Atlas Packaging (Pty) Ltd v Palierakis; In re: Palierakis v Atlas Carton and Litho CC (In Liquidation) (JA108/14) [2015] ZALAC 43 (21 October 2015)
The Labour Appeal Court disallowed the appeal against an order of Molahlehi J in the Labour Court dismissing a preliminary point that an alleged unfair dismissal claim must be determined in terms of s197A(1)(b) of the LRA.
LAC summary: Application of s197A of the LRA in respect of a scheme of arrangement or compromise entered into in order to avoid winding up – court should examine the true nature of the contractual agreement. Appellant contending that a scheme of arrangement or compromise was entered into between it and another party to avoid the winding up of the latter for reasons of insolvency and consequently s197 of the LRA does not apply – contractual arrangements between parties not making use of the provisions of s311 of the Companies Act of 1973 – purpose of a scheme of arrangement or compromise to avoid a winding up order – –arrangement or compromise between the parties not serving its intended purpose but to circumvent the provisions of s197 of the LRA.
Excerpts
[10] In this dictum, the learned judge clearly envisaged that a court would have no jurisdiction to recognize some other form of arrangement outside of the provisions of s311. Most certainly these two judgments do not afford definitive support for the contention that s197 A can be interpreted to include a compromise or scheme which is not implemented in terms of s311 of the Companies Act, but rather under the common law.
[11] Nonetheless, for reasons that will become apparent, it is not necessary to decide this question definitively. A prior question arises, in this case, namely, was there a genuine scheme of arrangement or compromise, which had been entered into to avoid the winding up of Atlas Carton.
[12] In evaluating the relevant contract, a court must be cognisant of the doctrine regarding simulated transactions. This doctrine was definitely expounded in Commissioner of Customs and Excise v Randles Brothers and Hudson Limited[1] where Watermeyer JA said:
‘I wish to draw particular attention to the words “a real intention, definitely ascertainable, which differs from the simulated intentions”, because they indicate clearly what the learned Judge meant by “disguised” transaction. A transaction is not necessarily a disguised one because it is devised for the purpose of evading the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for that purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted by the Courts according to its tenor, and then the only question is whether, so interpreted, it falls within or without the prohibition or tax.
A disguised transaction in the sense in which the words are used above is something different. In essence it is a dishonest transaction: dishonest, in as much as the parties to it do not really intend it to have, inter partes, the legal effect which its terms convey to the outside world. The purpose of the disguise is to deceive by concealing what is the real agreement or transaction between the parties. The parties wish to hide the fact that their real agreement or transaction falls within the prohibition or is subject to the tax, and so they dress it up in a guise which conveys the impression that it is outside of the prohibiting or not subject to the tax. Such a transaction is said to be in fraudem legis, and is interpreted by the Courts in accordance with what is found to be the real agreement or transaction between the parties.
Of course, before the Court can find that a transaction is in fraudem legis in the above sense, it must be satisfied that there is some unexpressed agreement or tacit understanding between the parties. If this were not so, it could not find that the ostensible agreement is a pretence. The blurring of this distinction between an honest transaction devised to avoid the provisions of a statute and a transaction failing within the prohibitory or taxing provisions of a statue but disguised to make it appear as if it does not, gives rise to much of the confusion which sometimes appears to accompany attempts to apply the maxim quoted above.’[2]
[13] From this approach to the proper classification of a contact, a court is manifestly entitled to examine the substance and purpose of the agreement in order to determine its true nature. See for more recent authority Roshcon v Anchor Auto Body Builders and Others 2014 (4) SA 319 (SCA) at 332-334.
. . . . .
The applications of s 197 A
[20] It is now possible to return to s197 A which applies to a transfer of a business, pursuant to a scheme of arrangement or compromise which has been entered into to avoid winding up. When the agreement, which I have described, is read as a whole, it is clear that the only certainty that flowed therefrom was that Carton Atlas would, indeed, be wound up. Upon the conclusion of the agreement, Carton Atlas’ entire business structure had been transferred to appellant. The purchase price was structured so that, given the valuation of the fixed assets in the amount of R 4.2209,00, which was to be valued at the lower of the actual cost price and the market value thereof, Carton Atlas would have no assets, no infrastructure and presumably, little if any, cash.
[21] While an arrangement connotes a far wider class of agreement than a compromise, which is an agreement to settle a dispute over rights or to modify undisputed rights where a difficulty exists over their enforcement, within the context of the specific wording of s197A, there can be little doubt that the entire arrangement or compromise must have as its primary purpose, the avoidance of a winding up order.
[22] There is no basis by which this conclusion can be justified upon an analysis of the structure of this agreement. Clause 19 might proclaim that the business was to be sold as a going concern in terms of s197 A. But this only confirms that this proclaimed characterisation of this agreement sought to obscure its true purpose. That purpose was not to nurse the Carton Atlas back to commercial health so that it could avoid an order of winding up. The purpose appears to be in an attempt to circumvent the provisions of s197 of the LRA at worst for appellant and, at best, an asset stripping exercise, but not a compromise or arrangement even within the meaning of the common law.
[23] Viewed accordingly, the transaction was a sham. It cannot, in any way, be characterised as one which falls within the scope of s197 A of the LRA.
[1] 1941 AD 369.
[2] At 395 – 396.
Prof Darcy du Toit has commented on this judgment in the latest Weekly Comment: Contracts are not always what they seem published by LexisNexis in IR Network [subscription required].
Excerpts
Section 197A of the LRA is an important provision, especially in times of economic instability. Its purpose is to promote the rescue of businesses that would otherwise go insolvent. Unfortunately it is also open to abuse by employers who seek to evade their obligations towards employees, as appears from the judgment of the Labour Appeal Court in Atlas Packaging (Pty) Ltd v Palierakis (Case no: JA108/14, 21 October 2015).
The facts were somewhat complicated. In essence –
• On 14 April 2010 Atlas Carton dismissed Mr Palierakis for operational reasons.
• On 29 September 2010 AC and APS concluded a sale agreement with Atlas Packaging (AP) whereby the business of AC was transferred to AP as a going concern “subject to section 197A”.
• On 5 August 2011 Atlas Carton and Atlas Paper Sacks (hereafter AC and APS) were placed in voluntary liquidation and on 7 September 2011 in compulsory liquidation.
In the meantime Mr Palierakis had lodged an unfair dismissal claim against AC but, after the sale agreement, substituted AP as the respondent employer on the basis that it had taken over the business of AC as a going concern and, in terms of section 197 of the LRA, had therefore stepped into the shoes of AC (the “old employer”).
In terms of section 197 this claim was well-founded. Section 197 provides that, in the case of an ordinary business transfer, the “new employer” not only takes over all employment contracts of the “old employer” as at the time of transfer, but also becomes legally liable for “anything done before the transfer by or in relation to the old employer, including the dismissal of an employee” (s 197(2)(c)). On this basis, Mr Palierakis’s claim for unfair dismissal must lie against AP (the new employer) and not against AC (the old employer).
However, AP argued that section 197 was not applicable and that the transfer of AC’s business had been subject to section 197A. The latter section applies in the case of the transfer of a business where (a) the old employer is insolvent, or (b) “if a scheme of arrangement or compromise is being entered into to avoid winding-up or sequestration for reasons of insolvency” (s 197A(1)). And, as noted already, the agreement of 29 September 2010 expressly recorded that the transfer was in terms of section 197A.
If this was so, AP had a cast-iron defence. The crucial difference between sections 197 and 197A is that, when the latter applies, the new employer does not become liable for actions by the old employer prior to the transfer. The new employer does take over the contracts of employment of the old employer that are in existence “immediately before” the old employer’s insolvency, but “anything done before the transfer by the old employer in respect of each employee is considered to have been done by the old employer” (s 197A(2)(c)).
Now reported (2016) 37 ILJ 109 (LC).