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[2015] ZALAC 41
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Maluti-A-Phofung Local Municipality v Rural Maintenance (Pty) Ltd and Another (JA79/2014) [2015] ZALAC 41; (2016) 37 ILJ 128 (LAC); [2016] 1 BLLR 13 (LAC) (21 October 2015)
IN THE LABOUR
APPEAL COURT OF SOUTH AFRICA, JOHANNEBURG
Reportable
JA79/2014
In the matter between:
MALUTI-A-PHOFUNG LOCAL
MUNICIPALITY
Appellant
and
RURAL MAINTENANCE (PTY)
LTD
First Respondent
RURAL MAINTENANCE FREE STATE (PTY)
LTD
Second Respondent
Heard:
10 September 2015
Delivered:
21 October 2015
Summary:
Outsourcing of business – local municipality’s manager
outsourcing municipality’s function
of electricity supply –
party to agreement undertaking to manage, operate, administer,
maintain and expand the municipal
electricity distribution network -
municipality later cancelling agreement – cancellation of
agreement giving rise to transfer
of the electricity supply back to
municipality – transferor contending that transfer as going
concern took place as contemplated
in section 197 of the LRA. Labour
Court finding that transfer as a going took place – Appeal -
municipality contending lack
of authority of the municipal manager to
sign agreement and that no transfer of business as a going concern
took place –
concerning lack of authority,
Oudekraal
principle restated to the effect that until set aside an
administrative decision stands. Whether transfer of a business took
place
- court finding that some components of the business not
transferred and withheld by transferor – such components vital
for
the supply of electricity - municipality not with assets
transferred to it able to manage, operate, administer, maintain,
expand
the municipal electricity distribution network so as to
continue the same business run by the transferor – No transfer
of
business as a going concern took place. Labour Court’s
judgment set aside- Appeal upheld with costs.
Coram: Davis JA, Coppin JA
et
Savage AJA
JUDGMENT
DAVIS JA
Introduction
[1]
Appellant
is a local municipality responsible for exercising legislative and
governmental functions in the Eastern Free State area,
which includes
Harrismith, Kestell and Phutaditjhaba. Amongst its functions is the
supply of electricity to residents.
[2]
It is
common cause that in 2011, the then municipal manager of appellant
decided to outsource this function to first and second
respondents
(‘Rural’). Rural specialises in assisting municipalities
to provide electricity to consumers. It appears
that appellant had
allowed its electricity infrastructure to fall into a state of
disrepair. Major transformers had suffered oil
leaks which caused
them to malfunction and circuit breakers were damaged beyond repair.
There were frequent electricity outages.
There were cases of live
electricity distribution points which had not been properly secured
and which, if access by members of
the public would result in
electrocution and potential death. The switchgear was malfunctioning
and, at least, in one case a substation
exploded killing a person.
[3]
It
also appeared that appellant could not pay Eskom for the electricity
which was supplied. In significant part, this problem was
caused by
an inability to effectively collect revenue from consumers, because
appellant did not have the necessary metering, invoicing
and
collecting systems in place.
[4]
For
these reasons, on 3 April 2011, the municipal manager of appellant
and Rural concluded the Electricity Management Contract (EMC),
in
terms of which, Rural was appointed by appellant to manage, operate,
administer, maintain and expand the municipal electricity
distribution network for a period of 25 years, after which the
obligation to supply electricity to residents would revert back
to
appellant. The EMC was signed on behalf of the appellant by the
former municipal manager, Mr LM Mtombela and by Mr Ilze Bosch
on
behalf of Rural.
[5]
It is
also common cause that, in terms this agreement, Rural accepted 16
employees from appellant by way of a transfer agreed to
by the
parties which transfer was governed by s197 of the Labour Relations
Act of 1995 (‘LRA’).
[6]
Rural
commenced the performance of its obligations under the EMC from 1
September 2011. It incurred significant expenditure in expanding
the
business and it enlarged the workforce to 127 employees. It invested
money in this expansion process which it explained in
its founding
affidavit as follows:
‘
Rural
has incurred considerable expenditure in respect of:
1.
the
purchase of network materials being switch gears, polls,
transformers, mini-substations and prepaid meters and the purchase
of
17 new light commercial vehicles, totalling R13,523,766.51;
2.
the
purchase of two specialised trucks beings an Iveco 4x4 live line
truck and an Iveco 6x6 drill rig totalling R7,500,00;
3.
electrical
infrastructure mapping (ie. the compiling and recordal of the details
of the Municipality’s electrical distributions
infrastructure),
the mapping of townships within the geographical area of the
Municipality, the purchase of software systems in
regard to the
electricity metering, billing, collection, customer case, fault desk,
call centre, technical services and the
like.. salaries, legal costs,
travel costs, technical investigations, financial investigations and
feasibility study costs totalling
R 69,987,804; and
4.
the
purchase of an immovable property in Harrismith to be used to
construct offices for Rural’s employees and staff
accommodation.
The total costs of the immovable property
including construction will be approximately R 5,000,000.
’
[7]
On 5
August 2013, appellant advised Rural that it considered that it was
not bound by the terms of the EMC, because its former municipal
manager, Mr Mtombela, had not obtained the requisite authority from
appellant to enter into the contract on behalf of the appellant.
Therefore, his action was
ultra
vires
and, accordingly, the contract was null and void. A further reason
emerged as a basis for this contention, namely that Rural had
not
procured the necessary license from the relevant regulator NERSA,
which is a mandatory requirement in terms of the Electricity
Regulations Act 4 of 2006.
[8]
Rural
contends that appellant had no right to resile from the EMC and that
its actions amounted to a breach of contract. Accordingly,
it has
sought to cancel the contract. This contractual dispute is the
subject of a pending action in the Free State High Court.
It appears
that the action was set down for hearing in October 2014 but the
matter was postponed and will be heard later this year.
[9]
Notwithstanding
this pending action, Rural delivered an information pack to appellant
on 3 October 2014 containing a list of the
names of the 127 affected
employees, their employment contracts, an organogram of Rural’s
organisational structure together
with a proposed agreement in terms
of s197 of the LRA. Rural then sought to transfer the 127 employees
onto appellant’s payroll.
It returned to appellant what it
termed “possession of the Network and the Capital Assets”;
in other words the electricity
distribution infrastructure which
consisted largely of the properties, tools equipment and vehicles
that had been transferred by
appellant to Rural in the first place.
[10]
In
its replying affidavit, Rural said, “the retention by Rural of
peripheral assets such as vehicles, computer stations and
the like
does not affect this conclusion”; that is it had transferred
sufficient of the infrastructure to trigger the operation
s197 of the
LRA.
[11]
The
relevant portion of s197 reads as follows:
‘
1.
In this section:
(a)
“
business”
includes the whole or a part of any business, trade, undertaking or
service; and
(b)
“
transfer”
means the transfer of a business by one employer (‘the old
employer’) to another employer (‘the
new employer’)
as a going concern.
2.
If a transfer of a business takes place, unless otherwise agreed in
terms of
subsection (6):
(a)
The new employer is automatically substituted in the place of the old
employer in
respect of all contracts of employment in existence
immediately before the date of transfer;
(b)
All the rights and obligations between the old employer and an
employee at the time
of transfer continue in force as if they had
been rights and obligations between the new employer and the
employee;
(c)
Anything done before the transfer by or in relation to the old
employer, including
the dismissal of an employee or the commission of
an unfair labour practice or active unfair discrimination, is
considered to have
been done by or in relation to the new employer;
and
(d)
the transfer does not interrupt an employee’s continuity of
employment, and
the employer’s contract of employment continues
with the new employer as if with the employer.’
[12]
The
court
a
quo
found that it was satisfied that the business of providing a service
to the local inhabitants, had previously been in the hands
of Rural
but had now been transferred to appellant. It thus concluded that
there has been a transfer of a business as a going concern
as
contemplated in s197. Accordingly, Tlhotlhalemaje AJ ordered that,
with effect from 1 April 2014, the employment contracts of
all 127
affected employees were to be transferred to appellant in terms of
s197 (2) of the LRA.
[13]
On
petition, this issue has now come on appeal to this Court.
The key issues
[14]
Mr
Redding, who appeared together with Mr Hopkins and Ms Freese on
behalf of the appellant, raised an initial point to the effect
that,
even if factually there had been a transfer of business “as a
going concern”, the court
a
quo
had erred in finding that, as a matter of law, a transfer had taken
place. In his view, there could be no transfer unless there
was some
positive action on the part of the transferor. The transferor would
have to engage in a deliberate and intentional “handing
over”
of the business. Section 197 employs the words of a business being
transferred “by one employer (the old employer)
to another
employer (the new employer) as a going concern.” In Mr
Redding’s view, this connotes a positive act to effect
the
necessary transfer.
[15]
The
wording of this section has been the subject of a great deal of
debate, both among academic commentators and in case law. See,
in
particular, Malcolm Wallis “It's Not Bye-Bye to 'By': Some
Reflections on Section 197 of the LRA”
2013
(34)
Industrial
Law Journal
779-807
and the authorities cited therein together with the decision
of the Constitutional Court in
Aviation
Union of South Africa and Another v South African Airways (Pty) Ltd
and Others
2012 (1) SA 321
(CC). In reviewing the judgment of the Constitutional
Court, Wallis, writing in his academic capacity, concludes as
follows:
‘
Whilst
the principal is the agency by which that occurs, the principal is
not the employer of the affected workers and that employer
(the old
employer for the purposes of s 197) has not effected any transfer.
All that they can do is withdraw from the scene. In
those
circumstances the position remains that the transfer has to been
transfer by the old employer. The principal is the party
that causes
the transfer of the business not the old employer. The judgment of
the CC not only does not alter that, it reinforces
it. That
conclusion should not be obscured by the outcome of the litigation,
which was driven by the peculiar facts of that case.’
[1]
[16]
Following
upon this approach, Mr Redding submitted that, unless Rural took
positive steps to cause its business to be transferred
back to
appellant, s197 of the LRA could not have been triggered in this
case. In particular, Mr Redding submitted that the appellant
had
taken the view that the EMC had been concluded
ultra
vires
and, accordingly, the contract was void
ab
initio
.
It therefore followed that no positive act as envisaged in s197 had
taken place to cause the business to be transferred back to
the
appellant.
[17]
Regrettably,
this argument does not take sufficient cognisance of the implications
of the decision in
Oudekraal
Estates (Pty) Ltd v City of Cape Town and Others
[2]
where the following was said:
‘
For
those reasons it is clear, in our view, that the Administrator’s
permission was unlawful and invalid at the outset.…But
the
question that arises is what consequences follow from the conclusion
that the Administrator acted unlawfully. Is the
permission that
was granted by the Administrator simply to be disregarded as if it
had never existed? In other words, was
the Cape Metropolitan
Council entitled to disregard the Administrator’s approval and
all its consequences merely because
it believed that they were
invalid provided that its belief was correct? In our view, it
was not. Until the Administrator’s
approval (and thus
also the consequences of the approval) is set aside by a court in
proceedings for judicial review it exists
in fact and it has legal
consequences that cannot simply be overlooked. The proper functioning
of a modern State would be considerably
compromised if all
administrative acts could be given effect to or ignored depending
upon the view the subject takes of the validity
of the act in
question.’
[3]
[18]
This
approach has been further developed in
MEC
for Health EC v Kirland Investments (Kirland )
[4]
where Cameron J said:
‘
The
fundamental notion – that official conduct that is vulnerable
to challenge may have legal consequences and may not be
ignored until
properly set aside – springs deeply from the rule of law.
The courts alone, and not public officials,
are the arbiters of
legality.
’
[5]
[Footnote
omitted]
[19]
In
Kirland
an acting superintendent general in the Department of Health Eastern
Cape granted approval for the establishment of private hospitals,
which permission initially had been refused by the superintendent
general before he took an extended period of sick leave. When
he
resumed duty, the superintendent general withdrew the approvals on
the grounds that the acting superintendent general had acted
improperly and hence the former could withdraw the decision.
[20]
The
respondent approached the High Court seeking an order overturning the
decision to withdraw the purported approval and thus reinstating
the
initial approval that had been granted by the acting superintendent
general.
[21]
Of
relevance to the present dispute, the High Court held that the
withdrawal of the approval should be overturned on the basis that
when the decision to withdraw the approvals was taken, the
superintendent general had not complied with the requirements of
procedural
fairness. On appeal to the Constitutional Court, the wider
question of the implications of the
Oudekraal
decision were examined.
[22]
For
the majority, Cameron J found that the appeal had to fail because:
‘
The
approval communicated to Kirland was therefore, despite its
vulnerability to challenge, a decision taken by the incumbent of
the
office empowered to take it, and remained effectual until properly
set aside. It could not be ignored or withdrawn by
internal
administrative fiat. This approach does not insulate unconstitutional
administrative action from scrutiny. It merely requires
government to
set about undoing it in the proper way. That is still open to
government.
’
[6]
[23]
This
finding is clearly applicable to the present set of facts. It is not
sufficient, as Mr Redding argued, that, as the appellant
has taken
steps in another court to declare the contract
ultra
vires
and consequently void, the
Oudekraal
principle
does not apply thereto. See also
Nature’s
Choice Properties (Alrode) (Pty) Ltd v Ekurhuleni Metropolitan
Municipality
2010 (3) SA 581
(SCA); Hoexter
Administrative
Law in South Africa
2
nd
ed (Juta 2012) at 546 – 550. Accordingly, in the absence of a
finding by the Free State High Court, it cannot be said that
the EMC
can be ignored legally and there could be no transfer of the business
“by” Rural to the appellant because the
return of the
infrastructure happened in consequence of a
restituo
in integrum,
and not as a result of some positive conduct on the part of the
relevant parties.
Has there been a transfer as a
going concern?
[24]
Mr
Redding submitted that to classify the transaction as a going
concern, what must be transferred is “the same business in
different hands”. The business that was operated before the
transfer must be substantially the same as the business that
is
capable of being operated after the transfer. Accordingly, a business
cannot be sold as a going concern if it cannot seamlessly
commence
trading in substantially the same way as the business was traded
previously. Mr Redding submitted that the business that
was operated
by Rural immediately before the handover used specialised tools and
assets in a manner that the appellant could not
employ after “the
hand over”, because these same tools and assets had not been
handed over by Rural. Significant assets
were not transferred to the
appellant, including:
1.
A host vending system, software and intellectual property relating to
pre-paid
metering;
2.
An immovable property in Harrismith which provided offices and
accommodation
for at least 18 of the 127 employees;
3.
Computer software systems for electricity metering, billing,
collection, customer
care, fault desk, call centre, technical
services;
4.
Computer hardware and stationery;
5.
Two specialised trucks (Iveco 4x4 Live Line truck and Iveco 6x6 drill
rig) and
17 new light commercial vehicles; and
6.
Electrical infrastructure mapping.
[25]
Mr
Redding submitted that what Rural had handed over was the basic
infrastructure needed to supply electricity. It had transferred
a
service to the appellant but had not transferred the actual business
that provided the comprehensive service which it had conducted
prior
thereto. When appellant decided to outsource the business to Rural,
it had done so on the basis of two important considerations;
that is
the inadequate maintenance of the infrastructure and the appellant’s
inability to properly bill consumers and collect
revenue.
[26]
While
accepting that the basic infrastructure have been handed back to
appellant, this was insufficient to operate the trading business.
More was required to convert the mere supply of electricity into a
viable trading business. The additional components, which were
required to perform this additional set of activities, were never
transferred to appellant and accordingly the same business was
not
transferred. Thus, it could not be concluded that appellant had
received “a going concern” from Rural, without
a
substantial additional financial investment which had to be made in
order to replicate the business that Rural had run prior
to the
handover.
[27]
Mr
Pretorius, who appeared together with Mr Hollander on behalf of the
respondent, submitted that an extensive electricity transmission
and
distribution network comprising all the equipment, wires and hardware
installed in order to receive the bulk electricity from
the Eskom
metering, point and to distribute electricity to the end-users
through the end-user metering point, had been transferred
back to the
appellant. This included substations, switchgear protection and
isolators, transformers, power lines, dropout fuses
and links and
metering equipment together with the appellant’s prepaid
vending system, comprising approximately of 30 prepaid
stations.
[28]
In
support of his submission that it was sufficient for the entire
operating infrastructure and capital assets to be transferred
to
appellant in order to trigger the application of s197 of the LRA, Mr
Pretorius referred to the test as formulated in
Spijkers
v Gebroerders Benedik Abattoir v Alfred Benedik en Zonen:
[7]
The
decisive criterion for establishing whether there is a transfer for
the purposes for the directive is whether the business in
question
retains its identity. Consequently a transfer of an undertaking,
business or part of business does not occur merely because
its assets
are disposed of. Instead it is necessary to consider…
whether the business was disposed of as a going concern,
as would be
indicated, inter alia by the fact that its operation was actually
continued or resumed by the new employer, with the
same or similar
activities. In order to determine whether those conditions are met,
it is necessary to consider all the facts characterising
the
transaction in question, including the type of undertaking or
business, whether or not the business’s tangible assets,
such
as buildings and movable property, are transferred, the value of its
intangible assets at the time of transfer, whether or
not the
majority of its employees are taken over by the new employer, whether
or not its customers are transferred and the degree
of similarity
between the activities carried on before and after the transfer and
the period, if any, for which those activities
were suspended.
It should be noted, however, that all those circumstances are merely
single factors in the overall assessment
which must be made and
cannot therefore be considered in isolation.
’
[8]
[29]
On
the basis of this
dictum
,
Mr Pretorius submitted that it was clear that the same business was
conducted in the same location for the benefit of the same
constituency, albeit in different hands. There had been a transfer of
the infrastructure and capital infrastructural assets which
was
sufficient to conclude that the business which was now conducted by
the appellant was the same business as had been conducted
by the
respondents. See also
Harsco
Metals SA (Pty) Ltd v Arcerlomittal SA Ltd
[2012] 4 BLLR 385
(LC) at para 34 – 36.
[30]
In
the debate about the appropriate test, Mr Redding sought to rely on a
decision of the European Court of Justice in
Oy
Liikenne Ab v Pekka Liskojärvi, Pentti Juntunen
(
Oy
Liikenne)
[9]
.
In this case the court noted that when a transfer is of a going
concern, the transfer must relate,
‘
to
a stable economic entity whose activity is not limited to performing
one specific work’s contract… the term “entity”
thus refers to an organised grouping of persons and assets
facilitating the exercise or an economic activity which pursues a
specific
objective.
’
[10]
The court went on to say
‘
So
the mere fact that the service provider by the old and new
contractors are similar does not justify the conclusion that there
has been a transfer of an economic activity between the two
undertakings. Such an entity cannot be reduced to the activity
entrusted to it. Its identity also emerges from other factors
such as its workforce, its management staff, the way in which
its
work is organised its operating methods, or indeed, where
appropriate, the operational resources available to it.
’
[11]
[31]
In
this case, the court dealt with the transfer of seven local bus
routes from the respondent to the appellant. It noted:
‘
In
a sector such as scheduled public transport by bus, where the
tangible assets contribute significantly to the performance of
the
activity, the absence of a transfer to a significant extent from the
old to the new contractor of such assets, which are necessary
for the
proper functioning of the entity, must lead to the conclusion that
the entity does not retain its identity
.’
[12]
Para 42
Evaluation
[32]
To
the argument that the case of
Oy
Liikenne
is
authority for the proposition that in an asset intensive industry
such as the delivery of petroleum products by a tanker, the
absence
of a transfer of such assets or a significant part of them is
decisive, in that in these circumstances the entity does
not retain
its identity, the Court of Appeal in
P
and O Trans-European Limited v Initial Transport Services Limited
[13]
said:
‘
to
determine whether the conditions for the transfer of an economic
entity are satisfied, it is also necessary to consider all the
factual circumstances characterising the transaction in question,
including in particular the type of undertaking or business involved,
whether or not its tangible assets such as buildings and movable
property are transferred, the value of its intangible assets at
the
time of the transfer, whetehr or not the core of its employees are
taken over by the new employer, whether or not its customers
are
transferred, the degree of similarity between the activities carried
on before and after the transfer, and the period, if any,
for which
those activities were suspended. These are, however, merely
single factors in the overall assessment which must
be made, and
cannot therefore be considered in isolation (see in particular
Spijkers
paragraph 13 and
Süzen
paragraph 14).
’
[14]
See also Wynn-Evans
The
Law of TUPE Transfers
(
Oxford
University Press
2013)
at
41-44.
[33]
It is
clear therefore that the overall assessment depends on an examination
of the totality of the business; in this case, the business
operated
by Rural prior to the transfer.
[34]
The
court
a
quo
held that the vehicles, drill, rigs, tools, computers, software,
metering and billing systems, intellectual property, debtors’
information and debtors books were peripheral assets used in the
conduct of the business. The contrary argument was that this focused
the attention of the enquiry solely on a service that supplies
electricity, rather than upon the totality of the service which
had
been performed by Rural and which could be described as its business.
Following this description, the business conducted by
Rural operated
on two legs, namely the provision of adequate infrastructure in order
for residents to be supplied with electricity
and the mechanism by
which to generate sufficient revenue for the supply of electricity by
way of an adequate billing of consumers
and the collection of what
was owed for the supply of electricity.
[35]
In
its founding affidavit, deposed to by Mr Bester, Rural states as
follows:
‘
The
entire Network Business relating to all aspects of the Project, i.e.
the provision of all electricity related services to inhabitant
of
the Municipality’s jurisdictional area, has reverted back to
and has been taken over by the Municipality and is already
under the
control of the Municipality and possession of the Network and the
Capital Assets have already been returned to the Municipality.
The
entire electricity distribution infrastructure of the Municipality
that Rural and Rural Free State were in control of and utilised
(and
maintained and upgraded) for the provision of all electricity related
services to inhabitants of the Municipality’s
jurisdictional
area, as the Municipality had previously done, are no longer under
the control of Rural and Rural Free State and
has been handed back,
together with the additions and improvements thereto effected by
Rural and Rural Free State, to the Municipality.’
[36]
Significantly,
earlier in his affidavit Mr Bester sets out “the considerable
expenditure” incurred by Rural, when it
began to fulfil its
obligations under the EMC including two specialised trucks,
electrical infrastructure mapping and the purchase
of an immovable
property as well as software systems ‘in regard to the
electricity metering, billing, collection, customer
care, fault desk,
call centre, technical services and the like’. All of these
were considered to be necessary for the operation
of the business
conducted by Rural. As indicated earlier, many of these assets were
not transferred to the appellant and accordingly,
without significant
investment by the latter, it would be impossible for the appellant
without more, to seamlessly conduct the
same business as that which
had been conducted by Rural.
[37]
In my
view, given that the
onus
rests upon the respondent to show, on the probabilities, that a
transfer of a business as a going concern had taken place, it cannot
be said that the same business conducted by Rural had been
transferred so that it was now conducted by a different entity,
namely
appellant. Take but one critical issue, debt collection. For
debt collection to be continued seamlessly by appellant, this
component
of the business had been conducted by Rural, it was
necessary to meter the use of electricity, invoice the consumer and
collect
payments therefrom. Essential to this process would have been
the use of software and information stored and used in digital form
as had been employed by Rural. In short, the means to perform this
debt collection activity had not been transferred. On its own,
this
was a significant component of the overall business. It supports the
overall assessment that it cannot be said, on these papers,
that the
very business conducted by Rural had been transferred to appellant.
Expressed differently, appellant would not have been
able to continue
business seamlessly after the “transfer”. For these
reasons, the appeal must be upheld.
Order
[38]
The
appeal succeeds with costs, including the costs of two counsel. The
order of the of the court
a
quo
is set aside and replaced with the following:
The application
is dismissed with costs.
__________________
Davis JA
Coppin JA and
Savage AJA concur in the Judgment of Davis JA.
APPEARANCES:
FOR THE
APPELLANT:
Adv AIS Redding SC, Adv K Hopkins and
Adv S Freese
Instructed by Majavu Inc
FOR THE RESPONDENTS:
Adv PJ Pretorius SC
and Adv L Hollander
Instructed by Webber Wentzel
[1]
At 797.
[2]
2004 (6) SA 222
(SCA).
[3]
At para 26.
[4]
2014 (3) SA 481
(CC).
[5]
At para 103.
[6]
Kirland
at para 105.
[7]
[1986] 2 CMLR 296
(ECJ).
[8]
At para 11-13.
[9]
[2001] IRLR 171
ECJ.
[10]
At para 31.
[11]
At para 34.
[12]
At para 42.
[13]
[2003] IRLR 128
(CA).
[14]
At para 12 quoted
in
Oy
Liikenne
at
para 33
.