The South African Revenue Service (SARS) is typically one of the creditors in a company undergoing business rescue.
In liquidation, SARS is a preferent creditor, ranking after secured creditors and employees but before concurrent creditors. Therefore, SARS receives payment before concurrent creditors.
However, in business rescue, SARS has the same rights and entitlements as any other concurrent creditor. This was confirmed in the case of SARS v Beginsel, where the court ruled that SARS must be treated the same as other concurrent creditors in business rescue proceedings. SARS had argued that, as a preferent creditor under the Insolvency Act, its claims should take priority over those of ordinary concurrent creditors.
The court found that the Companies Act, which governs business rescue proceedings, does not grant statutory preferences as outlined in the Insolvency Act. If the legislature had intended for SARS to rank higher than other creditors in business rescue, it would have expressly stated so. As a result, the court held that SARS is not a preferent creditor in business rescue, unlike in liquidation.
The rationale for treating SARS as a concurrent creditor is encapsulated in Section 7(k) of the Companies Act, which underscores the goal of business rescue: to efficiently rehabilitate companies in financial distress. If SARS were granted preferent status, it would leave very little for distribution to other concurrent creditors.
Although this judgment places SARS in an unfamiliar position, it affirms the purpose and intent of business rescue proceedings. SARS should actively participate in these proceedings to ensure that the distressed company continues operating and that jobs are preserved.
Disclaimer: The information provided above is general in nature and should not be construed as legal advice.