Retrenchment during business rescue
As the lockdown continues, most companies are likely to experience financial difficulties. As a result, they will commence with business rescue proceedings and appoint a business rescue practitioner (BRP). The first thing BRPs do after being appointed, is to try to reduce the company’s expenses, one of these being salaries. In reducing the labour costs, the practitioner will initiate the retrenchment process by issuing a notice to the employees.
In this article, we will discuss when a BRP can initiate the retrenchment process, as held in the matter between Numsa vs SAA 2020.
The main legal issue in the above matter was whether Section 136(1) of the Companies Act (the Act) allows a BRP to retrench employees only as part of a business rescue plan, or whether a retrenchment process may be initiated in the absence of such a plan.
Numsa sought to interdict the retrenchment process embarked on by SAA which, it argued, was procedurally unfair as the notice was sent to SAA’s employees before the presentation of a business rescue plan.
SAA argued that if the relief sought by Numsa was granted, the interests of other affected persons would be undermined.
The court held that a purposive interpretation of the Act allows a BRP to initiate a retrenchment process only once a business rescue plan that contemplates retrenchments has been presented.
This means that until such time when it is presented, employees may not be retrenched and are entitled to full pay unless they agree to different terms and conditions of employment or voluntary retrenchment. In cases of severe financial distress, prohibiting retrenchment processes before the presentation of the business rescue plan has a significant impact on the business’ cash