In the recent Labour Appeal Court decision of Spar Group Limited (Spar) and Sea Spirit Trading 162 t/a Paledi (Paledi) and Greenvile Trading 543 CC t/a Paledi (Paledi Tops) and two Others, the LAC considered whether the perfection of a notarial bond by Spar constituted a transfer of a business as a going concern.

Paledi and Paledi Tops, operating as a supermarket and bottle store respectively, employed the third and fourth respondents, Cornelius Vermaak and Marline Vermaak (the Vermaaks) as managers of the businesses.

On 4 December 2013, the Registrar of Deeds in Pretoria registered two general notarial covering bonds over the movable property of Paledi and Paledi Tops in favour of Spar. In terms of the notarial bond agreement, Paledi and Paledi Tops bound and hypothecated generally all movable property as security for their acknowledged indebtedness to Spar. Thus, in the event that either party defaulted on payments due, Spar was entitled to take possession and dispose of the movable property. Further, the notarial bond agreement enabled Spar to carry on the business of Paledi and Paledi Tops for the purpose of recovering the debt owed to it.

In terms of section 197 of the Labour Relations Act, 66 of 1995, an automatic transfer of employees takes place when the transaction constitutes a transfer of a business as a going concern. "Transfer" means the transfer of a business by the older employer to the new employer as a going concern and "business" is defined widely to include the whole or part of any business, trade, undertaking or service. Importantly, the rendering of a service does not necessarily trigger an automatic transfer of employees. "Service" should not be viewed as a discrete entity, but rather, it means that what is capable of being transferred is the business that supplies the service and not the service itself.

According to Invula Quality Protection and Others v University of South Africa (2017) 38 ILJ 2763 (LC), the court will consider, inter alia, the following factors when determining whether a transfer of business has occurred:

  1. Is the transfer of assets tangible (i.e. premises or equipment) and/or intangible (i.e. goodwill)?
  2. Are the workers taken over by the new employer?
  3. Are the contracts with the particular clients transferred?
  4. Are the same operational resources available to the business?
  5. Is the management staff and the manner in which the business is organised and performed the same?
  6. Is the same business being carried on by the new employer?

At the end of June 2015, Paledi and Paledi Tops were indebted to Spar in the amount of ZAR 6 510 032. Subsequently, Spar obtained an order from the High Court perfecting the notarial bonds, in order to settle the amounts owed to creditors. The High Court granted Spar the right to perfect the notarial bonds by assuming responsibility for conducting the business of Paledi and Paledi Tops temporarily, with the limited purpose of recovering its debt. The court order did not authorise Spar to take possession of the movable property for any purpose other than the realisation of its security for the debt . Moreover, the court did not authorise Spar to sell the movables in its own name.

On 1 July 2015, Spar took possession of the business in accordance with the court order. Shortly afterwards, Spar presented the Vermaaks with a draft management agreement in terms of which they would both be paid a lower salary for an initial three month period, which the Vermaaks declined. Spar then employed a new store manager for Paledi and Paledi Tops and informed the Vermaaks that they were released from their duties as managers for both businesses. When Spar was unable to make the business profitable, it undertook a sale of both businesses as going concerns to Erasmus Group Holdings (Pty) Ltd.

The Vermaaks contended that the perfection of the notarial bonds by Spar constituted a s197 transfer from Paledi and Paledi Tops to Spar. This argument was upheld by the Labour Court, which found that there was a transfer of assets as Spar had taken over the employees, properties, the same operational resources available to both businesses and the same or similar activities were carried on without any interruption.

However, the LAC set aside the Labour Court's decision and held that "requiring a creditor perfecting a notarial bond to assume responsibility for the employment contracts of the debtor will render this form of security burdensome and less attractive". In this case, there was no transfer from the old employer to the new employer as Spar performed its functions in order to recover the debt owed to it by Paledi and Paledi Tops.

The LAC reasoned that Spar was never the owner or lessee of the business and the furniture and fittings on the premises never belonged to Spar. Spar only carried on the business of Paledi and Paledi Tops for the purposes of securing the debt owed to it. The LAC loosely compared the facts of this case "in a limited respect… to a change in shareholders through the sale of shares, where the shareholder gains control of the business but the business remains intact and does not transfer to the new shareholder".

In this respect, control was shifted to Spar temporarily in order to realise and recover a debt, however, the legal entities remained the same, including their contractual obligations with their employees.

In light of the above, the LAC held that the perfection of a notarial bond does not constitute a transfer in terms of section 197 of the LRA.

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