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COVID-19: Revisiting the question: when can retrenchment processes start?

13 May 2020
– 4 Minute Read


As the lockdown continues, an increasing number of businesses will face significant solvency issues and, in some cases, may resort to business rescue proceedings. By the time businesses do so, many will be faced with a real and immediate need to reduce costs.

During these proceedings, the business rescue practitioner (BRP) steps into the shoes of the Board and is immediately confronted with the same need to reduce costs and restore the business to a state of solvency.

One such cost is the cost of labour, which in most cases can only effectively be reduced by implementing a retrenchment process in terms of section 189 or section 189A of the Labour Relations Act 66 of 1995 (LRA).

This is what confronted the BRPs appointed to assist South African Airways (SAA) as they initiated a retrenchment process by giving notice in terms of section 189(3). Ordinarily, the retrenchment process would not have presented any problems from a procedural perspective, provided that the BRPs followed the 60-day consultation process provided for in the LRA.

However, this proved not to be the case when, last week, the Labour Court interdicted the BRPs from proceeding with section 189 retrenchments in a judgment that is sure to have far-reaching implications for BRPs, the funders of business rescue proceedings, and for the survival of the business under the proceedings themselves.

In NUMSA & Others v SAA (SOC) Ltd & Others, (SAA decision) unions sought to interdict the retrenchment process embarked on by SAA which, they argued, was procedurally unfair because the invitation to consult sent to the employees in question was sent before the presentation of a business rescue plan.

The decision turned on whether section 136(1) of the Companies Act permitted a BRP to retrench employees only as part of a business rescue plan, or whether a retrenchment process may be initiated in the absence thereof.

The Court held that on a proper interpretation of the Companies Act, a BRP may initiate a retrenchment process only once a business rescue plan that contemplates retrenchments has at least been presented. In the absence of the plan, the issuing of section 189(3) notices commencing consultation processes over proposed retrenchments was premature which rendered the process procedurally unfair.

The SAA decision may have dire consequences for both employers and employees. In cases of severe financial distress, prohibiting retrenchment processes initiated before the approval of the business rescue plan has a significant impact on the business’s cash flow especially where delays in finalising the business rescue plan are experienced. This, in turn, has the potential to lead to even greater job losses as a result of the delay in effecting retrenchments.

The SAA decision also appears to be at odds with findings made by the court in the Solidarity Obo BD Fourie & Others v Vanchem Products (Pty) Ltd and Others; In re: National Union of Metalworkers (NUMSA) Obo Members v Vanchem Vanadium Products (Pty) Ltd and Another decision (Vanchem decision), which has been the authority for the assertion that a BRP is not precluded from commencing a retrenchment process before the business rescue plan has been approved.

The material impact of the judgment is that the time period required to effect a retrenchment in a business rescue scenario is substantially extended, and with the extension the employees remain on full pay. 

Section 189A requires a 60-day consultation process before notice can be given.  In SAA, the BRPs sought to have this period run while they prepared a plan. As a result of the decision, the BRPs will have to wait for the plan to be prepared before they can invoke the 60-day period at substantial additional cost to the organization. 

The decision has an anomalous result: the BRPs should consult employees about retrenchments before they finalise the plan (if retrenchments are to be part of the plan) and that consultation must be in terms of section 189. This judgment suggests that there would be no consultation in terms of section 189 on the plan, even if the plan contemplates retrenchments. 

The BRPs have advised of their intention to appeal the decision.  The Appeal Court will hopefully clarify the position once and for all. 

During the hearing the union also argued that a suspension of the retrenchment process pending finalization of the plan prohibited the BRP from engaging with the employees on voluntary retrenchments.

The court found that nothing in the LRA or the Companies Act prevents an employer from offering voluntary severance packages to employees as a way to avoid retrenchments.