Comment on Insolvency Amendment Bill submitted to Portfolio Committee on Justice and Constitutional Affairs by The Law Society of the Cape of Good Hope on 19 April 2002 with discussion in bold and italics by Tienie Cronje

INSOLVENCY AMENDMENT BILL, 2002
At the request of the Law Society of the Cape of Good Hope, its specialist committee on Insolvency Law matters met to consider and to comment on the above mentioned
Bill.
The committee offers the following comment -
1. References in this note are to the Insolvency Act and expressions therein. Similar considerations apply in the case of corporate entities which have been wound-up.
2. The Committee endorses the aim of the amendments, including the need to address the anomaly that accumulated service benefits are forfeit by staff on sequestration of the employer.
3. Caution is raised regarding -
3.1. the effect of the legislation;
3.2. the implementation thereof.
4. The primary concern raised with regard to the effect of the amendments, is that the legislation may be counter-productive in causing a further diminution of schemes of arrangement (in the case of a company) or offers for businesses on a going concern basis. As an obviously unintended consequence of the legislation, it is apparent that the purchase of a business as a going concern from a trustee of the sequestrated employer may no longer be a viable option. We expand upon this below,
5. The difficulty in respect of timing is that the proposed period of suspension is virtually open-ended. At present it is proposed to link this to the appointment of a (final) trustee and it is noted that this could be several months after the provisional order of sequestration. One proposal would be to link the period of suspension to the date of the provisional order of sequestration.
A balance need to be struck between
(a) giving enough time for meaningful consultation; and
(b) not interfering with the administration of the estate in general and the sale of assets in particular.
It is true that it may be several months after the provisional order before a final trustee or liquidator is appointed.
An insolvency practitioner has reminded me that there is no final appointment of a liquidator for a close corporation, similar to section 56 of the Insolvency Act or section 375 of the Companies Act. Section 75 of the Close Corporations Act 69 of1984 provides for the appointment of a "liquidator" as soon as possible after the provisional winding-up order. It is decided at the first meeting of a close corporation whether a joint liquidator should be appointed with the initial liquidator (section 78).
A problem with the proposal to link the period of suspension to the date of the provisional order is that a liquidator is only appointed later (although it may be within a few days) and that there is no guarantee that a provisional trustee or liquidator will be appointed at all. (There is not always a provisional order either.) The period may commence or even expire before a liquidator is in office.
It seems to be a better option to link the period to the appointment of a trustee or liquidator (in terms of definitions in the Insolvency and Companies Act this includes a provisional trustee or liquidator) and not the appointment in terms of section 56. Although the Master has a discretion whether to appoint a provisional trustee or liquidator or not, a provisional appointment is usually made if there is a business which must be attended to. A need for consultation with employees could be submitted to the Master as a reason why a provisional appointment should be made.

6. Several concerns of a practical nature have been raised and should be considered, namely -
6.1. How would the trustee be able to keep track of the whereabouts and contact details of the suspended employees – this is necessary should it be possible to negotiate for a sale on a going concern basis;
It is conceded that this will be a practical problem, especially if the workforce is not active at the time of appointment of the trustee and if there are no representatives agreed upon collectively, no workplace forum and no registered trade union. The trustee may also, in appropriate circumstances, have to communicate with workers in order to terminate their contracts. The trustee may be able to rely on the rule that the impossible is not expected by the law, but it will probably be better to provide some accepted and practical means of communication where direct communication is impossible, for instance a notice on the front gate or door of the premises.
6.2. Presumably, the common-law principles relating to contract would still be applicable (the amending legislation simply provides for the "suspension" of the employment contract), meaning that the employees would be required to give notice to the trustee in the event of their wishing to terminate their contract of employment during the suspension period;
6.3. What would the position of the trustee be during the period of suspension If, for example, he or she wished to complete work in progress, requiring only certain of the employees to do so;
Regarding 6.2 and 6.3: The last sentence of paragraph 2.5 of the memorandum on the objects of the Bill reads as follows: "In terms of existing law a trustee may engage the services of certain of the employees of the insolvent employer in order to continue running the business." Section 97(2)(c) of the Insolvency Act refers to the cost of the salary or wages of any person engaged by the trustee in connection with the administration of the estates. This cost enjoys, and will continue to enjoy, the highest preference against the free residue of the estate.
Proposed 38(4) of the Bill published for comment in July 2000 read as follows:
(4) Nothing in this section shall be construed as precluding –
(a) a trustee from engaging the services of any employee whose contract of service has been suspended in terms of subsection (1);
(b) a trustee from concluding an agreement with an employee whose contract of service has been suspended in terms of subsection (1) to terminate that contract;
(c) an employee whose contract of service has been suspended from terminating that contract;
(d) an employee whose contract of service has been suspended or terminated in terms of this section from claiming compensation from the insolvent estate of his or her former employer for loss suffered by reason of the suspension or termination of a contract of service prior to its expiry.
I may have indicated to the Department of Labour that paragraph (a) did not in my opinion make any difference to the present position, but I am not aware of the reason why (b) and (c) were omitted. I suspect the view was held that this was declaratory of the existing position, but I am not aware of objections raised against the retention of these provisions. Paragraphs (b) and (c) above will apparently go some way to give answers to the questions by the commentator.
6.4. How would a trustee be able to achieve meaningful consultation if an offer were to be received requiring an urgent acceptance.
This concern can be dealt with together with the discussion of paragraph 5 above.
7. The committee, while endorsing the sentiment embodied in the amending legislation, was concerned that this could well be the final blow to the ability of a trustee to dispose of a business as a going concern. This is unfortunately a commercial reality and the amendment could consequently be counter-productive. It must be borne in mind that the sequestration of the employer (or liquidation of a company), would invariably be associated with some form of commercial loss, A purchaser who wishes to acquire a business would obviously not want to place himself in the same position as the seller, prior to sequestration. All aspects of a business would accordingly be considered before any going concern offer would be made. Practical experience has shown that purchasers are reluctant to take on an entire workforce in circumstances where downsizing of the enterprise should have been undertaken in an endeavour to avoid sequestration. Purchasers would, quite simply, not wish to take on the problems of the insolvent.
I agree that the proposed provisions should not make it too unattractive to sell a business of an insolvent debtor as a going concern. On the other hand, it should not be easy to abuse insolvency proceedings to get rid of labour commitments. Any submissions on how to better strike an appropriate balance between the competing interests of workers and other creditors would be most useful.
8.1. The committee also considered the fact that post-sequestration service (although suspended), would continue to accrue service benefits as far as the employee was concerned, thus leading to the creation of a preferred claim arising post-sequestration, but still participating in the concursus of creditors as if it were a claim in existence as at the granting of the provisional order of sequestration. It is unusual in the scheme of the insolvency legislation that a post-liquidation category of claim would give rise to a pre-liquidation preference.
If the trustee engages the services of a person, this is in effect a preference for a post liquidation claim. It is conceded, however, that the preference for severance or retrenchment pay as a result of post sequestration is new. However, this seems to be a natural extension of the existing preference in terms of section 98A(1)(a)(iv).
8.2. In practical terms the net effect of the additional service benefits post-sequestration would probably be small although this could result in a material number where there are large numbers of staff and where the period of suspension extends for some considerable period of time.
9. We trust that this note is of some assistance. We would be happy to amplify any aspect thereof should this be required.
I found the note of assistance to evaluate the practical implications of the proposals and would welcome amplification of aspects thereof.