THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

Reportable

Case No 227/02
In the matter between
TELKOM SA LIMITED

First Appellant
THE TELKOM PENSION FUND

Second Appellant
MOLAPO TECHNOLOGY (PTY) LTD
Third Appellant

and
P N BLOM

First Respondent
D R GOUNDEN

Second Respondent
D D DELL

Third Respondent
B E O’REILLY

Fourth Respondent
S MALLIAH

Fifth Respondent
M L SMITH

Sixth Respondent
P D TURNER

Seventh Respondent
J E ENSLIN

Eighth Respondent

Coram
Harms, Cameron, Mthiyane JJA, Jones and Mlambo AJJA
Heard
15 May 2003
Delivered
30 May 2003
Summary:  Pension benefits – transfer of employment contracts in terms of s 197 of
Labour Relations Act, 66 of 1995 – whether employees entitled to payment of pension
benefits on transfer –whether transfer to a new employer brings about termination of
their former employment as a result of abolition of their posts or a reorganization of
the old employer’s business.

JUDGMENT

JONES AJA:
[1] The eight respondents were formerly employed by the first
appellant (‘Telkom’) and because of their employment they were
members of the second appellant (the Telkom Pension Fund or the
‘Fund’). On 5 March 2002 Bertelsmann J made an order1 in the Transvaal
Provincial Division directing Telkom and the Fund ‘to pay forthwith the
benefits due to [the respondents] in consequence of their former
employment with [Telkom] being terminated as a result of the abolition
of their posts on 31 March 2000, such benefits being payable to [the
respondents] in terms of clauses 4.7 and 5.7 respectively of the statutes of
the [Fund]’. He also ordered them to pay the respondents’ costs of suit.
Telkom and the Fund appeal against these orders with leave from the
court a quo.

[2] Until 31 March 2000 the respondents were employed by Telkom in
its Iuvatek Electronics Services division, which carried on the business of
performing repairs to electronic equipment. During March 2000 Telkom
sold the Iuvatek division to Molapo Technology (Pty) Ltd (‘Molapo’).
Molapo was the third respondent in the court below, and it is cited as the

The judgment follows the wording of the notice of motion.

third appellant. No relief was sought against it and it has not participated
in these proceedings.

[3] The Iuvatek division was sold to Molapo as a going concern, and
Telkom no longer carries on any of the operations previously conducted
by that branch of its business. In terms of the agreement of sale Telkom
transferred its contracts of employment with its employees to Molapo
without their consent, which brings the provisions of s 197 of the Labour
Relations Act 66 of 1995 into play.

[4] Section 197 was amended in 2002. The section as it was before
amendment must be applied in these proceedings. Its provisions are:2

‘(1)
A contract of employment may not be transferred from one employer (referred
to as “the old employer”) to another employer (referred to as “the new employer”)
without the employee's consent, unless-
(a)
the whole or any part of a business, trade or undertaking is transferred by the
old employer as a going concern; or
(b)
. . .

Parts of the section which are not material to this appeal are elided. They are subsections
(1)(b) and (2)(b) which deal with transfer of employment contracts where the old employer is insolvent
and being wound up or is being sequestrated or where a scheme of arrangement or compromise is
entered into to avoid winding up or sequestration, and subsection (5) which refers to criminal
prosecutions.

(2)
(a) If a business, trade or undertaking is transferred in the circumstances
referred to in subsection (1) (a), unless otherwise agreed, all the rights and obligations
between the old employer and each employee at the time of the transfer continue in
force as if they were3 rights and obligations between the new employer and each
employee and, anything done before the transfer by or in relation to the old employer
will be considered to have been done by or in relation to the new employer.
(b)
. . .
(3) An agreement contemplated in subsection (2) must be concluded with the
appropriate person or body referred to in section 189 (1).
(4) A transfer referred to in subsection (1) does not interrupt the employee's continuity
of employment. That employment continues with the new employer as if with the old
employer.
(5) . . . .’

[5] The parties agree that s 197 applies to the transaction and that the
respondents’ contracts of employment were transferred to Molapo in
terms of the section. Paragraph 12 of the agreement, which deals with
employees, is patently designed to comply with s 197. It acknowledges
that the sale of the Iuvatek division is the transfer of a whole or a part of
Telkom’s business as a going concern in terms of s 197(1), and that in the
absence of an agreement involving the employees in terms of s 197(3),
the provisions of s 197(2) apply. It records that all the rights and

The text at my disposal contains the word ‘were’ whereas Bertelsmann J in the court a quo,
and Ngcobo J in NEHAWU v University of Cape Town (2003) 24 ILJ 95 (CC) at 114G, quote from a
text which contains the words ‘had been’. The difference is not important in this case.

obligations between the seller, as the old employer and employees will
continue in force as if they were rights and obligations between the
purchaser, as the new employer, and employees and that anything done
before the transfer of the business by or in relation to the old employer
will be considered to have been done by or in relation to the new
employer.

[6] The respondents contend that the effect of this was to bring about a
termination of their services with Telkom as the result of the abolition of
their posts and a reorganization of Telkom’s activities. This in turn
brought about termination of their membership of the Fund which, they
say, entitles them to benefits from the Fund in terms of its statutes, or
rules.

[7] Telkom and the Fund on the other hand contend that the
application of s 197 produced quite the reverse result. This was to keep
the respondents’ contracts of employment alive. Far from being
abolished, their posts were preserved when their employment contracts
were transferred to Molapo. After the transfer the respondents continued
to occupy the same posts by doing precisely the same work on precisely
the same terms and conditions as before. Telkom and the Fund also argue

that the sale to Molapo does not amount to a reorganization of Telkom’s
activities. Central to the appellants’ main argument is the proposition that
s 197 brings about an assignment in terms of which the old and new
employers cede rights and delegate obligations under the employment
contracts. This is done with statutory authority and hence with the
deemed consent of the employees. The result, so they argue, is that the
contracts of employment were not terminated but assigned by substituting
one employer for another. In all respects other than the identity of the
employer the employment contracts remained as before, their continuity
was maintained from the date upon which the original parties entered into
them, and their existence continued undisturbed. This results in a
statutory assignment which, they argue, expresses the policy and the
wording of section 197. The argument is, further, that a transfer of this
nature precludes the conclusion that the employees’ contracts were
terminated by the employer and, consequently, it precludes their
entitlement to payment of pension benefits by reason of such termination.

[8] I am in agreement with the argument that the section brings about a
statutory assignment of the employment contracts. The result is similar to
the situation where a new owner becomes ex lege the substituted lessor of

leased premises. Corbett CJ in Genna-Wae Properties (Pty) Ltd v Medio-
Tronics (Natal) (Pty) Ltd 1995 (2) SA 926 (A) 939 A-C put it thus:

‘Accordingly, I hold that in terms of our law the alienation of leased property
consisting of land or buildings in pursuance of a contract of sale does not bring the
lease to an end.  The purchaser (new owner) is substituted ex lege for the original
lessor and the latter falls out of the picture. On being so substituted, the new owner
acquires by operation of law all the rights of the original lessor under the lease. At the
same time the new owner is obliged to recognise the lessee and to permit him to
continue to occupy the leased premises in terms of the lease, provided that he (the
lessee) continues to pay the rent and otherwise to observe his obligations under the
lease. The lessee, in turn, is also bound by the lease and, provided that the new owner
recognises his rights, does not have any option, or right of election, to resile from the
contract.’

But I do not agree that the assignment takes away the employees’ rights
to receive pension benefits on the date of their entitlement thereto in
terms of the rules of the Fund.

[9] The courts have over the years expressed different views on the
interpretation and effect of s 197, and, in particular, on whether or not, on
transfer of a business as a going concern, the employees are automatically
transferred in the absence of prior agreement to that effect between the

parties to the transfer. The Constitutional Court has now put the conflict
to rest in NEHAWU v University of Cape Town4 by holding that the
section, properly interpreted, indeed produces an automatic transfer of
employment contracts. In the course of doing so Ngcobo J explained that
the section has the twofold purpose of facilitating the transfer of a
business and of protecting workers against loss of employment when a
business is transferred.5 He then proceeded to interpret the section as it
was before the 2002 amendment:6

‘[62] The proper approach to the construction of s 197 is to construe the section as a
whole and in the light of its purpose and the context in which it appears in the LRA
[Labour Relations Act]. In addition, regard must be had to the declared purpose of the
LRA to promote economic development, social justice and labour peace. The purpose
of protecting workers against loss of employment must be met in substance as well as
in form. And, as pointed out earlier, it also serves to facilitate the transfer of
businesses. The section is found in a chapter that deals with unfair dismissal.
Construed against this background, the section makes provision for an exception to
the principle that a contract of employment may not be transferred without the
consent of the workers. Subsection (1) says so and it makes it possible to transfer the
business on the basis that the workers will be part of that transfer. This will occur if
the business is transferred “as a going concern”.

(2003) 24 ILJ 95 (CC).
At 115C-F paras 45 and 46, 118G para 53, and 124F para 70.
AT 121D – 122D paras 62, 63, 64 and 65.

[63] Subsection (2) tells us the consequences that flow from a transfer of a business
as a going concern as contemplated in subsection (1). It refers back to subsection (1)
which envisages two categories of transfer:  one from a solvent employer and the
other, broadly speaking, from an insolvent employer. In both instances, the transfer of
the business as a going concern results in the transfer of the workers to the new
business. The section makes a distinction between contracts of employment, on the
one hand, and rights and obligations that flow from such contracts on the other. “All
the rights and obligations” must include all the terms and conditions of the contracts
of employment. It therefore does not matter, from a practical point of view, that
subsection (2)(a) does not explicitly provide for the transfer of contracts of
employment. The section is premised on the continuity of employment of the workers
which is not interrupted by the transfer contemplated in subsection (1). “That
employment”, subsection (4) says, “continues with the new employer as if with the
old employer”.
[64] Reading the section as a whole, and, in particular, having regard to the fact
that all the rights and obligations flowing from employment with the transferring
employer are transferred to the new employer in the case of a solvent business;  that in
the case of an insolvent business the contracts of employment are transferred;  that the
transfer of business does not interrupt the workers’ continuity of employment;  the
inference that the transferee employer takes over the workers and that the transferee
employer is, by operation of law, substituted in the place of the transferor employer is
irresistible. It follows by necessary implication.
[65] If there is any doubt on this score, the recent amendment to s 197 puts matters
beyond doubt by providing that “the new employer is automatically substituted in the
place of the old employer in respect of all contracts of employment”. Indeed its

declared purpose is “the clarification of the transfer of contracts of employment in the
case of transfers of a business, trade or undertaking as a going concern”.’

[10] Ngcobo J did not use the word assignment, but his description of
the nature and effect of the transfer of an employment contract
contemplated by the Act leaves me in no doubt that an assignment takes
place. In legislating that all the rights and obligations between the old
employer and each employee at the time of the transfer continue in force
as if they were rights and obligations between the new employer and each
employee, and that the transfer of business does not interrupt the workers’
continuity of employment, the lawgiver makes its intention plain. In the
words of Ngcobo J, the inference is irresistible that the new employer
takes over the workers and is by operation of law substituted in the place
of the old employer. This is what happens on assignment. In my view the
further inference is also irresistible that in the course of this process the
contractual relationship between the old employer and each employee, i.e.
the employment contract between them, is brought to an end. This is a
natural result of the assignment: the original employer falls out of the
picture, and, as between him and the employees, the contract is
extinguished. From the effective date of this transfer – 1 April 2000 – the
employees were no longer obliged to perform services for Telkom and

Telkom was no longer entitled to their services. They were then
employed by Molapo.

[11] The statutes of the Fund regulate what happens when the
contractual relationship of employer and employee is terminated.
Paragraph 3.2 says that no member may terminate his membership of the
Fund while he is in the service of Telkom and his membership shall
terminate upon termination of his services with Telkom, unless otherwise
provided in the statutes. This can only mean that the respondents’
membership of the Fund terminated when their contracts were transferred
to Molapo. Paragraph 4 deals with payment of benefits to members when
they cease being members and employees. It applies to seven of the
respondents, who are class A members of the Fund, and paragraph 5
applies to the remaining respondent, who is a class B member.  The two
paragraphs confer different benefits upon class A and B members, but
their wording and structure is otherwise identical and for present purposes
what is said about paragraph 4 applies equally to paragraph 5. It is
therefore not necessary to deal separately with paragraph 5 and class B
members. Paragraph 4 is structured to cater for the various ways in which
termination of employment is possible. Paragraphs 4.1, 4.2 and 4.3
provide for benefits on the retirement of a member. Paragraph 4.4 applies

in the case of disability. Paragraphs 4.5 and 4.6 apply to the death of a
member or a pensioner. Paragraph 4.7 applies to the case of retrenchment
by the employer. And paragraph 4.8 deals with a member’s resignation
and dismissal.

[12] Paragraph 4.7 is the operative clause here. It provides that ‘if the
services of an A-member are terminated by the employer as a result of the
abolition of his post or a reorganisation of the employer’s activities’,
certain specified pension and gratuity benefits ‘shall be paid to the
member’. In my judgment its provisions cover what happened when
Telkom transferred its Iuvatek division and the Iuvatek employment
contracts to Molapo in terms of s 197. The transfer of the Iuvatek division
and its employees was designed to rearrange Telkom’s affairs. It would
no longer carry on any of the activities undertaken by Iuvatek. This work
would in future be contracted out to Molapo. The posts of employees who
worked for Telkom in the Iuvatek division ceased to exist within the
framework of Telkom’s organization. In the wording of rule 4.7, the
transfer brought about a termination of the respondents’ employment with
Telkom as the result of a reorganization of its activities and the abolition
of the posts of its Iuvatek employees.

[13] Mr Brassey argued on behalf of Telkom and the Fund that although
the transfer may have brought about a termination of the employees’
services with Telkom, it was not a termination by Telkom, which is
indispensable to the operation of paragraph 4.7. This argument is
artificial. Although the assignment of contracts of employment is, by
operation of law, an automatic consequence of the transfer of a business
to which s 197 applies, Telkom’s conduct in transferring the employment
contracts together with the Iuvatek division was plainly the causa sine
qua non of the termination of the contractual relationship between it and
its employees within the meaning of paragraph 4.7. It follows that the
employees are entitled to the benefits for which paragraph 4.7 provides.

[14] During the course of argument, Mr Brassey suggested that even if
the appeal is dismissed, the order for payment made by the court a quo is
inappropriate. It should be replaced with a declaratory order which
simply asserts the respondents’ entitlement to benefits in terms of
paragraphs 4.7 and 5.7. This would enable the Fund to manage the
respondents’ pension rights in the most satisfactory manner in the light of
the prevailing circumstances. In developing the argument Mr Brassey
raised the possibility of the Fund preserving the pension rights of
transferred employees in trust in the event, for example, of the

respondents resuming employment with Telkom, or transferring them to
another pension fund in terms of paragraph 7.8 of the statutes. These
suggestions were made in the context of Mr Brasssey’s response to
problems which Molapo would inevitably encounter in stepping into
Telkom’s shoes as the employer obliged to contribute to the Fund. These
problems point to an apparent lacuna in the Act in respect of pension
rights which, according to Mr Brassey, gives rise to absurdity.

[15] Mr Brassey’s suggestion cannot be countenanced. It came late in
the proceedings. It was neither part of the case on the papers nor even
raised in the heads of argument. Indeed, it first emerged in the course of
counsel’s argument in reply.

[16]  In any event the difficulty, which illustrates that not all rights are
capable of unqualified transfer from old to new employer and that some
form of modification will sometimes be necessary, is not really one of
absurdity. It arises from the failure of the Labour Relations Act to make
specific provision for the transfer of pension rights when employment
contracts are transferred. Literally, the effect of s 197 in this case is to
transfer Telkom’s obligation to contribute to the Telkom Pension Fund
for the benefit of each employee from Telkom to Molapo. But once

transferred, Molapo would be unable to perform it. This is because the
employees would no longer be members of the Fund after transfer, and
Molapo was not a contributing employer. The Fund, which is an
independent entity distinct from the employer, was not a party to the
agreement between Telkom and Molapo. It could not be compelled to
accept contributions by an outsider for the benefit of persons who were
no longer members. It also could not, without the consent of the members
affected, be compelled to transfer accrued pension rights under paragraph
4.7 to a pension fund to be established by Molapo. Paragraph 4.7.3 of the
rules reads:

‘If the services of an A-member are terminated by the employer in terms of this
clause, the Board may, with the approval of the member, arrange for the transfer of
the said service termination benefits to an alternative retirement scheme, whereafter
the Fund shall have no further obligation towards the member.’

It follows that the Fund may not transfer pension benefits without the
approval of the member.

[17] From the aforegoing it also follows that the respondents must be
paid their pension benefits on transfer of their contracts. In the absence of
statutory measures for the protection of the rights of employees, the

notion of the previous pension fund holding pension benefits in trust is
untenable. There is no provision for this in the old or amended sections of
the Labour Relations Act dealing with the transfer of employment
contracts, and without such provision there is no basis for permitting it.

[18] Much the same reasoning refutes the argument that the new
employer’s obligation regarding pension rights, once transferred to him,
translates into an obligation to make the same contribution for the benefit
of the employees to a similar fund and not necessarily the same fund. I
have already explained that in terms of the rules the Fund cannot transfer
employees to another Fund without their co-operation. There is also no
provision in s 197 before it was amended for the transfer of employees
from one pension fund to another. Even though Telkom and Molapo had
agreed that Molapo would create a new pension fund, such a fund, which
(we were told from the Bar) has apparently to date not been formed,
could well be but a poor substitute for the well-established, well-funded
and well-supported Telkom Pension Fund. Where the intention of s 197 is
to leave the rights of the employee intact, this result cannot be attained in
relation to pension rights. The 2002 amendment contains section 197(4)
which is permissive and not mandatory and which seems to me to be an

indication that the legislature is alive to the difficulties relating to pension
rights when contracts are transferred in terms of the section. It reads:

‘Subsection (2) [which provides for automatic transfer of employment contracts in the
absence of agreement involving the employees] does not prevent an employee from
being transferred to a pension, provident, retirement or similar fund other than the
fund to which the employee belonged prior to the transfer, if the criteria in section
14(1)(c) of the Pension Funds Act, 1956 (Act 24 of 1956) are satisfied.’

This subsection strengthens the conclusion that in this case, under the old
section, transfer to another fund is not possible. But it does not adequately
address the transfer of pension rights simultaneously with the transfer of
employment contracts where employees are not by agreement party to the
transfer.

[19] Yet another alternative advanced by counsel during the course of
argument was that, being a statutory provision, s 197 overrides the rules
of the Fund, and that in order to enable compliance with the section the
respondents should be regarded as members of the Fund despite the terms
of its rules, and the new employer should be regarded as their employer
for purposes of contributions although it is not an employer as defined in
the rules. I can find no justification for so drastic an interpretation of s

197. I can see no merit in an interpretation which, first, compels the Fund
to disregard the rules which it is by statute obliged to obey, and, second,
which compels the respondents to accept a situation for which the rules
do not provide and which they do not want.

[20] In the result the appeal is dismissed with costs.

RJW JONES
Acting Judge of Appeal

Concur:

HARMS JA

CAMERON JA

MTHIYANE JA

MLAMBO AJA