Introduction
South African law has developed a framework, principally through the Insolvency Act 24 of 1936, the Labour Relations Act 66 of 1995 (LRA) and the Basic Conditions of Employment Act 75 of 1997 (BCEA) that regulates the effect of liquidation on employment contracts, employee entitlements, and dispute resolution. Recent case law has further clarified the position, although employees often face uncertainty and hardship in practice
Suspension and Termination of Employment Contracts
Section 38 of the Insolvency Act provides that all contracts of employment are automatically suspended upon the granting of a final liquidation order. The suspension endures for 45 days, during which employees are not obliged to tender their services, and the liquidator is not required to pay remuneration. If the liquidator does not revive the employment relationship within this period, the contracts are deemed terminated by operation of law (see SA Airways (Pty) Ltd v National Union of Metalworkers of SA [2020] ZALCJHB 46).
This statutory suspension serves two purposes: it prevents employees from being bound indefinitely to an insolvent employer, and it gives the liquidator a short period to assess whether the business might be sold as a going concern or whether operations must cease altogether.
Employees as Preferred Creditors
Employees enjoy preferential creditor status under section 98A of the Insolvency Act. This means that they are paid in priority to concurrent creditors for certain claims. The preference covers up to three months’ unpaid remuneration, three months’ unpaid contributions to benefit funds (such as medical aid, pension, provident and UIF), accrued leave pay, and statutory severance pay.
However, these entitlements are subject to monetary caps set out in the Insolvency Act and associated regulations. Amounts that exceed the caps are treated as concurrent claims, competing with other unsecured creditors. In practice, concurrent dividends in insolvency are often negligible, which means employees seldom recover their full entitlements (see Jansen van Vuuren v South African Airways (Pty) Ltd [2021] ZALCJHB 15).
Severance Pay
Section 41 of the BCEA, read with section 196 of the LRA, entitles employees dismissed for operational requirements, including those dismissed due to liquidation, to severance pay of one week’s remuneration for each completed year of service. Section 41(4) of the BCEA provides an exception: if an employee unreasonably refuses an offer of alternative employment on similar terms, the right to severance is forfeited. This principle was confirmed in Chemical Energy Paper Printing Wood and Allied Workers Union v Metrofile (Pty) Ltd (2004) 25 ILJ 231 (LAC)
The Role of the CCMA
Liquidation-related dismissals are generally considered “no-fault” retrenchments. The LRA requires that the employer or liquidator follow the consultation procedures set out in section 189. Where this does not occur, employees may challenge the dismissal as procedurally unfair at the CCMA or Labour Court. In National Union of Metalworkers of SA v Fry’s Metals (Pty) Ltd 2005 (5) SA 433 (SCA), the court recognised that dismissals for operational requirements must still adhere to fairness standards, even if the employer faces financial collapse.
Nevertheless, in cases of insolvency, the statutory insolvency framework often dominates, leaving employees with limited practical recourse beyond their preferential claims
Practical Consequences for Employees
Despite the statutory protections, employees affected by liquidation usually experience significant hardship. Job losses are common unless the company is transferred as a going concern, in which case section 197 of the LRA provides for the automatic transfer of employment contracts to the new employer. Liquidators may take months to finalise the distribution of funds, causing long delays in the payment of claims. In the interim, employees are often forced to rely on the Unemployment Insurance Fund (UIF) for income support
Liquidation versus Business Rescue
It is important to distinguish between liquidation and business rescue. Whereas liquidation focuses on winding up the company and distributing its assets, business rescue under Chapter 6 of the Companies Act 71 of 2008 is intended to rehabilitate the company. In business rescue, section 136 provides that employment contracts remain in force unless varied by agreement. Employees therefore retain a far stronger position in business rescue than in liquidation (see National Union of Metalworkers of SA v SA Airways SOC Ltd [2020] ZALCJHB 46)
Conclusion
The liquidation of a company places employees in a precarious position. While the Insolvency Act affords them preferential creditor status, and the BCEA guarantees severance pay, these measures seldom protect employees from the financial shock of sudden job loss and delayed payment. By contrast, business rescue offers a more employee-friendly framework in which jobs may be preserved. Until liquidation law is reformed to give employees stronger rights, their position will remain one of vulnerability within the broader insolvency regime.
