No preferential status for SARS in a business rescue By Eric Levenstein, director and Lauren Barnett, associate

Legal Brief | december 2012 On 31 October 2012, Judge Fourie, in the In this matter, SARS averred that on its january 2013 Western Cape High Court, handed down interpretation of these provisions, it was of a seminal judgment in the matter of the view that the decision taken to adopt the Since the date of inception of Commissioner for the South African Revenue business rescue plan was unlawful and invalid. the new Companies Act 71 of Service v Beginsel NO & Others (Case No While SARS agreed that the Act did not oblige 15080, 31 October 2012), which dealt with, 2008, as amended (Act) (1 May a business rescue practitioner to confer a among other things, the manner in which 2011), we have seen numerous preference on SARS over unsecured , concurrent creditors will be treated in business and informative judgments it also averred that the Act did not oblige a rescue proceedings. handed down by our High practitioner to treat SARS as a concurrent Courts in the various provinces We set out below, some of the salient points creditor. In the circumstances, SARS held that dealing with business rescue raised by Judge Fourie in his judgment it is in the discretion of the practitioner (by proceedings. which deals with the treatment of SARS virtue of section 150(2)(b)(v)) to determine and concurrent creditors in business rescue the order of preference for the payment of proceedings and the manner in which such creditors subject, of course, to the order of creditors would vote on a business rescue plan; preference conferred by section 135 of the the validity of business rescue plans for their Act. failure to comply with certain provisions in SARS further argued that all preferent the Act and the sustainability of the company creditors, as contemplated by the subsequent to the commencement of business Act 24 of 1936 (Insolvency Act), should be rescue proceedings. categorised as unsecured creditors in terms of section 145(4)(a) of the Act and should SARS as a concurrent creditor therefore be entitled to vote at the value Section 145(4)(a) and (b) of the Act deals with of their claim, whilst all other concurrent the voting interests attributed to creditors creditors (as envisaged by the Insolvency Act) for purposes of voting on a proposed business should be categorized as concurrent creditors rescue plan. who would ordinarily be subordinated in a , as envisaged by section 145(4)(b) 150 of the Act. We do not intend to detail the achievement of a better return for the of the Act, and therefore entitled to vote at with each instance in which SARS argued creditors and shareholders of the company their liquidation value (generally a negligible or that the plan failed to comply with the Act, than would result from an immediate zero value). If this were the case, SARS would suffice it to say that its concerns related to liquidation of the company. have had a vote at the value of its claim and it sections 150(2)(a)(ii) (list of the creditors of Both parties agreed that a “better return” would have carried the vote. the company and a statement as to which are would mean more money for distribution to secured, statutory preferent and concurrent in The court held that the Act does not create the creditors. Whilst agreeing on the test to be terms of insolvency law), 150(2)(c)(iv)(aa) and statutory preferences as set out in the applied, the parties differed in their application (bb) (a projected balance sheet and statement Insolvency Act and that, if the legislature had of the test to the facts. SARS felt that a of income and expenses) and 150(2)(b)(vi) intended to prefer SARS above other creditors liquidation of the company would achieve (benefits of the business rescue as opposed to in business rescue proceedings, it would have a better return for the creditors whilst the explicitly stated so. Accordingly, the court a liquidation). business rescue practitioners were of the view held that SARS is not a preferent creditor in The thrust of the court’s ruling was that that a liquidation of the company would in business rescue as it would be in a liquidation. section 150(2) of the Act prescribes the effect give rise to a duplication of costs which had already been incurred in the business To support its contention, the court stated content of business rescue plans in general rescue process and that the implementation of that the Act differentiates between secured terms and that the legislature could never the business rescue plan would yield a better and unsecured creditors in section 145(4)(a) have precisely prescribed the content for a return for the creditors than would be the case with concurrent creditors forming part of the business rescue plan as each will differ from in a liquidation. latter group. The court then went further to case to case. Accordingly, the court held that state that concurrent creditors can further substantial compliance with the provisions of The court held that in deciding the matter be divided into “preferent” or “concurrent” section 150 would suffice. This would mean it had to adopt a practical common sense unsecured creditors. The court held that the that where sufficient information, along the approach. It stated that the court that granted term “preferent creditor” generally refers to a lines of that prescribed by section 150(2) the order for business rescue at the outset creditor whose claim is unsecured but which of the Act, had been provided to enable must have viewed the company as a viable ranks above the claims of concurrent creditors interested parties to make an informed concern; that the practitioners had taken (ie unsecured preferent creditors). The court decision on the plan, there would have been control of the business and had managed to held that in assigning the phrase its ordinary substantial compliance with section 150 of reduce the losses of the company and that meaning, it could not interpret the word the Act. the plan was already in an advanced stage. Accordingly, the court held that nothing “” to refer only to “preferent The court held that there was no merit in the would be achieved if the business rescue was unsecured creditors”. Accordingly, in business submissions made by SARS in support of their converted into al iquidation and that business rescue proceedings, the court held that SARS contention that the plan should fail as a result rescue proceedings would result in a better is to be treated like any other concurrent of its failure to comply with the provisions of return for the creditors than would occur in a creditor of the company. section 150 of the Act. liquidation. The court held that the reference to a “concurrent creditor” in section 145(4)(b) of Continuation of business rescue Conclusion the Act is not a reference to all concurrent proceedings This is a refreshing and interesting judgment creditors but rather a reference to those Section 140(2)(a)(i) and (ii) of the Act sets out concurrent creditors who have subordinated on business rescue as it is one of the few when a practitioner is to make application judgments handed down by our courts which their claims in a liquidation pursuant to a to court to discontinue the business rescue deal with substantive aspects of business formal agreement to that effect. process and place the company into rescue. Most judgments to date have dealt Accordingly, all concurrent creditors vote at liquidation. This would occur when there is no with the procedural aspects of business rescue the value of their claim and only those whose reasonable prospect for rescuing the company. and the instances in which a court will be claims have been formally subordinated in SARS argued that the business rescue inclined to grant a business rescue. a liquidation, by virtue of an agreement to practitioner is obliged, pursuant to section This judgment clarifies, once and for all, the that effect, will vote at liquidation value. 141(2)(a)(i) and (ii) of the Act, to apply to very important aspect of the manner in which Accordingly, SARS, together with all other court for an order discontinuing the business concurrent creditors will vote in business concurrent creditors, whose claims had rescue process and to place the company in rescue proceedings. Concurrent creditors not been subordinated by agreement on liquidation if he believes, at any point in the stand alongside secured creditors and have the liquidation, would be entitled to vote at value. business rescue process, that the company opportunity to have their say, namely to vote does not have a reasonable prospect of being Compliance with provisions for at value, either for the approval of the plan or rescued. for the rejection thereof, the latter probably business rescue plans resulting in the liquidation of the company. The court considered what is meant by the Section 150 of the Act delineates the phrase “rescuing the company”. It confirmed As a result, all creditors in companies facing framework for business rescue plans. that rescuing the company means achieving business rescue, will have an equal say about In this matter, SARS argued that the plan was the goals envisaged by the business rescue the company’s future and the prospect of such invalid and unlawful on the basis that it failed process, namely the continuation of the company trading its way out of its financial to comply with specific provisions in section company on a solvent basis or failing this, distress and to a position of solvency. About the Authors economic imperatives; andastrong focus thebestlegal onachieving outcomefor clients. success foundation isbuilt onasolid of insightfulandinnovative dealstructuring andlegal advice; akeenabilitytounderstand businessand Werksmans’ more than 190lawyers are apowerfulteamof independent-minded individuals who share acommonserviceethos. The firm’s distinguished by thepeople, thatit attracts clientsandwork andretains. With aformidable track record inmergers andacquisitions, bankingandfinance, andcommercial litigation anddispute resolution, thefirmis circumstances. Professional advice should therefore besought before any action istaken. should be seenasgeneral summaries ofdevelopments or principles ofinterest thatmay notapply directly to specific Nothing inthispublication should beconstruedaslegal advice from any lawyer orthisfirm. Werksmans’ briefs legal *In 1993, theLexWerksmans co-founded Africa legal network,whichnow in27 hasmemberfirms African countries. Werksmans operates in Gauteng andthe Western Cape, andisconnectedtoanextensive African through network Lex Africa listed companies, financialinstitutions, entrepreneurs and government. Established intheearly 1900s, Werksmans Attorneys isaleadingSouth African corporate andcommercial law firmserving multinationals, About Werksmans Attorneys www.werksmans.com Johannesburg +27(0)115358000 C The Corporate & Commercial Law Firm Keep usclose Training of merit andacertificate asthe“Top competitionlaw student”, tonamebuta few. candidate intheattorneys admissionexaminations”, theaward for the “Best overall performance” for attheSchool Practical Legal Witwatersrand (Wits). As atop scholar, shehasreceived several asthePhilipFriedland accolades such prize for the “Most successful Business R Lauren joined Werksmans inthefirm’s working asacandidate attorney in2010and2012becameanassociate Insolvency, Email: Switchboard: Fax: Direct line: Office: Title: Lauren Barnett Lawyer andhasBCom andLLBdegrees, higherdiplomasin Company Law and Tax Law. andadiplomainInsolvency group practitioners of insolvency andattorneys. Heisnamedasarecommended lawyer inrestructuring by andinsolvency PLC Which among others. Heisamemberof the Practitioners of Insolvency Association of South Africa (AIPSA)andof INSOL, aworldwide consumer protection anddirector liabilityissues. Heregularly delivers seminars andwrites for various publicationsonthesetopics finance, forensics inadditiontobusiness andintellectualproperty rescue, and insolvency . extendsto Hisexpertise Business R Eric Levenstein hasbeenadirector of Werksmans Attorneys since 1993andiscurrently thejointheadof thefirm’s Insolvency, Email: Switchboard: Fax: Direct line: Office: Title: Eric Levenstein escue &R escue &R [email protected] +27 (0)115358000 +27 (0)115358796 +27 (0)115358196 Johannesburg Associate [email protected] +27 (0)115358000 +27 (0)115358737 +27 (0)115358237 Johannesburg Director ape T estructuring practice. SheholdsbothaB estructuring practice. Hespecialisesinlitigationfocus anddisputeresolutionwithaparticular onbanking own +27(0)214055100 A (cumlaude)andanLLBdegree from theUniversity of the * .

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