of employment, as opposed to merely preserving conditions of employment.

However, the court was of the view that to interpret the words "ordinary course of attrition" as providing a guarantee of employment would, in essence, mean that a company in business rescue would not be able to terminate the employment of any of its employees with the company for whatsoever reason, whether or not such termination was fair in terms of the LRA. This would be inconsistent with the remaining provisions of section 136(1). Therefore, the court found that the phrase "ordinary course of attrition" must be read to include all forms of lawful termination, including retrenchments.

With respect to section 136 of the Companies Act, the court concluded that:

"It does not seem to be directed at preventing the lawful termination of obligations including employment contracts. Consequently, I am not persuaded that the provisions of section 136 effectively outlaw any retrenchments taking place except in terms of an approved business plan."

The Vanchem decision has since become the authority for the contention that a business rescue practitioner is not precluded from embarking on a retrenchment exercise in advance of the approval of the business rescue plan, provided there is compliance with section 189 of the LRA. In particular, the business rescue practitioner would have to demonstrate that the proposed retrenchments are based on the employer's proper and justifiable operational needs and requirements at that time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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