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Transfer of Businesses as a Going Concern: What Business Owners Need to Know

Introduction

In today’s fast-paced business environment, transfers of businesses as a going concern are becoming increasingly common. The recent Labour Court judgment [Numsa obo Members and Others v AIH Logistics (Pty) Ltd and Another (D 1112/19) [2023] ZALCD 2 (27 January 2023)] has shed light on what constitutes a bona fide transfer of a business as a going concern in terms of section 197 of the Labour Relations Act. The Court noted that the primary function of section 197 is to protect employees’ rights. These rights include the right to not be subjected to an unfair labour practice, unfair dismissal and continuity of employment.

 

The Court considered several key indicators in its judgment. In this blog post, I’ll delve into some of the key takeaways from the Court’s decision, including the importance of the substance of the transaction, the transfer of assets and personnel, and the continuity of business operations. These indicators are crucial for business owners and legal practitioners to be aware of when considering or advising on transfers of businesses or sections thereof.

 

The Court was tasked with determining whether a transfer of a section of a business was indeed a bona fide transfer of a business as a going concern as provided for under section 197 of the Labour Relations Act, 66 of 1995. In coming to its decision, the Court considered several key indicators to assess the transfer.

Substance Above Form

The Court stated, as found by the Constitutional Court in Nehawu v University of Cape Town and Others [2002] ZACC 27 at para 56, that the substance and not the form of the transaction must be interrogated. In this case, it was known that some of the workers involved in the assembly of motor vehicles were transferred from AIH Logistics (Pty) Ltd (the first respondent) to Blacksuits (Pty) Ltd (the second respondent), but not all workers were transferred. There was no transfer of assets, customers, or suppliers. Also, the second respondent did not own equipment, nor did it lease any from the first respondent. Lastly, the Court found that the second respondent was not carrying on the same business as the first respondent. The services provided by the second respondent did not result in the production of a quality-controlled motor vehicle.

Transfer of assets and workers

Although the Court stated that “not all workers… or assets were transferred”,  this statement should not be interpreted as suggesting that every asset and worker must be transferred from the previous employer to the new one. The Court noted that in a legitimate transfer of business transaction, what is transferred are the assets and personnel that are crucial to the way the business was run by the previous owner. Without transferring the tools and resources necessary to carry out the work, there can be no bona fide transfer of the business as a going concern.

Continuity of the business operations:

The Court scrutinised the intended role of the second respondent. In its argument, the first respondent claimed that it searched for service providers to address its human resource and labour management issues, enforce the use of personal protective equipment, reduce absenteeism and improve productivity by having backup staff. The first respondent asserted that it retained its team leaders as part of its staff because it was responsible for overseeing the assembly process and ensuring compliance with safety certifications, among other things. The Court stated, as found by the Constitutional Court in Aviation Union of SA and Another v SAA (Pty) Ltd and Others (2011) 32 ILJ 2861 (CC) at para 108, that a distinction must be made between the transfer of a business as a going concern and the transfer of the right to provide an outsourced service. The Court found that the evidence suggested the transfer from the first respondent to the second respondent was not a transfer of a portion of the business as a going concern [Severable, yes, as {the} body is from a head, but not as a going concern (para 19)]. The work performed by the applicants, which was at the core of the assembly process, was not separable from the overall task of producing motor vehicles. The first respondent retained control over the applicants and merely identified a “service” that the second respondent could provide to it. In this case, the “services” that the second respondent provided fall short of the requirements of section 197. Therefore, based on the evidence, the Court concluded that the second respondent is not an independent economic entity capable of operating as a going concern.

In concluding its judgment, the Court stated:

“[20]… the second respondent structurally viewed could not achieve those results [increase in productivity] as a separate, excisable business. Without its own machines, tools, premises, safety certification, team leaders, customers, and ability to issue operational instructions, the second respondent’s laudable role in achieving better results for the first respondent is akin to the work of an HR/IR consultancy.”

“[21] Considered properly, the purpose of the transaction was to shift employees to another entity, not to shift work processes there, with the employees following behind. The new employer is not in possession of a going concern after the transfer but rather in possession of the right to perform certain HR time management and disciplinary functions, which is brought into focus when one considers the personnel the second respondent brings to the table; labour lawyers, labour brokers and no-one with assembly-line experience.”

In conclusion, the issues discussed herein are some of the key indicators that the Court considered in determining whether a transfer of a section of a business was a bona fide transfer as a going concern. Business owners and legal practitioners should be aware of these indicators when considering or advising on transfers of businesses or sections thereof.

THIS POST IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. INDIVIDUALS INTERESTED IN THE LEGAL TOPICS DISCUSSED IN THIS POST SHOULD CONSULT WITH THEIR LEGAL PRACTITIONER OR CONTACT OUR FIRM.

If you require a consultation, please contact us at 012 348 0000, email us at info@welmanbloem.co.za or come by our office at 549 Jacqueline Drive, Garsfontein, Pretoria.  In the meantime, feel free to visit our website at www.welmanbloem.co.za.

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