A recent judgment of the North Gauteng High Court dealt with the powers of the South African Revenue Service to bring an application under section 177 of the Tax Administration Act for the sequestration, liquidation or winding-up of a taxpayer that is a tax debtor (CSARS v Miles Plant Hire (Pty) Ltd, judgment delivered on 30 September 2013).
The facts were relatively uncomplicated. The company had resolved that it would file for voluntary business rescue. At the time the company was indebted to SARS for approximately R37 million, in respect of unpaid value-added tax, penalty and interest. An objection had been made against the assessment, which had been disallowed and the company had noted an appeal against the disallowance of the objection, which. at the time of the application, had not yet been finally determined. SARS then filed an application with the Court that the resolution be set aside and that the company be placed in liquidation.
Section 177(1) of the Tax Administration Act grants the right to SARS, as part of its powers to enforce the collection of tax debts, to institute proceedings for the liquidation of a company for a tax debt. In this instance, after the assessment had not been paid, SARS had filed a certificate in terms of section 172 of the Tax Adminisatration Act which constitued a civil judgment in respect of the tax debt. As a result, SARS had valid grounds for an application that the company be placed in liquidation.
The company opposed the application on the basis of section 177(3) of the Tax Administration Act, which provides:
“If the tax debt is subject to an objection or appeal under Chapter 9 or a further appeal against a decision by the tax court under section 129, the proceedings may only be instituted with leave of the court before which the proceedings are brought.”
The Court ruled that section 177(3) confers a discretion on the court, in the case of a disputed tax debt, to determine whether the tax debt may be recovered in liquidation proceedings. The dispute between the parties related to when that discretion may be exercised. The language of the subsection requires the court that is hearing the application for liquidation to consider the implications of the objection or appeal, and it is precluded from exercising its discretion until it has done so. The Court pointed out (at paragraph :
“This does not require the court to determine the appeal; what it requires is a consideration of the grounds of appeal and whether they disclose any merit. If leave to institute the proceedings is refused, the proceedings are discontinued, whether by way of postponement pending the outcome of the appeal or some other appropriate outcome.”
The plain meaning of the subsection was found to be the following (paragraph ):
“In short, in my view, the words “the proceedings may only be instituted with the leave of the court before which the proceedings are brought” mean that the disputed tax debt is not recoverable under the “pay now, argue later” rule during winding-up proceedings, unless the court before which those proceedings serve, permits it. Such an interpretation affirms the court’s inherent discretion in winding-up proceedings, and empowers the court to evaluate all of the appropriate facts and circumstances (including the merits of any objection and pending appeal), and to make an appropriate order.”
On consideration of the grounds of objection and appeal, it was found that the dispute was not directed so much to the merits of the imposition of the value-added tax, penalty and interest, but more to the quantum of the penalty. The director had pleaded guilty to fraud and tax evasion. The company had not disputed the quantum of the value added tax that had been assessed, but objected to the penalty as they found it “inordinate and harsh”. In its grounds of appeal, the company had placed blame for its failure on its internal accountant.
The Court found that, on the papers, the grounds of appeal were clearly intended to delay the inevitable. The company was hopelessly insolvent. It granted leave to SARS, and issued an order placing the company under a final order of winding-up.
This article was first published in PwC Tax Synopsis October 2013 – pwc.co.za