The Receiver becomes a giver?

Anyone who has been involved in insolvency will know that there is a pecking order of creditors in liquidation. The gold medallists are secured creditors - people who have advanced credit against security - followed by statutory preferences, employees (up to a fixed amount), SARS, and only then, the rank and file of concurrent creditors.

What this has meant is that SARS has been able to sit back and relax. When businesses are liquidated, SARS is often a significant creditor and will, in terms of its preference, take whatever is left after secured creditors and employees have been paid. This often means that concurrent creditors are the big losers. Little, if anything, may be left once secured and preferent creditors have been paid.

A new ranking introduced

Business rescue in the Companies Act, No 71 of 2008 introduces a new ranking. In fact, there is almost no ranking. Save for the protection of those creditors who advance post-business rescue finance and the protection of employees carried over from labour law, no mention is made of the concept of preferent or concurrent creditors. Although the rights of secured creditors are protected for purposes of voting at meetings to approve a business rescue plan, all creditors are treated equally. The vote is based on aggregate claim value only and not the status of creditors.

This also means that, if any distribution is made, unsecured creditors will receive a pro rata share according to their claim value.

Unfortunately for SARS (and fortunately for everyone else), under business rescue SARS appears to enjoy no preference. This makes sense as the purpose of business rescue is to ensure the survival of the business - or at least a better overall outcome for all affected parties, these being shareholders, employees and creditors. Were SARS to retain a preference, it is difficult to see how business rescue could work since, as with insolvency, SARS could use its preference to block business rescue or make it an unviable proposition for anyone else.

While SARS has commendably adopted a pragmatic view on tax compromises, this policy does no work in business rescue as compromises require funds to be available immediately to make the compromise. Companies in business rescue are self-evidently cash strapped and unable to make funds available.

SARS challenge

One might think that, as an organ of state, SARS would throw its wholehearted support behind business rescue. After all, if it works, a business taxpayer will survive and some, if not all, of its taxpaying employees will retain their jobs.

Regrettably this is not so. In a substantial business rescue matter involving our firm, acting on our advice and that of senior counsel, the business rescue practitioners advised SARS that they will be treated as an ordinary creditor for both voting and distribution purposes. As this has previously not been the approach, SARS has issued a challenge in the Cape High Court, arguing that it should be treated the same way in business rescue as in insolvency, which is as preferent creditors.

The outcome of this case will be heard in October 2012. It will have a significant impact on business rescue in the future and on past matters where SARS has received preferential treatment.