It must be borne in mind that we remain committed to the position as stated in our earlier submission. These additional comments are intended for the purposes of clarification and should be read together with the original submission. Further, we provide comment on additional issues raised during the public hearings.

The comments contained herein cover the following two broad areas:

1. Notification; and

2. Impact of a sequestration order on Employment Contracts.

Our comments on notification are divided into the following two parts:

• Impact on the Companies Act and the Close Corporations Act; and
• Whether Notification Should be Directed at Trade Unions Only and not Employees

1. Impact on the Companies Act and the Close Corporations Act

The overall purpose of the Insolvency Act is to provide for the application and granting of sequestration orders in respect of the estates of individuals or natural persons. In the case of companies and close corporations the equivalent references are to the granting of an order for winding-up (or a liquidation order as it is more commonly referred to).

Both the Companies Act and the Close Corporations Act contain provisions applicable on winding-up. These are contained in Chapter XIV and Part IX respectively. Nevertheless section 39 of the Companies Act provides:

In the winding-up of a company unable to pay its debts the provisions of the law relating to insolvency shall, in so far as they are applicable, be applied mutatis mutandis in respect of any matter not specially provided for by this Act.

Section 66(1) of the Close Corporations Act incorporates the application of this principle by providing that winding-up provisions from the Companies Act are applicable to the winding-up of close corporations. Further under section 66(2) applicable definitions are provided, which should be read into the Insolvency Act when winding up a close corporation. For example, any reference to a trustee in the Insolvency Act must be construed as a reference to a liquidator when winding-up close corporations.

The implications of the winding-up provisions under the Close Corporations Act and the Companies Act is that the Insolvency Act applies directly to the winding of companies and close corporations that are unable to pay their debts. However, where the Insolvency Act legislates on particular area that is explicitly covered by either the Companies Act or the Close Corporations Act, then the relevant provision of the Insolvency Act will fall away. The converse is also applicable. Therefore if the Companies Act or the Close Corporations Act is silent then the provisions of the Insolvency Act are to apply where relevant.

Taking into account the above factors, there is a need to assess the impact on the Companies Act or the Close Corporations Act should the Insolvency Act be amended to require that trade unions and employees be notified of a sequestration/winding-up order.

As we noted in our earlier submission, providing for notification will require different amendments for voluntary sequestration orders as opposed to compulsory sequestration orders, owing to different application procedures leading up to the granting of a final sequestration order.

Section 3 of the Insolvency Act provides for the sequestration of the estates of individuals. The corresponding provision in relation to companies and close corporations is called a voluntary winding-up and may only be effected once a company has passed a special resolution and has complied with the necessary registration procedures. Winding-up may then commence without having to apply for a court order granting the winding-up. Despite this provision is made for the application to a court for a voluntary winding-up. In most instances this is effected if the company or close corporation has passed a special resolution resolving that that the winding-up be effected as an order of the court.

Simply stated a voluntary winding-up may be effected by either of the following two procedures:

1. A voluntary winding-up without a court order; or
2. A voluntary winding-up order granted by a court,

both of which require the passing of a special resolution.

A company or a close corporation must, within 28 days of registration of a special resolution to wind-up, give notice in the Gazette of such a resolution. This provision applies only to the first category of voluntary winding-up that is effected without a court order. However, the Companies Act and Close Corporations Act are silent on notification requirements in respect of the second category, which is granted by a court. In this respect it is important to note section 4 of the Insolvency Act, which requires the notification of creditors and publication of a notice in the Gazette prior to presenting an application to court for a voluntary sequestration order. Therefore, we submit that section 4 is automatically applicable to a voluntary winding-up order by a court, but is not applicable where this is effected without a court order.

The distinction noted above has implications for the amendments to section 4 that we proposed to section 4 of the Insolvency Act, requiring notification of trade unions and employees. Since section 4 is automatically applicable to winding-up orders by court, there is no need to amend the Companies Act and Close Corporations Act to accommodate this.

Our proposals on notification in respect of compulsory sequestration entailed amendments to:

• Section 9 in order to provide that a debtor must furnish a copy of notice of petition to employees and trade unions;
• Section 11 in order to require the service of a copy of a rule nisi on trade unions and employees; and
• Section 136 in order to provide that it is an offence should there be non-compliance with notification procedures.

The current wording of section 9 sets out the procedure applicable to applications for a compulsory sequestration order. The amendments, which we have proposed, would require that a debtor furnish trade unions and employees with copies of a notice of such an application within two days of receiving it. The intention behind this is to provide notification of the sequestration application before it is granted.

Sections 346 and 68 of the Companies Act and Close Corporations Act respectively provide for the application to court for an order to wind-up. However, these provisions are silent on the notification requirements in respect of the debtor and other creditors, which would otherwise have been affected by an amendment to section 9 of the Insolvency Act.

The current wording of section 11 requires the service of a rule nisi upon a debtor upon the granting of a provisional sequestration order. Our proposed amendments would require that copies of the rule be served on trade unions and employees as well. There are no corresponding provisions in the Companies Act and Close Corporations Act.

The current wording of section 136 of the Insolvency provides that the debtor will be guilty of an offence should s/he fail to furnish the trustee and master with certain information or fails to hand over assets, books or other relevant items belonging to the estate. The amendments that we have proposed to this section would make it and offence if a debtor fails to comply with notification requirements.

Corresponding provisions in the Companies Act under section 425 provide that the criminal provisions of insolvency law apply mutatis mutandis in respect of winding up orders. The only qualification is that a director or office of a company (as opposed to the debtor) is held liable for failing to provide the requisite information or property.

3. Notification of First and Second Creditors Meetings

The current wording of section 40 of the Insolvency Act provides for the convening of the first and second meetings of creditors. Notification of creditors is required. Although creditors include employees, they are often not furnished with a notice of the meetings. Therefore, NEDLAC negotiations considered making this an explicit requirement, which is provided in the amendments that we proposed to section 40.

Section 412(1)(a) of the Companies Act outlines the requirements for the meeting of the creditors. It further provides that this should be convened in the manner provided under insolvency law, which is the Insolvency Act. (See quotation below, which applies to close corporations as well.)

412 Meetings of Creditor and members and voting at meetings of creditors

(1) In any winding-up of company, meetings of creditors and members or contributories shall, save as otherwise provided in this Act, be convened and held in the following manner:

1. in the case of meetings of creditors, as nearly as may be in the manner prescribed for the holding of meetings of creditors under the law relating to insolvency;

Therefore, it is possible to effect this amendment without requiring a corresponding amendment to either the Companies Act or Close Corporations Act.

Discussions on notification requirements distinguished between notification furnished to trade unions as opposed to employees. The oral submission of the Law Society of the Cape of Good Hope(Law Society) indicated concern that notification of employees may lead to a "fall out" and should be limited to trade unions.

We cannot support this position since this would constitute a violation of employees’ individual rights to information and fair labour practices. Further this contradicts the new amendment to the Labour Relations Act under section 197B, which requires notification of employees AND trade unions even before any formal sequestration/liquidation process has been instituted.

Having said this, we recognise the Law Society’s concern about a potential "fall out". This may be averted by other means, which do not restrict employees’ rights. For example, there is nothing preventing employers from informing employees at an earlier stage through a less formal, but more consultative process involving trade unions as well. In fact this practice should be encouraged. Failing to keep workers informed creates an environment of secrecy that creates suspicion and distrust of employers amongst workers.

There appears to be uncertainty about when the suspension of an employment contract comes into effect as provided under the proposed section 38(1). In other words does an employment contract suspend upon a provisional or final sequestration order?

The wording of the new provision follows the same principle of the original section 38, which does not qualify whether the sequestration order is final or provisional. This should be read with definitions under section 1 of a "sequestration order" and a "trustee", both of which include provisional trustees and sequestration orders. The implication is that under current insolvency law an employment contract terminates on the granting of a:

• Provisional order in cases of compulsory sequestration and
• Final order in cases of voluntary sequestration.

Further, the termination of an employment contract on the granting of provisional order is already an accepted principle in our law, as recognised in the cases of:

• South African Agricultural Plantation and Allied Workers Union v HL Hall and Sons (1999) 20 ILJ 399(LC) and
• Ndima v Waverley Blankets Ltd (1999)8 LC,.

We note that section 38(5) and (6) authorises a trustee to terminate an employment contract, without qualifying whether this is a provisional trustee or trustee appointed under section 56(final trustee). Although subsections 38(10) and (8) qualify the trustee as one appointed in terms of section 56, the wording of these provisions nevertheless allow for the preceding subsections to be applied independently of this.

As noted in our earlier submission, we believe that the power to terminate employment contracts in terms of section 38 should be excluded in cases of provisional sequestration. The standard principle is that terminated contracts do not automatically revive once a provisional sequestration order has been set aside. This applies even in cases whether the original application was found to be malicious or vexatious. Although this was noted as a casus omisus in the Waverley Blankets Case, the court was of the opinion that this should be left to Parliament to remedy.

Accordingly we recommend that Committee distinguish between powers of provisional and final trustees and between provisional and final sequestration orders. Further, the power of a trustee to terminate a contract in terms of section 38 must be excluded unless this is in accordance with the Labour Relations Act.