Realising the Potential of Set-Off: Revolutionary Effect on Business Rescue Procedures

In South African law, the principle of set-off holds significance in various legal contexts, including business rescue proceedings as outlined in the Companies Act 71 of 2008. The concept of set-off, rooted in common law, facilitates the resolution of reciprocal claims between two parties. For set-off to be applicable, certain conditions must be met: the debts must be of the same kind, owned by the same parties in the same capacities, reciprocal, due, enforceable, and liquidated.

Under Chapter 6 of the Companies Act, business rescue aims to rehabilitate financially distressed companies. Section 128(1)(b) of the Act outlines the objectives of business rescue, including temporary supervision, a moratorium on creditor rights, and the development of a rescue plan. During business rescue, Section 133 of the Act prohibits legal action against the company without the practitioner’s consent or court permission. However, set-off is permitted against any claims made by the company, provided it has the practitioner’s consent.

The interpretation of set-off within the context of business rescue has been subject to legal scrutiny. In Murray NO and Another v FirstRand Bank Ltd, the court clarified that set-off does not qualify as enforcement action, allowing it to be used against claims made by a financially troubled company. Section 154(2) emphasises that creditors cannot enforce debts against the company once a business rescue plan is approved and implemented, except as provided for in the plan.

In the case of Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for the SA Revenue Service, the court addressed whether SARS could set off a company’s tax liability against VAT refunds during business rescue. The court ruled in favour of SARS, affirming its right to set off, highlighting that tax liabilities only become due and payable upon assessment, which may occur after the commencement of business rescue.

The article concludes that while statutes like the Companies Act do not restrict the right to set off, its operation in business rescue proceedings involving creditors other than SARS remains untested in South African courts. Thus, the impact of business rescue on set-off in such circumstances awaits judicial clarification.
In essence, set-off remains a vital legal principle in South African law, facilitating the resolution of reciprocal claims, especially in the complex terrain of business rescue proceedings.