by Graeme Palmer

Insolvency law

Rescuing a business with tax liabilities

SA Revenue Services says according to insolvency laws, Sars is a preferent creditor in liquidations which affords them the right to receive payment before other unsecured creditors.
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Business rescue is a process providing for the rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders. The South African Revenue Services (Sars) has participated as a creditor in business rescue proceedings and has exercised the rights afforded to it by the Companies Act, 2008 ('the Act') in respect of such proceedings.

According to insolvency laws Sars is a preferent creditor in liquidations which affords them the right to receive payment before other unsecured creditors.

However, the same status does not apply to Sars in business rescue proceedings as the recent judgment Sars vs Beginsel N.O. and Others confirmed that they are 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 are regulators as they are 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 them as ordinary creditors during business rescue, it is inconceivable that they 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.

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Issue 72