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[2015] ZALAC 43
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Atlas Packaging (Pty) Ltd v Palierakis; In re: Palierakis v Atlas Carton and Litho CC (In Liquidation) and Others (JA108/14) [2015] ZALAC 43; (2016) 37 ILJ 109 (LAC) (21 October 2015)
IN
THE LABOUR APPEAL COURT OF SOUTH AFRICA, JOHANNESBURG
Reportable
Case no: JA108/14
In the matter between:
ATLAS PACKAGING (PTY)
LTD
Appellant
and
STYLIANOS
PALIERAKIS
Respondent
In Re
STYLIANOS
PALIERAKIS
Applicant
and
ATLAS CARTON AND LITHO CC (IN
LIQUIDATION)
First Respondent
ATLAS PAPER SACKS
CC
Second Respondent
ATLAS PACKAGING (PTY)
LTD
Third Respondent
Heard:
10 September 2015
Delivered:
21 October 2015
Summary:
Application of s197A of the LRA in respect of a scheme of arrangement
or compromise entered into
in order to avoid winding up – court
should examine the true nature of the contractual agreement.
Appellant contending that
a scheme of arrangement or compromise was
entered into between it and another party to avoid the winding up of
the latter for reasons
of insolvency and consequently s197 of the LRA
does not apply - contractual arrangements between parties not making
use of the
provisions of s311 of the Companies Act of 1973 - purpose
of a scheme of arrangement or compromise to avoid a winding up order
- –arrangement or compromise between the parties not serving
its intended purpose but to circumvent the provisions of s197
of the
LRA – Appeal dismissed with costs.
Coram: Davis JA, Coppin JA and
Savage AJA
JUDGMENT
DAVIS
JA
Introduction
[1]
This
is an appeal against an order of Molahlehi J of 20 June 2014 in
which, he dismissed a preliminary point raised by appellant
that a
dispute concerning an alleged unfair dismissal claim of respondent
stands to be determined in terms of s197A (1)(b) of the
Labour
Relations Act No.66 of 1995 (‘LRA’).
[2]
Briefly,
the background can be described thus: Respondent was dismissed for
operational reasons by third respondent on 14 April
2010. On 29
September 2010, first respondent (‘Atlas Carton’) and
second respondent (‘Atlas Paper’) concluded
a business
sale agreement with appellant. On 5 August 2011, Atlas Carton and
Atlas Paper were placed into voluntary liquidation
which was later
converted into compulsory liquidation on 7 September 2011. Appellant
contends that, although the transfer of the
business from Atlas
Carton took place as a going concern, the provisions of s197 of the
LRA do not apply, as the dispute is governed
by s197A of the LRA.
[3]
The
significance of this argument is that, in the event that s197A of the
LRA is found to be applicable, respondent would have no
claim against
appellant because the latter would bear no liability in respect of
the alleged claim. By contrast, if the decision
of Molahlehi J is
upheld, the matter would have to proceed further on the merits of the
alleged dismissal as well as in respect
of a determination of
quantum.
Appellant’s case
[4]
Appellant’s
case is based on s197 A of the LRA which provides:
‘
197
A Transfer of contract of employment in circumstances of insolvency
(1)
This
section applies to the transfer of a business-
(a)
if
the old employer is insolvent; or
(b)
if
a scheme of arrangement or compromise is being entered into to avoid
winding-up or sequestration for reasons of insolvency.
(2)
Despite
the Insolvency Act, 1936 (Act No. 24 of 1936), if a transfer of a
business takes place in the circumstances contemplated
in subsection
(1), unless otherwise agreed in terms of s 197 (6) –
(a)
the
new employer is automatically substituted in the place of the old
employer in all contracts of employment in existence immediately
before the old employer’s provisional winding up or
sequestration;
(b)
all
the rights and obligations between the old employer and each employee
at the time of the transfer remain rights and obligations
between the
old employer and each employee;
(c)
anything
done before the transfer by the old employer in respect of each
employee is considered to have been done by the old employer;
(d)
the
transfer does not interrupt the employees’ continuity of
employment and the employee’s contract of employment continues
with the new employer as if with the old employer.
(3)
Section
197 (3), (4), (5) and (10) applies to a transfer in terms of this
section any reference to an agreement in that section
must be read as
a reference to an agreement contemplated in s 197 (6).
(4)
Section
197 (5) applies to a collective agreement or arbitration binding on
the employer immediately before the employer’s
provisional
winding up or sequestration.
(5)
Section
197 (7), (8) and (9) does not apply to a transfer in accordance with
this section.’
[5]
Critical
to appellant’s case is the contention, based upon s197A (1)(b),
that there was a scheme of arrangement or compromise
entered into
between appellant and Atlas Carton to avoid the winding up of the
latter for reasons of insolvency.
[6]
It is
common cause that the contractual arrangements between appellant and
Atlas Carton did not make use of the provisions of s311
of the
Companies Act of 1973, the relevant portion of which provides:
‘
Where
any compromise or arrangement is proposed between a company and its
creditors or any class of them, or between a company and
its members,
the court may, on application of the company or any credit member of
the company, or in the case company being wound
up, of the
liquidator, or if the company is subject to judicial management
order, the judicial manager, order a meeting of the
company or class
creditors, or the members (as the case may be), to be summoned in
such matter as the court may direct.’
[7]
However,
in
Henochsberg
On
the
Companies Act
71
of 2008
[1]
at 536 – (7) it is contended that specific reference is not
made to s311 of the Companies Act of 1973 in s197 A, which, on
this
line of argument is intended to apply not only to a compromise or
scheme of arrangement implemented in terms of s311 of the
1973
Companies Act, but also in respect of common law arrangements and
compromises.
[8]
I
remain uncertain as to how a common law compromise or scheme is to
apply in the context of s197 A. In
Henochsberg
On
the
Companies Act
71
of 2008
,
it is cited as support for his proposition the judgment in
Ex
Parte NBSA Centre Ltd
1987 (2) 783 (T) (
Ex
Parte NBSA)
and
an earlier judgment in
Ex
Parte Lomati Landgoed Beheerende Eiendoms Bpk
1985 (2) SA 517
(W).
[9]
Unquestionably,
Coetzee DJP in
Ex
Parte NBSA (supra)
accepted that not every so called arrangement is an arrangement in
terms of
s311.
Coetzee DJP went on however to say at 802B that “only
an arrangement between the company and its members or creditors or a
class thereof can be an arrangement. When member’s shares are
to be transferred to or to be obtained by a third person or
other
members of the company this question arises. In every case it
would have to be determined on a consideration of all
the relevant
aspects of the scheme and the surrounding facts whether it is such an
arrangement between the company and its members
or creditors”.
[10]
In
this
dictum,
the learned judge clearly envisaged that a court would have no
jurisdiction to recognize some other form of arrangement outside
of
the provisions of
s311.
Most certainly these two judgments do not
afford definitive support for the contention that
s197
A can be
interpreted to include a compromise or scheme which is not
implemented in terms of
s311
of the
Companies Act, but
rather under
the common law.
[11]
Nonetheless,
for reasons that will become apparent, it is not necessary to decide
this question definitively. A prior question arises,
in this case,
namely, was there a genuine scheme of arrangement or compromise,
which had been entered into to avoid the winding
up of Atlas Carton.
[12]
In
evaluating the relevant contract, a court must be cognisant of the
doctrine regarding simulated transactions. This doctrine was
definitely expounded in
Commissioner
of Customs and Excise v Randles Brothers and Hudson Limited
[2]
where Watermeyer JA said:
‘
I
wish to draw particular attention to the words “a real
intention, definitely ascertainable, which differs from the simulated
intentions”, because they indicate clearly what the learned
Judge meant by “disguised” transaction. A transaction
is
not necessarily a disguised one because it is devised for the purpose
of evading the prohibition in the Act or avoiding liability
for the
tax imposed by it. A transaction devised for that purpose, if the
parties honestly intend it to have effect according to
its tenor, is
interpreted by the Courts according to its tenor, and then the only
question is whether, so interpreted, it falls
within or without the
prohibition or tax.
A
disguised transaction in the sense in which the words are used above
is something different. In essence it is a dishonest transaction:
dishonest, in as much as the parties to it do not really intend it to
have,
inter partes
, the legal effect which its terms convey to
the outside world. The purpose of the disguise is to deceive by
concealing what is
the real agreement or transaction between the
parties. The parties wish to hide the fact that their real agreement
or transaction
falls within the prohibition or is subject to the tax,
and so they dress it up in a guise which conveys the impression that
it
is outside of the prohibiting or not subject to the tax. Such a
transaction is said to be in
fraudem legis
, and is interpreted
by the Courts in accordance with what is found to be the real
agreement or transaction between the parties.
Of
course, before the Court can find that a transaction is in
fraudem
legis
in the above sense, it must be satisfied that there is some
unexpressed agreement or tacit understanding between the parties. If
this were not so, it could not find that the ostensible agreement is
a pretence. The blurring of this distinction between an honest
transaction devised to avoid the provisions of a statute and a
transaction failing within the prohibitory or taxing provisions
of a
statue but disguised to make it appear as if it does not, gives rise
to much of the confusion which sometimes appears to accompany
attempts to apply the maxim quoted above.
’
[3]
[13]
From
this approach to the proper classification of a contact, a court is
manifestly entitled to examine the substance and purpose
of the
agreement in order to determine its true nature. See for more recent
authority
Roshcon
v Anchor Auto Body Builders and Others
2014 (4) SA 319
(SCA) at 332-334.
[14]
It
follows that the threshold question which arises in this case
requires that this Court looks into the true nature and substance
of
the contract between appellant, Atlas Carton and one Nicolas
Gargassoulas, which the appellant alleges was a scheme of arrangement
or compromise entered into to avoid the winding up of Atlas Carton.
From the papers, it is clear that Mr Gargassoulas controlled
both the
corporate entities which were parties to this agreement.
[15]
It is
now necessary to drill down into the fundamentals of the agreement.
In terms of the agreement, Carton Atlas agreed to sell
to the
appellant ”the business as a going concern including the
subject matter. The business was defined as the packaging
material
business currently carried on by the seller as a going concern at the
premises.” The subject matter was defined
as including the
current assets, the fixed assets, goodwill, the intellectual property
rights, the right title and interest in
and to the contracts, the
sold liabilities and the employees. It excluded “any benefit or
risk to the Seller arising pursuant
to the Mondi Litigation and any
other assets or liability not specifically mentioned or referred to
in this clause.”
[16]
The
purchase price was in an amount equivalent to the net asset value.
Net asset value was defined as follows:
‘“
Net
Asset Value” – the net asset value of the Seller as at
the Effective Date, determined with reference to the Effective
Date
Accounts and which shall comprise –
1.
the
aggregate value of the Fixed Assets and Current Assets of the Seller
at the Effective Date (excluding Goodwill, Intellectual
Property Rights and other intangible assets) less-
1.1
the
total of all provisions (made in terms of generally accepted
accounting practice) in respect of such assets; and less
1.2
the
Sold Liabilities.’
[17]
Sold
liabilities was defined as follows:
‘
The
liabilities of the Seller to be assumed by the Purchaser and
comprising –
1.
the
trade liabilities of the Seller in respect of the Business as at the
Effective Date, incurred in the ordinary, normal and regular
course
of business, including without limitation, all employee related
liabilities;
2.
the
amount owing by the Seller by way of bank overdraft as at the
Effective Date;
3.
the
Member’s Loans;
4.
any
third party loans owing by the Seller and any other non-current
liabilities of the category described in the Base Date Accounts;
5.
the
liability of the Seller and the Business in respect of taxation;
6.
any
claims against the Seller and/or the Business in respect of product
liability or breach of contract, the cause of which arose
or was
incurred prior to the Effective Date, but specifically excluding the
amounts (including legal costs), owing by the Seller
pursuant to the
Mondi litigation.’
[18]
The
agreement provided that the purchaser shall discharge the sold
liabilities as defined as and when they fell due for payment.
However, specific provision was made for the repayment of the
member’s loan; that is the loan to Mr Gargassoulas. In this
connection, the agreement provided:
‘
The
purchaser hereby undertakes to assume the Member’s Loans and
repay same to Gargassoulas or to any third party to whom
Gargassoulas
may cede his claim as and when it is in a position to do so, and to
this end, the same terms and conditions that applied
to the repayment
of the Member’s Loans by the Seller, shall apply mutatis
mutandis to the Purchaser. The Purchaser
undertakes as its
costs to pass and cause to be registered in favour of Gargassoulas or
to any third party to whom Gargassoulas
may cede his claim a Special
and General Notarial Bond over the Business and the Fixed Assets in
an amount of R 5 000 000,
00 (FIVE MILLION RAND) to secure
the repayment of the Member’s Loans such bond to be registered
by 2010.’
[19]
One
final clause requires attention. Clause 19 dealt specifically with
employees. It reads as follows:
‘
It
is recorded that as the Business is sold as a going concern, in terms
of s 197 A of the
Labour Relations Act, 1995
, all contracts of
employment between the Employees and the Seller as at the Effective
Date shall continue in force between the
Purchaser and the employees
without interruption of the employee’s continuity of
employment.
The
Seller hereby indemnifies the Purchaser and holds it free and
harmless against any and all claims which may be made against
the
Purchaser by any employee in respect of unpaid salary, leave pay and
any other employee related benefits to the employee’s
employment by the Business prior to the Effective Date including all
legal costs which may be incurred by the Purchaser in the
defence
thereof and in the enforcement of this indemnity.’
The applications of
s 197
A
[20]
It is
now possible to return to
s197
A which applies to a transfer of a
business, pursuant to a scheme of arrangement or compromise which has
been entered into to avoid
winding up. When the agreement, which I
have described, is read as a whole, it is clear that the only
certainty that flowed therefrom
was that Carton Atlas would,
indeed, be wound up. Upon the conclusion of the agreement, Carton
Atlas’ entire business
structure had been transferred to
appellant. The purchase price was structured so that, given the
valuation of the fixed assets
in the amount of R 4.2209,00, which was
to be valued at the lower of the actual cost price and the market
value thereof, Carton
Atlas would have no assets, no infrastructure
and presumably, little if any, cash.
[21]
While
an arrangement connotes a far wider class of agreement than a
compromise, which is an agreement to settle a dispute over rights
or
to modify undisputed rights where a difficulty exists over their
enforcement, within the context of the specific wording of
s197
A,
there can be little doubt that the entire arrangement or compromise
must have as its primary purpose, the avoidance of a winding
up
order.
[22]
There
is no basis by which this conclusion can be justified upon an
analysis of the structure of this agreement. Clause 19 might
proclaim
that the business was to be sold as a going concern in terms of
s197
A. But this only confirms that this proclaimed characterisation of
this agreement sought to obscure its true purpose. That purpose
was
not to nurse the Carton Atlas back to commercial health so that it
could avoid an order of winding up. The purpose appears
to be in an
attempt to circumvent the provisions of
s197
of the LRA at worst for
appellant and, at best, an asset stripping exercise, but not a
compromise or arrangement even within the
meaning of the common
law.
[23]
Viewed
accordingly, the transaction was a sham. It cannot, in any way, be
characterised as one which falls within the scope of
s197
A of the
LRA.
[24]
For
these reasons therefore, the appeal is dismissed with costs.
___________________
Davis JA
Coppin
JA and Savage AJA concur in the judgment of Davis JA
APPEARANCES:
FOR
THE APPELLANT:
Mr A Christophoran of Biccari Bollo Matiano Inc
FOR
THE FIRST RESPONDENT:
Adv N Lombard
Instructed by
Goldberg Attorneys
[1]
P Delport
Henochsberg
On
the
Companies Act
71 of 2008
Vol 1 (LexisNexis
2011).
[2]
1941 AD 369.
[3]
At 395 –
396.