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ASPECTS OF SARS’ RIGHTS & DIRECTORS LIABILITIES IN

LIQUIDATIONS & BUSINESS RESCUES

Presented By:

Tax Indaba - 2016 - Danie Potgieter 2


Authority without knowlege & wisdomis like an axe with no sharp edge

it can only cause damage – Ann Bradstreet

TOPICS

HISTORIC - FIVE MINUTE OVERVIEW - DEVELOPMENT OF INSOLVENCY

INSOLVENCY IN SA – DISCRIMINATIN IN OUR STATUTES

STATUTORY OBLIGATIONS TO LIQUIDATE / RESCUE

SARS’ ROLE & RIGHTS IN THE INSOLVENCY PROCESS

THE “PECKING ORDER” OF CREDITORS – with specific reference to SARS

THE CONSEQUENCES OF LIQUIDATION - FYI only

VOIDABLE DISPOSITIONS

DIRECTORS’ CIVIL LIABILITY

DIRECTORS / REPRESENTATIVE TAXPAYERS’ CRIMINAL LIABILITY

AUDITORS, ACCOUNTANTS & TAX PRACTITIONERS’ LIABILITY

EXCLUDED FROM OBLIGATION TO REPORT & PRIVALEGE

THE STORY OF THE JEWISH BOY....


HISTORIC - FIVE MINUTE OVERVIEW DEVELOPMENT OF INSOLVENCY


In Judaism and the Torah, or Old Testament, every 7th year was a Sabbatical year wherein the write-off of all debts owed by members of Jews community was mandated, but not of “gentiles".

TIME OF THE OLD TESTAMENT ISLAM

In Islamic teaching, according to the Quran, an insolvent person was deemed to be allowed time to be able to pay out his debt.

Bankruptcy did not exist.

If a man could not pay, he, his wife, children & servants were forced into “ Debt Slavery”.

ANCIENT GREECE

– MEDIEVAL TIMES The Yessa of Genghis Khan mandated the death penalty for anyone who became bankrupt three times.

– RECORDED STATE BANKRUPTCIES Philip II of Spain had to declare four state bankruptcies in 1557, 1560, 1575 and 1596. Spain became the first sovereign nation in history to declare bankruptcy.

– ENGLAND The first recognised insolvency legislation - Statute of Bankrupts 1542;

Bankruptcy was a crime, the Act aimed to prevent "crafty debtors" escaping their debt.

The Joint Stock Companies Act 1844; Companies had "separate legal personality", the ability to sue and be sued. The Company could now be “wound up”.

The Limited Liabilities Act 1855 produced a further innovation; Shareholders' liability would be limited to the amount they had paid for their shares.

Bankruptcy Act 1869 was passed allowing all people, rather than just traders to file for bankruptcy.


HISTORIC - FIVE MINUTE OVERVIEW DEVELOPMENT OF INSOLVENCY - Continued

– ANCIENT ROME• The early Romans were a rough bunch.

• If you could not pay you debt, you became a slave of your creditor.

• He was allowed to kill you if he wanted to.

• If debtor had rich family - killed and his body was cut up in pieces. Each creditor received a body part.

• The method behind the madness is that the Romans believed that, should all your body parts not rest in one grave, your spirit would haunt your family.

• To prevent your family from being be haunted by this restless soul, they would buy the body parts from the creditors and bury it in one grave.

• Further developments in the Romans law;– They removed the debtor from the commercial environment by sequestrating him thus protecting

creditors from incurring further losses.

» The debtor’s assets were divided amongst creditors.

» During this time insolvency was deemed a criminal offence.


HISTORIC - FIVE MINUTE OVERVIEW DEVELOPMENT OF INSOLVENCY - Continued

HISTORIC - FIVE MINUTE OVERVIEW DEVELOPMENT OF INSOLVENCY


Only as recent as 1923 (in the matter ex parte Pretorius) it was decided that insolvency is indeed a civil matter and not a criminal offense.

SA Inherited a most of its insolvency principles from mostly the above.

SOUTH AFRICA

In modern time the main aim of Liquidation/sequestration is to prevent creditors from incurring further damages, and to bring about a situation where there is an orderly and fair way in which the estate is wound up.


PRIVATE SECTOR IN SOUTH AFRICAWHERE ARE WE NOW?

The problem - we are struggling to match our

Gross Spending habits with our Nett Income

Debt Status in SA – (debt-to-equity)

The AFS (Annual financial statistics) reports that the debt-to-equity ratio for the private sector as a whole has dropped since 2005.• There was R1,86 debt per R1 of equity in 2014

• Falling from R2,11 in 2005.

• The construction industry recorded the highest debt-to-equity ratio (3,3) in 2014.

Source Stats SA

SA - Debt-to-disposable-income ratio:• December 2015, the household debt-to-disposable-income ratio was 77,8% in the second

quarter of 2015.

• Peaked 1st quarter of 2008 - 88,8%

Source Stats SA


DEVELOPMENT OF INSOLVENCY WHERE ARE WE NOW? - Continued

Consumers are in Deep trouble– Many owe as much as three quarters (75%) of their monthly

pay to creditors;

– Struggling to pay home loans now - 56.86%;

– Struggling to pay off credit card debt - 58.83%;

– Only 23.42% of South Africans have any money left at the end of the month

– The other 76.58% are flat broke

» Source: Business Tech (online Magazine) in Aug 2015


CONSUMERS - SAWHERE ARE WE NOW? - Continued

Year Companies & Close

Corporations

Individuals & Partnerships Total

2008 3024 4763 7787

2009 3838 6078 9916

2010 3708 4101 7809

2011 3178 4196 7374

2012 2399 3745 6144

2013 2374 3189 5563

2014 2064 3100 5164


Number of Insolvencies - SA

DEVELOPMENT OF INSOLVENCY WHERE ARE WE NOW? - Continued

APPLICABLE LAW IN SOUTH AFRICA- FYI only

– Insolvency Act 1936– Old Companies Act 1973 (Chapter 14 – Sec 337 to 426)

S416 refers to Insolvency Act

– Close Corporations Act 1984 Sec 66(1) refers to Old Co’s Act

– New Companies Act (2008) Item 9 of Schedule 5 - Refers us to Old Co’s Act Rescue – Chapter 6 (Sec 128 tot S154)

– Court may order Liquidation – even if not prayed for– Court may order Rescue if;

Can be saved Better outcome than Liquidation

– Pension Funds, Banks, Statutory Organisations– We All look forward to a New Unified Bankruptcy Act!


SECTION 351 OF THE OLD CO’S ACT

Voluntary Liquidation by Creditors Sect 351 vs sec 350

Contentious - same with Rescue Resolution passed


INSOLVENCY IN SA DISCRIMINATION IN OUR STATUTES


Currently Limited Liability is bought by those who can afford it - We need a more modern approach

Co’s vs Individuals - Sec 347 vs Benefit for creditors

STATUTORY OBLIGATION TO LIQUIDATE / RESCUE

Sec 129(7) – If it is foreseeable that Co will not be able to pay its debts...


SARS’ ROLE & RIGHTS IN THE INSOLVENCY PROCESS

– May be Applicant

– May prove claims

– May Oppose – But for sec 347 of Old Co’s Act

– May hold Insolvency Enquiry

– Has all the rights that any other creditor has

– Voidable Dispositions; sect’s 26,29,30,31,34,46 & iusta causa test.

– SARS: Certain Taxes – Criminal & Civil Remedies


THE “PECKING ORDER” OF CREDITORS

– Liquidations – order of preference

Sect 89 costs – Admin – Cost of Liquidators expenses & fees Retention Liens – (Panel Beater & Building Sites) General Notarial Bonds Special Notarial Bonds Cession in Securitatem Debiti Secured by – bonds, Hp’s Hypotec of Landlors (Carried on or Chased on) – sec 85

Influenced by term of lease – Sec 47

Registered Special Notarial Bonds Act 57 of 1993 Can be over Movable & Immovables

Employees – Sec 98A SARS Concurrent Creditors


– Rescue Procedure

Pre- and Post Rescue Creditors

Critical Creditors

Secured Creditors – Bonds, Hp’s

SARS has no pre-Rescue preference – becomes concurrent with all unsecured creditors.


THE “PECKING ORDER” OF CREDITORS

THE CONSEQUENCES OF LIQUIDATIONFYI only – not to be discussed today

– All share transfers after commencement of the winding up process is void

– Disposition of any property after commencement of the winding up position is void.

– All civil proceedings against the company are suspended from date of the court order until appointment of a final liquidator

– Any attachment by creditors put enforce against the company / close corporation after the commencement of winding up is void

– The Directors cease to be in charge of the company. They are however (if it is a hostile liquidation application against the Company), entitled to oppose the granting of the final order after the provisional order has been made

– The property of the company falls under the custody of the Master who then hands it to the Liquidators once they are appointed

– Sections 417 and 418 of the Companies Act come into play. This empowers the Master, the Court or a Commissioner to summons all people who have knowledge of the company’s affairs to appear in a forum which is called an “Insolvency Enquiry”, where they can be interrogated.


DIRECTORS’S CIVIL LIABILITY

Fraud & Gross Negligence

Piercing or lifting of the corporate veil

Signed surety

SARS – Sect 154 & 155 of TAA

Liquidation Under Sect 351


DIRECTORS / REPRESENTATIVE TAXPAYER’S CRIMINAL LIABILITY

– Fraud & Gross Negligence

– Ponzi & Pyramid Schemes – 13 Acts

– Insolvency – by Statute Hidden assets or business books from Liquidator (Sec 132),

within 2 years before company’s liquidation, hidden liabilities or lied about your company’s assets when obtaining credit (Sec 133),

Failed to keep proper books and records of your business (Sec 134)

Fraudulently preferred creditors or incurred debt without reasonable expectation that the company can pay (Sec 135),

Neglected or refused to give information, assets or documents to liquidator on his request (Sec 136)

Failed to appear at a meeting convened to hold a enquiry about Company’s insolvent estate (section 139)


– VAT – Criminal Liability of Directors

Non payment of VAT is not theft - Judgment in Director of Public Prosecutions Western Cape v Parker

Sec 58(d) read with Sec 28(1)(b) of the VAT act 89 of 1991.

– Payroll Taxes – Criminal Liability of Directors

Chapter 1 (sec 2) of the IT Act 58 of 1962 [Read with Sec 30 of Part IV of 4th Schedule] and [sec 2 of the Part II of the 4th Schedule].


DIRECTORS / REPRESENTATIVE TAXPAYER’S CRIMINAL LIABILITY - Continued


IRBA, Law Society, SARIPA, Bar Council etc.

Sec 240A of TAA

Senior SARS official may lodge complaint to the Controlling Body if a member of such body omitted or acted as follows;

The Liquidator / BRP becomes Representative

Taxpayer

NB – IN RECUE & LIQUIDATIONS

AUDITORS, ACCOUNTANTS & TAX PRACTITIONERS’ LIABILITY

Sec 241 (1) of TAA

AUDITORS, ACCOUNTANTS & TAX PRACTITIONERS’ LIABILITY – Continued – FYI Only

........acted as follows;– Assisted Taxpayer in avoiding or unduly postponing any due obligation i.t.o. any Tax Act

– Caused the above by negligence

– Contravened the Controlling Body’s rules of code of conduct

– Acted without due diligence in preparation, submission or approval of documents

– Unreasonably delayed finalization of a matter

– Gave an opinion contrary to clear law

– Acted recklessly or in gross incompetence

– Knowingly gave false or misleading information

– Attempted to influence a SARS official by false accusation, duress, coercion, or by offering gratification


EXCLUDED FROM OBLIGATION TO REPORT & PRIVALEGE

• Attorneys & persons who advise the Taxpayer in anticipation of, or in the course of any litigation to which SARS is a party


THE STORY OF THE JEWISH BOY....



Thank you

012 663 [email protected]

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