The Constitutional Court in Stratford and Others v Investec Bank Limited and Others [2014] ZACC 48 delivered on 19 December 2014 declared that the word “employees” in Section 9(4A) of the Insolvency Act 24 of 1936 includes domestic employees.

Section 38(1) of the Insolvency Act states that a sequestration order granted against a debtor has the effect of suspending contracts of service of the debtor’s employees with immediate effect.  The effect thus of the suspension is that the employees are not entitled to any remuneration and no employment benefits accrued to them except for an employment benefit in terms of Section 35 of the Unemployment Insurance Act 63 of 2011.  An amendment to the Insolvency Act in 2002 inserted Section 9(4A) in terms whereof a copy of the sequestration application has to be furnished to employees of the insolvent debtor before an order for provisional sequestration may be granted.  The SCA in Gungudoo and Another vs. Hannover Reinsurance Group Africa (Pty) Ltd and Another 2012 (6) SA 537 (SCA) interpreted this amendment to apply only to employees of the insolvent’s business, i.e. business employees, to the exclusion of domestic employees. 

The facts

Following Investec having launched sequestration proceedings against the Stratfords in the High Court which application had been served on the Stratfords as well as one of its three domestic employees (the Stratfords had failed to disclose that they had two other domestic employees), the application had been set down for hearing on a predetermined date.  By agreement between the parties the matter was only heard at a later date however the Court had refused the application for a postponement by the Stratfords and had granted a provisional order of sequestration.  In terms hereof, the Sheriff had served a copy of the provisional order of sequestration on the Stratfords as well as the identified domestic employee and subsequently on Ms Stratford and the remaining two domestic employees.  A rule nisi was issued in terms of a provisional sequestration order calling Ms Stratford and all interested parties to show cause why the final sequestration order should not be granted on a predetermined date.  The Stratfords had opposed the application and on the same day the domestic employees had filed an application to intervene as applicants in the proceedings which had been granted.  Subsequently the domestic employees together with the Stratfords had launched a counter-application joining the Minister of Labour and the Minister of Justice in seeking an order that Section 9(4A) is unconstitutional in that it indirectly discriminates against domestic employees and a failure to notify them of the sequestration proceedings amounted to a breach of their constitutional right to fair labour practices and the right of access to Courts.  They submitted that had they been given prior notice of the provisional sequestration proceedings, they would have been able to seek legal advice and oppose the application.

The High Court had found that the Stratfords had committed an act of insolvency and had failed to explain their financial situation and had therefore found that Investec had proved on a balance of probabilities that there were prospects of pecuniary benefit to creditors.  With respect of the constitutional challenge, the High Court held that compliance with the provisions of Section 9(4A) is peremptory and that failure to comply with the section would result in the discharge of the rule nisi.  Nonetheless, the Court had concluded that the provision did not require the petition to be served on each and every domestic employee or that it should be brought directly to the attention of the employees or that each employee be personally advised of the sequestration application.  It had therefore given effect to the decision in Gungudoo above and had held that given the protections afforded to employees in both the Labour Relations Act, No 66 of 1995 (LRA) and the Basic Conditions of Employment Act, No 75 of 1997 (BCEA) domestic employees could not argue that they had been discriminated against.  The Stratford’s estate was placed under final sequestration and the counter-application was dismissed with no order as to costs.  Whilst initially the application was dismissed as it was not in the interest of justice to hear the matter at that stage, the appellants persisted in their constitutional challenge placed before the High Court that the respected restrictive interpretation in Gungudoo of Section 9(4A) renders the section unconstitutional in that it infringes on, amongst others, the right to equality, human dignity, fair labour practices and access to Courts.  They added that differentiation between domestic and business employees amounts to indirect discrimination against domestic employees and submitted that a reasonable interpretation consistent with the Constitution is that Section 9(4A) includes domestic employees.  They further state that the final sequestration order should not have been granted because the requirement that there be an advantage to creditors was not satisfied.

The Constitutional Court in accepting that the word employee in Section 9(4A) includes domestic employees considered the following:

(i) That they must be guided by the Constitutional, in particular Section 39(2) of the Constitutional requires Courts to promote the spirit, purport and objects of the Bill of Rights when interpreting any legislation and would therefore require that Section 9(4A) be interpreted in conformity with it.

(ii) The term “employee” is not defined in the Insolvency Act except for the definition of employee in Section 98A(5) which is similar to the definition of “employee” in the LRA which gives a strong indication of the kinds of employees the legislation had in mind, namely those –

(a) Employed by a person or the State and who receive or are entitled to a salary or remuneration; or
(b) Who assist in carrying on or conducting the business of an employer.

(iii) Section 197B of the LRA requires an employer who is facing financial difficulties that may reasonably result in the winding up or voluntary sequestration must advise a consulting party contemplated in Section 189(1) of the Act with a copy of the application.  Given that an employer who finds himself in a position unable to afford the salaries of his employees including his domestic employees who for that reason would need to be dismissed for operational requirements of the employer (this would fall under economic needs of an employer).  The Court therefore found that when Section 197B prescribes that an employer must provide a copy of the sequestration application to a “consulting party” contemplated in Section 189(1) of the LRA, “consulting party” applies to employees in both a domestic and a business context.

Accordingly, the Constitutional Court had indicated that where an employer contemplates dismissing one or more of his employees he is required to consult with either a person identified as a consulting party in terms of the collective agreement, failing which, a workplace forum and registered trade union, failing which the employees or their representatives directly, the latter category to be interpreted to include employees such as domestic employees.  Section 189(1) therefore does not distinguish between employees defined in Section 213 when providing for dismissals based on operational requirements.

Overall therefore, the Constitutional Court had ruled that domestic employees must also receive notification of the provisional or final winding up of their employer’s estate and in so doing would also further secure their rights in labour law with such circumstances would result in their dismissal due to operational requirements.

Written by Manisha Maganbhai-Mooloo and Khanyisile Khanyile, Employment Law Department at Adams & Adams