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Employee's Rights in Liquidation

21 May 2013

Routlege Modise

 

Does Section 348 of the Companies Act 61 of 1973 apply to the calculation of claims of employees who are creditors of a company in liquidation?

Often when a company is liquidated employees of the company are at a loss of what their entitlements are, if any.

Section 348 of the Companies Act 61 (the 1973 Act) provides that "a winding-up of a company by court shall be deemed to commence at the time of the presentation to the court of the application for the winding-up".

Accordingly, in terms of the section, the effective date of liquidation is the date the application papers are issued by the Registrar of the Court.

The effect of this section on the creditors of a company that is placed under liquidation by a court order is that any claims that each creditor of an insolvent company might have against the company are calculated up until the date when the application papers were filed at court.

This is regardless of the fact that it may take months for the court to grant an order placing the company under provisional liquidation.

In a liquidation scenario, the employees of the company are considered creditors of that company in respect of unpaid salaries, leave and other monies which the company owes its employees.

The Act does not specifically deal with the issue of employees' contracts of service and in terms of section 339 of the Act the provisions of the law relating to insolvency shall apply.

Section 38(1) of the Insolvency Act provides that "the contracts of service of employees whose employer has been sequestrated are suspended with effect from the date of granting of a sequestration order".

In light of the above, it is safe to state that while the claims of all the other creditors of a company under liquidation will be calculated up until the date of winding-up, the calculation of employees' claims will have to be up to the date of granting of the winding-up order. This is because, where there is no other agreement in place, the contracts of employees remain in full force and effect until they are suspended by a liquidation order.

In terms of section 131(l) of the Companies Act 71 of 2008 (the 2008 Act), an affected person may apply at any time for an order placing the company under supervision and commencing business rescue proceedings.

An affected person, as defined in the 2008 Act, includes an employee, whether represented by a registered trade union or otherwise.

One of the effects of bringing a business rescue application is that it suspends any liquidation proceedings against the company. Further, during a company's business rescue proceedings its employees, as at the beginning of those proceedings, continue to be so employed on the same terms and conditions as set out in their contracts of service.

The only exceptions to the above are when changes occur in the ordinary course of attrition or when the employees and the company agree to different terms and conditions.

It is evident that section 348 of the 1973 Act does not apply to contracts of service of employees of a company in liquidation as well as the calculation of their claims. This is in line with the provisions of the 2008 Act which recognises the continued existence of the employees' contracts of service regardless of the fact that a business rescue application was preceded by liquidation proceedings.

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