Tag Archives: SARS

SUPREME COURT OF APPEAL: LIQUIDATORS UNHINDERED BY OUTSTANDING VAT OR CUSTOMS

The Customs and Excise Act 91 of 1964 does not prevent a liquidator from taking possession of property in terms of the Insolvency Act 24 of 1936.

Commissioner, South African Revenue Service v Van der Merwe and Others (598/2015) [2016] ZASCA 138 (29 September 2016).

  1. The Background
    • Pela Plant (Pty) Limited (Pela), was provisionally liquidated on 20 July 2014 after a failed business rescue. By the time that the liquidation order was made final on 16 September 2014 twenty three pieces of heavy earthmoving equipment belonging to Pela had not yet been cleared by the Customs authorities and was retained in Durban’s harbour.
    • The company had exported the equipment, valued at R25 million, to the Democratic Republic of the Congo. After completing its operations there, it was repatriated to South Africa.
    • During March and June 2014, the equipment arrived in the country and was stored in the warehouse of Trans-Med Shipping CC, acting as UTI’s sub-agent, who was appointed by Pela as it’s clearing and forwarding agent regarding the equipment. A dispute arose between SARS and Pela as to whether or not VAT and customs duties were payable and if so how much. A dispute that had not been resolved at the time of the Pela’s liquidation.
    • The intervention of Pela’s liquidation created an interesting further complication. Usually, customs duty and VAT have to be paid in full prior to the release of any items held in bond. However the liquidators refused to pay SARS prior to the release of the equipment and contended that the provisions of the Insolvency Act are peremptory in this regard and that SARS was obliged to release the equipment to them and to submit a claim in the winding up of Pela’s affairs, as provided for in terms of the Insolvency Act. SARS disagreed and refused to release the equipment.
  1. The Appeal
    • Having unsuccessfully demanded the release of the equipment from UTI and the SARS, the liquidators launched an urgent application in the Durban High Court (DHC) contending that the provisions of the Insolvency Act trump those of the Customs and Excise Act.
    • SARS and UTI opposed the application essentially contending it couldn’t release the equipment unless all custom duties and VAT were paid in full.
    • The DHC ruled in favour of the liquidators and order SARS and UTI to release the equipment to the liquidators. Both SARS and UTI sought to appeal the order of the DHC and the Supreme Court of Appeal (SCA) was left with the final determination.
    • The SCA found, unlike SARS had argued, that there was no inferred “embargo” in favour of SARS and that there is nothing in either the Customs Act  in or the Insolvency Act which infers that goods subject to a lien in favour of SARS cannot be dealt with under the laws of insolvency.
  1. Conclusion:
    • The SCA concluded that the Customs and VAT Acts do not absolve SARS from releasing the equipment to the liquidators, to be dealt with in terms of the laws of insolvency, without the liquidators first having to pay duty and VAT and ordered the immediate release of the equipment.
    • The appeal was dismissed with costs, including the costs of two counsels.

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. Errors and omissions excepted (E&OE)

MAY THE SOUTH AFRICAN REVENUE SERVICES IMPOSE POST COMMENCEMENT CHARGES BECAUSE OF OUTSTANDING RETURNS UNDER BUSINESS RESCUE

By: Hans Klopper

It is trite law that SARS will be unable to contend that a claim, which arose in respect of activities of a company prior to the date of liquidation, but in respect of which returns were only submitted to SARS subsequent to the date of liquidation, must be dealt with by the liquidator as a cost of administration in the liquidation process and that SARS is under such circumstances released from the duty to prove its claim as it existed as at the date of concursus creditorum as provided for in terms of the Insolvency Act.

For SARS to contend, as they seem to be doing in on-going communication with business rescue practitioners, that they are a “super preferent creditor’ in terms of Section 135 of the Companies Act, 71 of 2008 (“the Act”) merely because returns were outstanding at the beginning of business rescue proceedings and thereby achieving a “higher status” than what they would ordinarily have received under the Laws of Insolvency is fallacious. We are of the view that, on the same basis that SARS cannot, upon the liquidation of a company, assert to have an entitlement to be treated as a cost of administration where returns have been submitted post the commencement of concursus creditorum, they can equally not content to be entitled to treated as a “post commencement cost” under business rescue.

The purposes of the Act are contained in, inter alia, Section 7(k) thereof. This sub-section provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.

Before and during the enactment of the Act it was widely publicised  that the intention of the legislature was,  with the promulgation thereof, to ensure that businesses be rescued as opposed to prior to 2011, when companies in financial distress were merely liquidated. This led to unnecessary job losses. SARS’s attitude in developing a contrived (or artificial) interpretation as contained in your letter under reply would appear to fly in the face of what the legislature intended.

It is therefore fundamentally flawed to argue that claims against entities, already incurred as at the commencement date of business rescue proceeding, but at that stage unassessed, should now be treated as “super preferent” in terms of the provisions of section 135 of the Act. The simple reason for this has been dealt with above. We are of this view for the same reason as to why claims already incurred upon the arrival of concursus creditorum, but as yet unassessed at that date, would rank as a statutory preferent claim in terms of the Laws of Insolvency are not costs of administration in liquidation circumstances such claims cannot be “post commencement finance” under business rescue.

The provisions of Section 135 of the Act are furthermore clear insofar that the plain wording thereof contemplates the following to be incurred by the company (under the management of the BRP) during business rescue proceedings[1]:

  • the remuneration, reimbursement for expenses or any amount relating to employment due and payable to any employee during business rescue proceedings[2];
  • finance obtained[3];
  • payment of the BRP’s remuneration and expenses incurred under Section 143 of the Act;
  • other claims arising out of the cost of business rescue proceedings

These claims will be treated equally but will have preference over finance obtained as envisaged above[4]

Section 135 of the Act therefore provides that “post commencement finance” relate to expenses incurred and finance confirmed by the company [5]post the commencement of businesses rescue proceedings. SARS continuously express the view that the company is under the management control of the BRP and therefore it follows that the company, represented by the BRP, can thus only be liable for expenses and costs incurred at the BRP’s behest and duly authorised by the BRP after the commencement of proceedings.

In fact, nowhere does Section 135 suggest that the company, duly represented by the BRP, will become liable for post commencement finance as a consequence of a mere act or omission by the company prior to the commencement of proceedings.

For SARS to read into Section 135 that there could be an ‘automatic” imposing of post commencement funding upon by virtue of some event prior to the commencement of proceedings (over which the BRP had no control whatsoever) is most certainly fanciful. SARS ought to be aware and is hereby reminded that the High Court of South Africa found that SARS used an “artificial and strained interpretation” of certain provisions of Chapter 6 of the Act[6] insofar as that matter was concerned.

We furthermore submit that the clear intention of the legislature with the promulgation of the Act was to create a platform for a business under financial distress to make a fresh start. The post commencement finance provisions contained in Section 135 of the Act were introduced to provide for a mechanism to introduce new money to the business and not to burden the business with historic debt. If it was the intention of the legislature to retain old debt under section 135 it would have made it clear as appears from the following dictum by Fourie J:

I would have expected that, if it were the intention of the legislature to confer a preference on SARS in business rescue proceedings, it would have made such intention clear.”[7]

The purpose and nature of post commencement finance was extensively discussed and dealt with in a recent MBA dissertation[8]  by Wanya du Preez of Deloitte & Touche and the following passage appears therein[9] with reference to the United Nations Commission on International Trade Law (UNCITRAL) model Law that has been developed for cross-border insolvencies and rescue legislation. Post commencement or “post-petition” funding is described as follows:

“It is critical for the company in distress to have access to funds to be able to pay for crucial day to day costs. This funding may come from existing liquid assets of the company or incoming cash flow from operations. Alternatively this funding should be sourced from a third party through extended trade credit or loans. These financing needs should be established early to accommodate financing requirements post filing and post acceptance of the business plan (UNCITRAL, 2005).”  

In another article[10] by Wanya du Preez referred to above she summarised the purpose of PCF as follows:

“Therefore one of the critical components of the business rescue plan involves securing turnaround finance to meet short-term trade obligations (such as working capital requirements), covering turnaround/restructuring costs, and restoring the company’s balance sheet to solvency.”

In an article by Vatsal Gaur[11] a comparative study of post-petition regimes over various jurisdictions was conducted in respect of:

  • The United States of America – debtor in possession finance under Chapter 11 of the USA Bankruptcy Code;
  • The United Kingdom – under the Insolvency Act, 1986 and Enterprise Act 2002;
  • Canada- the Companies Creditors Arrangement Act (CCAA);
  • China- Enterprise Bankruptcy Law (2007); and
  • India – Indian Companies Act 1956.

It is clear from this article that, internationally, the funding in the nature of post commencement finance is “funding” in the nature of:

  • Finance;
  • goods delivered; or
  • services rendered

to the business under distress and no mention is made of a contrived “snatching” at an opportunity by the relevant country’s Revenue services to create a “post commencement preference” as SARS would appear to be trying to achieve in this matter.

It is furthermore stated in this article by Guar that it is “very common” (sic) in the USA for Chapter 11 debtors to seek post-petition financing, either from pre-petition lenders or from another source and that the “economic desirability of this debtor in possession financing is that it would inject absolutely new value into the distressed firm.”

In Canada, the need for post-petition financing stems from the inability of financially distressed companies to either obtain trade credit from existing suppliers or to raise fresh funds to finance after the filing under the CCAA.

What is therefore clear and which is consistent with the South African legislation, is that, internationally, the intention with post-petition funding is the introduction of new funds to the distressed business with view to procuring a turnaround and not whereby old, but as yet unassessed, debt is forced upon the post commencement period by way of an artificial mechanism.

By:  HANS KLOPPER ATTORNEY

MANAGING DIRECTOR AT INDEPENDENT ADVISORY

[1] As was confirmed in Merchant West Working Capital Solutions v Advanced Technologies And Engineering Company (Pty) Limited – Case No: 13/12406 – South Gauteng High Court (Johannesburg) Judgement by Kgomo J – 10 May 2013 : p 9-10

[2] Section 135(1) of the Act

[3] Section 135(2) of the Act

[4] Section 135(3)(a)(i) of the Act

[5]As was confirmed in Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314

[6] See Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314 – line 25

[7] Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 311 – paragraph 24

[8] By Wanya Du Preez  in a research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Masters of Business Administration named “ The status of post commencement finance for business rescue in South-Africa

[9] Du Preez – p 22

[10] “Post-commencement finance: The silver bullet of business rescue”

[11] Gaur, V. (2012). Post-petition financing in corporate insolvency proceedings. Issue I of Taxmann‘s SEBI & Corporate Laws Journal, Volume 111, 17-26.

Hans Klopper, Attorney and Managing Director at Independent Advisory.

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. Errors and omissions excepted. (E&OE)