The intersection between taxation and insolvency — The South African Revenue Service’s preference

• Author: Fritz, C.
• Pages: 799-817
• Citation: (2021) 138 SALJ 799
• DOI: https://doi.org/10.47348/SALJ/v138/i4a6
• Published date: 10 December 2021
• Date: 10 December 2021

799

THE INTERSECTION BETWEEN TAX ATION

AND INSOLVENCY — THE SOUTH AFRICAN

REVENUE SERVICE’S PREFERENCE

CARIKA FRITZ†

Associate Profe ssor of Law, University of the Witwa tersrand

THABO LEGWAILA‡

Professor of Law, Univers ity of Johannesburg

When a debto r’s estate is sequestrated or an in solvent company is wo und up,

insolvency and t axation intersect wheneve r the debtor or company has an outsta nding

tax debt. Thi s article consid ers whether the S outh African R evenue Ser vice should,

or could, be provided w ith a better standing in cases of in solvency. From a comparison

of the situations in S outh Africa, Ma uritius, Australia and t he United Kingdom, it

is clear that Sou th Africa’s approach of determ ining the order of distribution in r elation

to tax claims ba sed on the type of tax is in line with the a pproaches of Mauritius and

the United Kingdom. Ho wever, s 179 of the Tax Administration Act and ss 114

and 147(1) of the Customs and E xcise Act may have a n impact on a claim by th e

South Afric an Revenue Se rvice in the ev ent of insolvency. In this re spect, we argue

that, in instanc es where a taxpayer is sequestrat ed or wound up due to insolvency, the

Insolvency Ac t and the Companie s Act should take prec edence. Since th e Insolvency

Act provides for a c lear order of distrib ution both in respect o f the insolvent estate s of

natural persons a nd when an insolvent company is w ound up, tax legislation in South

Africa should n ot be used to deviate f rom this order of distr ibution.

Insolvency – w inding-up – tax ation – SARS – preference

I IN TRO DUC TIO N

Insolvency and t ax are two a reas of the law tha t are based la rgely on

legislat ion. Both apply to par ticula r circum stances, but are not mut uall y

exclusive. The Insolvency Ac t 24 of 1936 regulates t he sequestrat ion of a

natura l person’s estate for the benet of the d ebtor’s creditors,1 while t he

Companies Ac t 61 of 1973 (‘the Compan ies Act’), which incorpor ates

certai n provisions of the In solvency Act, regu lates the w inding -up of

insolvent compan ies.2

A natura l person’s estate can be sequest rated either by way of compulsor y

sequestrat ion — that is, the proce ss is initi ated by a creditor, or cred itors,

of the natur al person3, — or volunt ary sur render — that is , the debtor

† LLB LLM LLD (Pr etoria). https://www.orcid.org/0000-0002-3995-6646.

‡ BJuris (Venda) LLB LL M (Wits) LLM PG Dip Tax (UCT) LL D (Pretor ia).

1 R G Evan s & M L Haski ns ‘Friend ly sequestra tion and the adva ntage of

creditor s’ (1990) 2 SA Merc LJ 246 at 246.

2 See s 339 of the Compa nies Act of 1973. These prov isions of the 1973 Act

continue to apply d espite the int roduction of the Com panies Act 71 of 20 08.

See B de Clercq et a l Insolvent Estat es 8 ed (2014) 155.

3 Section 9 of the Insolve ncy Act.

https://doi.org/10.47348/SALJ/v138/i4a6

(2021) 138 SALJ 799

© Juta and Company (Pty) Ltd

800 (2021) 138 THE SOUT H AFRICAN LAW JOUR NAL

https://doi.org/10.47348/SALJ/v138/i4a6

or debtor’s agent applies to have the e state sur rendered voluntar ily.4

An insolvent compa ny is wound up by a court or by way of a spec ial

resolution adopted by the c reditors of the i nsolvent company.5

Once a court is sat ised that t he applicant has com plied with the

necessary requirements,6 t he court can grant a seque stration order or order

the windi ng-up.7 In instances where an i nsolvent company is wound up by

creditors , a special resolut ion must be regist ered with the Compa nies and

Intellect ual Proper ty Comm ission before the liqu idation proces s starts .

An impor tant consequence of a seque stration order is t hat the asset s

of the estate vest i n the Master of the H igh Court ( ‘the Master’). Once a

truste e is appointed, the a ssets thereupon vest i n the truste e.8 As regard s

the liquida tion of an insolvent compa ny, control of the company lies

with the Ma ster and, later, w ith the liquida tor once a liquidator h as been

appointed.9 The t rustee, in t he case of a natu ral person’s estate, or the

liquidator, i n the case of an in solvent company, then reali zes the relevant

assets and a llocates t he proceeds to the cre ditors accordi ng to the order of

distr ibution provided for in the Insolvency Act.10 It is in t he course of such

distr ibution, and when the seque strated pers on or liquidated comp any has

an outstand ing ta x debt, that ins olvency and tax ation interse ct.

General ly, it has been argued t hat revenue authorities s hould enjoy a

preference over other creditor s in insolvenc y proceeding s.11 One of the

argument s is that the payment of a t ax debt is benecial t o an entire countr y,

whereas other debt s benet only the spec ic creditor, and t hat, without

a preference, the burden of out standin g tax debts wou ld be transfer red to

other taxpayers.12 Another ar gument is th at a revenue authority doe s not

have the luxur y of screeni ng potentia l debtors before ext ending cred it to

4 Section 4 of the Insolve ncy Act.

5 Section 343(1) of the Compan ies Act. Alt hough s 343(2) als o refers to

voluntar y windi ng-up by member s, when consider ing the precond itions tha t

must be met for the spec ial resolut ion to take eect (s 350 (1) of the Companies

Act), it is clear tha t the voluntar y windi ng-up by member s relates on ly to the

windi ng-up of solvent compa nies. See De Clercq op cit note 2 in t his rega rd.

6 S ections 6, 10 and 12 of t he Insolvency Act ; ss 346 and 347 of the C om-

panies Act .

7 Where a voluntar y surrender of a n estate occ urs, the cour t will rst gr ant a

provisiona l order in terms of s 10 of the Insolven cy Act.

8 Sect ion 20 (1)(a) of the Insolvency Act.

9 Section 361(1) of the Companies Act.

10 Eberhard Ber telsmann et al Mar s: The Law of I nsolvency in South Africa 10 ed

(2019) 21. In terms of s 342(1) of the Compan ies Act, the order of d istri bution

con tained i n the Insolvency A ct also appl ies to a company th at has been

wound up.

11 I n terms of s 2 of t he Insolvency Act , ‘preference’ refers to ‘t he right to

payment of that c laim out of the assets of t he estate in preference to othe r claims’.

12 Barbara K D ay ‘Should the sovereig n be paid r st? A comparat ive

interna tional an alysis of t he priorit y for tax cla ims in ba nkruptc y’ (2000) 74

American Bankruptcy LJ 461 at 463.

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