In The Car Company Ltd (in Liquidation) v. The Mauritius Revenue Authority, the Commercial Division of the Supreme Court ruled that the amount of taxes due under the Value Added Tax Act and the Income Tax Act (value-added tax (“VAT”), pay-as-you-earn (“PAYE”) and tax deducted at source (“TDS”)), do not form part of the estate in liquidation and have to be paid to the Mauritius Revenue Authority (“MRA”) before any distribution of property is made by a liquidator. The Court’s decision may have serious implications in relation to all insolvency cases going forward.

Background

The case relates to a claim filed by the MRA in the liquidation of The Car Company Ltd (in Liquidation) for payment of outstanding VAT, PAYE, corporate tax, penalties and interest for late payment of monthly TDS. The claim was challenged by the liquidator on the grounds that the MRA was not entitled to payment as a privileged creditor, despite agreeing to being indebted to MRA in the amounts claimed. 
 
The liquidator contended that the MRA was not entitled to the payment claimed in priority and that there was a contradiction between the Insolvency Act and the provisions of the Value Added Tax Act and the Income Tax Act. Since the MRA had not inscribed its claim on a yearly basis in the present case, the liquidator claimed that the MRA should not rank as a preferential creditor under the Fourth Schedule of the Insolvency Act.
 
The MRA contended that the law imposes upon the liquidator an obligation to pay, out of the money received on behalf of the debtor, the claims in the order of priority as set out in the “Fourth Schedule” which concerns only the inscribed creditors. The MRA also contended that the law also takes out of the purview of “Fourth Schedule”, any amount due to the MRA (VAT, PAYE and TDS). According to the MRA, section 328(1A)(a) goes even further by expressly removing, from the sum total of the money recovered by the liquidator, any amount that is due by way of VAT, PAYE and TDS to the MRA which “shall not form part of the property of the debtor” and imposes a duty on the liquidator to set aside, in priority, any money received by him or her in order to pay to the MRA any amount due as VAT, PAYE and TDS “before payment of any preferential claim”. 
 
The Supreme Court’s decision

The Court ruled in favour of the MRA and found that the amount of taxes due under the Value Added Tax Act and the Income Tax Act (VAT, PAYE and TDS), do not form part of the estate in liquidation and have to be paid to the MRA before any distribution of property is made by the liquidator. 
 
Conclusion

The decision of the Court will undoubtedly have some serious consequences for secured creditors, not only in cases of liquidations, but also in cases of receiverships (section 328(1A) was replicated by the legislator in section 204(4) which deals with receiverships regarding TDS and VAT). By introducing the amendment to sections 328 and 204 of the Insolvency Act, the universal and standard priority ranking among creditors in cases of insolvency is circumvented as sums due to MRA for VAT, PAYE and TDS are simply removed from the ambit of rankings between creditors. 

The decision of the Court will also have implications for borrowers as the lenders are now at risk and will no doubt remove the risk by imposing personal guarantees, as was the case years back when the legislator introduced legislation circumventing the standard industry practice priority rankings. The effect of requesting personal guarantees to remove the risk on the security rankings was so devastating to the Mauritius economy, that the legislator had to back pedal in haste. The effect of placing the MRA outside the insolvency regime for PAYE, VAT and TDS may bring about the very same reaction from the lending community.