Post-Commencement Tax Debt in Business Rescue: SARS’ Enforcement Rights
Post-Commencement Tax Debt in Business Rescue: SARS’ Enforcement Rights
This is the pertinent question that the High Court of South Africa, KwaZulu-Natal, Pietermaritzburg had to consider in the recent landmark judgment of JBSA Props (Pty) Ltd and Another v Commissioner for South African Revenue Services and Others (5009/2023P) [2025] ZAKZPHC 3 (10 January 2025).
Brief overview of the facts
Wilmeg Investments (Pty) Limited (“Wilmeg”) went into business rescue in May 2020. Wilmeg continued operating and conducting its business throughout the period during which it was in business rescue. Wilmeg generated VAT liabilities that were declared in VAT returns throughout the period that it was in business rescue, but these VAT liabilities remained unpaid to SARS (whether before or after the approval of the business rescue plan).
After Wilmeg emerged from business rescue, a dispute arose between Wilmeg and SARS when Wilmeg claimed that VAT liabilities generated during business rescue were effectively extinguished/compromised under the business rescue plan. In particular, Wilmeg contended that the effect of the adopted business rescue plan was that the claim of SARS for post-commencement VAT had allegedly been extinguished, “by virtue of section 152(4) of the Companies Act 71 of 2008 read with section 154".
Wilmeg contended that SARS’ failure to attend the meeting of creditors and SARS failure to vote in favour or against the business rescue plan signified its agreement and consent to the plan’s terms, including the VAT treatment.
Wilmeg essentially sought an order that SARS be interdicted from pursuing the post-commencement VAT debt it claimed from Wilmeg.
SARS vehemently maintained that the business rescue plan of Wilmeg did not formally extinguish post-commencement VAT liabilities. SARS argued that it had not consented to the business rescue plan’s provisions regarding its claims and had also not been consulted before the plan’s approval. SARS further denied that it "acquiesced to the discharge, either in whole or in part, of the debt owing to it” by Wilmeg.
The central issue in the matter was whether Wilmeg could establish that its obligations to pay VAT generated by its trading during the course of business rescue were compromised in terms of the adopted business rescue plan.
The relevant provisions of the Companies Act 71 of 2008
The cornerstone of Wilmeg’s argument was section 152(4) of the Companies Act 71 of 2008 (“Companies Act”), which reads as follows:
“A business rescue plan that has been adopted is binding on the company, and on each of the creditors of the company and every holder of the company's securities, whether or not such a person-
Furthermore, Wilmeg relied on section 154 of the Companies Act, which provides as follows:
The Court’s findings
At the outset, the Court highlighted the crucial difference between section 154(1) and (2) of the Companies Act. Subsection (1) speaks to any debt owing to a creditor (whether pre- or post-commencement). Subsection (2) deals only with debts owed before the commencement of business rescue.
The Court stated that both section 154(1) and (2) deal with the loss of a right to enforce a debt. However, the automatic loss of the right dealt with in section 154(2) is confined to pre-commencement debts. Approval of the plan brings about that all pre-commencement creditors lose the right to enforce their pre-commencement claims "except to the extent provided for in the business rescue plan". A creditor does not have to accede or agree to that outcome. It is imposed on a creditor even in the face of objection. Section 152(4) is to that effect.
On the other hand, the Court emphasised that Section 154(1) operates quite differently. It applies to a specific creditor who has acceded to the discharge of the whole or part of a debt owed to the creditor by the company. The scope of its operation is not confined to pre-commencement debts. Accordingly, if a creditor accedes to the discharge of the whole or part of a post-commencement debt, the business rescue plan may provide that, if it is duly implemented, the creditor will lose the right to enforce that debt or the relevant part of it.
The Court held that the inevitable conclusion must be that a business rescue plan may not provide that a creditor loses the right to enforce in whole or in part a post-commencement debt if the creditor has not acceded to the discharge of that debt in whole or in part.
Importantly, the Court went on to consider the interplay between section 154 and section 152(4) of the Companies Act. The Court highlighted that section 152(4) deals generally with the provisions of a business rescue plan. It renders all the provisions of an approved business rescue plan binding on all creditors and all holders of the company's securities, irrespective of whether any of those persons do not support the plan. The section deals only with the enforceability of an approved plan. It says nothing about the content of a plan.
The Court went on to explain that section 154 of the Companies Act serves a different purpose. It
addresses the permissible content of a plan on the crucial issue of debt enforcement. Section 154(2) allows a business rescue plan to provide for the deprivation of a creditor's right to enforce its claim (in full or in part) against a company. But this deprivation of a creditor's right to enforce a debt through the compulsion exerted by a vote in favour of a plan is expressly confined to pre-commencement debts. Otherwise, the loss of a right to enforce a debt can only be included in a business rescue plan if the affected creditor accedes to such a measure. Section 154(1) is to that effect.
The Court found that such provisions, which regulate what may lawfully be made part of a business rescue plan, do not contradict the general provision of section 152(4), that an adopted business rescue plan is binding.
In the result, the Court stated that a proposed business rescue plan which depends for its viability on a compromise of post-commencement debts is futile unless all the affected post-commencement creditors accede to the compromise required of them under the plan.
The Court emphasised that at least some overt act must be performed by the creditor in order to convey that it accedes to the discharge of a post-commencement debt owed to it. In this case, there was no evidence of any such act, or of any verbal expression of agreement, on the part of SARS.
The Court pointed out that what section 154(1) requires is that the creditor should have acceded to the discharge of the debt; not that it should have acquiesced in the discharge of the debt. The Court held that there was no room for a contention that there was acquiescence in this case. Neither does section 154(1) of the Companies Act create an obligation to express dissent. It does not provide that a creditor who fails to object shall be taken to have acquiesced in the discharge of its claim.
It was common cause that at the time that the business rescue plan was to be voted upon, Wilmeg owed a post-commencement VAT debt to SARS. Section 154(1) required SARS to accede to the compromise of that debt if it was to be rendered unenforceable and discharged in terms of the business rescue plan.
The Court concluded that there was no room for a contention that SARS tacitly acceded to the compromise of the post-commencement tax debt which had accrued. SARS’ failure to object to the business rescue plan did not constitute consent to waive post-commencement VAT liabilities.
The Court ruled that there could in law be no compromise of the claim against Wilmeg for post-commencement VAT in circumstances where SARS neither consented to nor acceded to the discharge of its VAT claims. The Court found that, on the evidence placed before it, SARS had not acceded to that compromise, and the purported compromise was therefore invalid. Wilmeg’s application was accordingly dismissed, and costs were awarded in SARS’ favour.
Conclusion
This judgment highlights key legal and practical principles regarding the treatment of tax debts during business rescue.
In particular, the judgment makes it clear that a VAT liability arising during the business rescue is not compromised in terms of an adopted business rescue plan, unless SARS has specifically acceded or consented to the discharge of its VAT claims. Without a legally binding compromise, tax debts remain enforceable, and SARS is empowered to proceed with collections on the outstanding amounts.
Notably, the Court examined the important distinction between pre- and post-commencement debts. Section 154(2) of the Companies Act automatically extinguishes pre-commencement debt, unless the business rescue plan states otherwise. However, post-commencement debts can only be compromised if the relevant creditor explicitly agrees to it under section 154(1).
This judgment underscores the limited scope of debt compromise in business rescue without creditor consent. A creditor cannot lose its right to enforce a post-commencement debt if it has not explicitly “acceded” to the discharge of that debt in whole or in part.
This judgment makes it critically clear that a company in business rescue cannot bury its head in the sand, under the guise of business rescue, to make a post commencement tax debt disappear without active engagement with and participation by SARS.
We at BDO are equipped and ready to provide the necessary guidance to companies in financial distress in relation to their available options and to creditors and companies alike regarding their respective rights and obligations pertaining to post-commencement debts under business rescue proceedings.
Brief overview of the facts
Wilmeg Investments (Pty) Limited (“Wilmeg”) went into business rescue in May 2020. Wilmeg continued operating and conducting its business throughout the period during which it was in business rescue. Wilmeg generated VAT liabilities that were declared in VAT returns throughout the period that it was in business rescue, but these VAT liabilities remained unpaid to SARS (whether before or after the approval of the business rescue plan).
After Wilmeg emerged from business rescue, a dispute arose between Wilmeg and SARS when Wilmeg claimed that VAT liabilities generated during business rescue were effectively extinguished/compromised under the business rescue plan. In particular, Wilmeg contended that the effect of the adopted business rescue plan was that the claim of SARS for post-commencement VAT had allegedly been extinguished, “by virtue of section 152(4) of the Companies Act 71 of 2008 read with section 154".
Wilmeg contended that SARS’ failure to attend the meeting of creditors and SARS failure to vote in favour or against the business rescue plan signified its agreement and consent to the plan’s terms, including the VAT treatment.
Wilmeg essentially sought an order that SARS be interdicted from pursuing the post-commencement VAT debt it claimed from Wilmeg.
SARS vehemently maintained that the business rescue plan of Wilmeg did not formally extinguish post-commencement VAT liabilities. SARS argued that it had not consented to the business rescue plan’s provisions regarding its claims and had also not been consulted before the plan’s approval. SARS further denied that it "acquiesced to the discharge, either in whole or in part, of the debt owing to it” by Wilmeg.
The central issue in the matter was whether Wilmeg could establish that its obligations to pay VAT generated by its trading during the course of business rescue were compromised in terms of the adopted business rescue plan.
The relevant provisions of the Companies Act 71 of 2008
The cornerstone of Wilmeg’s argument was section 152(4) of the Companies Act 71 of 2008 (“Companies Act”), which reads as follows:
“A business rescue plan that has been adopted is binding on the company, and on each of the creditors of the company and every holder of the company's securities, whether or not such a person-
- (a) was present at the meeting;
- (b) voted in favour of adoption of the plan; or
- (c) in the case of creditors, had proven their claims against the company.”
Furthermore, Wilmeg relied on section 154 of the Companies Act, which provides as follows:
- “(1) A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.
- (2) If a business rescue plan has been approved and implemented in accordance with this Chapter, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.”
The Court’s findings
At the outset, the Court highlighted the crucial difference between section 154(1) and (2) of the Companies Act. Subsection (1) speaks to any debt owing to a creditor (whether pre- or post-commencement). Subsection (2) deals only with debts owed before the commencement of business rescue.
The Court stated that both section 154(1) and (2) deal with the loss of a right to enforce a debt. However, the automatic loss of the right dealt with in section 154(2) is confined to pre-commencement debts. Approval of the plan brings about that all pre-commencement creditors lose the right to enforce their pre-commencement claims "except to the extent provided for in the business rescue plan". A creditor does not have to accede or agree to that outcome. It is imposed on a creditor even in the face of objection. Section 152(4) is to that effect.
On the other hand, the Court emphasised that Section 154(1) operates quite differently. It applies to a specific creditor who has acceded to the discharge of the whole or part of a debt owed to the creditor by the company. The scope of its operation is not confined to pre-commencement debts. Accordingly, if a creditor accedes to the discharge of the whole or part of a post-commencement debt, the business rescue plan may provide that, if it is duly implemented, the creditor will lose the right to enforce that debt or the relevant part of it.
The Court held that the inevitable conclusion must be that a business rescue plan may not provide that a creditor loses the right to enforce in whole or in part a post-commencement debt if the creditor has not acceded to the discharge of that debt in whole or in part.
Importantly, the Court went on to consider the interplay between section 154 and section 152(4) of the Companies Act. The Court highlighted that section 152(4) deals generally with the provisions of a business rescue plan. It renders all the provisions of an approved business rescue plan binding on all creditors and all holders of the company's securities, irrespective of whether any of those persons do not support the plan. The section deals only with the enforceability of an approved plan. It says nothing about the content of a plan.
The Court went on to explain that section 154 of the Companies Act serves a different purpose. It
addresses the permissible content of a plan on the crucial issue of debt enforcement. Section 154(2) allows a business rescue plan to provide for the deprivation of a creditor's right to enforce its claim (in full or in part) against a company. But this deprivation of a creditor's right to enforce a debt through the compulsion exerted by a vote in favour of a plan is expressly confined to pre-commencement debts. Otherwise, the loss of a right to enforce a debt can only be included in a business rescue plan if the affected creditor accedes to such a measure. Section 154(1) is to that effect.
The Court found that such provisions, which regulate what may lawfully be made part of a business rescue plan, do not contradict the general provision of section 152(4), that an adopted business rescue plan is binding.
In the result, the Court stated that a proposed business rescue plan which depends for its viability on a compromise of post-commencement debts is futile unless all the affected post-commencement creditors accede to the compromise required of them under the plan.
The Court emphasised that at least some overt act must be performed by the creditor in order to convey that it accedes to the discharge of a post-commencement debt owed to it. In this case, there was no evidence of any such act, or of any verbal expression of agreement, on the part of SARS.
The Court pointed out that what section 154(1) requires is that the creditor should have acceded to the discharge of the debt; not that it should have acquiesced in the discharge of the debt. The Court held that there was no room for a contention that there was acquiescence in this case. Neither does section 154(1) of the Companies Act create an obligation to express dissent. It does not provide that a creditor who fails to object shall be taken to have acquiesced in the discharge of its claim.
It was common cause that at the time that the business rescue plan was to be voted upon, Wilmeg owed a post-commencement VAT debt to SARS. Section 154(1) required SARS to accede to the compromise of that debt if it was to be rendered unenforceable and discharged in terms of the business rescue plan.
The Court concluded that there was no room for a contention that SARS tacitly acceded to the compromise of the post-commencement tax debt which had accrued. SARS’ failure to object to the business rescue plan did not constitute consent to waive post-commencement VAT liabilities.
The Court ruled that there could in law be no compromise of the claim against Wilmeg for post-commencement VAT in circumstances where SARS neither consented to nor acceded to the discharge of its VAT claims. The Court found that, on the evidence placed before it, SARS had not acceded to that compromise, and the purported compromise was therefore invalid. Wilmeg’s application was accordingly dismissed, and costs were awarded in SARS’ favour.
Conclusion
This judgment highlights key legal and practical principles regarding the treatment of tax debts during business rescue.
In particular, the judgment makes it clear that a VAT liability arising during the business rescue is not compromised in terms of an adopted business rescue plan, unless SARS has specifically acceded or consented to the discharge of its VAT claims. Without a legally binding compromise, tax debts remain enforceable, and SARS is empowered to proceed with collections on the outstanding amounts.
Notably, the Court examined the important distinction between pre- and post-commencement debts. Section 154(2) of the Companies Act automatically extinguishes pre-commencement debt, unless the business rescue plan states otherwise. However, post-commencement debts can only be compromised if the relevant creditor explicitly agrees to it under section 154(1).
This judgment underscores the limited scope of debt compromise in business rescue without creditor consent. A creditor cannot lose its right to enforce a post-commencement debt if it has not explicitly “acceded” to the discharge of that debt in whole or in part.
This judgment makes it critically clear that a company in business rescue cannot bury its head in the sand, under the guise of business rescue, to make a post commencement tax debt disappear without active engagement with and participation by SARS.
We at BDO are equipped and ready to provide the necessary guidance to companies in financial distress in relation to their available options and to creditors and companies alike regarding their respective rights and obligations pertaining to post-commencement debts under business rescue proceedings.