Business rescue: Is the moratorium enforceable in employment disputes?

26 May 2016

One of the innovations introduced by the Companies Act, 71 of 2008 (“Companies Act”) is the mechanism of business rescue proceedings in South Africa. In particular, chapter 6 of the Companies Act was inserted to “provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders” (see section 7(k)). In order to achieve this balance, a legal moratorium was provided for in section 133 of the Companies Act. The relevant parts of this section read as follows:

“133. General moratorium on legal proceedings against company

(1) During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except –

(a) with the written consent of the practitioner;

(b) with the leave of the court and in accordance with any terms the court considers suitable;
…

(3) If any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time must be suspended during the company’s business rescue proceedings.”

Mixed Messages

The effect of the moratorium in employment-related disputes has been considered by the Labour Court in three decisions, which have unfortunately given rise to conflicting jurisprudence.

In Fabrizio Burda v Integcomm (Pty) Ltd (unreported case no. JS539/12, 29 November 2013), the Labour Court held that the moratorium is applicable to employment-related disputes that are referred to the Commission for Conciliation, Mediation and Arbitration (“CCMA”) and the Labour Court, and that all “legal proceedings” must be stayed in accordance with the moratorium.

In the subsequent judgment in NUMSA v Motheo Steel Engineering (unreported case no. J271/14, 7 February 2014), the court held that the moratorium conflicts with the provisions of the Labour Relations Act, 66 of 1995 (“LRA”) and, in these circumstance, the LRA prevails. This is due to section 210 of the LRA, which provides that the provisions of the LRA prevail over the provisions of any other Act of parliament, save for the Constitution, unless they expressly amend the LRA. This judgment therefore confirms that the right to refer disputes to the CCMA and the Labour Court found in the LRA prevails over the moratorium in the Companies Act.

In the third case, Sondamase and another v Ellerine Holdings Limited (in business rescue) and another (unreported case no. C669/14, 22 April 2016) the Labour Court, again, had an opportunity to consider the moratorium. In this case, the applicants were employees of Ellerine Furnishers (Pty) Ltd (in business rescue) (“Ellerine”) who had been dismissed for operational reasons in November 2014. Prior to their dismissals, in June 2014, they had lodged a grievance alleging discrimination, victimisation and unfair labour practices. In July 2014, they referred a dispute to the CCMA. The dispute was not resolved and they subsequently referred their dispute to the Labour Court and delivered a statement of claim. However, there were various deficiencies in the applicants’ papers and Ellerine ultimately raised various special pleas, including that the section 133 moratorium was in force because the respondents were in business rescue. Therefore, all legal proceedings had to be stayed pending the finalisation of the business rescue processes.

The Labour Court considered the purpose of the moratorium and held that:

“The aim of this provision is clear. It is to create some breathing space for the business to be rescued and thus to put all legal proceedings on hold until the company may be brought back on track to continue with its business. Henochsberg explains:

‘Section 133 makes provision for a general moratorium (in some jurisdictions and [sic] moratorium is known as a “stay” or a “stay of proceedings”) on legal proceedings … against the company … while the company is subject to business rescue proceedings. The moratorium granted by this section is designed to provide the company with a breathing space while the business rescue practitioner attempts to rescue the company by designing and implementing a business rescue plan. This is a crucial element of any corporate rescue mechanism, as it allows the company sufficient breathing space to be able to find a solution to the financial problems it is experiencing at the time.’”

The Labour Court then considered and referred, with approval, to the judgment in the Integcomm matter mentioned above. The Labour Court also referred to the conflicting judgment in the Motheo Steel Engineering case and refused to follow it insofar as it suggested that there is a conflict between the moratorium and the LRA. In this regard, the Labour Court held that:

“It does not appear to me that there is any conflict between s133(1)(a) of the Companies Act and the dispute resolution provisions set out in the LRA. And in so far as there has been conflicting jurisprudence on the application of s133 of the Companies Act to dispute[s] arising out of the LRA, it appears to have been settled by the recent decision of the Supreme Court of Appeal in Chetty t/a Nationwide Electrical v Hart and another NNO [2015 (6) SA 424 (SCA) paras 26-29]. In that case, the SCA interpreted s133 to place a moratorium, not only on legal proceedings in court, but even [on] arbitration proceedings.”

The court upheld all of Ellerine’s special pleas, including the one relating to the moratorium. It pointed out that the moratorium does not result in the employees forfeiting their claims, but rather, that the claims are merely suspended pending the finalisation of Ellerine’s business rescue processes.

In the subsequent decision in Ellerine Furnishers (Pty) Ltd (in business rescue) and others v FGWU obo Cleopatra Somtsewu (unreported case no. JR1836/15, 26 April 2016), the Labour Court, relying on the Sondamase decision, reviewed and set aside a CCMA award that adopted the same approach as that in the Motheo Steel Engineering decision.

Although the issue of section 133’s applicability to arbitrations and Labour Court disputes can only be finally determined by a higher court, it seems likely that these two precedent-setting decisions will be followed by the Labour Court in the future, and that section 133 will be held to apply to all employment disputes in the CCMA and the Labour Court.

*ENSafrica acted for the respondents in the Sondamase and Integcomm matters and the applicants in the Somtsewu matter.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)