Employment contracts are suspended from date of provisional order of liquidation

The Johannesburg High Court in the case of Reginald Ngwato and Another v Liebenberg Dawid Ryk van der Merwe N.O and Others, case number 2014/28470, handed down on 6 May 2016 held that employment contracts are suspended from the date that the provisional order of liquidation (or the final order if it is granted without the provisional order) is granted in terms of s38 of the Insolvency Act, No 24 of 1936 (Insolvency Act) and employees are entitled to prove a claim for salaries during the period between the date of presentment of the application for liquidation and the granting of the provisional order.

Facts

The application for the winding-up of Petzetakis Africa (Pty) Ltd (Company) was presented to court on 10 November 2011. The company was placed in provisional liquidation on 3 February 2012 and a final order was granted on 23 October 2012.

The Company’s employees, and specifically Mr Reginald Ngwato, alleged that their contracts of employment were suspended on 3 February 2012 by virtue of the operation of s38(1) of the Insolvency Act and that they were entitled to claim their salaries and other benefits for the period from 10 November 2011 to 3 February 2013.

The liquidators of the company disputed the employee’s claim, arguing that the obligation to pay Ngwato’s salary for the period 10 November 2011 to 3 February 2012 constituted a disposition within the meaning of s341(2) of the Old Companies Act (as read with s2 of the Insolvency Act) as it arose after the presentment and issuing of the liquidation application ie the date of the concursus creditorum in terms of s340 of the Old Companies Act and as such it could not be enforced unless a court order was granted.

Moreover, the liquidators submitted that if Ngwato was correct, the effect of a declaration in his favour would be to increase the value of concurrent claims made against the Company by some R20.8 million to the detriment of the Company’s general body of creditors.

Crux of the Dispute

The crux of the dispute was the determination of the date upon which contracts of employment are suspended. Was it the date of the provisional order (or if the final order is granted without the provisional order, the final order), or the retrospective date of the presentment of the liquidation application in terms of s348 of the Old Companies Act?

Judgment

In deciding the matter, the court considered two issues of interpretation, firstly the meaning of s38 of the Insolvency Act and secondly, the proper interpretation of s341(2) of the Old Companies Act.

In respect of s38 of the Insolvency Act, the court noted that the meaning of this section is clear and the contracts of service of employees are suspended with effect from the date of the granting of a sequestration order as read with s339 of the Old Companies Act. The contracts therefore remain extant until then.

In considering the payment of salaries and whether it constituted a disposition, the court noted that s341(2) envisages the situation where a company, in anticipation of the consequences of being wound up, makes dispositions of its property in order to advantage other creditors to the potential prejudice of others. Payment of salaries arising out of a valid and binding contract of service does not fall within this provision. Payment of salaries is to be construed as part of the continuation of operations until such time as the liquidation order is granted, if it is granted.

However, the court further noted that not all of the Company’s employees would be entitled to claim in terms of the judgment. If employees obtained alternative employment during the various periods between 1 May 2011 (when the company ceased carrying trading) and 3 February 2012 (the date of provisional liquidation), they would be excluded. Since it was common cause that all employees had a claim up to 10 November 2011 (date of presentment and issuing of the application) such employees each had a further claim for the periods that they were not otherwise employed between 10 November 2011 and 3 February 2012. Each claim has to be proved separately with the liquidators.