n Business Tax and Company Law Quarterly - The impact of business rescue on tax claims : does SARS enjoy a preference under s 135 of the Companies Act against a company in business-rescue proceedings?

Volume 5, Issue 3
  • ISSN : 2219-1585


Business rescue is an important innovation introduced in South Africa by Chapter 6 (sections 128 to 154) of the Companies Act 71 of 2008 ('the Act'), with the aim of rehabilitating financially distressed companies and restoring them to financial health by placing them under the temporary supervision of a business-rescue practitioner ('BRP'). The BRP is tasked with developing and implementing a business-rescue plan approved by creditors for the recovery of the company, while the Act affords a temporary moratorium in respect of creditors' claims against it. Business rescue has replaced the judicial management procedure, which had proved unsuccessful in saving companies from liquidation under the previous companies legislation.

The article discusses, in particular, the impact of business-rescue proceedings on SARS's claims for tax liabilities owed by the affected company, both prior and subsequent to the commencement of business-rescue proceedings, in the light of a clash of views between SARS and business-rescue practitioners as to the correct treatment of SARS's claims for tax against a company under business rescue.
The particular issue which is proving controversial arises when the company placed under business rescue not only has outstanding tax liabilities to SARS, but has failed to render the required returns for the tax periods prior to the commencement of business rescue in respect of income tax, VAT and other employee taxes such as PAYE, UIF and skills-development levies. The question is whether, as SARS apparently contends, taxes that arise from the belated submissions of outstanding tax returns must in all cases be treated as post-commencement financing as contemplated in section 135 of the Act; or whether, as contended by the business-rescue practitioners' profession, such claims constitute pre-commencement claims, which do not enjoy any preference over other unsecured creditors.
The article discusses the purpose of business rescue as stipulated in the Act and the status of SARS as a creditor in business-rescue proceedings according to the recent decision in 2013 (1) SA 307 (C) at 314E-G, paragraphs [24]-[25].
It is then suggested that, to resolve the controversy, three pivotal issues must be considered: (i) whether, irrespective of the tax period for which the tax is due, liability for tax arises only on the date of assessment, with the result that in the case of a post-commencement assessment, the liability must be treated as a post-commencement claim. This raises the further question as to whether the differences relating to the assessment of income tax and of VAT (and other self-assessment taxes), require a different conclusion as to when the tax liability arises; (ii) whether, if any tax liability arises only after an assessment post-business rescue, SARS's claims in respect thereof constitutes post-commencement finance as contemplated in sections 135(2) and (3), thereby conferring on SARS the preference accorded to such claims; and (iii) whether the liability for income tax in relation to pre-commencement tax periods as a result of a post-commencement assessment, in any event, constitutes a preferent claim by SARS 'arising out of the costs of the business-rescue proceedings' as contemplated in section 135(3) of the Act.
The analysis concludes, with reference to case law and the provisions of the Tax Administration Act 28 of 2011, that the tax liability for VAT does not depend on an assessment being made, but that it arises continuouslyand periodically on the dates specified as the required self-assessment and payment dates for each tax period, in terms of sections 27 and 28, read with section 38, of the Value-Added Tax Act 89 of 1991. On the other hand, in relation to income tax, it is submitted that the correct conclusion is that, given the special statutory rules for arriving at taxable income and the requirement that the tax assessment is made by SARS on the basis of the taxpayer's return for the relevant tax year, the income-tax liability arises only on assessment by SARS, and if this is done after business rescue has commenced, the liability will arise during the post-commencement period.
The question that then still remains is whether this tax liability will constitute 'post-commencement finance' for the purposes of section 135. The article concludes that in light of the purpose of business rescue and in the context of section 135 as a whole, SARS's claim for income tax in these circumstances does not qualify as post-commencement finance.
The article further concludes that, on a proper interpretation of section 135(3), neither VAT (and the other self-assessment taxes) relating to prebusiness-rescue tax periods, nor income tax relating to such periods (but only assessed after business rescue has commenced), can constitute claims arising 'out of the costs of business-rescue proceedings'.
The article distinguishes, in this regard, however, VAT (or similar self-assessment employee taxes) and income-tax liabilities arising in relation to the conduct and operation, post-commencement, of the company's business by the business-rescue practitioner. Such tax liabilities would probably fall into the category of claims arising out of the costs of the business-rescue proceedings, on the analogy of 1997 (1) SA 883 (C) at 892I-893B, which deals with tax due on post-liquidation interest earned by the company in liquidation.
It is further submitted that where the company has outstanding pre-commencement tax returns, any late assessment and resulting liability is coincidental and fortuitous, and that there is not a sufficiently real and close connection between cause and effect, which has been held by the Courts must be present in applying the phrase 'arise out of' in a statute.
Finally, the article discusses the application of section 22(3) of the VAT Act, which gives SARS a 'clawback' claim for input tax deducted by the company where there are unpaid creditors who have not been paid for supplies made to the company within twelve months after the expiry of the tax period within which the relevant deductions were made. In such event, the tax fraction on the unpaid consideration is deemed to be tax charged in respect of a taxable supply made by the company in the period following the expiry of the twelve-month period.
The article concludes that business rescue does not affect SARS's claims in terms of section 22(3): where the twelve-month period ended prior to the commencement of business-rescue proceedings, SARS will have a pre-commencement claim for the deemed VAT under section 22(3). But where the twelve-month period ends after business-rescue proceedings have commenced the conclusion is that because the deemed VAT relates to a taxable supply made in a tax period that falls during the business-rescue proceedings and arises from the continued failure to pay the suppliers while the company is under business rescue, it is properly to be treated as a claim arising out of the costs of the business-rescue proceedings. The result is that SARS would probably enjoy the 'super preference' conferred on such claims by section 135(3) of the Act. It is further submitted that the proviso to section 22(3) dealing with compromises with creditors has no application to business-rescue proceedings.
The article cautions that, apart from the case of , there are no authoritative judicial precedents providing clear guidance on these issues, and that the statutory provisions involved lack clarity and certainty. It is suggested that the efficacy and success of the business-rescue process would be advanced by providing greater clarity on these difficult issues through appropriate legislative amendment.

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