Western Cape high court rules on purpose of preservation orders
13 November 2014
Posted by: Author: Beric Croome
Author: Beric Croome (Edward Nathan Sonnenbergs Inc.)
Section 163 of the
Tax Administration Act 28 of 2011 ("TAA”) provides that a senior SARS official
may authorise an ex parte application to the High Court for an order for the
preservation of any assets of a taxpayer, or other person prohibiting any
person, subject to the conditions and exceptions as specified in the
preservation order, from dealing in any manner with the assets to which the
The TAA provides
that a preservation order may be granted if required to secure the collection
of tax. The preservation order will apply in respect of realisable assets
seized by SARS in terms of section 163(2), which allows SARS to attach assets
in anticipation of being granted a preservation order by the court.
preservation order would typically be granted in respect of realisable assets
as may be specified in the order, and which may be held by the person against
whom the preservation order is being made. In terms of section 163(4) of the
TAA, the court to which an application is made may grant a provisional
preservation order having immediate effect. In addition, the court may grant a
rule nisi calling on the taxpayer or any other person, on a business day
mentioned in the rule, to appear and satisfy the court as to why the
preservation order should not be made final.
The TAA requires
that the preservation order must provide for notice to be given to the affected
taxpayer and the person from whom the assets are seized.
preservation order is granted in terms of section 163 of the TAA, the court may
make any ancillary orders regarding how the assets must be dealt with,
- authorising the seizure of all movable assets
- appointing a curator bonis in whom the assets of that taxpayer or another
person liable for tax vests
- realising the assets in satisfaction of the tax debt
- making provision as the court may think fit for reasonable living expenses of a
person against whom the preservation order is made, or
- any other order which the court considers
appropriate for the proper, fair and effective execution of the order.
The court which
grants the preservation order may vary or rescind that order if the
circumstances set out in section 163(9) of the TAA are complied with.Once a preservation
order has been granted, it remains in force pending the setting aside thereof
on appeal, or until the assets subject to the preservation order are no longer
required for purposes of the satisfaction of the tax debt.
The TAA provides
that assets seized under section 163 of the TAA must be dealt with in
accordance with the directions issued by the High Court which granted the
relevant preservation order.
Rogers J in
Commissioner for the South African Revenue Service v Tradex (Pty) Ltd (case number 12949/2013) as yet
unreported, was required to decide whether to confirm the provisional
preservation order granted in terms of section 163(4) of the TAA. In the Tradex
case the affected taxpayers had been delinquent in that tax returns had not
been submitted timeously to SARS, and it was accepted that amounts were due to
SARS for various tax debts payable to SARS.
In the case before
the court, the taxpayers repeated an offer of security made in negotiations
with SARS by way of continued operation of caveats in respect of various
immovable property which the taxpayer contended had a value of approximately
R7.5 million. In addition, Tradex offered SARS a cession in securitatem debiti of the company’s book
debts to the value of R10.5 million.
SARS, in its papers
filed with the court, continued to be dismissive of the value of the book debts
offered as security by the taxpayer.
SARS approached the
court for confirmation of the preservation order and that the taxpayers be
prohibited from disposing, dissipating of any assets and that SARS be authorised
to cause caveats to be registered over the taxpayer’s immovable properties. In
addition, SARS sought that a Mr Nel be appointed as the taxpayer’s curator
bonis with all of the taxpayer’s assets vesting in him. Rogers J expressed the
view that he did not think that the legislature intended that a preservation
order would routinely be available to SARS in every case of an actual or
anticipated tax liability. The court was of the view that there must be a
material risk that assets will be dissipated in order to justify the granting
of a final preservation order.
In the case at
hand, SARS did not satisfy the court that there was an appreciable risk of the
assets owned by the taxpayer being diminished. SARS did not in its replying and
supplementary replying papers allege that the taxpayer was causing the company
to dissipate its assets by distributing dividends or paying unreasonable
salaries or engaging in other suspicious transactions.
At paragraph 54
Rogers J stated as follows:
"One gains the
distinct impression that SARS launched the application not so much because a
preservation of the respondents’ assets was required but in order to bring the
matters to a head by placing legal pressure on the respondents.”
The court expressed
the view that the granting of a final preservation order would have the effect
of forcing the company to shut down and the granting of a preservation order in
such circumstances would not be just. The court made the point that the
taxpayers had offered SARS caveats over the immovable property and had those
been accepted by SARS, the litigation would have been resolved far earlier than
what was the case.
In the result the
court ordered that the caveats registered against the immovable properties
remain in place unless the taxpayer and SARS agree thereto in writing or the
court otherwise directs.
The court was
critical of the appointment of the curator bonis by way of the provisional
preservation order on the basis that that appointment increases the costs of
the taxpayer and was not strictly necessary to preserve the assets in question.
The court also made the point that section 163 of the TAA is a procedure for
preserving assets and is not a means of execution on the basis that once tax
has been assessed or is otherwise due and payable, the "pay now, argue later”
rule applies. In terms of the provisions of the TAA, SARS has various
provisions in terms of which it can institute proceedings to recover assessed
tax from a delinquent taxpayer.
The court ordered
SARS to pay a large portion of the taxpayer’s costs and dismissed SARS’
application to confirm the provisional preservation order.
The grant of a
preservation order is an intrusion into the life of a taxpayer and confirmation
of an interim preservation order will not be granted lightly by the courts,
based on the Tradex decision.
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This article first appeared on bericcroome.com.