Retrenching the efforts of SAA’s business rescue practitioners June 2020

By KERRI WILSON AND NATALIE HARTEN, Published in Company Law

On 9 March, the business rescue practitioners (BRPs) of South African Airways (SAA) issued notices in terms of s189 (3) of the Labour Relations Act (LRA) inviting employees to consult on retrenchment processes. With the consultation process period set to expire on 8 May, the National Union of Metalworkers of South Africa (NUMSA) and the SA Cabin Crew Association launched urgent proceedings out of the Labour Court against SAA and its BRPs, in terms of which the applicant unions sought an order declaring the BRPs' conduct in issuing the notices procedurally unfair. The court upheld the urgent application, and ordered the BRPs to withdraw the notices.

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The issues

At the time that the application was brought by the applicant unions, the business rescue practitioners for SAA had not yet published their business rescue plan because they were required to determine the effect of the COVID19 pandemic on SAA's business, given that the President had declared a national state of disaster on 15 March, and a nation-wide lockdown preventing and restricting air travel. Consequently, the business rescue practitioners, who had initially planned to publish the business rescue plan in the week of 16 March, applied for, and were granted, an extension until 29 May 2020.

The crisp issue which the court had to deal with was whether s136(1)(b) of the Companies Act permitted the BRPs to initiate retrenchment proceedings prior to the publishing and acceptance of the business rescue plan, or whether the BRPs could only retrench employees as part of a business rescue plan. The Labour Court summarised this in the following question: "can a business rescue practitioner appointed under the Companies Act dismiss employees for reasons related to operational requirements before a business rescue plan that contemplates retrenchments has been prepared and presented?" (own emphasis)

In brief, s136 deals with the effect of business rescue on a company's employees. Section 136(1)(b) states that any retrenchment of employees as contemplated in a company's business rescue plan is subject to s189 and s189A of the Labour Relations Act, 1995, and other employment-related legislation.

The facts

On 9 March, the business rescue practitioners for SAA issued a "section 189(3) notice", being an invitation to consult with SAA's employees regarding proposed retrenchments. This notice had the effect of triggering a 60-day consultation process.

The crux of the application was that the applicant unions sought to declare the consultation process initiated by the business rescue practitioners procedurally unfair on the basis that they issued the notices before the business rescue plan had been published and presented to SAA's employees. The unions did not attend further consultation sessions and ultimately withdrew from the consultation process entirely.

On 23 April, the business rescue practitioner communicated the dire state of SAA to all interested and affected parties, including the employees of SAA. Government would no longer provide funding to the business rescue practitioners to develop and implement a business rescue plan which would have contemplated a restructuring of SAA until travel bans are lifted.

Notwithstanding the BRPs communications, the applicant unions launched the application to ensure that the notices were withdrawn. The unions also sought to suspend the consultation process initiated by the BRPs until such a time as the BRPs had prepared a business rescue plan contemplating retrenchments.

Furthermore, the unions also sought an order from the Labour Court "directing SAA and the business rescue practitioners not to terminate the services of any SAA employee in terms of section 189 of the Labour Relations Act".

The decision

Section 189A(13) of the LRA empowers the court to intervene in retrenchment processes and make orders to ensure that any retrenchment ultimately meets the requirements of fair procedure.

In order to determine whether or not the BRPs conduct in issuing the notices was procedurally unfair, the Labour Court considered the right to fair labour practices contained in the Bill of Rights (s23(1) of the Constitution). In the past the Constitutional Court has recognised that this right includes the right to security of employment which is considered a "core value" of the LRA. Therefore, s136(1) of the Companies Act must be read in light of the purpose of the LRA, as well as s23 of the Constitution. This means that when interpreting s136(1) of the Companies Act, the interpretation which ought to be preferred is the one which promotes the preservation of work security.

The Labour Court held that a business rescue practitioner may initiate retrenchment processes only after a business rescue plan has been presented to all interested and affected parties. The business rescue plan which is presented must contemplate retrenchments in order for s136(1)(b) to be complied with, as s136 "locates the right to retrench in the business rescue plan" even if it "might not provide for an absolute moratorium".

Furthermore, the Labour Court held that "section 136(1) should be construed so as to provide continuity of employment in business rescue proceedings, subject to natural attrition and the variation of any conditions of employment by agreement, and to locate the right to terminate employment for reasons related to operational requirements in the terms of a business rescue plan".

Therefore, the Labour Court held that where a business rescue plan has not been presented or adopted which contemplates retrenchments, any notices which have been issued to commence a consultation process relating to proposed retrenchments are procedurally unfair. The Labour Court ordered the business rescue practitioners to withdraw the notices issued in terms of s189(3) of the LRA, and precluded the business rescue practitioners from offering any voluntary retrenchment packages to employees, and any employees from accepting such packages.

The effect

In terms of s128 of the Companies Act, "business rescue" means "proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for the temporary supervision of the company, and of the management of its affairs, business and property…".

The BRPs' task is to step into the shoes of the board, in a supervisory role, to manage the company's affairs, business and property. Retrenchments are often resorted to when there is a need to lower or reduce the costs of a business's operations in certain circumstances. In so far as SAA was concerned, the BRPs clearly considered the need to preserve the viability of the business. The first step was to close off various flight routes and reduce numbers of flights. Following the President's declaration of a national state of disaster on 15 March, prohibitions on travel and restrictions on movement resulted in flight cancellations, grounding of aircrafts and the closure of airports worldwide. Consequently, the BRPs were required to assess the implications of COVID-19 and revisit the proposed restructuring options that they had initially identified.

The only option available to the BRPs was to proceed with a retrenchment process.

The court interpreted s136(1)(b) to place some form of moratorium on retrenchments prior to the publishing of a business rescue plan. This interpretation appears to afford employees an elevated status in business rescue. This undermines the requirement for balancing the rights of all affected persons in business rescue.

As a wave of concern washes over all South African BRPs, we can only hope that the Labour Appeal Court considers the impact that such a decision will have on the future of business rescue.

Wilson is a Director and Harten a Senior Associate with Falcon & Hume.