Realisation of secured immovable property in the winding-up of insolvent estates - does the mortgagee's secured claim to proceeds trump SARS's claim for CGT on the disposal?

• Published date: 01 June 2012
• Date: 01 June 2012
• Author: Milton Seligson
• DOI: 10.10520/EJC174309
• Pages: 1-13

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© SIBER INK

Realisation of Secured

Immovable Property in the

Winding-up of Insolvent

Estates

DOES THE MORTGAGEE’S SECURED CLAIM TO

PROCEEDS TRUMP SARS’S CLAIM FOR CGT ON

THE DISPOSAL?

MILTON SELIGSON SC

ABSTRACT

A creditor who provides loan funding will frequently take security for repay-

ment of the debt in the form of a mortgage registered over the immovable

property of the debtor. Should the debtor be liquidated (in the case of an

insolvent company or close corporation) or sequestrated (in the case of an

insolvent natural person), the secured property will be realised by the liqui-

dator or trustee, as the case may be, and the proceeds, after the deduction

of certain costs, will be distributed to the secured creditor who is the mort-

gagee, in preference to other creditors.

Since the introduction of capital gains tax (‘CGT’) such a disposal of the

immovable property will often result in a capital gain, triggering liability for

CGT to SARS by the insolvent estate for the amount thereof. What is the

status of SARS’s claim for CGT, and how does this affect the mortgagee’s

preferent right to receive the proceeds of realisation?

This article seeks to clarify these issues and to provide an answer, in the

absence of judicial precedent directly in point, as to whether the mortgagee is

entitled to the proceeds without deduction of CGT, or whether the CGT liability

incurred in the course of winding-up must be settled by the liquidator or trustee

before payment of the proceeds to the mortgagee as secured creditor. This is an

issue of substantial importance to f‌inancial institutions and other loan creditors,

as well as to legal practitioners, insolvency administrators and to SARS itself.

The article seeks to demonstrate that the answer to this conundrum lies in

a close analysis of the applicable and inter-related provisions of the Income

Tax Act 58 of 1962, the Companies Act 71 of 2008, read with Chapter 14 of

the Companies Act 61 of 1973, and the Insolvency Act 24 of 1936.

The relevant provisions of the Income Tax Act applicable to the insolvent

estate of a natural person which by law vests in his/her trustee on sequestra-

tion, are contained in section 25C and paragraph 83 of the Eighth Schedule

to the Act. In the case of a company (including a close corporation), the

insolvent estate continues to be a taxpayer on liquidation and remains liable

for tax, including CGT, the liquidator becoming the representative taxpayer

and being obliged to meet the requirements of the Income Tax Act on behalf

of the liquidated company.