Employees: What happens when an employer is sequestrated in his/her personal capacity or a company is liquidated and where do the claims of employees rank?

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BUSINESS NEWS - When an employer is sequestrated in his/her personal capacity or a Company is liquidated, the question usually arises as to what will happen to the employees and if they lodge claims against the estate of the employer, where do their claims rank?

Preferent or concurrent?

Section 38 of the Insolvency Act deals with the effect of sequestration/liquidation on a contract of service of an employee.

In terms of the aforementioned section, the contract of service of the employees, in the case where an employer is sequestrated in his/her personal capacity or a Company is liquidated, is suspended as from the date of the granting of a sequestration or liquidation order, i.e. the provisional sequestration or liquidation order.

During this suspension, the employee does not have to render any services to the employer and is also not entitled to any remuneration but is entitled to unemployment benefits as provided for in the Unemployment Insurance Act as from the date of suspension, being the date of the provisional sequestration or liquidation order.

The trustee or liquidator is entitled to enter into short-term employment contracts with the employees and proceed to pay them salaries or wages.

This will usually be the case where the trustee or liquidator continues to trade in the estate. If there is no agreement between the trustee or liquidator and the employee(s) regarding continued employment, all suspended contracts will terminate 45 days after the appointment of the final trustee or liquidator.

The Basic Conditions of Employment Act provides for a preferent claim for severance benefits for an employee whose contract of service has been terminated while the Insolvency Act also provides in terms of Section 38 for an unliquidated concurrent claim by the employee against the estate for damages suffered due to the suspension of the contract or the termination thereof before its expiration.

Employees have the following preferential claims against an estate, which means it ranks immediately after the death bed and funeral expenses of the insolvent, if any, and the administration costs and execution:

A maximum of R12,000.00 for salaries or wages which does not exceed three months’ salary or wages that is due to the employee before the date of sequestration/liquidation;
A maximum of R4,000.00 in respect of leave which is due to the employee and has accrued to him/her either in the year of insolvency or the previous year;
A maximum of R4,000.00 in respect of any other form of leave of absence, for example sick leave, which does not exceed three months before sequestration/liquidation;
A maximum of R12,000.00 in respect of severance or retrenchment pay which is calculated as one week’s salary/wage for every completed year of service.

Any amounts claimed that exceeds the above limits are concurrent claims. This means that the employees will receive a concurrent dividend for the amount that exceeds the limits above together with the rest of the unsecured creditors from the amount that is available for distribution, if any, after the awards to all preferent creditors who proved a claim against the estate.

For more information Anél can be reached via acloete@rgprok.com or 044 601 9900.