SARS is a creditor like any other

The taxman has to wait his turn in the creditors’ queue after a liquidation.

Peter O’Halloran - Tax advice

Arecent case at the Supreme Court of Appeal clarified key aspects of the Insolvency Act. The facts were as follows:

A South African company in liquidation re-imported heavy machinery. Upon arrival in South Africa, the machinery was placed under embargo by Customs and Excise and was not to be released until the relevant VAT and Customs duties had been paid. The liquidators of the company sought to obtain the goods from the

The liquidators of the company sought to obtain the goods from the warehouse, but were rebuffed. This led to a successful application to the High Court.

The appeal was launched against this order. SARS maintained it could not be treated as an ordinary creditor in terms of the Insolvency Act. It held that a statutory embargo was permissible under Sections 20, 38, 39 and 114 of the Customs and Excise Act, and the machinery could not be released before re-importation taxes were paid in full.

The liquidators relied on the provisions of the Insolvency Act, especially Section 47. This is a codification of the common-law rule that requires anyone holding assets of an insolvent estate to surrender them to the duly appointed liquidator, even if the assets are subject to a lien (the right to retain the assets pending debt settlement).

In terms of the Insolvency Act, the lien holder retains preferent right – that is, the right to receive preference – after surrender of the asset.

SARS had also argued that if the sections relied upon did not allow for an embargo, the warehouse operator would be liable for the duty if the same were unpaid. But the High Court stated that the warehouse operator had no say in this; it was up to SARS to release the machinery.

The Appeals judge agreed, and held that the rules of the insolvency laws came into play. SARS could not be preferred at the expense of another except as provided for in terms of the Insolvency or Companies Act. The embargo SARS wanted would have denied the assets to the liquidators. Statutes excluding the provisions of the

Insolvency Act did not apply.

Duties and VAT would therefore not be paid in full before the assets were released to the liquidators. The latter would then sell them and the SARS’ claims would rank in terms of the provisions of the Insolvency Act, so that the winding up of the company would be to the benefit of the general body of creditors, or concursus creditorum.

Source: CSARS v Van der Merwe NO (598/2015) [2016] ZASCA 138.