The South African Revenue Service's role with respect to the liquidation of the Retail Apparel Group (RAG) has been the subject of intense debate during the past few weeks. In light of the inquiry called by the Master's Office under the Companies Act (s417), resuming on the 28th of October 2003, SARS considers it appropriate to brief the media and the public on our role in this matter.
SARS' most important objective is to improve tax morality in the country and collect all money due to the fiscus. We consider it our mandate to be uncompromising in our efforts to ensure that the fiscus does not lose any money in any liquidation process. If SARS has a valid claim, then it will pursue that claim through every legal avenue available. It is indeed true that SARS has more vigorously pursued the interest of the fiscus in liquidation cases in recent years. We make no apology for that.
It is therefore not surprising that, ever since SARS has begun to assert its rights as a creditor on behalf of government in the liquidation arena, we found that other creditors and historical role-players who have traditionally not been challenged, find SARS' presence uncomfortable.
A decision was made to liquidate RAP (Retail Apparel (Proprietary) Ltd). SARS was not made aware of this decision. On the day (27th May 2002) while the application for provisional liquidation was being made, Mr. Enver Motala made SARS aware that SARS might have a claim.
We looked into the affairs of the company and raised an assessment of R106m, which formed the basis on which we supported Mr. Motala's application to be a liquidator in the matter.
In the normal course of events, a creditor is not required to prove the validity of their claim when submitting a requisition in support for a particular liquidator. Subsequent to our support for Mr. Motala, we received queries from the already- appointed 4 liquidators asking us to justify our R106m claim. At this point in the insolvency proceedings no other creditor is expected to prove their claim. The other liquidators resisted the appointment of Mr. Motala by making representation to the Master indicating that SARS had no claim. We considered this to be unfair. This resistance, and the refusal of the Master to appoint Mr. Motala, led to SARS approaching the Minister of Justice in terms of Section 371 of the Companies Act to intervene.
This intervention has now been tested in the Courts.
It is often perceived in the liquidations industry that, in spite of the fact that a liquidator is appointed to serve the interests of all creditors, the reality is that liquidators often place the interests of creditors whose support assisted them in getting appointed, above other creditors. It is for this reason that we as SARS have a panel of liquidators as well as a policy that governs their support.
We hold no brief for Mr. Motala's conduct in this matter.
It must be stated plainly that the RAG case has proven to be one in which the traditional roleplayers in liquidations have had to test their respective strengths and interests in order to defend their claims. It is no secret that the banks resisted SARS' entry into this matter initially. It is also no secret that there remain a number of unresolved issues on the role of the banks in respect of liquidations such as their control/stake in liquidators, and the competing interests between the banks and SARS. These matters have been the subject of discussion between the SARS and the Banking Council, as well as SARS and specific banks.
Subsequent to discussions with the Banking Council, two banks have sold off their interest in liquidations.
On the latest events, we must state our position on the following issues:
With regard to the process involved in the liquidation of an entity, the Master of the Court has an unfettered discretion on who he/she appoints as a liquidator. The Master usually uses the support that a particular liquidator has in value or number of creditors as a yardstick. It has never been our experience that the Master will make an appointment solely on the basis that the liquidator has SARS' support.
Three additional points must be made:
In the interests of transparency, a chronology of SARS' actions in the RAG case is made available as part of this information pack.
We must emphasise that SARS is always at a disadvantage in liquidation matters because of the lack of information available to SARS and the lack of transparency in these processes. SARS is reliant on periodic returns from taxpayers to identify emerging trends. Often the first sign that a taxpayer is experiencing financial difficulty is that it ceases to submit its returns. The inevitable result is that SARS must lodge its claims based on estimates and what information it has on hand or is able to glean at very short notice. This should be contrasted with the position of banks and other creditors who have a day to day engagement with their debtors. These creditors are in a position to identify signs of financial difficulty more quickly and may then use this advantage to restructure the nature of their claims to the detriment of other creditors. At worst they are in a position to stop trading with the debtor, an option that is simply not available to SARS.
Another difficulty that SARS encounters is in respect of "friendly" liquidations and sequestrations where applications are not served on SARS, as required by law. Certain liquidators and creditors also seem to be of the view that if a creditor's interests are to be sacrificed, SARS' interests are those that are best suited for this treatment. This demonstrates an attitude amongst other creditors that SARS has no place in this industry.
Over the past two years, SARS has been extremely concerned about liquidations and has engaged a number of parties including the liquidation industry, the banks and its own employees in an attempt to bring respectability to an industry that is otherwise noted to be cut throat, ruthless and unsavoury. Until then, SARS was not considered to be a role player of any note within the liquidations industry, but few outsiders raised any issues or concerns regarding potential losses to the fiscus.
It is important to mention that SARS currently has an approved liquidations policy in place. We also have an Insolvencies Practitioners Panel in place. This panel comprises mainly of individuals and companies whose expertise and experience coupled with affirmative action and employment equity merits their participation in the business. SARS will shortly be placing an advert asking persons to apply to be part of the SARS panel of approved liquidators. This panel will be reviewed on a continual basis by senior staff within SARS and liquidators who are found to be acting in an unacceptable manner will be removed. The persons selected will be used by SARS on a rotation basis. As can be seen SARS is doing all possible to stamp out any possible irregularities with the submission of requisitions to the Master.
Once again, in the interests of transparency, an analysis of the liquidators appointed by SARS from July 2002 to date is included in this information pack.
For the period July 2002 to the present, we have had and an interest in a total of about 770 cases with a value of R1.2 billion.
It should be noted that in this period SBT Trust (Mr. Motala) only received one nomination.
SARS fully supports the Section 417 inquiry. This inquiry is a tool in the insolvency arena which is designed to assist the liquidator/s in their search for an equitable resolution and distribution of an insolvent estate. It is also available in order to assist the Master to ensure that all creditors are protected. The RAG matter is no less different. At this inquiry, the aim of the five liquidators and the Master is to test the status of creditors' claims (in order to determine if they are secured, preferent or concurrent), as well as to look into the actual process leading up to the liquidation of the company. The questions that the inquiry seeks answers to, is whether or not this company was trading under insolvent circumstances. Further, there seems to be a concerted effort by the Master's Office to test the validity of the secured status of creditors. Should the secured status of creditors be changed, this will effectively mean that there will be more money available to the current list of concurrent creditors.
SARS commits our full co-operation with this procedure. To this end SARS legal representatives will be present at the inquiry representing our interests when it reconvenes later this month.
Lastly, if anyone has information of impropriety by SARS officials, they should come forward and provide it to us for further investigation. We will act against such transgressors as this is in line with our strong stance against corruption.
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE