To retrench employees during business rescue?

Many employers which are facing financial difficulties as a result of the Covid-19 lockdown. While some employers have gone into liquidation, others have gone into business rescue, and have initiated retrenchment processes. This gives rise to the question: Can an employer retrench employees during business rescue?

Section 136(1) of the Companies Act provides as follows:

“(1) Despite any provision of an agreement to the contrary-

(a) during a company’s business rescue proceedings employees of the company immediately before the beginning of those proceedings continue to be so employed on the same terms and conditions, except to the extent that-

(i) changes occur in the ordinary course of attrition; or

(ii) the employees and the company, in accordance with applicable labour laws, agree different terms and conditions; and

(b) any retrenchment of any such employees contemplated in the company’s business rescue plan is subject to section 189 and 189A of the Labour Relations Act, 1995 (Act No. 66 of 1995), and other applicable employment related legislation.”

An important judgment which interpreted this provision was South African Airways (SOC) Limited (In Business Rescue) and Others v National Union of Metalworkers of South Africa obo Members and Others [2020] 8 BLLR 756 (LAC).

The facts of the case were as follows:

• It is well-known that SAA has been facing economic difficulties over the past few years. The huge government bailouts that SAA has received, have been widely reported on in the media.
• On 5 December 2019, SAA was placed under voluntary business rescue.
• On 9 March 2020, the business rescue practitioners issued an invitation to consult over proposed retrenchments, commonly referred to as a ‘section189 (3) notice’. The effect of that notice, given the scale of the proposed retrenchment and the size of SAA’s business, was to trigger a 60-day period during which consultation should take place. This was because it triggered section 189A of the Labour Relations Act 66 of 1995 (“LRA”).
• At that point, the business rescue practitioners had not published a business rescue plan.
• The CCMA appointed facilitators for the consultation process.
• The unions refused to participate in the consultation process. They adopted the stance that the consultation process was premature as the business rescue practitioners had not yet published a business rescue plan.

NUMSA and the South African Cabin Crew Association launched an urgent application in terms of section 189A(13) of the LRA to challenge the procedural fairness of the process.

The Labour Appeal Court found that it was not permissible to retrench employees during business rescue if a business rescue plan has not yet been adopted. There is therefore a period during which it is impermissible to retrench employees during business rescue – starting from the date on which the company goes into business rescue until the date on which a business rescue plan is adopted.

If the business rescue plan envisages a process to retrench employees during business rescue, the employer may issue an invitation to consult regarding retrenchments, and after such consultation, may take a decision to dismiss employees based on operational requirements.