Understanding business rescue rules when dealing with debt, particularly debt owed to the South African Revenue Service (SARS), is no easy undertaking. The company must understand that there is a clear distinction between pre-commencement debt and post-commencement debt in a business rescue plan.
A recent case before the High Court in Pietermaritzburg highlighted that post-commencement debt will be compromised only if the creditor agrees to do so, and the agreement is included in the business rescue plan.
In the matter between JBSA Props and SARS, the company’s interpretation of its business rescue plan was described tax experts as rather “aggressive”. The court sided with SARS’s interpretation.
A creditor cannot lose his right to enforce a post-commencement debt if he has not explicitly “acceded” to the discharge of that debt in whole or in part.
The facts
Wilmeg Investments went into business rescue in May 2020 and was bought by JBSA Props for R600 million. The business rescue plan was delivered to creditors on 14 December 2020 and considered and voted on during a meeting on 23 December.
SARS did not attend the meeting and did not vote in favour of or against the plan.
Wilmeg continued trading throughout the period it was in business rescue. It filed its value-added tax (VAT) returns, reflecting a tax liability, but didn’t pay it – not before or after the approval of the business plan. VAT payments were made only after the business rescue ended in December 2021.
The VAT debt amounted to about R24m. Of this, R9m was incurred between the commencement of business rescue and the approval of the plan (23 December 2020) and R15m between the approval of the plan and the conclusion of the business rescue (13 December 2021).
Wilmeg argued that SARS did not react to any emails concerning the plan and did not attend the creditors meeting where they voted in favour of the plan. “SARS by this conduct signified its consent to the business plan, which was implemented,” its general manager contended.
The effect of the business plan, according to Wilmeg, was that SARS’s claims for post-commencement VAT incurred up to 13 December had been “extinguished”.
SARS rejected this interpretation.
It directed Nedbank and Investec to extract almost R300 000 from Wilmeg’s accounts and to pay it over to SARS. This action by SARS led to the court action to interdict SARS from pursuing the VAT debt it claimed.
The judgment
The court said there was no evidence of consultation by the companies (JBSA and Wilmeg) or its business rescue practitioners with SARS about the business rescue plan or the VAT that would continue to be incurred during the business rescue.
SARS was not concerned about the pre-commencement business rescue VAT. However, it denied that it “acquiesced” to discharge the VAT debt during and after the business rescue owed by the company.
This would have meant that SARS discharged a tax debt that did not exist at the time the plan was voted on by the creditors.
The Companies Act distinguishes between pre-commencement and post-commencement debt. The automatic loss of the right to enforce a debt is dealt with in section 154(2), which relates to pre-commencement debt, while section 154(1) applies to a specific creditor who has acceded to the discharge of a debt owed to it.
“A proposed business plan which depends for its viability on a compromise of post-commencement debts is futile unless all the affected post-commencement creditors accede to the compromise required of them under the plan,” the court pointed out.
“I am in respectful agreement with the proposition that at least some overt act must be performed by the creditor in order to convey that it accedes to the discharge of as post-commencement debt owed to it. There is no evidence of any such act, or of any verbal expression of agreement, on the part of SARS.”
‘Aggressive interpretation’
VAT expert and ENSafrica tax executive Charles de Wet says it is general practice to account for VAT if a company continues trading during the business rescue plan.
The company argued that its debt was compromised in terms of the approved plan where SARS would receive 0.0265 cents in the rand. But for this to be correct, the Companies Act required SARS to accede to the compromise of the (post-commencement debt).
It did not.
De Wet adds that business rescue provisions, from a VAT perspective, are quite complicated.
The fact is that if a company invoices for VAT and collects the VAT, it is not for the company to keep. It belongs to the fiscus.
“It simply makes no sense that the company could charge its customers 15% VAT but only pay a fraction of it over to SARS. This was quite an aggressive interpretation (of the business rescue plan and the Companies Act).”
A different outcome, and an option still available to the company, is to approach SARS in terms of the provisions in Tax Administration Act to apply for a compromise of its debt or a debt waiver.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal, or tax advice that is appropriate to every individual’s needs and circumstances.