The concept of a transfer of a business as a going concern is one that has been unpacked and assessed by our judiciary since its inception in the LRA. The Labour Appeal Court recently handed down a decision dealing with this very matter albeit in somewhat unique circumstances.

In Spar Group Limited v Sea Spirit Trading 162 CC t/a Paledi Superspar & Others (JA47/2017), the Court had to look at the situation where a creditor (Spar Limited) sought to perfect a notarial bond to recover the debts of one of their franchisees (Paledi Superspar and Tops). The complexity arose in that, as a condition of the perfected notarial bond, Spar was entitled to:-

carry on the business of the Mortgagor (i.e. Paledi Superspar and Tops) relating to the movable property in the name and at the expense of the Mortgagor and for that purpose to purchase goods and do whatever else the Mortgagees (i.e. Spar) deem necessary.”

Without veering from the topic at hand and this becoming a lesson in perfecting notarial bonds, it is necessary to understand the background as the above condition contained in the notarial bond is what eventually gave rise to the evaluation in terms of s197 that ended up before the Labour Appeal Court.

In effecting their rights in terms of the notarial bond, Spar took over the operation of Paledi Superspar and Tops. In this process, the managers that had been running the respective stores were offered fixed term contracts which they turned down, resulting in Spar appointing other candidates into the positions. Spar continued to run the stores in an effort to recover the debt owed and until finding a suitable buyer for the franchise operation, which they ultimately did.

The original managers referred a dispute to the Labour Court in which they contended that the perfection of the notarial bonds by Spar led to a transfer of business from Paledi Superspar and Tops to Spar and, therefore, that their dismissals were automatically unfair in terms of s187(1)(g) of the LRA.

Initially, the Labour Court agreed with the managers argument and held that Spar’s perfection of its notarial bond and by taking control of the business constituted a transfer of business as a going concern as contemplated in section 197 of the LRA and, therefore, that their dismissals were automatically unfair.

When the matter came before the Labour Appeal Court, they summarized the assessment in terms of s197 of the LRA as follows:-

“The definition of the word ‘transfer’ in section 197(1)(b) of the LRA requires that there be a transfer of the business from one employer to another. The decisive criterion is whether, after the alleged transfer, the undertaking has retained its identity, so that employment in the undertaking is continued or resumed in the different hands of the transferee. The inquiry requires examination of the all the facts relating both to the identity of the undertaking and the relevant transaction in order to assess their cumulative effect, looking at the substance, not 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.”

 It was ultimately held that there was no transfer in this situation and that it is clear from the wording of section 197 of the LRA that the old and the new employer must be two separate entities. In essence, Spar acted as a creditor, not an employer. Their aim was to recover the debt owed and withdraw from the arrangement once they had achieved the object. If creditors perfecting a notarial bond were required to assume responsibility for the employment contracts of the debtor, this form of security would be rendered unduly burdensome and less effective.

The Court likened the situation with that of a sale of shares in a business – a new shareholder takes control of a business but the business (i.e. the employer) remains intact and does not transfer to the new shareholder.

Spar emphasises the evaluation of s197 transfers – that being a factual enquiry into the identity of the employer; the transaction itself; the activities of the undertaking and the employment situation of the undertaking. There will never be a hard and fast solution as to when s197 will become operative. Each circumstance needs to be assessed on its own merits.

If you need assistance with any transactional advice and arrangements, please contact our offices.

Lee-Ann Harris