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Retrenching an Over-Indebted Employee

01 June 2013

Routledge Modise

Ailing businesses often have little or no option but to a reduce head count and hence retrench employees. The effects of retrenchment are obviously disastrous not only to the affected employees but also to their families. It is for this reason that the Labour Relations Act, 1995 (the LRA) obliges an employer to provide preretrenchment, and to consider post-retrenchment, assistance to retrenched employees. While the LRA was promulgated 10 years prior to the National Credit Act, 2005 (the NCA), it is the intersection between these two pieces of legislation, which we seek to consider in this article.

An obvious consequence of retrenchment for an employee is that he or she will, soon after being retrenched, find it difficult to repay debts. Timeous recourse to debt re-arrangement can he a useful tool in the hands of such a person.

The NCA introduces possible debt re-arrangement mechanisms. Its intent is to assist over-indebted consumers or those consumers who are likely to become over-indebted in the future. The primary purpose of the NCA is to protect consumers and to alleviate their over-indebtedness. For the purposes of this article, the concept of consumer in the Act should be understood to he the retrenched employee. s86 of the NCA applies where the employee is unable to settle all his or her debts timeously and the credit provider has not sent a s129 notice (notice enforcing credit provider's rights and advising the consumer of his rights) to the consumer.

s86 provides that the consumer may apply to a debt counsellor to have herself declared over-indebted. An employee would be considered over-indebted when unable to pay all debts in a timely manner. A debt counsellor must determine,within a prescribed time (30 business days from date of the application), whether the consumer appears to be over-indebted.

When assessing the consumer's obligations (debts) in terms of s86, the debt counsellor must have regard to s79 of the NCA. In terms of s79, the debt counsellor will have to consider whether the available information indicates that the employee is or will be unable to satisfy, in a timely manner, all his obligations under all his credit agreements.

The debt counsellor will consider:

  • the employee's financial means, prospects and obligations; and
  • the employee's probable propensity to satisfy, in a timely manner, all the obligations under all the credit agreements to which he or she is a party, as indicated by the debt repayment history.

If, as a result of the assessment conducted, a debt counsellor reasonably concludes that the employee is not over-indebted but is, nevertheless, experiencing or likely to experience difficulty satisfying all the obligations under the credit agreements in a timely manner, the debt counsellor may recommend that the consumer and the respective credit providers voluntarily consider and agree on a debt re-arrangement plan. Where the recommendation is accepted by the employee and each credit provider concerned, this would constitute a consent order in terms of s138 of the NCA.

Where the debt counsellor finds that the employee is over-indebted, he must refer the matter to the Magistrates' Court for debt restructuring in terms of s86(7) of the NCA.

The following proposals may be brought before the court:

  • Extending the period of the agreement and reducing the amount of each payment due accordingly;
  • Postponing during a specific period the dates on which payments are due under the agreement; or
  • Extending the period of the agreement and postponing during a specific period the dates on which payments are due under the agreement.

The Magistrates' Court has discretion whether or not to accept the proposal or to make a recommendation of its own. If the proposal is accepted, it is made an Order of Court with the employee's debts being re-arranged in accordance with the court's recommendation or the debt counsellor's proposal. In practice, the debt counsellor will furnish the Magistrates' Court with regular review dates, at which times the consumer's financial position will be reviewed. This review process works particularly well where the consumer is retrenched and is in the process of looking for alternative employment. In most instances, the consumer will approach the credit provider directly with the intent to arrange alternative payment methods. The LRA requires that an employer must issue a written notice inviting the employee to consult with it regarding any assistance it proposes to offer to employees likely to he retrenched. Assistance with debt restructuring is
not specifically listed in the LRA.

Despite the absence of a positive obligation being placed upon an employer by the LRA (a legislative development which would be progressive and in line with the purposes of the NCA), employers contemplating retrenchments should look at this form of assistance seriously as it has the potential to provide real, tangible assistance to retrenched employees.

This form of assistance is a long way from paying mere lip service to the obligation to assist under the LRA. Employers can, in this way, address the common perception and criticism that they are notorious in not providing any palpable assistance to retrenched employee. Also, if this form of assistance is provided by employers, all things being equal, a court is likely to declare the dismissal fair, should it be challenged.

Employers should advise employees who face the prospect of retrenchment to correspond with their credit providers requesting debt restructuring. Where the credit provider provides no voluntary assistance, employees should he advised to approach a debt counsellor for appropriate relief.

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