Stratford v Investec Bank Limited CCT62/14 [2014] ZACC 38 (19 December 2014)

Today the Constitutional Court delivered a judgment in what appeared to be a straight forward application by a bank to have a debtor’s estate sequestrated.  But an important issue was the application of the Insolvency Act 24 of 1936 to employees who are regarded as ‘domestic’ and not ‘business’ employees.  One of the issues concerns the giving of notice of any application to domestic employees.  So it seems that section 9(4A) of the Insolvency Act was not intended to apply to domestic employees and the Minister of Justice and Constitutional Development argued that although there was differentiation it was not discriminatory.

An unsuccessful appeal against Investec Bank Limited v Stratford (10394/2012) [2013] ZAWCHC 207 (14 August 2013).

Summary provided by the Court

The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

Today the Constitutional Court handed down judgment in an appeal against the order of the Western Cape High Court, Cape Town (High Court), concerning the constitutional validity of certain notice provisions in the Insolvency Act 24 of 1936 (Insolvency Act) and their applicability to domestic employees in sequestration applications.

Mr and Ms Stratford are indebted to Investec Bank Limited (Investec) for over R240 million.  After Investec was granted a provisional sequestration order in respect of the Stratfords’ joint estate, it applied to the High Court for a final sequestration order.  The Stratfords and their domestic employees (appellants) launched a counter-application, contending that section 9(4A) of the Insolvency Act is unconstitutional because it does not require notice of an employer’s provisional sequestration application to be given to domestic employees

The High Court granted a final order of sequestration, finding that there would be advantage to creditors if an appointed trustee investigated various transactions and assets upon sequestration of the joint estate.  The Court rejected the appellants’ constitutional challenge, following the Supreme Court of Appeal’s decision in Gungudoo and Another v Hannover Reinsurance Group Africa (Pty) Ltd and Another [2012] ZASCA 83, which held that section 9(4A) only required notice to be provided to business employees and not domestic employees.  The Court also dismissed the constitutional challenge because it found that notice had in fact been given to the domestic employees.  The Supreme Court of Appeal subsequently dismissed the appellants’ application for leave to appeal for lack of prospects of success.

In this Court the appellants submitted that excluding domestic employees from section 9(4A) is unconstitutional and breaches their rights to equality, dignity, fair labour practices and the right of access to the courts.  They further contended that a final sequestration order should not have been granted because there was no advantage to creditors.

Investec detailed various possible recoverable assets and potentially impeachable transactions to illustrate that a final sequestration order would advantage creditors.  It contended that notice was provided to the domestic employees, and thus the constitutional issue need not be decided.  Alternatively, it contended that the section does not unfairly discriminate against domestic employees or impact their rights.  The second respondent, the Minister of Justice and Constitutional Development, submitted that section 9(4A) was intended only to require notice to business employees and that this differentiation does not amount to discrimination, as domestic employees are adequately protected by other pieces of legislation.

In a unanimous judgment written by Leeuw AJ, the Constitutional Court dismissed the appeal, affirming the High Court’s finding that a final sequestration order will advantage creditors and declining to interfere with the final sequestration order.  This Court declared that the word “employees” in section 9(4A) of the Insolvency Act includes domestic employees, as this interpretation best promotes the spirit, purport and objects of the Bill of Rights.  However, the Court limited the retrospective effect of this interpretation, given that many creditors would have acted on the authority of the Gungudoo decision.  The Court found that furnishing the petition on employees is compulsory and that the petition must be made available in a manner reasonably likely to make it accessible to the employees.  But, the Court held that there are conceivable instances where a provisional sequestration order may be granted despite failure to furnish notice, as the purpose of the provision is not to provide a technical defence to debtors.  On the facts of this case, the Court held that the petition had been made available in a manner that was reasonably likely to become accessible to the Stratfords’ domestic employees and accordingly, the High Court had been correct in granting the final sequestration order.

Extract from the CC judgment with footnotes omitted and links added

In this Court

[16]        Leave to appeal was granted on 4 June 2014.  The appellants persist in their constitutional challenge raised before the High Court that Gungudoo’s interpretation of section 9(4A) renders the section unconstitutional in that it infringes the right to equality,  the right to human dignity,  the right to fair labour practices  and the right of access to courts.   They add that differentiation between domestic and business employees amounts to indirect discrimination against domestic employees.  They submit that a reasonable interpretation consistent with the Constitution is that section 9(4A) includes domestic employees.  They also say a final sequestration order should not have been granted because the requirement that there be an advantage to creditors was not satisfied.


[17]        The issues to be decided are—

1.            whether section 9(4A) includes domestic employees;

2.            if not, whether the differentiation renders the provision inconsistent with the Constitution;

3.            whether compliance with the section is peremptory or directory; and

4.            whether the granting of a final sequestration order by the High Court was correct.

Does section 9(4A) include domestic employees?

[18]        Section 9(4A)(a) provides:

“When a petition is presented to the court, the petitioner must furnish a copy of the petition—

(i)            to every registered trade union that, as far as the petitioner can reasonably ascertain, represents any of the debtor’s employees; and

(ii)           to the employees themselves—

(aa)        by affixing a copy of the petition to any notice board to which the petitioner and the employees have access inside the debtor’s premises; or

(bb)       if there is no access to the premises by the petitioner and the employees, by affixing a copy of the petition to the front gate of the premises, where applicable, failing which to the front door of the premises from which the debtor conducted any business at the time of the presentation of the petition;

(iii)          to the South African Revenue Service; and

(iv)         to the debtor, unless the court, at its discretion, dispenses with the furnishing of a copy where the court is satisfied that it would be in the interest of the debtor or of the creditors to dispense with it.”

[19]        In determining whether section 9(4A) includes domestic employees, we must be guided by the Constitution.  Section 39(2) of the Constitution requires courts to promote the spirit, purport and objects of the Bill of Rights when interpreting any legislation.  The Constitution, therefore, requires that section 9(4A) be interpreted in conformity with it.  Thus, if there is a reasonable interpretation that promotes the spirit, purport and objects of the Bill of Rights, that interpretation must be preferred.

[20]        There are “three interrelated riders” to the basic principle of statutory interpretation.  They were adumbrated in Cool Ideas, where Majiedt AJ stated:

“A fundamental tenet of statutory interpretation is that the words in a statute must be given their ordinary grammatical meaning, unless to do so would result in an absurdity.  There are three important interrelated riders to this general principle, namely:

(a)          that statutory provisions should always be interpreted purposively;

(b)          the relevant statutory provision must be properly contextualised; and

(c)           all statutes must be construed consistently with the Constitution, that is, where reasonably possible, legislative provisions ought to be interpreted to preserve their constitutional validity.  This proviso to the general principle is closely related to the purposive approach referred to in (a).”   (Footnotes omitted.)

[21]        The term “employees” 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.  However, it is apparent from section 9(4A) that “employees” is capable of including domestic employees because it does not distinguish between a debtor’s domestic employees and those who are employed in the debtor’s place of business.

[22]        The Minister of Justice concedes that from a reading of section 9(4A) the word “employees” is unqualified and hence capable of including domestic employees.  However, he argues that given the context – including the background and apparent scope and purpose of the section and related provisions in the Insolvency Act – “employees” means persons employed in a business conducted by a debtor.  This approach in relation to the package of legislation amended in 2002, that includes amendments to the LRA, the Insolvency Act and the old Companies Act,  was adopted by the Supreme Court of Appeal in Gungudoo in its interpretation of “employees” in section 9(4A).

[23]        In Gungudoo, one of the grounds of appeal was similarly that the domestic employees of Gungudoo, who was the insolvent debtor, were not furnished with the petition before the provisional sequestration order was granted.  They argued that compliance with both sections 9(4A) and 11(2A) is peremptory and that non compliance made the entire application defective.  This latter issue was left open.  The Supreme Court of Appeal held that a debtor’s “employees” in section 9(4A) refers to the insolvent debtor’s employees in the employ of his or her business to the exclusion of his or her domestic employees.

[24]        The Supreme Court of Appeal,  in evaluating the package of legislation, looked at the amended section 197B of the LRA, which behoves an employer who applies for voluntary sequestration or against whom an application for compulsory sequestration has been launched, to “provide a consulting party contemplated in section 189(1) with a copy of the application”.   The Court reasoned that because “consulting party” is not defined, section 189(1)  requires the employer to consult only with employees that face dismissal for operational requirements of the employer, which operational requirements can only refer to an employer’s business requirements.

[25]        The Court held that the language used in sections 9(4A) and 11(2A)  of the Insolvency Act suggests that only business employees are affected because notice of the application should be furnished “at the premises from which the debtor conducted business”.   “Premises”, like “employees”, is not defined in the Insolvency Act.

[26]        The exclusion of domestic employees, according to the Court’s interpretation, suggests that sections 9(4A) and 11(2A) of the Insolvency Act have no bearing on those employers who do not conduct any form of business but nonetheless have employees in their private homes.  Thus the Court used provisions of the LRA to bolster a conclusion that section 9(4A) of the Insolvency Act excludes domestic employees.  Ordinarily, sequestration proceedings relate to a person who or a partnership that has employees including domestic employees.   In view of the fact that Gungudoo did not deal with the constitutional issues raised in this case, I respectfully disagree with the Court’s analysis of the LRA and its impact on the interpretation of section 9(4A).

[27]        Although the definition of “employee” in section 213 of the LRA is not directly applicable, it gives a strong indication of the kinds of employees the package of legislation that simultaneously amended insolvency procedures had in mind.  It envisages two types of employees, 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.

I am of the view that a domestic employee not employed in his or her employer’s place of business falls within the category of section 213.

[28]        Section 213 defines “operational requirements” as concerning “requirements based on the economic, technological, structural or similar needs of an employer”.  It is accepted that economic needs of an employer include financial needs which may result in an employer not being able to afford the salaries of employees.  This may occur to an employer who does not conduct a business but employs domestic employees, who for that reason would be dismissed for operational requirements of that employer.

[29]        When section 197B prescribes that an employer must provide a copy of a 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.

[30]        Section 189(1) does not define consulting party.  It however provides that where the employer contemplates dismissing one or more employees he or she must consult: (1) a person identified as a “consulting party” in terms of the collective agreement; (2) if there is no collective agreement, a workplace forum and registered trade union; (3) where there is no workplace forum, a registered trade union; or (4) where (1), (2) and (3) are not applicable, the employees or their representatives directly.  The latter category should be interpreted to include employees such as domestic employees.  Thus this section does not distinguish between employees defined in section 213 when providing for dismissals based on operational requirements.

[31]        The Minister of Justice and Investec argue that the purpose of notice in section 9(4A) is to:

(1) initiate consultation in respect of section 189 of the LRA; and

(2) if provisional sequestration is granted, to initiate consultation in respect of section 38(5)  and (6)  of the Insolvency Act.

The respondents submit that the purpose of consultation is only to save the total or part of the business, which the domestic employees cannot meaningfully participate in, thus resulting in notice being superfluous for them and further, that giving notice to domestic employees will create additional costs and administrative burdens for the creditor.

[32]        The respondents’ argument overlooks the fact that the consultation envisaged in section 38 must happen regardless of the notice envisaged in section 9(4A) as it is the trustee who must initiate such consultation if the trustee intends on terminating contracts.  From this it is clear that consultation and notice are distinctly separate issues.  And there is nothing in the text of section 38 to indicate otherwise.

[33]        The parties agree that where section 38(1)  of the Insolvency Act refers to “employees”, it envisages all employees including domestic employees.  Thus, the section suspends the employment contracts of all employees upon a provisional sequestration order being granted.  This means that the contracts of domestic employees are effectively suspended without notice, while their business counterparts who could conceivably be doing the same kind of work in the insolvent employer’s business will receive notice.

[34]        Notice prevents a situation where employees would show up at work and suddenly find out that they can no longer render their services or receive remuneration.  Notice at an earlier stage, before a provisional sequestration order, will not only warn an employee of the tumultuous financial state of the employer, but also meaningfully enable employees to find alternative jobs or make alternative arrangements.  These are the virtues of being informed of the possibility of a sequestration.  Notice, ultimately, signifies respect for the human dignity of employees.

[35]        The interconnection between the right to dignity and work has long been articulated by this Court.  In Affordable Medicines it held [para 59]:

“One’s work is part of one’s identity and it is constitutive of one’s dignity.  . . .  And there is a relationship between work and the human personality as a whole.  ‘It is a relationship that shapes and completes the individual over a lifetime of devoted activity, it is the foundation of the person’s existence’.”   (Footnote omitted.)

The impact of a narrow reading of “employees” on their right to dignity, so illustrated, tilts the interpretive balance decisively in favour of a wider reading.  And this is indeed required by section 39(2) of the Bill of Rights.

[36]        The respondents acknowledge the vulnerability of domestic employees but contend that their plight is not as a result of the conduct of the creditors, but rather as a result of the conduct of their employers.  Investec stated poignantly:

“It is indeed unfortunate that their employers are insolvent and can no longer employ them.  This is not as a consequence of the [first respondent’s] making but is a consequence of the manner in which the [Stratfords] have managed their financial affairs.”

This is of course true.  But to interpret the statute as including domestic employees will protect their dignity in situations where their employers face sequestration.  This interpretation better promotes the spirit, purport and objects of the Bill of Rights.   Also, it will give them timeous notice and an opportunity to re-arrange their affairs going forward.

[37]        Finally, given the ordinary meaning of “employees”, the interpretation of various provisions in the LRA and constitutional considerations, I conclude that “employees” in section 9(4A) includes all employees, as well as domestic employees.  The challenge to the constitutional validity of the provision therefore falls away.

Is compliance with section 9(4A) peremptory or directory?

[38]        The appellants contend that the order of sequestration must be set aside because the domestic employees were not properly furnished with the petition when the order for provisional sequestration was sought.  Investec argues that even if it were to be assumed that section 9(4A) includes domestic employees, it has nonetheless complied with the provision.

[39]        Gungudoo left open the question whether section 9(4A) is peremptory.  In other words, it did not decide whether non-compliance with the provision is fatal to the granting of a provisional order.  However in EB Steam Company,  the Supreme Court of Appeal dealt with section 346(4A)  of the old Companies Act – a section almost identical to section 9(4A) of the Insolvency Act.  There it held that compliance with section 346(4A) is peremptory whilst the method in which a creditor furnishes the application to the employees is directory.   The appellants accepted EB  Steam Company as correct.

[40]        The fact that “furnish” is used in section 9(4A) and the word “serve” is used in section 11(2A)  of the Insolvency Act indicates that the legislation envisaged a lower threshold for notifying the employees than service in respect of section 11(2A).  I am of the view that “furnish” requires that petitions “must be made available in a manner reasonably likely to make them accessible to the employees”.

[41]        What needs to be determined in the present case is whether the candidate attorney, on behalf of Investec, made the petition available in a manner that was reasonably likely to become accessible to the employees.  The following observations are relevant:

(a)          The candidate attorney, according to the Stratfords, enquired whether they had a domestic employee and they answered that they had one domestic employee (referring to Mr Ngoma).

(b)          She then left a copy of the petition on the kitchen table for Mr Ngoma after having alerted the Stratfords that it was for the employee.

(c)           It was reasonable of her to assume that the Stratfords would pass on the information to their employees (after she said that a copy of the petition was for their employee).

(d)          The candidate attorney could not have been aware that there were other employees because of the Stratfords’ failure to disclose that fact to her.

(e)          The Stratfords, as the employer, had a duty to bring the application to the attention of the employees in terms of section 197B of the LRA.

I conclude that the candidate attorney’s effort to furnish the petition on the employees was sufficient to meet the standard set by EB Steam Company.

[42]        Failure to furnish the employees with the petition may not be relied upon by the debtor for opposing sequestration when the question to be decided is whether sequestration is to the advantage of creditors.  In EB Steam Company the Supreme Court of Appeal stated that the purpose is not to provide a “technical defence to the employer, invoked to avoid or postpone the evil hour when a winding-up or sequestration order is made”.   I agree.  There may be instances where a provisional order should be granted to avoid the concealing of assets or for other urgent reasons in circumstances where a delay would substantially prejudice the creditors.  Thus, non compliance will not always render the granting of an order fatal, but this should be only in exceptional circumstances.