Insolvency, liquidation, sequestration and the selling of a business as a going concern.
TERMINOLOGY
Where a natural person becomes insolvent – sequestration
Where a partnership goes insolvent – sequestration
Where a company or a close corporation goes insolvent – liquidation / winding up
The ordinary test for insolvency: the inability to pay his/her debts.
The legal test for insolvency: whether his/her liabilities fairly estimated, exceed his/her assets,
fairly valued.
PROCESS OF LIQUIDATION
Final liquidation occurs when a business:
Company Pty (Ltd.) has applied to the High Court;
Close Corporation has applied to the Magistrates court for an order of final liquidation. This order will have the effect that the business no longer exists. The business will stop trading; its assets will be liquidated and distributed to creditors in order of ranking.
INSOLVENCY & LIQUIDATION OF THE EMPLOYER
All contracts of employment are automatically terminated in terms of section 38 of the Insolvency Act when a business is placed in final liquidation. This provides protection to employees upon sequestration or liquidation of their employer. Prior to the amendment, the termination of contracts of employment for reasons of insolvency meant that employees were not considered as dismissed and therefore they did not receive any protection or benefits the law offered in terms of the Basic Conditions of Employment Act or the right to not be unfairly dismissed in terms of the Labour Relations Act.
EFFECT OF AMENDMENTS
Contracts of service are suspended on the insolvency of the employer from the date of the sequestration/liquidation order. During the suspension of the contract, the employee is not obliged to render any services to the employer and the employee is not entitled to receive pay or employment benefits. The employee whose contract has been suspended is deemed to be unemployed and would be entitled to claim UIF. An employee whose contract is suspended or terminated would be entitled to claim compensation for loss suffered by suspension or termination of the contract.
TRANSFER OF CONTRACTS OF EMPLOYMENT RELATING TO INSOLVENCY
Section 197A of the Labour Relations Act applies to transfers of a business where the old employer is insolvent and a scheme of arrangement or compromise has been entered into to avoid winding up or sequestrating the employer for reasons of insolvency.
If a transfer of business takes place between an old employer and a new employer in the circumstances above, the new employer is, unless otherwise agreed, automatically substituted in the place of the old employer in all contracts of employment in existence immediately before the old employers winding up or sequestration.
The transfer of the business does not interrupt the employees’ continuity of employment and their employment continues with the new employer as if with the old employer.
However, anything done before the transfer by the old employer in respect of each employee will be considered to have been done by the old employer and not the new employer. For example, the new employer cannot be responsible for a dismissal made against an employee by the old employer. In addition, all rights and obligations between the old employer and each employee at the time of transfer remain the rights and obligations of the old employer and each employee.
The rights and obligation of the old employer in respect of collective agreements and arbitration awards also become the rights and obligations of the new employer.
The new employer will comply with its obligations in terms of section 197A if the new employer employs transferred employees on terms and conditions that are on the whole not less favourable to the employees than those on which they were employed by the old employer. However, if the terms and conditions are determined by a collective agreement, this will continue to apply.
RECOURSE
The CCMA and or Bargaining Council has no jurisdiction to consider the validity of an order of insolvency or liquidation issued by the High Court. Employee’s recourse would therefore be in lodging a claim with the trustees or liquidators.
CLOSING YOUR BUSINESS
The EOHCB Constitution requires members to give three months written notice to the divisional manager when membership is terminated. The same principle applies for when you close your business.
Keep in mind that the Bargaining Council will upon receipt of closure notification, request an Agent to conduct an inspection to confirm the closure of the business and thereafter only issue a “code 9”. This means that the business is made inactive and will no longer attract any costs.
RELEVANT LEGISLATION
Basic Conditions of Employment Act, Insolvency Act; Labour relations Act, and the Companies Act.
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