Does the perfection of a notarial bond trigger section 197?

In the matter of Spar Group Limited v Sea Spirit Trading 162 CC t/a Paledi and Others (JA47/2017 [2018] ZALAC 15 (June 7, 2018)) the Labour Appeal Court held that perfecting a notarial bond, by a creditor taking possession of a business to recover monies due, does not trigger section 197 obligations. This judgment dealt with the following facts.

Mr Vermaak held a 50 per cent member’s interest in two close corporations, Paledi Superspar and Paledi Tops. He was employed by Paledi Superspar to manage it, while Mrs Vermaak was employed by Paledi Tops as its manager. The Paledi businesses obtained trading stock on credit from the Spar Group Ltd. As security for their indebtedness to Spar, notarial bonds were registered over the movable property of the Paledi businesses. On default, Spar was entitled to take possession of and retain the movable property and to sell and dispose of it. In particular, it was entitled to conduct the Paledi businesses, in their name. This included the power to purchase goods, and to dispose of the businesses.

Towards the end of June 2015 the Paledi businesses communicated to Spar that they were no longer in a position to meet their expense and wage obligations at the end of that month. In order secure its interests, Spar obtained an order from the High Court on June 30, 2015, perfecting the notarial bonds by taking possession of the businesses. Thereafter, it took possession with effect from July 1, 2015.

On July 13, 2015, Spar proposed to Mr Vermaak that he be appointed as the Store Manager of Paledi Superspar, at a reduced salary, for the first three months. A similar proposal was made to Mrs Vermaak in respect of Paledi Tops. The Vermaaks each rejected the proposals. This prompted Spar to appoint a new store manager. Spar informed the Vermaaks that they were released from duty, that their presence was no longer required, and that they remained employees with claims for remuneration that lay against the Paledi businesses.

Ultimately Spar sold both the Paledi businesses to Erasmus Group Holdings (Pty) Ltd as going concerns. In the sale agreement, it was expressly provided that Erasmus would be substituted for each of the Paledi businesses as the employer in the existing employment contracts. This gave expression to section 197 of the Labour Relations Act, 1995 (the LRA).

The Vermaaks claimed that they had been dismissed by Spar. They argued that the perfection of the notarial bonds resulted in the Paledi businesses being transferred to Spar as going concerns, and accordingly triggered the transfer of their employment contracts to Spar in accordance with section 197. Their subsequent dismissals by Spar were thus allegedly automatically unfair, in contravention of section 187(1)(g) of the LRA. This section provides that if the reason for a dismissal is a transfer in terms of section 197, or related to such a transfer, the dismissal is automatically unfair.

Spar argued that while it took control of the businesses, it did so only for a limited and specific purpose, i.e. to recover the monies owed to it by the Paledi businesses. This argument was upheld on appeal. In enunciating the test, the LAC stated that the “decisive criterion is whether, after the alleged transfer, the undertaking is continued or resumed in the different hands of the transferee. The inquiry requires examination of all the facts relating both to the identity of the undertaking and relevant transaction in order to assess their cumulative effect, looking at the substance, not at the form of the arrangements. The emphasis is on a comparison between the actual activities of and actual employment situation in an undertaking before and after the alleged transfer. The purpose of the relevant transaction often will be an important relevant consideration.”

In reaching the conclusion that the perfection of the notarial bonds did not trigger section 197, the LAC considered the following facts

• Spar assumed responsibility only for a limited period and purpose (i.e. recovery of its debt).
• Spar was not authorised to sell the Paledi businesses’ movable property in its own name.
• Spar was not authorised to dispose of immovable property.
• Spar could not retain movable or immovable property after its debt had been realised.
• The leases in the names of the Paledi businesses were not transferred to Spar.
• When the Paledi businesses were sold in order to realise their debt to Spar, the employment contracts were transferred to Erasmus.
• It was not disputed that if Spar’s debt was settled, the responsibility for running the Paledi businesses would have been returned to them.
• It was common cause that any revenue generated in excess of the amount due to Spar would have been for the benefit and account of the Paledi businesses.

Ultimately, Spar had acted as a creditor, and not as an employer, and only for a limited period and purpose. Section 197 envisages two separate legal entities as old and new employer. The perfection of the notarial bond did not result in a transfer from one legal entity (the Paledi Superspar or Paledi Tops, as the old employer) to another legal entity (Spar, the new employer). For the same reason, a sale of shares does not trigger the operation of section 197. The LAC thus held that there was no basis for the Vermaaks’ claim that they were automatically unfairly dismissed by Spar.

Employers are reminded that whether or not a business is transferred as a going concern will always depend on the specific facts of the transaction. A creditor perfecting a notarial bond over movable property does not generally intend to acquire the business to make a profit on an ongoing basis. To require it to do so would, in the words of the LAC, “render this form of security unduly burdensome and less effective”. A creditor taking over a business in such circumstances should nonetheless ensure that in managing the business, it complies with the provisions in the LRA regarding the rights of employees.