Insolvency Amendment Bill: briefing

Meeting report

SECURITY AND CONSTITUTIONAL DEVELOPMENT SELECT COMMITTEE
29 July 2002
INSOLVENCY AMENDMENT BILL: BRIEFING

Chairperson: Mr L M Mokoena (ANC, Northern Cape)

Documents handed out:
Insolvency Amendment Bill [B14B-2002]

Relevant documents:
Briefing notes on Insolvency Amendment Bill (See Appenidix)

SUMMARY
The Committee was briefed on the Insolvency Amendment Bill, which replaces s36 of the Insolvency Act and provides that upon sequestration of a company all employment contracts become suspended, rather than terminated as had previously been the case. The suspension would allow the trustee time to save as many jobs as possible. The Committee recommended that the issue of protecting pension funds should also be considered. Mr Cronje, of the South African Law Commission, felt that the issue would better be addressed in forthcoming insolvency reform legislation.

MINUTES
The Chair announced that the Committee would be meeting the following day to finalise the Insolvency Amendment Bill if all went well at the present meeting.

Briefing by Mr Tienie Cronje
Mr De Lange, legal advisor for the Department of Justice, introduced Mr Tienie Cronje, researcher for the South African Law Commission, and handed the briefing over to him.

Mr Cronje stated that the Bill had not originated from the South African Law Commission but from the Department of Labour, who had initially begun investigations into the matter in 1999 and published it for comment in July 2000. He explained that there were only two clauses to the Bill, while other amendments had been kept over for the major review of insolvency law. The clauses contained in the Bill would be applicable to all entities (natural and juristic), while further amendments would not.

Clause 1:
Mr Cronje stated that in terms of the present position, upon sequestration all employment contracts were terminated by law. The termination was not regarded as dismissal and employees were therefore deprived of further benefits associated with dismissal. Clause 1 now replace s38 of the Insolvency Act and now allows for employment contracts to be suspended and not terminated, and an attempt to be made to protect jobs. In addition, employees may also register for unemployment benefits and could claim for damages and severance benefits if their services had been terminated. Prior to the termination of employment contracts, the trustee is obliged to consult with, inter alia, the employees concerned and the relevant trade union. Unless otherwise agreed, employment contracts terminate 45 days after the appointment of a trustee or liquidator.

Clause 2:
Clause 2 replaces section 98A(iv) of the Insolvency Act and refers to a claim that existed at the time of insolvency. It includes termination in terms of s38 so that an employee would therefore be entitled to a severance claim.
(For a more detailed briefing, please see briefing notes)

Discussion
A member asked for clarity on which payments become preferential, and which non-preferential claims.

Ms Lubidla (ANC, Northern Cape) asked if the Saambou occurrence related to the same issue.

Mr Cronje responded that a distinction had to be drawn between two types of claims: secure claims, meaning those for which there was some form of security, such as land, and free residue claims, under which all else falls. Payments to creditors were made in a particular order. First to be paid are the administrative costs, followed by VAT and other taxes and then preferred claims for workers, including three months unpaid salary, severance pay and holiday and leave pay.

Mr Cronje said that the Saambou case was different because it was not an insolvency matter but a special case regulated Banks Act. He explained that if it had been a case of insolvency, all employee contracts would have been terminated immediately. However, if the process had been carried out in terms of the Amendment Bill, an attempt would have been made to save some jobs as had been done.

Mr Ralane (ANC, Free State) asked if an employee who had worked for a company for 30 years would only benefit in terms of the Unemployment Insurance Fund.

Mr Cronje replied that the term "suspended" only applied after insolvency and had no bearing on any pre-existing claim. Other benefits, for example pensions, would not be covered by section 38.

The Chair enquired as to any possibility of management continuing to enjoy benefits, such as company cars, after sequestration.

Mr Cronje answered that this would only occur if there had been collusion with the trustee. Legally, management would not have a say in the matter.

Ms Lubidla raised the question of when a company is declared insolvent.

Mr Cronje responded that the Act applies when the Court formally declares a person insolvent. It was also possible for a resolution to be taken that the company be would up, and in this circumstance the Act would also apply.

Ms Lubidla enquired if it was possible for a company to "play" bankrupt in order to run away with funds.

Mr Conroy (NNP, Gauteng) asked whether insolvency such as this would affect pension funds - he was thinking in terms of CNA.

Mr Cronje replied that that the CNA situation was like that of Saambou as it was a case of judicial management and not insolvency, and therefore would not fall under the Bill. If CNA were to be liquidated and the pensions benefits were solely in terms of the employment contract, employees would not be entitled to a claim for it under the Bill. If however, the pensions were arranged outside of the employment contract, the Act/Bill would not influence it.

Mr Conroy asked if anybody else could lay claim to the pension fund - as an asset of the company - or would the employees have a preferment claim.

Mr Cronje said that he would be surprised if the pension fund were to be run as a company asset and was not aware of any such case. The fund would usually be a separate entity that creditors would not have a claim to.

Mr Matthee (NNP, KZN) asked if the law was clear as far as protection for employees pension benefits was concerned. He suggested that if there was not sufficient protection, the matter should then be dealt with.

Mr Cronje replied that the issue had not been discussed during the development of the Bill so he could not give a clear answer.

Mr Matthee said that he assumed that because the Bill dealt with employee's contracts, it would be the right place to del with pensions and benefits relating to employees.

Mr Conroy felt that the possibility existed for the pension fund to be construed as an asset of the company and recommended that it be made clear in the Bill what the protection afforded to employees are.

Ms Lubidla asked what would happen in the case where employees had shares in a company.

Mr Cronje replied that shareholders would usually lose everything, as they were usually the last to be paid out. Employees who owned shares were regarded as ordinary shareholders in respect of the shares. In response to Ms Lubidla's earlier question, he said that "playing" should not occur as the court must be satisfied that the company is insolvent. In answer to Mr Conroy, he said that the issue of pension funds had not been addressed in the Bill as the Bill had a very narrow scope, which was to deal with the effect of the termination of employment contracts. However, a bigger insolvency reform legislation was coming up.

The Committee agreed to finalise the Bill.

The Chair raised the Motion of Desirability, which was agreed to, and stated that the Committee's report would reflect that the Committee had agreed to the Bill.

Meeting adjourned.

Appendix
BRIEFING BILL 14B-2002 NCOP S12A