On 16th July, 2024, Justice Stephen Mubiru, the Head of the Commercial Division at the High Court, made a significant ruling in Uganda Revenue Authority Vs Crane Autos Ltd (In Liquidation) & 5 Others HCMA No. 0372 of 2024 where he deferred the dissolution of a company suspected of attempting to evade taxes.
What was the background?
In 2018, a whistle-blower alerted the Uganda Revenue Authority (URA) to a possible tax evasion scheme involving Crane Autos Ltd. This prompted URA to investigate the tax affairs of five related companies. The investigation revealed that these companies operated as a single entity, sharing common shareholders, directors, employees, and even addresses. They were engaged in similar or related businesses.
Crane Autos Ltd, at the centre of the scheme, had established a branch in Dubai. From 2002 to 2020, this branch was purchasing Ural armoured trucks from M/s Ural Automobile Works JSC and selling them at a marked-up price to East African Motor Supplies Ltd-EAMS, a company under the same management and ownership.
In 2012, EAMS, the 4th Respondent ordered heavy-duty trucks and spare parts from a Russian supplier. The Dubai branch of Crane Autos acquired the trucks at factory price and on-sold to EAMS at a mark-up, with EAMS selling the trucks to government entities in various East African countries. The Dubai branch also paid management fees to one of the shareholders without declaring withholding tax.
URA concluded that Crane Autos, through the transactions of its branch, earned income and had an obligation to file tax returns and pay tax in Uganda. However, Crane Autos had not done so since 2002. URA advised the company to file its tax returns. The company eventually filed tax returns in June 2022, declaring a tax liability of UGX603-million but failed to pay the total amount of tax due. A review of the returns disclosed inconsistencies in the declarations. URA issued an additional assessment in September 2022, bringing the total tax liability to UGX 20-billion.
In the meantime, in May 2022, the directors and shareholders of EAMS divested themselves of their interests in the company in an attempt to disassociate EAMS from Crane Autos. This was construed by URA as one of the series of events undertaken by the shareholder to disassociate the 2nd, 4th and 5th respondents from the 1st Respondent in light of the 1st Respondent’s outstanding tax liability.
In March 2023, the shareholders of Crane Autos passed a special resolution to voluntarily wind up the company and appointed a liquidator. URA lodged a complaint with the Official Receiver and requested the winding-up process to be halted. It notified the Liquidator about Crane Autos’ affiliation with the other four entities, which had assets that could be applied to satisfy its outstanding tax liability. The Liquidator engaged the Police in investigating the respective companies. Subsequently, the Liquidator issued its final Liquidation Report, concluding that there was no reason to use the other four companies’ assets to settle Crane Auto’s tax liabilities.
URA filed an application before the High Court seeking the court defer the effective date of the dissolution of Crane Autos and that the corporate veils of all the Respondents be lifted.
However, Crane Autos obtained its certificate of dissolution before the applications could be heard. URA then applied under the provisions of the Insolvency Act and Civil Procedures Act that, the date of dissolution be deferred until the final determination of its applications on the basis that Crane Autos deliberately neglected to pay tax and opted to commence liquidation proceedings to frustrate the collection of its outstanding taxes and reinforce its tax evasion scheme, and the liquidation proceedings were not properly executed by the Liquidator.
What was the issue for determination?
The key issue for determination was whether the company’s dissolution could be deferred and its certificate of dissolution cancelled.
What was the court’s decision?
The court held that;
- It has the power to defer a company’s dissolution upon the application of the Liquidator or any other interested person.
- If the company has unresolved legal issues, its dissolution may be deferred, allowing it to maintain its corporate status.
- A deferral may also be granted to ensure a more effective, economical and timely liquidation that benefits its contributories and creditors.
- The dissolution of the company should be deferred to a specific date, which may be extended. Any further deferral of the dissolution should also be to a specific date. The deferral ought to be brought to an end and the company dissolved as soon as reasonably practicable.
- The guiding principle in the exercise of the discretion to defer the dissolution of an insolvent company is whether the its continued existence is necessary in order to effect some proper purpose.
- When a company is on the verge of insolvency, its directors have a duty to act in the best interests of the creditors, preserving company assets to allow for debt recovery, and ensuring the company’s affairs are orderly to avoid asset misuse to the prejudice of the creditors.
- The provisions of the Insolvency Act may be invoked to defer the dissolution of an insolvent company reasonably suspected to have engaged in tax fraud or unlawful tax avoidance.
- The principles of tax administration void any transaction entered into for the purpose of tax evasion.
- Provisions on voidable transactions are intended to protect and maximise the value of the assets of the company for the benefit of all interested parties and to support the pari passu principle of equal distribution of asset.
- For a transaction to be voidable, it must have occurred within specific time frames around the liquidation of the company ranging from six months.
- Court can pierce the corporate veil if it is shown that the individual director expressly directed the company’s misconduct such as diversion of funds.
- The Commissioner of URA is empowered, based on the tax payer’s return of income and on any other information available to make an assessment of the chargeable income of a taxpayer and the tax payable thereon for a year of income within seven years from the date the return was furnished.
- Courts have power to examine the substance of composite transaction schemes or transactions devised solely for the purpose of tax avoidance, devoid of economic substance.
- That there was an obvious public interest in the pursuit of undoing a reasonably suspected tax evasion scheme orchestrated by the company.
What are the key takeaways?
- Tax fraud may lead to the deferral of a company’s dissolution and courts have the power to defer dissolution of a company whose dissolution was intended to avoid meeting its tax obligations or liabilities.
- A company cannot simply use tax shelters to avoid taxation; there must be a legitimate business reason for doing so.
- Deferral proceedings must be initiated within three months of lodging the return.
- Any transactions intended for tax evasion are considered void.
- Tax evasion is illegal and serves as a valid reason for deferring company dissolution.
Author
DISCLAIMER: This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice. For any further information or advice relating to this article, please contact us.
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