17 June 2020 by and Employment Alert

Business Rescue, Employment Law and Supervening Impossibility: Mhlonipheni v Mezepoli and various other related matters

A consolidated application for business rescue brought by employees and creditors under section 131(4)(a) of the Companies Act 71 of 2008 (Act) successfully placed numerous companies, operated by a single trust, under supervision and business rescue. The decision of the court, reported as Mhlonipheni v Mezepoli and various other related matters, provides a useful assessment of the legal, economic and social ramifications of the national lockdown imposed in response to the COVID-19 pandemic in South Africa, and the relief that can be obtained for employees through business rescue proceedings.

The key mechanism through which the employment relationship may trigger business rescue proceedings is expressed in section 131(4)(a)(ii) of the Act, which provides that the court may make an order placing a company under supervision and commencing business rescue proceedings if it is satisfied that:

“the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulations, or contract, with respect to employment related matters”.

The respondent companies operate primarily as sit-down restaurants. The companies’ business activities had slowed from 16 March 2020, and they have not traded at all since 26 March 2020. Following the introduction of the national lockdown, the companies’ directors had elected not to trade at all even though they could elect to trade on a ‘delivery only’ or delivery/collection basis during levels 4 and 3 of the lockdown. The companies indicated their intention to resume operations only once the lockdown had been lifted. The companies’ 158 employees were last paid their salaries on 28 March 2020.

On 28 April 2020, the day on which staff salaries were contractually required to be paid, a memorandum was sent to employees stating that:

 ‘the company will not be paying you for the month of April 2020 as a direct result of the down-trading and continued losses incurred during the recent months exhausting any historic profits there may have been.’

Two further memoranda were sent to employees of the respondent companies:

‘It is with regret that the company has to inform you and confirm that the temporary layoff as of 1 April 2020 continues to be in force.’

‘The temporary layoff period will continue until the end of lockdown, when each company’s circumstances will be reviewed.’

‘As a result of the company being closed and not being allowed to trade as normal, a “no work no pay” principle will apply.’

Following engagement with the directors, the employees launched a series of applications for business rescue in terms of the Act.

The respondents challenged the applicants’ locus standi on the basis that, as a result of force majeure, they were neither employees, nor creditors. The respondents attempted to argue that as a result of the lockdown, the employment contracts had been ‘terminated’ and the employees thereby could not apply for an order under section 131(4)(a)(ii).

In response, the court held that:

“The term ‘creditor’ includes employees to the extent that any amounts relating to employment that were not paid to that employee immediately prior to the commencement of those proceedings, became due and payable by a company to that employee. The fact that the employment contract of such a person might be suspended for any reason does not have the effect that the employment contract is terminated.

The employees of the respondent companies have at all times tendered their services, and the respondent companies at all times expected them to remain available to return to work. Their employment contracts were not suspended; the respondent companies took a decision not to operate on any basis during the lockdown and thus did not require their employees to attend to their ordinary functions.”

The court further noted that the contracts of employment contained no express provisions dealing with force majeure.

Impossibility of performance and the contract of employment

In analysing the common law, the court held that if provision is not made contractually by way of a force majeure clause, “a party will only be able to rely on the very stringent provisions of the common law doctrine of supervening impossibility of performance, for which objective impossibility is a requirement”. Relying on traditional conceptions of ‘supervening impossibility’, the court held that performance is not excused in all cases of force majeure, reaffirming the position in Unlocked Properties that:

‘The impossibility must be absolute or objective as opposed to relative or subjective. Subjective impossibility to receive or to make performance does not terminate the contract or extinguish the obligation.’

Force majeure and the contract of employment

The judgment introduces a degree of certainty regarding the impact of the national lockdown on contracts of employment. By way of summary, the court at paragraph 39 stated that:

“The obligation which the trust companies owed to their employees, to pay them their salaries, has always been capable of performance and was at no time rendered impossible. It is trite that the duty to pay, and the commensurate right to remuneration, arises not from the actual performance of work, but from the tendering of service”.

The court held that the respondent companies could not rely on force majeure as a defence to their obligation owed to their employees as it was possible to pay their salaries.

The applicants further contended that the trust companies had also been permitted to trade in some form during the lockdown. In the context of business rescue, the court made it clear that:

“The decision to remain closed until the end of the lockdown will result in tremendous financial hardship to the respondent companies and their employees, particularly when there is no indication as to when the lockdown will reach the level at which restaurants will be permitted to resume normal trading.”

Conclusion

It is important to note that the respondent companies were able to conduct their businesses to some degree, albeit in alternate forms (i.e. takeaways and deliveries, rather than sit down). The ratio of this judgment therefore does not necessarily apply to businesses that were prevented from operating in terms of the Regulations under the Disaster Management Act 57 of 2002 (DMA).

The judgment does provide possible insights into how courts may view the employment relationship in the context of the COVID-19 pandemic. Business rescue may present an option to employees in such circumstances. It may also serve as a powerful deterrent against failure by employers to pay their employees during lockdown or refrain from operating to the extent permitted under the Regulations.

The court has emphasised the strong commitment to the enforcement of employees’ rights under the Act, particularly to remuneration, in spite of the lockdown and the decision not to trade. The judgment has provided guidance to employers affected by the national lockdown and decisions with regard to the reopening of businesses.

download PDF

The information and material published on this website is provided for general purposes only and does not constitute legal advice.

We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter.

We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.

Please refer to the full terms and conditions on the website.

Copyright © 2020 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com

You may also be interested in