The ruling confirms that while liquidation processes may consolidate more than one company under section 20(9) of the Companies Act, this does not erase the tax liabilities of individual companies. For professional liquidators and corporate taxpayers alike, the judgment underscores that SARS’s powers to assess tax liabilities remain intact even where companies are collapsed into a single liquidation scheme.
The dispute ‘devil’ is in the details
This case arose from the amalgamation of a fraudulent investment scheme operated by Johan and Riaan Smit through multiple entities, which included –
- Johan A Smit and Associates (Pty) Ltd (JASA);
- QSG Consult International (Pty) Ltd (QSG-I); and
- Rialis Consultants (Pty) Ltd.
Investors in these entities were promised incredible returns, through complex cross-border arbitrage transactions. Stated differently, funds moved offshore and later channelled back to South Africa. When this particular scheme inevitably imploded, these companies were wound up and consolidated.
During 2019, the liquidators successfully applied under section 20(9) of the Companies Act for the companies to be treated as a single entity, the “QSG Investment Scheme,” to enable one consolidated liquidation process. Curiously, SARS was not cited as a respondent in that application.
In 2021, SARS issued income tax assessments against the individual entities in the QSG Investment Scheme, specifically for the 2013 to 2018 years of assessment. The liquidators challenged these assessments, arguing that they were invalid because of the earlier consolidation order.
The liquidator’s arguments
The liquidators argued that the 2019 order declaring the companies a ‘single entity’, had the effect of stripping them of their individual and separate legal personality. In their view, once the companies no longer had distinct legal personality, they could not attract any new rights, obligations, or liabilities, which included tax debts.
On this basis, SARS therefore had no authority to issue assessments against JASA and QSG-I after the order was granted, and any such assessments should have been directed solely at the consolidated “QSG Investment Scheme.”
Accordingly, they sought a declarator that the companies ceased to be juristic persons for tax purposes and asked the Court to review and set aside SARS’s tax assessments.
SARS’s arguments
SARS opposed the liquidator’s application by raising two preliminary objections before addressing the merits. First, it argued that under section 105 of the Tax Administration Act (“TAA”), tax disputes must be resolved through the objection and appeal process under the TAA, and through the Tax Court, unless a High Court directs otherwise.
SARS further contended that the liquidators were attempting to bypass the TAA framework, by disguising their challenge as a declaratory application. Second, SARS contended that the QSG Investment Scheme was not a ‘taxpayer’ under the TAA, and that the liquidators therefore lacked standing to challenge tax assessments issued against the individual separate companies.
On the merits, SARS submitted that the consolidation order did not extinguish the juristic existence of JASA and QSG-I but merely facilitated a single liquidation process. The tax liabilities themselves arose within the individual companies, and SARS was thus entitled to raise assessments against them. While SARS’s claims had to be proved in the liquidation of the consolidated scheme, with the underlying debts remaining tied to the original companies.
The High Court’s ruling
The High Court dismissed the liquidator’s application with costs, including the costs of two counsel. The High Court held that it had jurisdiction to interpret the liquidator’s order. However, the liquidators’ interpretation was found to be incorrect, given that section 20(9) of the Companies Act is a deeming provision that empowers the High Court to pierce the corporate veil, and consolidate liquidation, but it does not erase a company’s legal personality.
The companies’ tax assessments, and corresponding tax liabilities, therefore did not “evaporate” with the consolidation order, and SARS remained entitled to raise assessments against JASA and QSG-I. The Court made clear that the only practical effect of the order was that recovery of debts would take place through the consolidated liquidation of the QSG Investment Scheme, not that the individual debts ceased to exist. Granting the relief sought would have had the untenable effect of extinguishing the companies’ tax liabilities entirely, which was never the purpose of section 20(9) of the Companies Act.
Legal merits or litigation?
This case illustrates the complexity of the intersection between company law and tax law, particularly where liquidation and consolidation orders are involved. Merely relying on a professional liquidator is not sufficient to ensure a successful court application, but also enlisting the assistance of specialist tax attorneys as well is crucial.
While section 20(9) of the Companies Act provides a powerful remedy for consolidating companies in cases of fiscal abuse, it cannot be stretched to eliminate statutory obligations such as tax debts.
For liquidators, the ruling is a reminder that consolidation orders under the Companies Act do not provide a shield against SARS. For SARS, the decision reinforces its ability to protect the fiscus and enforce compliance, even in complex commercial and insolvency settings.
With SARS continuing to report a high litigation success rate, this judgment signals that attempts to sidestep the statutory tax dispute resolution process, or to rely on overly broad interpretations of corporate law remedies are unlikely to succeed.
Key takeaways
Consolidation under section 20(9) of the Companies Act may streamline liquidation, but it does not erase tax liabilities. Securing the expertise of seasoned tax attorneys, together with liquidators will ensure that tax compliance hurdles are successfully navigated. SARS remains entitled to issue tax assessments against collapsed entities, and liquidators (with support from expert tax practitioners) must plan for these debts in the winding-up process.
