Summary: SARS v Mark Beginsel NO and Others

Oct 22, 2018

On 31 October 2012 an important decision on the ranking of creditors’ votes on a business rescue plan was handed down in the Western Cape High Court. This was in the matter of Commissioner: Sars v Mark Beginsel NO and Others.

In terms of Section 99 of the Insolvency Act, No 24 of 1936 (“the Insolvency Act”), SARS is regarded as a preferred creditor in the winding up process. The issue before the court was what is SARS’ ranking as a creditor when a company is in business rescue in terms the Companies Act, 71 of 2008 (“the Companies Act”).

The business rescue practitioners sought an extension for the submission of their proposed business rescue plan. At the meeting of creditors SARS had insisted that it should be ranked as a preferent creditor and that the business rescue practitioners should accordingly take into account SARS’ attitude based on the additional weight it would carry as a creditor. The business rescue practitioners refused to do this saying that they had taken senior counsel’s advice to the effect that the classification of creditors in the Insolvency Act was not applicable to Chapter 6 of the Companies Act, which contains no statutory preferences such as are found in s96 to s102 of the Insolvency Act.

87% of the creditors by value voted in favour of the business rescue plan and SARS, holding 13% of the claims by value, voted against the plan. A majority of more than 75% was achieved and the plan was accordingly adopted. SARS applied to Court for an order declaring unlawful and invalid the decision taken at the meeting of creditors to approve the business rescue plan. SARS also sought to interdict the business rescue practitioners from distributing any monies of the company pursuant to the business rescue plan. Following from this the Court was asked to declare that the business rescue practitioners must put the company into liquidation.

The issue turned on the interpretation of s145(4)(a) and (b) of the Companies Act, which stipulates that in respect of any decision, secured or unsecured creditors would have a voting interest equal to the value of their claim in the company, and that a concurrent creditor who would be subordinated in a liquidation, has a voting interest independently and expertly appraised equal to the amount which they could reasonably expect to receive ina liquidation. SARS’ argument was that its status as a preferent creditor under s99 of the Insolvency Act meant that its claims would rank ahead of ordinary concurrent creditors under s103 of the Insolvency Act. As such it is an unsecured creditor in s145 and had a voting interest at the creditors meeting equal to the value of its claim against the company. SARS’ argument was that ordinary concurrent creditors under s103 of the Insolvency Act are included in the class of concurrent creditors who would be subordinated in a liquidation. Their votes would accordingly be valued much lower. . In such a case SARS’ vote would have carried the most weight and the business rescue plan would have been rejected at the meeting, contrary to the wishes of the majority in value of the company’s creditors.

Fourie J’s view was that SARS argument was not only contrary to the ordinary grammatical meaning of the words, but also led to an illogical result that failed to balance the rights and interests of the relevant stakeholders. The judge’s view was that no statutory preferences were created in Chapter 6 of the Companies Act, and if the intention of the legislature had been to confer such a preference on SARS in business rescue proceedings, it would have made such intention clear. No trace of such an intention could be found in the Act.

According to the interpretation of the judge, and having regard to the purpose of business rescue proceedings, only one conclusion was justified, namely that SARS is not by virtue of its preferent status in s99 of the Insolvency Act a preferent creditor for the purposes of business rescue proceedings.

Accordingly, SARS would enjoy no greater voting interest than the other concurrent creditors of the company with the result that there is no basis on which to impeach the voting procedure that had been followed by the business rescue practitioners.

This judgment is in the writer’s view correct. It strengthens this firm’s view that there is no ranking of claims for purposes of voting on a business rescue plan.