Atlas Packaging (Pty) Ltd v Palierakis; In re: Palierakis v Atlas Carton and Litho CC (In Liquidation) and Others (JA108/14)  ZALAC 43 (21 October 2015)
For s197A of the LRA to apply, the entire arrangement or compromise must have as its primary purpose the avoidance of a winding up order. A court is entitled to examine the substance and purpose of an agreement in order to determine its true nature.
An employee was dismissed for operational reasons by Atlas Packaging (Pty) Ltd (the third respondent) in April 2010. In September 2010, first respondent ('Atlas Carton') and second respondent ('Atlas Paper') concluded a business sale agreement with Stylianos Palierakis, the appellant. In August 2011, Atlas Carton and Atlas Paper were placed into voluntary liquidation which was later converted into compulsory liquidation in September 2011. The Appellant contended that, although the transfer of the business from Atlas Carton took place as a going concern, the provisions of s197 of the LRA do not apply, as the dispute is governed by s197A of the LRA.
The Labour Court dismissed a preliminary point raised by appellant that a dispute concerning an alleged unfair dismissal claim of the respondent stands to be determined in terms of s197A(1)(b) of the LRA.
The LAC held that for an arrangement or compromise to fall into s 197A, it must have as its primary purpose the avoidance of a winding up order. In this case the court held that the purpose of the arrangement was not to nurse Carton Atlas back to commercial health so that it could avoid an order of winding up. The purpose was an attempt to circumvent the provisions of s197 of the LRA and an asset stripping exercise. The transaction was a sham. It could not, in any way, be characterised as one which falls within the scope of s197A of the LRA. The appeal was dismissed with costs.
Extract from the judgment:
 Appellant's case is based on s197 A of the LRA which provides:
'197A Transfer of contract of employment in circumstances of insolvency Critical to appellant's case is the contention, based upon s197A(1)(b), that there was a scheme of arrangement or compromise entered into between appellant and Atlas Carton to avoid the winding up of the latter for reasons of insolvency.
- This section applies to the transfer of a business-
- if the old employer is insolvent; or
- if a scheme of arrangement or compromise is being entered into to avoid winding-up or sequestration for reasons of insolvency.
- Despite the Insolvency Act, 1936 (Act No. 24 of 1936), if a transfer of a business takes place in the circumstances contemplated in subsection (1), unless otherwise agreed in terms of s 197 (6) -
- the new employer is automatically substituted in the place of the old employer in all contracts of employment in existence immediately before the old employer's provisional winding up or sequestration;
- all the rights and obligations between the old employer and each employee at the time of the transfer remain rights and obligations between the old employer and each employee;
- anything done before the transfer by the old employer in respect of each employee is considered to have been done by the old employer;
- the transfer does not interrupt the employees' continuity of employment and the employee's contract of employment continues with the new employer as if with the old employer.
- Section 197 (3), (4), (5) and (10) applies to a transfer in terms of this section any reference to an agreement in that section must be read as a reference to an agreement contemplated in s 197 (6).
- Section 197 (5) applies to a collective agreement or arbitration binding on the employer immediately before the employer's provisional winding up or sequestration.
- Section 197 (7), (8) and (9) does not apply to a transfer in accordance with this section.'
 It is common cause that the contractual arrangements between appellant and Atlas Carton did not make use of the provisions of s311 of the Companies Act of 1973, the relevant portion of which provides:
'Where any compromise or arrangement is proposed between a company and its creditors or any class of them, or between a company and its members, the court may, on application of the company or any credit member of the company, or in the case company being wound up, of the liquidator, or if the company is subject to judicial management order, the judicial manager, order a meeting of the company or class creditors, or the members (as the case may be), to be summoned in such matter as the court may direct.' However, in Henochsberg On the Companies Act 71 of 2008 at 536 - (7) it is contended that specific reference is not made to s311 of the Companies Act of 1973 in s197 A, which, on this line of argument is intended to apply not only to a compromise or scheme of arrangement implemented in terms of s311 of the 1973 Companies Act, but also in respect of common law arrangements and compromises.
 I remain uncertain as to how a common law compromise or scheme is to apply in the context of s197 A. In Henochsberg On the Companies Act 71 of 2008,it is cited as support for his proposition the judgment in Ex Parte NBSA Centre Ltd 1987 (2) 783 (T) (Ex Parte NBSA) and an earlier judgment in Ex Parte Lomati Landgoed Beheerende Eiendoms Bpk 1985 (2) SA 517 (W).
 Unquestionably, Coetzee DJP in Ex Parte NBSA (supra) accepted that not every so called arrangement is an arrangement in terms of s311. Coetzee DJP went on however to say at 802B that "only an arrangement between the company and its members or creditors or a class thereof can be an arrangement. When member's shares are to be transferred to or to be obtained by a third person or other members of the company this question arises. In every case it would have to be determined on a consideration of all the relevant aspects of the scheme and the surrounding facts whether it is such an arrangement between the company and its members or creditors".
 In this dictum, the learned judge clearly envisaged that a court would have no jurisdiction to recognize some other form of arrangement outside of the provisions of s311. Most certainly these two judgments do not afford definitive support for the contention that s197A can be interpreted to include a compromise or scheme which is not implemented in terms of s311 of the Companies Act, but rather under the common law.
 Nonetheless, for reasons that will become apparent, it is not necessary to decide this question definitively. A prior question arises, in this case, namely, was there a genuine scheme of arrangement or compromise, which had been entered into to avoid the winding up of Atlas Carton.
 In evaluating the relevant contract, a court must be cognisant of the doctrine regarding simulated transactions. This doctrine was definitely expounded in Commissioner of Customs and Excise v Randles Brothers and Hudson Limited where Watermeyer JA said:
'I wish to draw particular attention to the words "a real intention, definitely ascertainable, which differs from the simulated intentions", because they indicate clearly what the learned Judge meant by "disguised" transaction. A transaction is not necessarily a disguised one because it is devised for the purpose of evading the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for that purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted by the Courts according to its tenor, and then the only question is whether, so interpreted, it falls within or without the prohibition or tax. From this approach to the proper classification of a contact, a court is manifestly entitled to examine the substance and purpose of the agreement in order to determine its true nature. See for more recent authority Roshcon v Anchor Auto Body Builders and Others 2014 (4) SA 319 (SCA) at 332-334.
A disguised transaction in the sense in which the words are used above is something different. In essence it is a dishonest transaction: dishonest, in as much as the parties to it do not really intend it to have, inter partes, the legal effect which its terms convey to the outside world. The purpose of the disguise is to deceive by concealing what is the real agreement or transaction between the parties. The parties wish to hide the fact that their real agreement or transaction falls within the prohibition or is subject to the tax, and so they dress it up in a guise which conveys the impression that it is outside of the prohibiting or not subject to the tax. Such a transaction is said to be in fraudem legis, and is interpreted by the Courts in accordance with what is found to be the real agreement or transaction between the parties.
Of course, before the Court can find that a transaction is in fraudem legis in the above sense, it must be satisfied that there is some unexpressed agreement or tacit understanding between the parties. If this were not so, it could not find that the ostensible agreement is a pretence. The blurring of this distinction between an honest transaction devised to avoid the provisions of a statute and a transaction failing within the prohibitory or taxing provisions of a statue but disguised to make it appear as if it does not, gives rise to much of the confusion which sometimes appears to accompany attempts to apply the maxim quoted above.'
 It follows that the threshold question which arises in this case requires that this Court looks into the true nature and substance of the contract between appellant, Atlas Carton and one Nicolas Gargassoulas, which the appellant alleges was a scheme of arrangement or compromise entered into to avoid the winding up of Atlas Carton. From the papers, it is clear that Mr Gargassoulas controlled both the corporate entities which were parties to this agreement.
 It is now necessary to drill down into the fundamentals of the agreement. In terms of the agreement, Carton Atlas agreed to sell to the appellant 'the business as a going concern including the subject matter. The business was defined as the packaging material business currently carried on by the seller as a going concern at the premises." The subject matter was defined as including the current assets, the fixed assets, goodwill, the intellectual property rights, the right title and interest in and to the contracts, the sold liabilities and the employees. It excluded "any benefit or risk to the Seller arising pursuant to the Mondi Litigation and any other assets or liability not specifically mentioned or referred to in this clause."
 One final clause requires attention. Clause 19 dealt specifically with employees. It reads as follows:
'It is recorded that as the Business is sold as a going concern, in terms of s 197A of the Labour Relations Act, 1995, all contracts of employment between the Employees and the Seller as at the Effective Date shall continue in force between the Purchaser and the employees without interruption of the employee's continuity of employment.The applications of s 197A
The Seller hereby indemnifies the Purchaser and holds it free and harmless against any and all claims which may be made against the Purchaser by any employee in respect of unpaid salary, leave pay and any other employee related benefits to the employee's employment by the Business prior to the Effective Date including all legal costs which may be incurred by the Purchaser in the defence thereof and in the enforcement of this indemnity.'
 It is now possible to return to s197A which applies to a transfer of a business, pursuant to a scheme of arrangement or compromise which has been entered into to avoid winding up. When the agreement, which I have described, is read as a whole, it is clear that the only certainty that flowed therefrom was that Carton Atlas would, indeed, be wound up. Upon the conclusion of the agreement, Carton Atlas' entire business structure had been transferred to appellant. The purchase price was structured so that, given the valuation of the fixed assets in the amount of R 4.2209,00, which was to be valued at the lower of the actual cost price and the market value thereof, Carton Atlas would have no assets, no infrastructure and presumably, little if any, cash.
 While an arrangement connotes a far wider class of agreement than a compromise, which is an agreement to settle a dispute over rights or to modify undisputed rights where a difficulty exists over their enforcement, within the context of the specific wording of s197A, there can be little doubt that the entire arrangement or compromise must have as its primary purpose, the avoidance of a winding up order.
 There is no basis by which this conclusion can be justified upon an analysis of the structure of this agreement. Clause 19 might proclaim that the business was to be sold as a going concern in terms of s197A. But this only confirms that this proclaimed characterisation of this agreement sought to obscure its true purpose. That purpose was not to nurse the Carton Atlas back to commercial health so that it could avoid an order of winding up. The purpose appears to be in an attempt to circumvent the provisions of s197 of the LRA at worst for appellant and, at best, an asset stripping exercise, but not a compromise or arrangement even within the meaning of the common law.
 Viewed accordingly, the transaction was a sham. It cannot, in any way, be characterised as one which falls within the scope of s197A of the LRA.
 For these reasons therefore, the appeal is dismissed with costs.