Pre-commencement SARS liabilities in business rescue: Another “artificial and strained” interpretation by SARS?
It has now been over a decade since business rescue was introduced to South African law. While our courts have had their work cut out in developing jurisprudence to clarify the interpretation of Chapter 6 of the Companies Act 71 of 2008 (“Companies Act”), substantial progress has been made in clarifying various legal uncertainties. One area where considerable disagreement still exists, which is yet to be ruled on by our courts, is regarding the treatment of claims of the South African Revenue Service (“SARS”) in business rescue. For the purposes of this article, we examine one area of disagreement between business rescue practitioners (“BRPs”) and SARS officials: the treatment of SARS claims for pre-commencement PAYE and VAT liabilities, where the returns relating to those liabilities are outstanding at the commencement of business rescue proceedings. SARS officials have, in our experience, adopted the position that tax assessments which are raised by SARS post-commencement of business rescue, but which relate to pre-commencement tax periods, constitute post-commencement liabilities and therefore ought to be considered post-commencement finance (“PCF”)that ranks in preference to the claims of unsecured creditors in business rescue. In this article, we will consider whether SARS are correct in making this assertion. We will first consider the meaning of PCF. Thereafter, we examine SARS’ reasons for claiming that pre-commencement tax liabilities ought to be considered as PCF where returns are submitted post-commencement. Having done so, we then conclude by explaining why SARS’ interpretation is incorrect.
What is PCF?
To start, we consider the provisions of section 135 of the Companies Act, which deal with the provision of PCF. PCF, in terms of the provisions of section 135, enjoys a preference to all unsecured claims against the company in business rescue, and is made up of –
- amounts that become due and payable by a company to an employee during a company’s business rescue proceedings, but that is not paid to the employee; [section 135(1)]
- finance obtained by the company during a company’s business rescue proceedings; [section 135(2)] and
- unpaid business rescue costs, being the remuneration and expenses of the practitioner and other claims arising out of the costs of the business rescue proceedings. [section 135(3)]
The purpose and nature of post commencement finance has been considered by academic commentators and by our courts. In South African Property Owners Association v Minister of Trade and Industry and Others, the court held that the financing contemplated in section 135(2) of the Companies Act relates to financing obtained to help the company out of its financial distress and does not include existing obligations of the company apart from those owing to company employees.
The court held furthermore that the costs contemplated in section 135(3) of the Companies Act, being unpaid business rescue costs, consists of two categories of costs, namely – the practitioner’s remuneration and expenses (as provided for in section 143 of the Companies Act) and other costs incurred due to the business rescue proceedings.
“It is critical for the company in distress to have access to funds to be able to pay for crucial day to day costs. This funding may come from existing liquid assets of the company or incoming cash flow from operations. Alternatively, this funding should be sourced from a third party through extended trade credit or loans. These financing needs should be established early to accommodate financing requirements post filing and post acceptance of the business plan (UNCITRAL, 2005).”
In another article by du Preez, she summarised the purpose of PCF as follows:
“Therefore, one of the critical components of the business rescue plan involves securing turnaround finance to meet short-term trade obligations (such as working capital requirements), covering turnaround/restructuring costs, and restoring the company’s balance sheet to solvency.”
The purpose of section 135 of the Companies Act is to provide for a mechanism to introduce new money to a company in business rescue, and not to burden the company with historic debt. The above suggests that liabilities owing to SARS in respect of tax periods before the commencement of a company’s business rescue proceedings cannot constitute PCF, even if the returns relating to these liabilities were outstanding at the start of business rescue proceedings.
The basis of SARS’ contention
SARS officials have contended that returns submitted after the commencement of business rescue are part of costs arising out of business rescue proceedings as contemplated by section 135(3) of the Companies Act. According to SARS, it is irrelevant what period the return relates to but rather that what is important is the “date of assessment” as defined in the Tax Administration Act 28 of 2011 (“TA Act”).
Section 1 of the TA Act provides as follows:
“date of assessment” means—
- in the case of an assessment by SARS, the date of the issue of the notice of assessment; or
- in the case of self-assessment by the taxpayer –
- if a return is required, the date that the return is submitted; or …
SARS assert that because the date of assessment is the date on which a return is submitted by the taxpayer, the date of tax liability is the date that the return is submitted. This interpretation fails to distinguish between the imposition of tax liability, and the determination (or crystallisation) of tax liability. An assessment, as per the TA Act, is the determination of a tax liability and the date of assessment is thus the date that the tax liability is determined.
On the other hand, liability for tax is imposed in respect of a particular tax period (as defined in the TA Act) by the relevant tax Act, such as the Income Tax Act, for employees’ tax (PAYE), or the VAT Act, for VAT. The TA Act does not impose liability for tax, its purpose is, rather, to provide for the effective and efficient collection of tax. To contend that the date of assessment is the date that the tax liability is imposed would imply that a taxpayer is not liable to pay tax until a return is submitted, which would, in another context, be detrimental to SARS.
Can SARS liabilities relating to pre-commencement tax periods be PCF?
We submit that, in light of what has been discussed above, tax liabilities which relate to tax periods prior to the commencement of business rescue proceedings cannot be PCF, even if the returns relating to these liabilities are only submitted after the commencement of business rescue.
To contend otherwise would be to adopt an artificial and strained interpretation of the provisions of the Companies Act, which is precisely what the court criticised SARS for doing in the case of Commissioner South African Revenue Services vs Beginsel NO.
The South African Restructuring and Insolvency Practitioners Association has recently made submissions to SARS to request clarity on various tax issues in business rescue, including the issue discussed in this article. Hopefully, SARS will recognise the correct legal position as set out above. Until then or until a court is called upon to rule on this issue, some uncertainty will remain.
 2018 (2) SA 523 (GP)
 Ibid at paragraph 22.
 Ibid at para 23.
 Du Preez W, “The status of post-commencement finance for business rescue in South Africa”.
 Ibid, page 22.
 Du Preez W, “Post-commencement finance: The silver bullet of business rescue”.
 See Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) 314.