What Happens to Employees During Liquidation?

When a company goes into liquidation, it can be an uncertain period for everyone involved, but especially for employees. Jobs are suddenly in jeopardy, salaries may be in arrears and it’s not always clear what rights or protections exist. Understanding how the liquidation process affects employees is essential for both employers and workers to make informed decisions and plan their next move.

What Is Liquidation?

Liquidation is the legal process through which a company that can no longer pay its debts is wound up. The company’s assets are sold off and the proceeds are then used to pay creditors in a strict order of priority. Once this process is complete, the company ceases to exist.

In South Africa, liquidation can be either voluntary (initiated by the company) or compulsory (ordered by the court, usually at the request of a creditor). Once a company is placed into liquidation, a liquidator is appointed to take control of the business, sell its assets and distribute funds to creditors.

Are Employees Immediately Dismissed?

One of the most important things to note is that employment contracts are not immediately terminated when a company enters liquidation. Instead, employees are suspended in terms of Section 38 of the Insolvency Act 24 of 1936.

This suspension means:

• Employees are no longer required to work
  
• The employer is not obliged to pay salaries after the date of liquidation
  
• The liquidator will decide whether to terminate or transfer the contracts
  

If the liquidator chooses to terminate the contract, the employees will lodge their claims at the liquidator’s offices for any salaries/annual leave due.

What Can Employees Claim During Liquidation?

Employees are not left without recourse during a liquidation. The law dictates that they become preferent creditors, meaning they rank above ordinary (unsecured) creditors when claims are paid out.

According to the Insolvency Act 24 of 1936, employees are classified as preferent creditors and may claim for the following if funds are available:

• Unpaid remuneration, including salaries and wages (subject to a maximum amount per employee as prescribed in the Insolvency Act)
  
• Accrued leave pay due at the time of liquidation
  
• Notice pay, if their contracts are terminated without appropriate notice
  
• Severance pay, where it applies under the Basic Conditions of Employment Act (BCEA)

These amounts are limited to certain caps and may only be paid if sufficient funds are available after the sale of company assets. Any amounts over these limits are treated as concurrent claims, which rank lower in terms of priority.

Once the employment relationship is formally terminated, affected employees can also claim Unemployment Insurance Fund (UIF) benefits. Employees can apply online via the Department of Employment and Labour’s online system or at a labour centre. Processing times can vary, so it is advisable to apply as soon as possible after termination.

How Do Employees Claim What They’re Owed?

To claim what they’re owed during liquidation, employees must submit their claims to the appointed liquidator, usually using a prescribed form or an affidavit. It’s important to gather all relevant documentation, such as payslips, employment contracts and records of accrued leave as supporting evidence. 

These claims should be submitted promptly, as delays can result in missed opportunities if the available funds are depleted. Once submitted, the liquidator will verify each claim and, if approved, include it in the distribution process. Employees may also be invited to a meeting of creditors, where the liquidation process is explained and formal claims are officially lodged.

What If the Business Is Sold as a Going Concern?

Sometimes, the liquidator may manage to sell the company as a going concern, which means the business is transferred as a whole to a new owner.

Under Section 197 of the Labour Relations Act 66 of 1995, when a business is sold as a going concern:

• All existing employment contracts are automatically transferred to the new owner
  
• Employees retain their continuity of service and associated benefits
  
• There is no need to reapply for your job
  

This outcome is ideal for employees, but not always achievable as it is highly dependent on the company’s financial situation.

Final Thoughts

While liquidation can feel like the end of the road for employees, South African law provides certain protections that can help soften the blow. Knowing your rights, and acting on them, can make a significant difference in securing what you’re owed. If you’re unsure about any part of the process, it’s worth speaking to a legal professional who specialises in insolvency.
Contact Cawood Attorneys today, and we will help you navigate this difficult time by providing clear legal advice and practical support.