Brief Summary

Insolvency — Employment contracts — Suspension of contracts upon liquidation — Applicants, former employees of Petzetakis Africa (Pty) Ltd, sought a declaratory order regarding the date of suspension of their employment contracts following the company's liquidation. The dispute centered on whether the suspension took effect from the date of the provisional liquidation order or the date of the application for winding-up. The liquidators contended for the latter, arguing that the employees did not render services after 30 April 2011. The court held that the contracts of service were suspended with effect from the granting of the provisional order, entitling the employees to remuneration for the period up to that date.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an application in the Gauteng Local Division, Johannesburg, for declaratory relief concerning the interpretation and interaction of provisions governing employee contracts and claims in the context of a company liquidation. The dispute arose after Petzetakis Africa (Pty) Ltd (in liquidation) was placed under provisional and later final liquidation.

The first applicant, Mr Reginald Ngwato, was an erstwhile employee of the fourth respondent company. The second applicant, the National Union of Metalworkers of South Africa (NUMSA), acted in a representative capacity for a substantial body of former employees (at least 400, with the total employee cohort described as 488). The first to third respondents were the liquidators (with an explanatory note in the judgment that one liquidator had been removed from office), and the fifth respondent was the Master of the High Court, Johannesburg, who did not intervene.

The procedural history material to the interpretation question was that the winding-up application was presented to court on 10 November 2011, a provisional liquidation order was granted on 3 February 2012, and a final liquidation order followed on 23 October 2012. The application before the court sought to resolve, in principle, whether employee contracts of service were suspended (and salary claims affected) from the date of the provisional liquidation order, or retrospectively from the date the winding-up application was presented to court, by reason of the deemed commencement provisions applicable in company winding-up.

The general subject-matter was therefore the effective date of suspension of contracts of service in a company liquidation, and the associated question whether employees could claim remuneration for the period between the presentation of the winding-up application and the granting of the provisional order, in light of section 38 of the Insolvency Act 24 of 1936, read with section 339 of the Companies Act 61 of 1973 (preserved by the transitional regime in the Companies Act 71 of 2008), and the possible impact of section 341(2) of the 1973 Companies Act.

2. Material Facts

It was common cause that the fourth respondent company employed the first applicant and the relevant group of employees; that the winding-up application was presented on 10 November 2011; that the company was provisionally wound up on 3 February 2012; and that final liquidation followed on 23 October 2012. It was further common cause that the employees were entitled to remuneration until at least 10 November 2011, and that the employees who had proved claims were those reflected on the list attached as annexure “FA3”, with the relevant monthly salaries.

The company had ceased permanently to carry on its business with effect from 1 May 2011, which preceded the presentation of the liquidation application by approximately seven months. The respondents’ factual stance was that, because the business ceased operations, employees were not required to render services after 30 April 2011 and did not do so. The applicants, by contrast, alleged that employees tendered their services and made themselves available, notwithstanding that the company did not require them to work, and contended that their contracts were suspended only upon the granting of the provisional liquidation order on 3 February 2012.

A further factual area raised on the papers concerned whether some employees, including possibly the first applicant, had taken up alternative employment with Marley Pipe Systems (Pty) Ltd prior to 3 February 2012. The respondents suggested that if the first applicant had left for Marley, the declaratory relief would be moot as to him. The court, however, treated the primary dispute as one of principle and noted that it remained common cause that the company itself had not terminated the service contracts on the basis of cessation of business operations, nor retrenched employees under labour legislation, and that the respondents’ position (at least at one stage) proceeded from an acceptance that the contracts were extant up to the presentation date of the winding-up proceedings.

The judgment ultimately treated the core factual foundation for the interpretive issue as sufficiently established on the papers, namely that the contracts of service were regarded as extant at least to the relevant points identified in the litigation and that the principal contest was whether remuneration could be claimed for the period between 10 November 2011 and 3 February 2012, given the statutory framework.

3. Legal Issues

The central legal question was the correct interpretation of section 38(1) of the Insolvency Act 24 of 1936, as applied to company liquidation through section 339 of the Companies Act 61 of 1973, and preserved by item 9 of Schedule 5 to the Companies Act 71 of 2008. Specifically, the court had to determine from what date the contracts of service of employees are suspended when their employer (a company) is liquidated: whether suspension operates from the granting of the provisional liquidation order (or a final order where no provisional order is granted), or whether the suspension and/or remuneration consequences are effectively backdated to the date of presentment of the winding-up application because of the deemed commencement of winding-up.

A closely related interpretive question concerned section 341(2) of the Companies Act 61 of 1973, which provides that every disposition of a company’s property made after the commencement of winding-up is void unless the court otherwise orders. The respondents’ refined argument was that payment of salaries (or the obligation to pay arrears) in the period after presentment and before the provisional liquidation order constituted a disposition falling within section 341(2), such that it could not be enforced absent a court order “otherwise”.

The dispute was therefore primarily a question of law (statutory interpretation) and the application of legal rules to an identified period and category of claims, although the respondents also raised whether certain factual disputes (tender of service and alternative employment) needed to be resolved before the declaratory relief could properly be granted.

4. Court’s Reasoning

The court approached the matter on the basis that the application sought clarity on the governing legal principle: the operative date for suspension of service contracts in liquidation and the consequences for salary claims. It examined the statutory wording of section 38(1) of the Insolvency Act, which states that contracts of service of employees whose employer has been sequestrated are suspended with effect from the granting of a sequestration order. Through section 339 of the 1973 Companies Act, insolvency law principles apply mutatis mutandis in winding-up, “in so far as they are applicable”, for matters not specifically provided for in the Companies Act. The court accepted commentary and authority referred to in argument concerning the scope of section 339 and the notion that it applies to the liquidation process that commences once a winding-up order has been granted, rather than to the earlier litigation process leading to that order.

The respondents argued that the deemed commencement provisions in company winding-up, read with section 341(2), implied that employees’ salary entitlements for the post-presentment and pre-order period could not be enforced without a court order, because payment would be a voidable disposition after the “commencement” of winding-up. The court dealt with this by distinguishing the purpose and reach of section 341(2) from the continued operation of employment contracts prior to the liquidation order. It treated section 341(2) as aimed at preventing and reversing dispositions made in anticipation of winding-up that improperly advantage some creditors and prejudice the general body of creditors, rather than as a mechanism that effectively suspends employment contracts or renders ordinary remuneration claims non-enforceable absent proactive court intervention.

The court also rejected reliance on English law materials advanced by the respondents, stating that English law was not applicable to determine how salary should be treated in the relevant interim period in the South African statutory and constitutional setting. Instead, it emphasised that in the South African context, section 38(1) operates clearly to suspend contracts of service from the date of the liquidation order (provisional or final as the case may be), and that employees are not expected to seek relief under section 341(2) simply to “regularise” their right to remuneration for work performed or tendered pursuant to still-extant contracts.

In addition, the court placed weight on South African decisions interpreting section 38(1) in a labour-protective manner, and referenced the broader framework of the Labour Relations Act and constitutional protections, including the constitutional right to fair labour practices. It cited authority where section 38(1) had been confirmed as meaning what it says: suspension upon the granting of the relevant insolvency order, with the consequence that contracts remain extant until then, and that the statutory scheme includes mechanisms (such as the consultation and election provisions mentioned in section 38(4) and related subsections) that presuppose continuing contractual existence until the order triggers suspension.

On the factual disputes raised, the court was not persuaded that they constituted a genuine bar to determining the legal principle. While it accepted that not all employees would necessarily be entitled to identical amounts (for example, where alternative employment may have been taken up during the relevant period), it treated such variability as a matter to be addressed in individual proof of claims in the insolvent estate rather than as a reason to withhold declaratory clarity on the statutory interpretation. The court therefore separated the principle (the suspension date and the non-application of section 341(2) to invalidate ordinary salary claims arising from valid service contracts) from the quantification and proof of each employee’s claim.

Ultimately, the court concluded that section 348’s deemed commencement concept and the backdating of the concursus creditorum were not intended to “avoid transactions that may have been perfectly legitimate at the time they were entered into”, and that continued payment of salaries (or claims for arrear salaries) arising from valid service contracts did not fall to be voided as dispositions under section 341(2) in the manner contended for by the respondents.

5. Outcome and Relief

The court granted the declaratory relief in substance. It declared that section 38(1) of the Insolvency Act 24 of 1936, read with section 339 of the Companies Act 61 of 1973 and the preserved application of the 1973 Act under item 9 of Schedule 5 to the Companies Act 71 of 2008, means that employees’ contracts of service are suspended with effect from the date of the granting of a provisional liquidation order, or from the date of the final liquidation order where no provisional order is granted.

It declared that the first applicant’s contract of service was accordingly suspended on 3 February 2012, subject to the first applicant proving (for admission of his claim) that he had duly tendered or made his services available until that date. It further declared that, subject to similar proof and subject to reduction if alternative employment was obtained during the relevant period, the first applicant was entitled to claim the amount reflected in annexure “FAS” up to 3 February 2012 (identified in the order as R177 374.28, or a lesser proven amount depending on alternative employment).

The court ordered that the applicants’ costs of the application were costs in the winding-up of the fourth respondent.

Cases Cited

Kalil v Decotex (Pty) Ltd 1988 (1) SA 943 (A).

Cohen v Saphi (Pty) Ltd 1996 (1) SA 1190 (A).

Wolhuter Steel (Welkom) (Pty) Ltd v Jatu Construction (Pty) Ltd 1983 (3) SA 815 (O).

Venter NO v Farley 1991 (1) SA 316 (W).

The Nantes Princess 1997 (2) SA 580 (D).

Rennie NO v South African Sea Products Ltd 1968 (2) SA 138 (C).

Meaker NO v Cambell's New Quarries (Pvt) Ltd 1973 (3) SA 157 (R).

Storti v Nugent 2001 (3) SA 783 (W).

Mond & Another v Hammond Suddards & Another [1996] 2 BCLC 470.

Re Clifton Place Garage Ltd [1970] 1 All ER (CA) 353.

[1990] 1 All ER 1056 (English Practice Directive referred to in argument).

Richter v Bloempro CC 2014 (6) SA 38 (GP).

Van Zyl NO & Others v Commission for Conciliation, Mediation and Arbitration & Others (2012) 33 ILJ 2471 (LC).

Ndima & Others v Waverley Blankets Ltd (1999) 20 IJ 1563 (LC).

Stratford & Others v Investec Bank & Others 2015 (3) SA 1 (CC).

Development Bank of Southern Africa Ltd v Van Rensburg 2002 (5) SA 425.

Legislation Cited

Insolvency Act 24 of 1936, section 2 and section 38(1), and reference to section 38(4) and related provisions.

Companies Act 61 of 1973, section 339, section 341(2), section 348, and references to section 340.

Companies Act 71 of 2008, item 9 of Schedule 5.

Labour Relations Act 66 of 1995, section 189(1) and section 197B (referred to in the judgment as section 197B / “1978” in quoted text).

Constitution of the Republic of South Africa, 1996, section 23(1), section 36, and section 39(2).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, in a company liquidation, the effect of section 38(1) of the Insolvency Act (applied to winding-up through section 339 of the Companies Act 61 of 1973) is that employees’ contracts of service are suspended from the date of the granting of the provisional liquidation order, or from the final liquidation order if no provisional order is granted.

It held further that employees’ claims for remuneration in the period between the presentment of the winding-up application and the granting of the provisional liquidation order were not rendered unenforceable on the basis that the payment of salaries constituted a void disposition under section 341(2) requiring a court order to validate it. The court treated section 341(2) as targeting impeachable dispositions that prejudice the creditor body, not ordinary remuneration claims arising from valid service contracts continuing until suspension by operation of section 38(1).

It held that factual variability (such as whether particular employees obtained alternative employment during the relevant period) did not prevent declaratory clarification of the governing legal principle, but affected the proof and quantification of individual claims in the winding-up.

LEGAL PRINCIPLES

The judgment applied the principle that, in the winding-up of a company unable to pay its debts, insolvency law provisions apply mutatis mutandis through section 339 of the Companies Act 61 of 1973 in respect of matters not specifically regulated by company legislation, and that section 38(1) of the Insolvency Act 24 of 1936 operates according to its wording by suspending contracts of service upon the granting of the relevant insolvency order (in liquidation, the provisional or final winding-up order as applicable).

It applied the principle that section 341(2) of the 1973 Companies Act is concerned with dispositions after the commencement of winding-up that may disrupt the equal treatment of creditors, but that it does not operate, in the court’s analysis, to invalidate or render unenforceable ordinary salary payments (or claims for arrears) arising from valid, continuing employment contracts prior to their statutory suspension under section 38(1).

The judgment further applied the principle that deemed commencement provisions and backdating concepts associated with the concursus creditorum are not intended to unwind transactions that were legitimate when undertaken, and that statutory interpretation in this area should be consistent with the established South African approach to section 38(1) in light of labour-law and constitutional protections referenced in the authorities discussed in the judgment.

Ngwato and Another v Van der Merwe N.O and Others (2014/28470) [2016] ZAGPJHC 398 (6 May 2016)