Liquidation applications on a disputed tax debt and the applicability of section 177(3) of the Tax Administration Act 28 of 2011

business rescue 1Judge Andre van Niekerk handed down an interesting judgment in the High Court of South Africa (North Gauteng Division) on 30 September 2013.  In my respectful opinion the judgment is insightful and is correct.  The facts are fairly simple.  Miles Plant Hire (Pty) Ltd (MPH) had a tax liability of R37 441 090.59 to the commissioner of the South African Revenue Services (SARS). SARS had levied a tax assessment in this amount on MPH, which included penalties and interest. When MPH failed to pay the assessment, SARS brought a liquidation application against it, which was opposed on two grounds.

The first ground of opposition was to dispute the debt. MPH had challenged the assessment of SARS but did not directly challenge the quantum of the underlying tax debt.  MPH rather challenged the fact that the SARS penalty was “inordinate and harsh”.  In addition the challenge, which was in the form of a notice of appeal, blamed the internal accountant of MPH for the state of its financial affairs.

The second ground was a procedural objection that SARS was barred from bringing the application by virtue of its failure to comply with section 177(3) of the Tax Administration Act.

It is important to note the provisions of section 177 of the Tax Administration Act 28 of 2011:

“177 institution of sequestration, liquidation or winding-up proceedings

(1)  SARS may institute proceedings for the sequestration, liquidation or winding-up of a person for a tax debt.

(2) SARS may institute the proceedings whether or not the person –
a. is present in the Republic; or
b. has assets in the Republic.

(3) If the tax debt is subject to an objection or appeal under Chapter 9 or a further appeal against the decision by the Tax Court under Section 129, the proceedings may only be instituted with leave of Court before which the proceedings are brought.”

The Honourable Judge was faced with the following interesting question, namely whether SARS is required to seek leave to institute the application for winding-up because there is a disputed tax debt in respect of which an appeal is pending.

The Judge interpreted these provisions by referring to the case of Natal Joint Municipal Pension Fund v Edumeni Municipality 2012 (4) SA 593 (SCA).

The critically important part of the judgment of the Honourable Wallis JA is that in interpretation of statutes a sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.

MPH argued that before liquidation proceedings could be instituted, there had to be an order for leave to institute these proceedings.

Van Niekerk J correctly said in paragraph 10 that the issue before the court (if the application to liquidate was made) would be limited to whether SARS ought to be afforded leave to commence winding-up proceedings by way of a notice of motion, notwithstanding the fact of a pending objection or appeal.  If leave to institute these proceedings were granted, then a further application would have to be prepared and brought before a different judge.  The judge then concluded, correctly so, that this would lead to an absurd result, where the discretion exercised in the first application (the application in terms of section 177(3) of the Tax Administration Act 28 of 2011) would potentially fetter the court before which the subsequent substantive application was served (the application for liquidation).  The judge found that there was nothing in the papers that persuaded him that there were any grounds in terms of which the court should refuse leave to institute winding-up proceedings. The court accordingly granted a winding-up order against MPH.

This judgment importantly emphasises that the court has an inherent jurisdiction to prevent abuse of its process, and winding-up proceedings would not be resorted to in order to enforce payment of a debt, the existence of which was bona fide disputed on reasonable grounds.