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What happens when my employer goes bankrupt?

In the light of the grave impact that the Coronavirus (COVID-19) has on the global economy and the brutal reality that businesses and companies might not survive this pandemic that the world is confronted with, it may be wise to know your rights if your employment becomes at risk. What happens when the company or business you work for is sequestrated or liquidated? Section 38 of the Insolvency Act regulates the process of sequestration or liquidation, depending on the entity. Sequestration or liquidation of a business can either take place voluntarily upon application of the entity itself or compulsory by application of a creditor. For this article, the focus will be on voluntary sequestration.

When the employer is unable to meet the financial needs of the business and applies for sequestration or liquidation, depending on the type of entity, a trustee or liquidator (respectively) is appointed to take control of the financial affairs of the employer. From the moment that the trustee or liquidator is appointed the existing employment contracts are suspended for 45 days. During this time the employees are not required to work and are not entitled to any compensation or benefits in any form for example salaries, wages, annual leave, sick leave and so forth.

However, employees are entitled to submit an application to the Unemployment Insurance Fund (hereafter, UIF) during this suspension period. All employees are required by law to be registered to the UIF regulated by the Unemployment Insurance Act. In addition, employers are required to have all their employees registered to the UIF and failure to comply may result in penalties and/or fines.

The trustee or liquidator must manage the financial affairs of the employer including winding-up all assets and settling all debt with creditors insofar possible. He or she can also terminate contracts or decide to continue with employment contracts. Before a trustee or liquidator can terminate any contract there must be consultations with the employees, their trade unions or any relevant person in respect of an existing collective agreement in accordance with section 38(5) of the Insolvency Act. The aim of the consultations is to attempt to reach consensus on measures to save the whole or part of the business of the insolvent employer.

Employees, trade unions and other relevant persons may make suggestions to save the business in writing and within 21 days of the appointment of the trustee or the liquidator. On this basis, the trustee or liquidator may decide to continue contracts with employees after the 45-day suspension period, normally in the form of fixed-term contracts. An example of this is where employees agree to work for fewer wages for a period of time to save the whole or part of the business. If there is no agreement as such the suspended contracts of employment will automatically terminate 45 days after a trustee or liquidator was appointed.

An employee who suffered loss because of a suspended or terminated contract can claim for compensation from the insolvent estate of the employer.

Furthermore, an employee whose employment contract has been terminated due to sequestration or liquidation is entitled to claim severance pay from the insolvent estate. This claim will be equal to one week’s remuneration for every year in service of the employer.

In conclusion, in the unfortunate event that your employer becomes bankrupt and is undergoing sequestration or liquidation, the employment contracts are suspended, and employees can submit an application to the UIF for monetary relief. Employees or their representatives can make written suggestions to save the whole or part of the business. Compulsory consultations must be held before any contract of employment may be terminated and employees whose contracts were suspended and/or terminated is entitled to claim compensation against the insolvent estate.

Reference List:

Basic Conditions of Employment Act 75 of 1997

Insolvency Act 24 of 1936

Unemployment Insurance Act 63 of 2001

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)