n Business Tax and Company Law Quarterly - Realisation of secured immovable property in the winding-up of insolvent estates - does the mortgagee's secured claim to proceeds trump SARS's claim for CGT on the disposal?

Volume 3, Issue 2
  • ISSN : 2219-1585


A creditor who provides loan funding will frequently take security for repayment of the debt in the form of a mortgage registered over the immovable property of the debtor. Should the debtor be liquidated (in the case of an insolvent company or close corporation) or sequestrated (in the case of an insolvent natural person), the secured property will be realised by the liquidator or trustee, as the case may be, and the proceeds, after the deduction of certain costs, will be distributed to the secured creditor who is the mortgagee, in preference to other creditors.

Since the introduction of capital gains tax ('CGT') such a disposal of the immovable property will often result in a capital gain, triggering liability for CGT to SARS by the insolvent estate for the amount thereof. What is the status of SARS's claim for CGT, and how does this affect the mortgagee's preferent right to receive the proceeds of realisation?
This article seeks to clarify these issues and to provide an answer, in the absence of judicial precedent directly in point, as to whether the mortgagee is entitled to the proceeds of CGT, or whether the CGT liability incurred in the course of winding-up must be settled by the liquidator or trustee payment of the proceeds to the mortgagee as secured creditor. This is an issue of substantial importance to financial institutions and other loan creditors, as well as to legal practitioners, insolvency administrators and to SARS itself.
The article seeks to demonstrate that the answer to this conundrum lies in a close analysis of the applicable and inter-related provisions of the Income Tax Act 58 of 1962, the Companies Act 71 of 2008, read with Chapter 14 of the Companies Act 61 of 1973, and the Insolvency Act 24 of 1936.
The relevant provisions of the Income Tax Act applicable to the insolvent estate of a natural person which by law vests in his/her trustee on sequestration, are contained in section 25C and paragraph 83 of the Eighth Schedule to the Act. In the case of a company (including a close corporation), the insolvent estate continues to be a taxpayer on liquidation and remains liable for tax, including CGT, the liquidator becoming the representative taxpayer and being obliged to meet the requirements of the Income Tax Act on behalf of the liquidated company.
Since 1 May 2011, when the 2008 Companies Act came into force, Chapter 14 of the 1973 Companies Act continues to apply with respect to the liquidation and winding-up of companies, despite the repeal of the 1973 Companies Act. The relevant provisions, and in particular section 342(1) of the 1973 Companies Act, require that the winding-up and the claims of creditors must be conducted as nearly as possible as is applicable in the case of an insolvent estate under the Insolvency Act. This means applying the same scheme of winding-up and distribution that is applicable when an insolvent individual is sequestrated. The order of priority of creditors is dealt with in sections 95-104 of the Insolvency Act, subject to the preferential payment of the costs relating to maintaining, conserving and realising any secured property, as provided for in section 89 of the Insolvency Act.
Section 95(1) affords preference to mortgagees in respect of the proceeds of any immovable property which is subject to a special mortgage, but only after deduction of the costs referred to in section 89. In order for CGT to be deductible from such proceeds, it must fall under the cost of 'maintaining, conserving and realising' the immovable property. The article endeavours to show, with reference to English and South African authority, that post-liquidation CGT for which the liquidator is liable to SARS is clearly not a cost as contemplated in section 89(1), but that, at best for SARS, it falls under the rubric of 'all other costs of administration and liquidation', as provided for in section 97(2)() of the Insolvency Act. Consequently, the conclusion is that the mortgagee is entitled to receive the proceeds from the sale of the secured property, without any deduction of CGT.

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