In-depth analysis of the business rescue provisions contained in Chapter 6 of the Companies Act No. 71 of 2008 and the Companies Amendment Act No. 3 of 2011

Section 136: Effect of business rescue on employees and contracts

as amended by section 87 of the Companies Amendment Act No. 3 of 2011

(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.

(2) Subject to subsection (2A), despite any provision of an agreement to the contrary, during business rescue proceedings, the practitioner may -

(a) entirely, partially or unconditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that-

(i) arises under an agreement to which the company was a party at the commencement of the business rescue proceedings; and

(ii) would otherwise become due during those proceedings; or

(b) apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated in paragraph (a).

(2A) When acting in terms of subsection (2)-

(a) a business rescue practitioner must not suspend any provision of-

(i) an employment contract; or

(ii) an agreement to which section 35A or 35B of the Insolvency Act, 1936 (Act No. 24 or 1936), would have applied had the company been liquidated;

(b) a court may not cancel any provision of-

(i) an employment contract, except as contemplated in subsection 1;

(ii) an agreement to which section 35A or 35B of the Insolvency Act, (Act No. 24 of 1936), would have applied had the company been liquidated; and

(c) if a business practitioner suspends a provision of an agreement relating to security granted by the company, that provision nevertheless continues to apply for the purpose of section 134, with respect to any proposed disposal of property by the company.

(3) Any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, in terms of subsection (2), may assert a claim against the company only for damages.

(4) If liquidation proceedings have been converted into business rescue proceedings, the liquidator is a creditor of the company to the extent of any outstanding claim by the liquidator for any remuneration due for work performed, or compensation for expenses incurred, before the business rescue proceedings began.

Comment on amendment

Banks were concerned that the business rescue practitioners would have the right to choose which agreements would be honoured, suspended and cancelled i.e. to cherry pick agreements. Under the new provisions the practitioners will have to apply to court for the cancellation of agreements (“Bill puts minority shareholders at greater risk - claim,” 2010).

The practitioner can now only suspend contracts, and if he/she wishes to entirely, partially or conditionally cancel contracts, court permission is required. This change represents a dilution of the USA Chapter 11 principle originally contained in draft legislation.