Are employees of liquidated companies considered creditors that must be paid by the liquidators?

The long answer

Before dealing with your first question about whether employees are regarded as creditors that must be partially paid, we need to be clear about the requirements for consultation with affected employees: Barnard Incorporated said in a 2024 article that the Companies Act and the Labour Relations Act mandate that employees must be consulted during the business rescue process. This means that their trade union, or in the absence of a union, the workers themselves, must be kept informed on all aspects of the process, including notices, court proceedings, decisions and meetings. 

The business rescue practitioner must strive to find a balance between the rights of the employees and the commercial sustainability of the company.

But Cliffe Dekker Hofmeyr Attorneys warn in this article, “If there is no money left to pay the employees of the company under business rescue or if the company under business rescue is only able to partially pay the employees of the company, and this is set out in an approved business rescue plan, the employees of the company will not be entitled to claim the balance of their claims against the company.”

If the business rescue plan did not work, Bowman’s Law said in 2019 that there is often an application for provisional liquidation, which must be confirmed after six weeks. Before the date of the hearing for the application for liquidation, the company, the company’s employees, the trade union that represents them and SARS, must all be informed, and proof of this must be given to the court. 

The aim of the consultations is to reach an agreement or consensus about the best way to save all or part of the business. Employees and trade unions and representatives of collective agreements can make suggestions in writing within 21 days after the liquidator is appointed.

The sheriff of the court must deliver the court order granting the final liquidation order to all the parties mentioned above.

This would then result in the liquidation process beginning. Once the final winding-up order is issued, the CCMA says that an employee may lodge a claim of outstanding money with the liquidators. The CCMA says that any claim brought by an employee to the CCMA would end upon the company’s final liquidation.

While a business rescue practitioner cannot suspend or cancel any employment contract, all contracts of employment are automatically terminated (s38 of the Insolvency Act) when a company is wound up. 

A worker whose employment contract has been terminated is entitled to claim severance pay, as if they were dismissed for operational reasons, from the insolvent estate: this is one week’s pay for every year worked, according to Section 41(2) of the Basic Conditions of Employment Act (BCEA).

The Labour Appeal Court (LAC) has noted that section 41(2) of the BCEA clearly provides that if employees are dismissed for operational reasons, they are entitled to severance pay equal to one week’s remuneration for each completed year of service with the same employer.

A liquidator is appointed to oversee the winding up procedures, which will also entail an assessment of the assets and the debts. In addition, the liquidator will sell off the assets and the proceeds will be used to pay the creditors according to their status of secured, non-secured, and preferred.

This is the order in which creditors will be paid if the company is in liquidation:

1. Secured creditors (like mortgage or landlord)

2. Costs of the liquidation (like sheriff’s costs, Master’s fees payable in connection with the liquidation)

3. Costs of execution (like taxed fees of the sheriff in connection with any execution upon property owned by the company)

4. Preferent unsecured creditors (former employees of the company for salary or wages due to the employee, for a period not exceeding three months, payment of annual leave accrued in the year the company became insolvent or the previous year).

5. Concurrent creditors (which are any creditors who will be paid after the preferent creditors).

Employee benefits will only be paid out once the liquidation process has been finalised, which could take between six months and two years. 

So, to confirm: your husband and the other employees will be regarded as creditors and do have a claim against the company.

But perhaps it would be a good idea to consult a pro bono labour lawyer. (Pro bono means for the public good – in other words, free.) The South African Society for Labour Law Pro Bono Project (SASLAW Pro Bono NPC), based at South African Labour Courts, “serves to deliver a quality advisory service and defined Labour Law legal services to those who otherwise do not have access to justice.” 

This is what their website says: 

SASLAW Pro Bono NPC is committed to the project and its general membership is committed to:

• Assisting unrepresented and indigent litigants in gaining access to justice

• Using their knowledge in the field of Labour Law to perform pro bono work

• Assisting the Labour Court in addressing the backlog in its case-load and facilitating the efficient operation of the various Labour Courts

• The project assists the Labour Court with giving South Africans who cannot afford legal assistance, the right to have access to justice, and to receive advice on their labour matters from professional and qualified attorneys 

These are their contact details for Western Cape:

Administrator: Fatima Rustin

Tel: 065 216 2542

Email: westerncape@saslaw.org.za

Wishing you the best,
Athalie