Insolvency and transfers

Insolvency & Liquidation of employer

There was a need to protect the rights of employees upon sequestration or liquidation of their employer. Termination of contracts of employment for the above reasons meant that employees were not considered as dismissed and therefore they did not receive any protection or benefits the law offered e.g severance pay in terms of the Basic Conditions of Employment Act or the right not to be unfairly dismissed in terms of the Labour Relations Act. The amendment to section 38 of the Insolvency Act applies to the insolvency of individual employers who trade in their personal capacity and to companies and close corporations wound up due to insolvency.

NOTE: A trustee handles the insolvent estate of a person, whilst a liquidator administers the liquidation of a legal person e.g. company.

The effects of the amendments

Contracts of service are suspended on the insolvency of the employer from the date of the sequestration order. During the suspension of the contract, the employee is not obliged to render any services to the employer, the employee is not entitled to receive pay or employment benefits arising from the contract. The employee whose contract has been suspended is deemed to be unemployed and is entitled to claim UIF. The employee whose contract has been suspended or terminated due to the employer’s insolvency is entitled to claim compensation for loss suffered by suspension or termination of the contract of service.


The trustee / liquidator may not terminate contracts of service unless he/she has with consulted with:
Persons as require by virtue of a collective agreement;
A workplace forum; or
Affected employees and/or their trade unions

Consultation means that the parties must seek to reach consensus on appropriate means and ways to save the whole business or part of it by the sale of the whole or part of it; or
Transferring it as a going concern in terms of section 197A of the Labour Relations Act; or by a scheme or compromise in terms of section 311 of the Companies Act; or by any other manner. Parties wanting to make proposals must do so in writing within 21 days of the appointment of the trustee / liquidator, unless otherwise agreed. A creditor may participate in such consultations with the consent of the trustee / liquidator.

Termination of contracts of service

If the trustee / liquidator has not already terminated the services of employees, the contracts will automatically terminate after 45 days of the trustee / liquidator having been appointed.

Severance pay

An employee whose services have been terminated in this manner is entitled to claim severance benefits as if they were dismissed for operational reasons, from the employer’s insolvent / liquidated estate in terms of section 41 of the Basic Conditions of Employment Act.