A STITCH IN TIME

by HILLARY PLAATJIES

We are at the end of the first quarter of the year and those December holidays are by now, long forgotten. As we sail through the year, we face the challenges life throws at us, the ups and downs of life.

Likewise, there are businesses who experience ups and downs and the misfortune of financial difficulties, threatening job losses or declining businesses opportunities. Whatever difficulties businesses or individuals may face, taking action early, is important in rescuing the situation. Not addressing the problem when facing financial difficulties, can quickly turn into serious financial losses and consequences.

In this issue, we publish an article on when a business fights for its commercial life. Furthermore, the issue also contains informative information regarding capital protection for individuals.

We hope that the article on the responsibilities of the representative taxpayer in terms of the Tax Administration Act, will shed some light on the position for representative tax payers. The recognition of foreign orders in International Transport Trade have never been clear-cut. The article on this subject will shed some light on this topic.

Needless to say, we provide a wide range of services as reflected on our website. We have many tools at our disposal and the means to do a solvency health check of businesses and individuals.

Have a great Easter, and if you are hitting the roads, drive safely.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

SECTION 345 Demands: FIGHTING FOR YOUR COMMERCIAL LIFE

by DIRK KOTZE

The use of a statutory letter of demand in terms of section 345 (1)(a) of the old Companies Act 61 of 1973 (“the Act”) to collect outstanding debts of R100.00 (one hundred rand) or more payable by Companies is an established commercial recovery procedure which has survived the new Companies Act 71/2008[1]. Its effectiveness lies in the threat of a liquidation application based on the deeming provisions of section 345 relating to commercial insolvency.

It is trite law that commercial insolvency, being the inability of a company to pay its debts as it becomes due and payable, justifies the liquidation of a company. Factual solvency in itself is not a bar to an application to wind-up a company on the ground that it is commercially insolvent.[2] When faced with a section 345 demand based on an amount that is allegedly due and payable, the options of a company are limited. Either pay, secure or settle the amount claimed to the satisfaction of the creditor[3] or alternatively, show on a balance of probability that the alleged indebtedness is disputed on bona fide and reasonable grounds. If the company neglects to adequately respond to a secton 345 demand it will run the risk of being deemed to be unable to pay its debts and ultimately face a liquidation application based on its deemed commercial insolvency.

If a company elects to dispute the alleged indebtedness it must send a detailed response within the three weeks allowed for under section 345 (1) (a) of the Act recording the basis upon which the alleged liability to pay is disputed, mindful also of the legal principles that will apply, if a liquidation application is to follow. What are these legal principles?

First and foremost is the Badenhorst rule[4], which rule finds its application in a scenario where a claim is disputed. Under this rule, liquidation proceedings are not intended to be used as a means of deciding claims which are bona fide and reasonably disputed. Its foundation lies in the fact that court will not entertain factual disputes in application proceedings because of the need to hear oral evidence to properly adjudicate the factual disputes. An application for liquidation will thus fail if the alleged liability to pay is disputed on bona fide and reasonable grounds.

What constitutes a bona fide and reasonable defence will be determined by the relevant facts presented to Court. Insofar as presenting facts in support of its defence, it is important for the debtor company to “allege facts which, if approved at a trial, would constitute a defence to the claims against the company.. subject of course to the qualifications.. and in particular, to the Court being satisfied of their bona fides..”.[5]

Insofar as assesment of bona fides by a Court is concerned, it is important to bear in mind that, “..if the defence is averred in a manner which appears in all the circumstances to be needlessly bald, vague or sketchy, that will constitute material for the Court to consider in relation to the requirement of bona fides.”[6]

It is important to distinguish between two of the defences which a debtor may raise in opposition to a creditor’s claim. The one being an attack upon the substance of the creditor’s claim which is disputed on bona fide and reasonable grounds and the other, to raise a genuine and serious counterclaim in excess of the creditor’s claim which will extinguish the claim[7]. A factual foundation must of course exist for a debtor company to even consider using such a defence or counterclaim.

In the event of an alleged counterclaim, the creditor’s claim is not in issue and the purpose of such a defence will be to extinguish the debt by virtue of set-off. If the counterclaim is a bone fide and reasonable liquid claim then the use of it to oppose a liquidation application will succeed.

The question however is what happens when the debtor company raises a un-liquidated counterclaim for damages to oppose a liquidation application? An un-liquidated claim for damages will only become due and payable once judgement has been pronounced on it pursuant to a trial. Does this preclude the use of this defence to oppose a liquidation application? The answer is NO. It is however important to bear in mind that if such a defence is raised, it should be set-out with sufficient particularity for a Court to find that there exists a reasonable possibility that it will extinguish the creditors’s claim. In such circumstances it would be prudent to provide a breakdown or quantification of the un-liquidated counterclaim together with supporting vouchers. As Davis J pointed out in the recent case of Tiador CC and Other vs Rock Construction CC[8], the key point to consider is how genuine is the counterclaim.

Directors of debtor companies who neglect to give section 345 letters of demand the respect and attention it deserves, do so at their own peril and may ultimately end up having to fight for the commercial life of the Company by having to prepare and file court papers to oppose a liquidation application based upon the deeming provision in section 345.

Dirk Kotze (BA LLB, LLM) is an attorney at Dirk Kotze Attorneys in Stellenbosch  www.dirkkotze.co.za

[1]See Scania Finance Southern Africa (Pty)Ltd v Thomi-Gee Road Carriers CC & Another 2013(2) SA 439

[2]See Firstrand Bank Limited vs Vecto Trade 68 (Pty) Ltd

[3]See wording of section 345

[4]Badenhorst v Northern Construction Enterprises (Pty) Ltd 1956 (2) SA 346 (T) at 347H-348C

[5]See Hulse Reutter & Another vs HEG Consulting Enterprises (Pty)Ltd 1998 (2) SA 208 (C) at 219F-220C

[6]The often quoted words of Colman J in Breitenbach v Fiat SA (Edms) Bpk 1976(2) SA 226 (T) at 228

[7]See ABSA Bank Ltd vs Erf 1252 Marine Drive (Pty)Ltd 2012 ZAWCHC 43

[8]2014 ZAWCHC case no 21088/2013

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

THE IMPORTANCE OF CAPITAL PROTECTION

by GERBRANDT KRUGER 

One of the many pearls of wisdom dispensed by Warren Buffett is “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”. Unfortunately this is easier said than done in the real world. Fund managers are acutely aware of investor aversion to losses.

Losses on portfolios can be due to market movements in the price of the investments or when investments go under or default on their obligations. The latter is permanent capital loss, as there is no opportunity to recover the losses suffered. African Bank is an example of this. Investors may get some of their capital back, but will unlikely get a material portion of it back.

When suffering losses, an investor requires a return higher than the loss to return to breakeven. The graph below shows the subsequent required return needed to breakeven for a particular levels of loss.

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From the above graph we can see that the breakeven return required grows exponentially as losses increase. When investors suffer a 10% loss, they only need 11% to get back where they were. At a 50% loss the investments needs to have subsequent return of 100% to breakeven.

Fund managers have different ways in trying to minimise possible capital losses. If the fund manager is managing a multi asset class fund he/she will be able to underweight or avoid asset classes that are expensive (high in risk) and rather allocate capital to asset classes that are cheap (low in risk). An active fund manager can also try to reduce possible losses by individually picking the instruments he/she wants to include in their portfolio. They can select the companies that are undervalued and avoid ones that are expensive.

No fund manager is exactly alike and each has a different way in classifying risk and varying levels of risk aversion. The more aggressive fund managers will tend to outperform a conservative manager at the end of strong bull market. In bull markets a conservative manager will typically start taking profits from the stocks that performed well and deploy the capital into asset classes where there are opportunities. The aggressive manager will tend to ride the run as far as possible and will experience a bigger drawdown when the markets correct. Managers that avoid deep drawdowns typically perform better over full market cycles.

The graph below is a drawdown comparison between two funds (blue and green) and the category’s average fund (yellow). The blue line is a typical conservative manager and the green line a more aggressive manager. Both of these funds fall into the (ASISA) South African MA High Equity category.

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Source: Morningstar Direct

During the financial crisis of 2008 the blue fund manager was able to protect capital much better than the green fund. The maximum drawdown of the blue fund was 11.8% compared to the green’s 23.4% and the average manager’s 16.8%.

This is one of the reasons one should take time to understand a fund manager’s philosophy and investment process. You might just be able to spare yourself some heartache by avoiding making an investment with an aggressive fund manager at the peak of a market cycle.

Gerbrandt Kruger www.vitalconsult.co.za

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

DRACONIAN UNDERSTATEMENT PENALTIES AND POTENTIAL PERSONAL LIABILITY FOR LIQUIDATION AND BUSINESS RESCUE PRACTITIONERS

by ANDRÉ VAN STADEN 

The impact of draconian ‘understatement penalties’ provided for in sections 222 and 223 of the Tax Administration Act No. 28 of 2011 (“TAA”) for non-compliance with the provisions of the Income Tax Act No. 58 of 1962 (“ITA”) and other fiscal statutes, is not always fully understood. For example, understatement penalties of 50% and 125% on the difference between ‘tax’ properly chargeable and the amount of ‘tax’ that would have been chargeable if the understatement were accepted, are imposed in cases involving failure to take reasonable care and gross negligence, respectively, in completing a return. The taxpayer or ‘representative taxpayer’ must pay the understatement penalty in addition to the tax payable for the relevant tax period. The adverse impact of non-compliance with fiscal statutes by liquidation and business rescue practitioners cannot be ignored in light of the SARS insistence on compliance, especially with the advent of the TAA. Ignore the SARS call to compliance at your own peril.

Section 153 (1) of the TAA defines a ‘representative taxpayer’ as the person who is responsible for paying the tax liability of another person as an agent, other than as a withholding agent, and includes a person who is a ‘representative taxpayer’ in terms of the ITA; is a ‘representative employer’ in terms of the Fourth Schedule to the ITA; or is a ‘representative vendor’ in terms of section 46 of the Value-Added Tax Act No. 89 of 1991 (“VAT Act”). In terms of the ITA, this includes, in the event of a company being placed under business rescue in terms of Chapter 6 of the Companies Act, 2008, the business rescue practitioner and in respect of the income received by or accrued to an insolvent estate, the trustee or administrator of such insolvent estate. For VAT purposes, the ‘representative vendor’ is the natural person who resides in the Republic and is responsible for the duties imposed by the VAT Act in the case of any company which is placed under business rescue, or in liquidation, the business rescue practitioner or the liquidator thereof. The jury is still out in case of the ‘representative employer’ with judicial precedent expected in the near future.

Alarmingly, the personal liability provisions relating to ‘representative taxpayer/vendor’, find direct application to business rescue practitioners as well as liquidators – SARS will get its pound of flesh! A liquidator, or business rescue practitioner, for that matter, as ‘representative taxpayer/vendor’ of the company in liquidation or under business rescue, is personally liable for income tax or VAT payable in his or her representative capacity, if, while it remains unpaid the ‘representative taxpayer/vendor’ alienates, charges or disposes of amounts in respect of which the tax is chargeable; or disposes of or parts with funds or moneys, which are his or her possession or come to the ‘representative taxpayer/vendor’ after the tax is payable, if the tax could legally have been paid from or out of the funds or moneys (Section 155 of the TAA).

Moreover, a person is personally liable for any outstanding tax debt of the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt if the person controls or is regularly involved in the management of the overall financial affairs of a taxpayer; and a senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer (Section 180 of the TAA).

If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the collection of a tax debt of the taxpayer, the person is jointly and severally liable with the taxpayer for the tax debt to the extent that the person’s assistance reduces the assets available to pay the taxpayer’s tax debt (Section 183 of the TAA).

The TAA also deals with the trustees obligations to maintain and preserve records. The trustee or executor is required to maintain and preserve the records of the estate in the form and manner required by section 55 of the VAT Act and sections 29 and 30 of the Tax Administration Act 28 of 2011 (“TAA”).

Generally, all records have to be maintained and preserved for a period of at least five years from the date the relevant return was submitted. This would be the case irrespective of whether the Master granted permission to the trustee or executor of a VAT registered estate to destroy the records within a shorter period.

ANDRÉ VAN STADEN
Proc. LLM (Tax Law) Adv. Cert. Tax, H. Dip. International Tax, MTP (SA)  TEL 27 11 803 6897 | FAX 0866 376 258

SAIT Member Number: 10863209

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.