It’s not always fair for SARS to be treated as an ordinary creditor during a business rescue

2013-02-01 00:00

BUSINESS rescue is a process providing for the rescue and recovery of financially distressed companies in a way that balances the rights and interest of all the parties involved.

The South African Revenue Service (SARS) has participated as a creditor in business rescue proceedings and has exercised the rights it enjoys under the Companies Act, 2008 (the Act) for such proceedings.

According to insolvency laws, SARS is a preferential creditor in liquidations, which gives it the right to receive payment before other unsecured creditors.

However, the same status does not apply to SARS in business rescue proceedings, as a recent judgment, SARS v Beginsel N.O. and Others, confirmed that it has to be treated like any other concurrent creditor of the company.

The success of business rescue is largely dependent on the general moratorium placed on legal proceedings against a company during the process.

If a company is not given breathing space from its creditors, it will not be able to implement a business rescue plan for financial recovery.

There are exceptions to the moratorium, such as section 133(1)(f) of the Act.

This allows for legal proceedings by a regulatory authority in the execution of its duties, which may be effected by the authority giving notice to the appointed business rescue practitioner.

By definition, SARS is a regulator as it is responsible for determining liability for taxes, collecting them and investigating offences.

Many businesses in financial distress have tax liabilities.

Although SARS may not be pleased with the recent court decision to treat it as an ordinary creditor during business rescue, it is inconceivable that it would rely on the exception under section 133(1)(f) and not participate as a creditor in the business rescue process.

This would prevent the rescue of many distressed companies, resulting in their liquidation and rendering the business rescue process ineffectual.

There may be instances when SARS would be justified in relying on the exception, such as tax evasion cases where the taxpayer has deliberately concealed its true state of affairs or where there has been dishonest tax reporting.

In most cases where companies have accumulated tax liabilities in the ordinary course of business, it would not be appropriate for SARS to rely on the exception.

In those cases, SARS will have to be content with participating as an ordinary creditor in the business rescue process.

Graeme Palmer is a senior associate in the commercial department of Garlicke & Bousfield.

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