What happens to employees when a business goes bankrupt?
In the normal sphere of the law, a business needs to start retrenchment proceedings if there is financial difficulties and there is no other way of getting around it. If a business is liquidated, the retrenchment process isn’t always followed.
Section 38 of the Insolvency Act, as amended, is our primary legislation in dealing with employees during a liquidation procedure.
Step 1: Suspension
In a sequestration process, the employees’ contracts of employment are suspended. This is not the same, and should not be confused with, a suspension prior to a disciplinary hearing or with suspension as a sanction.
During the period of suspension the employees do not have to work and cannot be compelled to do so and they will not be entitled to any remuneration.
Employees will also not be entitled to the accrual of an employment benefits during this period. No annual leave, sick leave, family responsibility leave, etc.
The suspended employees may apply for UIF at the Department of Labour.
Step 2: Consultation Process
A trustee who is appointed in terms of Section 56 of the Insolvency Act, as amended, may terminate the contracts of service of employees but only after:
The trustee consults with:
- Any person who the insolvent employer was required to consult, immediately before the sequestration in terms of a collective agreement, for example, the MEIBC, BIBC, NBCRFLI, etc.
- A workplace forum in terms of Section 213 of the Labour Relations Act (LRA) if there is one.
- Any registered Trade Union whose members may be affected by the termination of contracts.
If there is no collective agreement that existed prior to the sequestration then the following parties must be consulted with:
- A registered trade union representing the employees whose contracts of employment were suspended and who is likely to be terminated, if there is no workplace forum; or
- the employees whose contracts of service were suspended and who is likely to be affected by the termination of the contracts of service or their representatives nominated for that purpose, if there is no trade union.
The consultation must be aimed at reaching consensus on appropriate measures to save or rescue the whole or part of the business of the insolvent employer.
For example by the sale of the whole or part of the business of the insolvent employer, or by a transfer in terms of Section 197 A of the LRA, by a scheme or compromise in terms of Section 311 of the Companies Act, or in any other way.
If any party to the consultation process wants to make proposals about the above-mentioned means to save the business, they must submit written proposals to the trustee or liquidator within 21 days of the appointment of the trustee in terms of Section 56, or the appointment of a liquidator, or appointment of a co-liquidator. If a co-liquidator is not appointed the date of the conclusion of the first meeting, unless the trustee or liquidator and an employee agree otherwise.
A creditor of the insolvent employer may with the trustees consent, participate in any consultation in this process.
Step 3: Termination of contracts of employment
The trustee, liquidator and employee during this process can decide that the employment may continue in view of the measures decided on to save the business. All suspended contracts of employment shall terminate 45 days after the date of the appointment of a trustee in terms of Section 56; or the date of the appointment of a liquidator in terms of Section 375 of the Companies Act.
The date of the appointment of a co-liquidator in terms of Section 74 of the Close Corporations Act if a co-liquidator is not appointed the date of conclusion of the first meeting.
What happens to employees now?
An employee whose contract of service has been suspended or terminated is entitled to claim compensation from the insolvent estate of their former employer for loss suffered by reason of suspension or termination of a contract of employment.
An employee whose contract of service has been terminated may claim severance benefits from the estate of the insolvent employer in terms of Section 41 of the Basic Conditions of Employment Act.
ABOUT THE AUTHOR
Rezonia Davids obtained her LLB degree in 2007 from the University of the Western Cape. She studied at The University of Cape Town and completed the School for Legal Practice programme. She worked at Legal Aid South Africa as an article clerk and was thereafter admitted as an Attorney of the High Court of South Africa. She started working at SEESA Labour in 2010 at our Cape Town office.