South Africa: No Preferential Creditor Status For SARS In A Business Rescue

Last Updated: 13 December 2012
Article by Eric Levenstein and Lauren Barnett

Since the date of inception of the new Companies Act 71 of 2008, as amended (Act) (1 May 2011), we have seen numerous and informative judgments handed down by our High Courts in the various provinces dealing with business rescue proceedings.

On 31 October 2012, Judge Fourie, in the Western Cape High Court, handed down a seminal judgment in the matter of Commissioner for the South African Revenue Service v Beginsel NO & Others (Case No 15080, 31 October 2012), which dealt with, among other things, the manner in which concurrent creditors will be treated in business rescue proceedings.

We set out below, some of the salient points raised by Judge Fourie in his judgment which deals with the treatment of SARS and concurrent creditors in business rescue proceedings and the manner in which such creditors would vote on a business rescue plan; the validity of business rescue plans for their failure to comply with certain provisions in the Act and the sustainability of the company subsequent to the commencement of business rescue proceedings.

SARS as a concurrent creditor

Section 145(4)(a) and (b) of the Act deals with the voting interests attributed to creditors for purposes of voting on a proposed business rescue plan.

In this matter, SARS averred that on its interpretation of these provisions, it was of the view that the decision taken to adopt the business rescue plan was unlawful and invalid. While SARS agreed that the Act did not oblige a business rescue practitioner to confer a preference on SARS over unsecured creditors, it also averred that the Act did not oblige a practitioner to treat SARS as a concurrent creditor. In the circumstances, SARS held that it is in the discretion of the practitioner (by virtue of section 150(2)(b)(v)) to determine the order of preference for the payment of creditors subject, of course, to the order of preference conferred by section 135 of the Act.

SARS further argued that all preferent creditors, as contemplated by the Insolvency Act 24 of 1936 (Insolvency Act), should be categorised as unsecured creditors in terms of section 145(4)(a) of the Act and should therefore be entitled to vote at the value of their claim, whilst all other concurrent creditors (as envisaged by the Insolvency Act) should be categorized as concurrent creditors who would ordinarily be subordinated in a liquidation, as envisaged by section 145(4)(b) of the Act, and therefore entitled to vote at their liquidation value (generally a negligible or zero value). If this were the case, SARS would have had a vote at the value of its claim and it would have carried the vote.

The court held that the Act does not create statutory preferences as set out in the Insolvency Act and that, if the legislature had intended to prefer SARS above other creditors in business rescue proceedings, it would have explicitly stated so. Accordingly, the court held that SARS is not a preferent creditor in business rescue as it would be in a liquidation.

To support its contention, the court stated that the Act differentiates between secured and unsecured creditors in section 145(4)(a) with concurrent creditors forming part of the latter group. The court then went further to state that concurrent creditors can further be divided into "preferent" or "concurrent" unsecured creditors. The court held that the term "preferent creditor" generally refers to a creditor whose claim is unsecured but which ranks above the claims of concurrent creditors (ie unsecured preferent creditors). The court held that in assigning the phrase its ordinary meaning, it could not interpret the word "unsecured creditor" to refer only to "preferent unsecured creditors". Accordingly, in business rescue proceedings, the court held that SARS is to be treated like any other concurrent creditor of the company.

The court held that the reference to a "concurrent creditor" in section 145(4)(b) of the Act is not a reference to all concurrent creditors but rather a reference to those concurrent creditors who have subordinated their claims in a liquidation pursuant to a formal agreement to that effect.

Accordingly, all concurrent creditors vote at the value of their claim and only those whose claims have been formally subordinated in a liquidation, by virtue of an agreement to that effect, will vote at liquidation value.

Accordingly, SARS, together with all other concurrent creditors, whose claims had not been subordinated by agreement on liquidation, would be entitled to vote at value.

Compliance with provisions for business rescue plans

Section 150 of the Act delineates the framework for business rescue plans.

In this matter, SARS argued that the plan was invalid and unlawful on the basis that it failed to comply with specific provisions in section 150 of the Act. We do not intend to detail with each instance in which SARS argued that the plan failed to comply with the Act, suffice it to say that its concerns related to sections 150(2)(a)(ii) (list of the creditors of the company and a statement as to which are secured, statutory preferent and concurrent in terms of insolvency law), 150(2)(c)(iv)(aa) and (bb) (a projected balance sheet and statement of income and expenses) and 150(2)(b)(vi) (benefits of the business rescue as opposed to a liquidation).

The thrust of the court's ruling was that section 150(2) of the Act prescribes the content of business rescue plans in general terms and that the legislature could never have precisely prescribed the content for a business rescue plan as each will differ from case to case. Accordingly, the court held that substantial compliance with the provisions of section 150 would suffice. This would mean that where sufficient information, along the lines of that prescribed by section 150(2) of the Act, had been provided to enable interested parties to make an informed decision on the plan, there would have been substantial compliance with section 150 of the Act.

The court held that there was no merit in the submissions made by SARS in support of their contention that the plan should fail as a result of its failure to comply with the provisions of section 150 of the Act.

Continuation of business rescue proceedings

Section 140(2)(a)(i) and (ii) of the Act sets out when a practitioner is to make application to court to discontinue the business rescue process and place the company into liquidation. This would occur when there is no reasonable prospect for rescuing the company.

SARS argued that the business rescue practitioner is obliged, pursuant to section 141(2)(a)(i) and (ii) of the Act, to apply to court for an order discontinuing the business rescue process and to place the company in liquidation if he believes, at any point in the business rescue process, that the company does not have a reasonable prospect of being rescued.

The court considered what is meant by the phrase "rescuing the company". It confirmed that rescuing the company means achieving the goals envisaged by the business rescue process, namely the continuation of the company on a solvent basis or failing this, the achievement of a better return for the creditors and shareholders of the company than would result from an immediate liquidation of the company.

Both parties agreed that a "better return" would mean more money for distribution to the creditors. Whilst agreeing on the test to be applied, the parties differed in their application of the test to the facts. SARS felt that a liquidation of the company would achieve a better return for the creditors whilst the business rescue practitioners were of the view that a liquidation of the company would in effect give rise to a duplication of costs which had already been incurred in the business rescue process and that the implementation of the business rescue plan would yield a better return for the creditors than would be the case in a liquidation.

The court held that in deciding the matter it had to adopt a practical common sense approach. It stated that the court that granted the order for business rescue at the outset must have viewed the company as a viable concern; that the practitioners had taken control of the business and had managed to reduce the losses of the company and that the plan was already in an advanced stage. Accordingly, the court held that nothing would be achieved if the business rescue was converted into al iquidation and that business rescue proceedings would result in a better return for the creditors than would occur in a liquidation.

Conclusion

This is a refreshing and interesting judgment on business rescue as it is one of the few judgments handed down by our courts which deal with substantive aspects of business rescue. Most judgments to date have dealt with the procedural aspects of business rescue and the instances in which a court will be inclined to grant a business rescue.

This judgment clarifies, once and for all, the very important aspect of the manner in which concurrent creditors will vote in business rescue proceedings. Concurrent creditors stand alongside secured creditors and have the opportunity to have their say, namely to vote at value, either for the approval of the plan or for the rejection thereof, the latter probably resulting in the liquidation of the company.

As a result, all creditors in companies facing business rescue, will have an equal say about the company's future and the prospect of such company trading its way out of its financial distress and to a position of solvency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions