Receiver Manager Mumias Sugar Company Limited V Commissioner Of Legal Service And Board Coordination- A Receiver Manager, Once Appointed Has A Legal Duty To Ensure Tax Compliance.

Background 

The Appellant, the Receiver Manager of Mumias Sugar Company Limited, was appointed on 20th September 2019 to oversee the affairs of the company, which had accumulated tax obligations including VAT, Income Tax, PAYE, and Excise Duty. Shortly after appointment, the Receiver wrote to the Kenya Revenue Authority (KRA) on 25th September 2019, requesting it to prove its debts against the company. 

In response, KRA communicated that the company had tax arrears amounting to KES 10.3 billion for the period 2013–2019. The Receiver acknowledged the claims and requested a detailed breakdown per tax head and per year. 

In August 2023, KRA issued a notice of intention to audit the company. Subsequently, in October 2023, the KRA issued an assessment totaling Kshs. 16.17 billion, of which Kshs. 13.85 billion related to the period before receivership, and Kshs. 2.32 billion related to the period under receivership. 

Appellant’s Submissions 

The Receiver Manager submitted that it could not confirm the tax liabilities incurred prior to the receivership due to the absence of a proper handover from the former management of Mumias Sugar Company.  

It further argued that it was unable to file tax returns for the post-receivership period because the iTax system required prior period compliance, which had not been fulfilled.  

The Receiver also contended that the lack of opening balances and records rendered it impossible to prepare accounts for the post-receivership period. 

The Receiver manager further argued that despite requesting a detailed breakdown of the KRA's claims by tax head and year to determine the preferential portion of the debt the KRA failed to provide the information.  

Additionally, the Receiver stated that it had submitted detailed computations showing that certain payments were not subject to withholding tax, yet the KRA still included them in the tax assessments. 

KRA’s Submissions  

The KRA argued that the company, even under the control of the Receiver Manager, continued to operate and generate income, thereby remaining subject to ongoing tax obligations. 

It noted that the Receiver failed to file tax returns as required and provided no evidence of seeking assistance from KRA to resolve the alleged system limitations.  

The KRA maintained that its assessments were grounded in observed variances between reported turnover and tax filings, including instances of non-deductible expenses, unaccounted salaries, double-claimed expenses, and failure to deduct or remit taxes such as PAYE and withholding tax. 

The Respondent emphasized that as a fiduciary standing in a position of trust, the Receiver Manager was obligated to comply with the law, act in good faith, and ensure tax compliance while running the company as a going concern. 

Tribunal’s Analysis and Determination 

The Tribunal observed that it was the Receiver Manager who, upon appointment, initiated communication with the KRA and invited the Authority to prove its claim. Therefore, the Receiver could not later disclaim responsibility or claim an inability to comment on pre-receivership tax obligations.  

The Tribunal found that while the Receiver claimed it was unable to file returns due to system limitations, it provided no evidence of having sought intervention or assistance from the KRA to resolve the issue.  

The Tribunal noted that under Section 56 of the Tax Procedures Act, the burden of proof lies with the taxpayer to demonstrate that an assessment is incorrect. In this case, the Receiver failed to present documentary evidence to challenge the KRA’s assessments, particularly in relation to withholding tax, PAYE, and excise duty.  

The Tribunal concluded by stating that without supporting documents, the Receiver’s contentions remained mere averments, the Tribunal found guidance in the case of Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] where it was held that:  

“A party can only discharge its burden upon adducing evidence. ...........Merely making pleadings is not enough.” 

How we can assist  

Our team of experienced tax consultants and legal experts can help you with tax advisory to ensure compliance, we review and advise on tax filings and audits to ensure compliance with tax laws.  We also assist with dispute resolution and representation if you find yourself facing issues with the KRA. Let us help you stay on top of your tax obligations and keep your business running smoothly. For any queries regarding the foregoing contact the contributors through taxteam@cmadvocates.com.