25 Oct 2016

Final Score: Liquidator 1 - Commissioner, South African Revenue Sevices 0

by Judy von Klemperer, Partner, Durban,
Practice Area(s): Litigation | Tax |

Even the taxman must stand in line with other Creditors before the Liquidator.  This is according to the recent Supreme Court of Appeal (“SCA”) decision of CSARS v Van der Merwe NO.  This appellate case dealt with a dispute about whether or not certain provisions of the Customs and Excise Act created an embargo in favour of the Commissioner of the South African Revenue Services (“CSARS”), thus preventing a Liquidator from taking possession of goods in terms of the Insolvency Act until all duty and VAT is paid.  The SCA upheld the ruling of the KwaZulu-Natal Local Division and found that CSARS cannot stand in the way of the Liquidator, but rather, must wait his turn with the other creditors.

Facts of the case

The Liquidators of Pela Plant Proprietary Limited (“Pela Plant”) approached the courts for assistance when they were unable to take possession of certain equipment that was warehoused in a Customs Bonded Warehouse with the deferment of customs duty and VAT.  The equipment had been exported from South Africa to be utilised in the Democratic Republic of the Congo and subsequently returned to South Africa, thereby incurring customs duty and a VAT liability.  Pela Plant was then placed in liquidation.


The Liquidators contented that they were obliged, in terms of the Insolvency Act, to take possession of the property of the company in liquidation and sought an order that the equipment be released to them without having to first pay the duty and VAT.  CSARS opposed the application on the basis that, in terms of the Customs Act, he was precluded from releasing the equipment until the duty and VAT was paid in full.  The practical difficulties faced by the Liquidators were that they were not in a position to pay the VAT and duty until they sold the equipment, substantial storage costs were escalating daily and few, if any, purchasers would be willing to pay SARS before being able to take delivery of the equipment.

Court’s findings

Acting Judge Annandale, in the court a quo, pointed out that a situation could arise where the value of goods was less than the duties and VAT due, and thus no purchaser would be prepared to pay the duties and VAT and the goods would then end up in a State Warehouse being sold in terms of section 43 of the Customs Act.

The SCA held, as had the court a quo, that the “ranking of claims within the Insolvency Act does not countenance any creditor being granted a preference such as that contended for by SARS”.  Both courts found that the core principal of Insolvency Law is that all creditors are subject to it unless specifically provided otherwise in Statute.  It is with that in mind that the Insolvency Act directs a liquidator to take possession of all of the assets of the insolvent and ensure that every asset is properly realised and the proceeds distributed to the creditors in accordance with the preference determined in accordance with Insolvency Law.

The Customs Act does not provide for a situation where goods are brought into the country and attract customs duty and then insolvency intervenes prior to payment of the duty and VAT.  In that situation, the Insolvency Act applies.  If an embargo existed, the Customs Act would nullify the provisions of the Insolvency Act.  In this situation, the SCA has held that the Insolvency Act trumps the Customs Act.