By: Hans Klopper
It is trite law that SARS will be unable to contend that a claim, which arose in respect of activities of a company prior to the date of liquidation, but in respect of which returns were only submitted to SARS subsequent to the date of liquidation, must be dealt with by the liquidator as a cost of administration in the liquidation process and that SARS is under such circumstances released from the duty to prove its claim as it existed as at the date of concursus creditorum as provided for in terms of the Insolvency Act.
For SARS to contend, as they seem to be doing in on-going communication with business rescue practitioners, that they are a “super preferent creditor’ in terms of Section 135 of the Companies Act, 71 of 2008 (“the Act”) merely because returns were outstanding at the beginning of business rescue proceedings and thereby achieving a “higher status” than what they would ordinarily have received under the Laws of Insolvency is fallacious. We are of the view that, on the same basis that SARS cannot, upon the liquidation of a company, assert to have an entitlement to be treated as a cost of administration where returns have been submitted post the commencement of concursus creditorum, they can equally not content to be entitled to treated as a “post commencement cost” under business rescue.
The purposes of the Act are contained in, inter alia, Section 7(k) thereof. This sub-section provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.
Before and during the enactment of the Act it was widely publicised that the intention of the legislature was, with the promulgation thereof, to ensure that businesses be rescued as opposed to prior to 2011, when companies in financial distress were merely liquidated. This led to unnecessary job losses. SARS’s attitude in developing a contrived (or artificial) interpretation as contained in your letter under reply would appear to fly in the face of what the legislature intended.
It is therefore fundamentally flawed to argue that claims against entities, already incurred as at the commencement date of business rescue proceeding, but at that stage unassessed, should now be treated as “super preferent” in terms of the provisions of section 135 of the Act. The simple reason for this has been dealt with above. We are of this view for the same reason as to why claims already incurred upon the arrival of concursus creditorum, but as yet unassessed at that date, would rank as a statutory preferent claim in terms of the Laws of Insolvency are not costs of administration in liquidation circumstances such claims cannot be “post commencement finance” under business rescue.
The provisions of Section 135 of the Act are furthermore clear insofar that the plain wording thereof contemplates the following to be incurred by the company (under the management of the BRP) during business rescue proceedings:
- the remuneration, reimbursement for expenses or any amount relating to employment due and payable to any employee during business rescue proceedings;
- finance obtained;
- payment of the BRP’s remuneration and expenses incurred under Section 143 of the Act;
- other claims arising out of the cost of business rescue proceedings
These claims will be treated equally but will have preference over finance obtained as envisaged above
Section 135 of the Act therefore provides that “post commencement finance” relate to expenses incurred and finance confirmed by the company post the commencement of businesses rescue proceedings. SARS continuously express the view that the company is under the management control of the BRP and therefore it follows that the company, represented by the BRP, can thus only be liable for expenses and costs incurred at the BRP’s behest and duly authorised by the BRP after the commencement of proceedings.
In fact, nowhere does Section 135 suggest that the company, duly represented by the BRP, will become liable for post commencement finance as a consequence of a mere act or omission by the company prior to the commencement of proceedings.
For SARS to read into Section 135 that there could be an ‘automatic” imposing of post commencement funding upon by virtue of some event prior to the commencement of proceedings (over which the BRP had no control whatsoever) is most certainly fanciful. SARS ought to be aware and is hereby reminded that the High Court of South Africa found that SARS used an “artificial and strained interpretation” of certain provisions of Chapter 6 of the Act insofar as that matter was concerned.
We furthermore submit that the clear intention of the legislature with the promulgation of the Act was to create a platform for a business under financial distress to make a fresh start. The post commencement finance provisions contained in Section 135 of the Act were introduced to provide for a mechanism to introduce new money to the business and not to burden the business with historic debt. If it was the intention of the legislature to retain old debt under section 135 it would have made it clear as appears from the following dictum by Fourie J:
“I would have expected that, if it were the intention of the legislature to confer a preference on SARS in business rescue proceedings, it would have made such intention clear.”
The purpose and nature of post commencement finance was extensively discussed and dealt with in a recent MBA dissertation by Wanya du Preez of Deloitte & Touche and the following passage appears therein with reference to the United Nations Commission on International Trade Law (UNCITRAL) model Law that has been developed for cross-border insolvencies and rescue legislation. Post commencement or “post-petition” funding is described as follows:
“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 Wanya du Preez referred to above 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.”
In an article by Vatsal Gaur a comparative study of post-petition regimes over various jurisdictions was conducted in respect of:
- The United States of America – debtor in possession finance under Chapter 11 of the USA Bankruptcy Code;
- The United Kingdom – under the Insolvency Act, 1986 and Enterprise Act 2002;
- Canada- the Companies Creditors Arrangement Act (CCAA);
- China- Enterprise Bankruptcy Law (2007); and
- India – Indian Companies Act 1956.
It is clear from this article that, internationally, the funding in the nature of post commencement finance is “funding” in the nature of:
- goods delivered; or
- services rendered
to the business under distress and no mention is made of a contrived “snatching” at an opportunity by the relevant country’s Revenue services to create a “post commencement preference” as SARS would appear to be trying to achieve in this matter.
It is furthermore stated in this article by Guar that it is “very common” (sic) in the USA for Chapter 11 debtors to seek post-petition financing, either from pre-petition lenders or from another source and that the “economic desirability of this debtor in possession financing is that it would inject absolutely new value into the distressed firm.”
In Canada, the need for post-petition financing stems from the inability of financially distressed companies to either obtain trade credit from existing suppliers or to raise fresh funds to finance after the filing under the CCAA.
What is therefore clear and which is consistent with the South African legislation, is that, internationally, the intention with post-petition funding is the introduction of new funds to the distressed business with view to procuring a turnaround and not whereby old, but as yet unassessed, debt is forced upon the post commencement period by way of an artificial mechanism.
By: HANS KLOPPER ATTORNEY
MANAGING DIRECTOR AT INDEPENDENT ADVISORY
 As was confirmed in Merchant West Working Capital Solutions v Advanced Technologies And Engineering Company (Pty) Limited – Case No: 13/12406 – South Gauteng High Court (Johannesburg) Judgement by Kgomo J – 10 May 2013 : p 9-10
 Section 135(1) of the Act
 Section 135(2) of the Act
 Section 135(3)(a)(i) of the Act
As was confirmed in Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314
 See Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314 – line 25
 Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 311 – paragraph 24
 By Wanya Du Preez in a research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Masters of Business Administration named “ The status of post commencement finance for business rescue in South-Africa”
 Du Preez – p 22
 “Post-commencement finance: The silver bullet of business rescue”
 Gaur, V. (2012). Post-petition financing in corporate insolvency proceedings. Issue I of Taxmann‘s SEBI & Corporate Laws Journal, Volume 111, 17-26.
Hans Klopper, Attorney and Managing Director at Independent Advisory.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)