Income Tax Consequences Of The New Business Rescue Regime For Companies
08 July 2012
Posted by: Author: Lee-Ann Steenkamp
Income Tax Consequences of The New Business Rescue Regime For Companies
"This article is the sixth instalment in the series which investigates the
interplay of the new Companies Act 71 of 2008 (COA) and the Income Tax Act 58 of
1962 (ITA).1 The COA replaces the old regime of judicial administration of
failing companies with a modernised version, referred to as the ‘business
The Department of Trade and Industry’s (dti) Explanatory Guide on
the Companies Act No 71 of 2008 notes that this regime is largely
self administered by the company, under independent supervision within constraints
set out in the Act, and subject to court intervention at anytime on application
by any of the stakeholders. Generally, a failing company is financially
distressed if it appears reasonably unlikely that the company will be able to pay
all of its debts when they become due and payable or if the company will be
insolvent within the ensuing six months. Pursuant to the approval of placing a
company under business rescue, a business rescue practitioner must be
appointed.The practitioner is tasked with a wide variety of duties, including
the preparation and implementation of a business rescue plan.
The business rescue plan
The business rescue plan must be in accordance with Part D of Chapter 6 of the
COA. It may provide for the discharge of debts and claims relating to the
company. During the business rescue proceedings, any guarantee or surety given by
the company is enforceable only with leave of the court and any claim against the
company is suspended for the duration of the business rescue proceedings.This
implies that any claim to payment for a loan or surety by the company will be
suspended,thereby forgiving the debt by the said company until the conclusion of
the proceedings. Furthermore, in terms of s154(2) of the COA, once a
business rescue plan has been approved, it may provide that a creditor is
barred from enforcing any debt owed by the company under business
rescue immediately before the beginning of the business rescue process, save to the
extent provided for in the plan. In other words, for the duration of
the proceedings and even thereafter, the company is discharged of any claims and
debts owing to its creditors.One notable exception is that of s133(1)(f) of the
COA, whereby the moratorium on legal proceedings against the company is not
applicable in the case of proceedings by a regulatory authority in the execution of
its duties after written notification to the business rescue practitioner.This
could potentially be cause for concern, as this exception seems to infer that
there will be no moratorium on SARS collecting taxes owed to it.
Possible CGT consequences
The suspension of the debt or surety ship does not in itself give rise to any negative tax consequences since it is not a complete waiver of a debt.The reduction or extinguishing of a debt during the proceedings is essentially a discharge from a debt owed to acreditor. This could lead to CGT in terms of par 12(5) of the Eighth Schedule to the ITA.
The discharge of the debt could therefore result in a capital gain in the hands of the company under business rescue proceedings.Once a creditor has discharged from debt a company under business rescue, it cannot upon the rehabilitation of that company claim the discharged debt.2 Similarly, the company under business rescue cannot upon rehabilitation reclaim the CGT paid in terms of par 12(5).
A noteworthy exception is if the creditor and the company under business rescue form part of the same group of companies, as defined in s 41 of the ITA. Unless the waiving or discharge of the loan was part of a tax avoidance scheme, it will not attract CGT.3
Although placing a company under business rescue does not in itself appear to give rise to income tax consequences, any subsequent discharge of debt could lead to negative CGT consequences. We might question whether it does not seem a rather self-defeating object to impose CGT on a financially distressed company while attempting to rehabilitate the company.
The next and final instalment will highlight the tax implications of the conversion of par value shares to non-par value shares.
1.The first five articles appeared in previous editions of TaxTalk.The series commenced in the September/October 2011 edition.Footnote references to the relevant sections in the COA were omitted in this article – please e-mail the author should your equire these.
2.As pointed out by N Napier & R Salani "Tax Implications of the New Business Rescue Regime” (27-05-2011) Cliffe Dekke rHofmeyr’s Tax Alert <http://www.cliffedekkerhofmeyr.com/news/files/CDH-Tax-Alert-27-May-2011.pdf> (accessed 29-06-2011).
3.Per exclusion (bb) of par 12(5) of the Eighth Schedule of the ITA
Source: By Lee-Ann Steenkamp (TaxTALK)