On 12 May 2025 the Supreme Court of Appeal’s decision, in Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for the South African Revenue Service (846/2023) [2025] ZASCA 56, marks a significant turning point in business rescue jurisprudence, particularly regarding how historical tax debts are treated during the rescue process. For Business Rescue Practitioners, the judgment provides long-awaited clarity and strengthens the legislative framework that protects financially distressed companies.
Background: The Tax Set-Off Dispute
Henque was placed in voluntary business rescue on 31 January 2018. Prior to this, it had filed a 2017 tax return and was assessed by SARS. However, in May 2018, after rescue proceedings had commenced, SARS issued an additional income tax assessment for the 2017 year. Around the same time, Henque had accrued VAT credits due to it.
SARS, contending that both the 2017 additional income tax liability and certain VAT liabilities were post-commencement debts and then applied set-off against the VAT refunds payable to Henque. The High Court sided with SARS. Henque appealed.
Key Legal Issues:
The appeal centred on two questions:
- Whether the additional income tax liability raised after the commencement of business rescue was a pre- or post-commencement debt; and
- Whether SARS was entitled to set off that debt against VAT refunds payable to the company post-commencement.
The SCA’s Reasoning: Legal Substance Over Administrative Form
The SCA overturned the High Court’s decision, adopting a principled and sound interpretation of the law :
1. Timing of Tax Liability: Creation vs Quantification
The court made an important distinction in that income tax liability is created at the end of a company’s financial year when income is earned or accrues, not when SARS issues an assessment. An additional assessment merely quantifies an existing debt and does not generate a new obligation.
- Accordingly, Henque’s tax liability arose prior to the commencement of business rescue. Regardless of when SARS issued its reassessment.
- The same applied to the VAT liability for the January 2018 period. Since the VAT period ended on the day business rescue commenced, the obligation also preceded the rescue.
2. Set-Off and Section 154(2): Reinforcing the Rescue Process
SARS sought to invoke section 191 of the Tax Administration Act 28 of 2011, which permits it to apply set-off against refundable amounts. However, the SCA held that this provision does not apply where the debt in question is irrecoverable by law, as in the case of a pre-commencement debt that is subject to a business rescue plan.
Section 154(2) of the Companies Act 71 of 2008 expressly bars the enforcement of pre-commencement debts unless the business rescue plan provides otherwise. SARS, like any other creditor, must abide by this limitation.
Why This Judgment Matters
For Business Rescue Practitioners
This ruling affirms a fundamental tenet of business rescue: the legal ringfencing of pre-commencement debt. It ensures that SARS, as a powerful statutory creditor, cannot bypass the rescue plan through unilateral action. This preserves the integrity and fairness of the business rescue regime and ensures equal treatment among creditors.
For Creditors and Accountants
Creditors must now be acutely aware that any claim they wish to enforce must be classified according to when the underlying obligation arose and not when it was quantified or demanded. Accountants preparing tax computations or advising clients in financial distress must take care to distinguish between pre- and post-commencement liabilities accordingly.
For SARS
The judgment underscores that even the fiscus must respect the commercial rehabilitation process provided by Chapter 6 of the Companies Act. If the law places limits on recovery, SARS must lodge claims like any other creditor and await distribution in accordance with the plan.
Conclusion
The Henque judgment significantly enhances legal certainty for BRPs and stakeholders navigating the tax consequences of business rescue. By emphasising the legal moment when tax liabilities arise and rejecting the notion that reassessment equals new liability. The SCA has provided clarity and predictability.
Perhaps most importantly, it reiterates that business rescue is not merely a technical process but a substantive legal mechanism designed to give companies breathing space while treating creditors even-handedly. That protection is now confirmed to apply even against SARS.