Should an employee accept a voluntary severance package when business rescue proceedings are anticipated?

​​​When business rescue is looming, it may be better for employees to wait before accepting a voluntary severance package, as they will rank higher as creditors if they accept the VSP after the business rescue plan is adopted

During a retrenchment process, employees may wonder whether to accept a voluntary severance package (VSP) or not. This decision is usually informed by factors such as access to funds, benefits and a need for finality.

The decision becomes more complicated where an employee anticipates that the company may be placed in business rescue. Employees may face the question whether they will be better off accepting a VSP, or being retrenched in the normal course of business rescue proceedings (and in which event they would be better placed to receive payment). The employees find themselves trapped between a rock and a hard place.

In business rescue proceedings, claims against a company rank (and are paid) in the following order:​

1Claims of the practitioner (for remuneration and expenses) and other persons, including legal and other professionals (for costs of business rescue proceedings)
2Claims of employees (for any remuneration, reimbursement for expenses or other amount of money relating to employment which became due and payable after business rescue proceedings began)
3Claims of secured lenders or other creditors (for any loan or supply made after business rescue proceedings began, i.e. post-commencement finance)
4Claims of unsecured lenders or other creditors (for any loan or supply made after business rescue proceedings began, i.e. post-commencement finance)
5Claims of secured lenders or other creditors (for any loan or supply made before business rescue proceedings began)
6Claims of employees (for any remuneration, reimbursement for expenses or other amount of money relating to employment which became due and payable before business rescue proceedings began)
7Claims of unsecured lenders or other creditors (for any loan or supply made before business rescue proceedings began, i.e. the concurrent creditors)

If the employee does not accept a VSP, and the company gets placed under business rescue supervision, any claim by that employee for arrear salary would rank 6th on the above list, ahead of concurrent unsecured creditors, but below all other creditors. As held in the July 2020 Labour Appeal Court judgment involving SAA, the business rescue practitioner would not be able to retrench workers until a business rescue plan has been adopted. This plan is often published and adopted 6-9 months after entering business rescue supervision.

The employee will continue to be employed on the same terms and conditions that existed before business rescue, except to the extent that changes occur in the ordinary course of attrition; or the employees and the company (in accordance with applicable labour laws) agree different terms and conditions.

In these circumstances, the Companies Act, 2008 provides that, to the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company’s business rescue proceedings, but is not paid to the employee, it is considered "post-commencement financing", and will rank 2nd on the above list.

If an employee accepts a VSP (considered an amount of money relating to employment, which would have become due and payable before the business rescue proceedings began), it will also rank 6th on the above list.  Accordingly, in these circumstances, whether an employee's claim against a company in business rescue is in respect of their VSP, or arrear salary, neither claim would be preferred over the other.  There is also (unfortunately for employees) no guarantee that an employee will be paid in either circumstance - the only guarantee for an employee would be the amount of their claim against the company.

If an employee does not accept a VSP, and if the Company is placed under business rescue during the course of the retrenchment process, the  employee will remain an employee of the Company for the purposes of the business rescue proceedings, so will have all the rights that a normal employee would have (provided the retrenchment process has not been finalised).

Of course, as mentioned above, any amounts which became due and payable to the employee after the business rescue proceedings would still rank 2nd on the above list.

While "post-commencement financing" takes preference over other secured and unsecured claims against the Company, as mentioned above, this is not a guarantee that an employee will be paid the amount owed to them. That sum can only be paid if the company has funds available.

In this regard, and depending on the terms of the V​SP, there is an argument that employee X may be better placed not accepting a VSP before the commencement of business rescue proceedings, because they rank higher than employee Y who accepts the VSP.  This is because employee X will remain an employee of the company during business rescue and will be paid out for any remuneration, reimbursement for expenses or other amount of money relating to their employment, which became due and payable after business rescue proceedings began, before employee Y, who accepted a VSP prior to the commencement of business rescue proceedings.

This insight was first published by Without Prejudice.


Webber Wentzel > News > Should an employee accept a voluntary severance package when business rescue proceedings are anticipated?
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