THE EFFECT OF BUSINESS RESCUE ON EMPLOYEES

INTRODUCTION

The Companies Act, 2008 ("Act") extends certain protection to employees in business rescue circumstances. Business rescue refers to any proceedings which facilitate the rehabilitation of a company that is financially distressed (unlikely to pay all its debts as they fall due and payable within the immediately ensuing 6 months; or likely to become insolvent within the immediately ensuing 6 months). These proceedings may, for example, provide for the temporary supervision of the company; the management of the company's affairs, business and property; a temporary moratorium on claimants' rights against the company; or the development of a restructuring plan.

BUSINESS RESCUE

 Business rescue proceedings may be implemented in one of the following ways:

•  the company's board of directors passing a resolution to commence such proceedings in terms of section 129 of the Act; or
• An affected party (which includes any registered trade union representing the company's employees and all non-unionised employees) applying to court for an order initiating business rescue proceedings. It is worthwhile to note that such an order, if granted, will suspend all liquidation proceedings which may be underway until the business rescue proceedings end. From an employment law perspective, this raises the question of whether employees can initiate business rescue proceedings as an alternative to retrenchments. It is unlikely that an individual employee will bring such an application, however, it is possible that a majority trade union will make such an application should the right circumstances arise, for example where a foreign parent company wants to cease operations in South Africa and is looking to liquidate its South African subsidiary.

Business rescue proceedings should be completed within 3 months. If the proceedings extend beyond the 3 month period, the company is required to submit a monthly progress report to each affected party, the court and the business rescue practitioner ("the practitioner") who is appointed to supervise the company and its management on a temporary basis.

Where the board has passed the section 129 resolution, but before the business rescue plan has been adopted, an affected person may apply to court for an order setting aside the resolution and/or the appointment of the practitioner, or requiring the practitioner to provide security to secure the interests of the company and any affected persons. It is worth noting that where the affected person is a director of the company who voted in favour of the section 129 resolution, such person cannot apply for the resolution or appointment of the practitioner to be set aside unless such person is able to show that he "acted in good faith on the basis of information that has subsequently been found to be false or misleading".

 Section 133 of the Act provides for a general moratorium on legal proceedings against the company during business rescue proceedings, however, there are certain circumstances where legal proceedings may be instituted. From an employment law perspective one must question whether this section would restrict the application of the Labour Relations Act, 1995 ("LRA") and hinder employees from referring any unfair dismissal or other labour disputes during this period. 

RIGHTS OF EMPLOYEES DURING BUSINESS RESCUE PROCEEDINGS

 Employees are given the following rights during business rescue proceedings:

• an employee is a preferred unsecured creditor, accordingly any remuneration, reimbursement for expenses or other amount of money relating to employment that becomes due and payable by a company to an employee during the company's business rescue proceedings, but is not paid to the employee, will be regarded as "post-commencement financing" and will be paid to the employee after the practitioner's remuneration and costs have been paid. The "post-commencement financing" takes preference over all other secured and unsecured claims against the company;
• during business rescue proceedings, employees must continue to be employed on the same terms and conditions of employment except to the extent that (i) changes occur in the "ordinary course of attrition"; or (ii) the employees and the company agree different terms and conditions. Any retrenchment contemplated in the business rescue plan is subject to the provisions of the LRA;
• all trade unions and non-unionised employees are entitled to: (i) notice of each court proceeding, decision, meeting or other relevant event concerning the business rescue proceedings and such notice must be given to employees at their workplace and served at the head office of the relevant trade union; (ii) participate in any court proceedings arising during the business rescue proceedings; (iii) be consulted by the practitioner during the development of the business rescue plan and afforded an opportunity to review the plan and prepare submissions; (iv) vote with the creditors on a motion to approve the business rescue plan; and (v) if the business rescue plan is rejected, propose an alternative plan or present an offer to acquire the interests of any or all of the other creditors; (vi) form a committee of employees’ representatives and
• a medical/pension/provident scheme for the benefit of the past/present employees of the company is an unsecured creditor of the company to the extent of (i) any amount that was due and payable by the company to the trustees of the scheme at any time before the beginning of the company's business rescue proceedings, and that had not been paid immediately before the beginning of those proceedings; and (ii) in the case of a defined benefit scheme, the present value at the commencement of the business rescue proceedings of any unfunded liability under that scheme. These rights are in addition to any other rights arising from, inter alia, any law, contract, collective agreement.

 SECTION 189 AND 189A OF THE LABOUR RELATIONS ACT NO 66 OF 1995

Sections 189 and 189A of the LRA require a company to consult with its employees before embarking on a retrenchment exercise. The Act not only allows employees to initiate business rescue proceedings, but requires the practitioner to involve and actively participate with the employees once the business rescue proceedings have commenced. The employees effectively have the same participation rights and rights to information as the creditors of the company.

CONCLUSION

 It is our experience that most business rescue plans do not entertain the best interest of employees, reason being is that unions are not familiar with the process of business rescue. A further contribution to the above is labourers not being aware or correctly informed of their rights to participate in the business rescue proceedings. It was always the intention of the Act that employees be regarded as important stakeholders in the business rescue proceedings.

Upon a company adopting a resolution to commence business rescue proceedings it is imperative that unions immediately consult with a business rescue practitioner to correctly establish the position of its members and advise their members accordingly.

The aforementioned is imperative to establish employees’ rights before the adoption of a business rescue plan that is not beneficial and in the interest of union members. Business rescue is no longer a commercial decision to be made by the company. By increasing the number of stakeholders and by allowing the stakeholders to initiate and participate in business rescue proceedings.