Judgment summary
The plaintiffs, being the liquidators of Swifambo Rail Leasing (Pty) Ltd ("Swifambo"), brought an action seeking to set aside VAT payments totalling R235,311,026.00 made by Swifambo to SARS as dispositions not made for "value" under section 26(1) of the Insolvency Act 24 of 1936 [1].
The court separated the question of whether the VAT payments were made "for value" from the remaining issues in the litigation, in terms of rule 33(4) of the Uniform Rules of Court, by order dated 7 March 2025 [2].
The court held that Swifambo was under a lawful statutory obligation to account for and pay VAT at the time the payments were made, that each payment extinguished an existing statutory liability, and that this constituted "value" for purposes of section 26 of the Insolvency Act [41, 47]. The subsequent invalidation of the purchase agreement did not retrospectively extinguish VAT liability that had already arisen [47, 50]. The plaintiffs' action was dismissed with costs [51].
Background
The Passenger Rail Agency of South Africa ("PRASA") originally procured 70 dual electric/diesel locomotives from Swifambo at a purchase price of R3.5 billion, inclusive of VAT, pursuant to a purchase agreement concluded in March 2013 [3].
Swifambo supplied 13 locomotives to PRASA under that agreement and paid a total net VAT amount of R235,311,026.00 to SARS [3].
A separate High Court subsequently reviewed and set aside both the procurement decision and the purchase agreement on the basis of material irregularities, including corrupt conduct in the tender process [4]. Swifambo was placed in liquidation, and its liquidators brought the present action.
In the earlier review proceedings, Francis J held that Swifambo had no right to have been awarded the tender and could not benefit from an unlawful tender, and that any prejudice to Swifambo was immaterial compared to the prejudice to the public interest [9, 10, 11].
Core dispute
The separated issue before the court was whether the VAT payments made by Swifambo to SARS constituted dispositions made "for value" within the meaning of section 26(1) of the Insolvency Act [12, 16].
The plaintiffs argued that once the purchase agreement was declared void ab initio, no taxable supply ever existed in law, no VAT obligation could arise, and the payments were therefore made sine causa and without value, rendering them recoverable under section 26 [7].
SARS argued that Swifambo was statutorily obliged to account for and pay output VAT in respect of taxable supplies actually made, that each payment discharged a lawful statutory obligation and therefore constituted value, and that the retrospective invalidation of the purchase agreement did not extinguish VAT liability that had already arisen [5, 8].
In the alternative, the plaintiffs contended that if any VAT was legally payable, it could only have been payable on the value of the 13 locomotives actually delivered, being approximately R91 million, so that the balance of approximately R144 million (being R235 million less R91 million) represented an excess paid without value and was recoverable [6, 42, 44].
Court findings
The court held that the definition of "supply" in section 1 of the VAT Act encompasses all forms of supply, including those not pursuant to a valid contract, and that the enquiry is directed at factual conduct rather than at the ultimate validity of the underlying contract [32, 34].
It was common cause that Swifambo issued invoices to PRASA and delivered 13 locomotives pursuant to the purchase agreement before it was set aside. The court found that this constituted a supply of goods for purposes of the VAT Act [35].
The court held that Swifambo carried on an "enterprise" as defined in section 1 of the VAT Act, being an activity carried on continuously or regularly for consideration, through the procurement and supply of locomotives over an extended period funded by progress payments, and that the later invalidation of the contract did not exclude those activities from the ambit of the VAT Act [37, 38].
The court applied the principle, drawn from MP Finance Group CC (In Liquidation) v Commissioner for the South African Revenue Service 2007 JDR 0416 (SCA) and Commissioner for Inland Revenue v Insolvent Estate Botha 1990 (2) SA 548 (A), that an illegal contract is not without all legal consequences and can have fiscal consequences [39].
VAT liability arose at the time invoices were issued or payments were received under sections 7 and 9 of the VAT Act, not upon ultimate delivery of goods [40, 41]. Each VAT payment extinguished an existing statutory liability and therefore constituted value for purposes of section 26 of the Insolvency Act [41].
On the alternative argument, the court rejected the plaintiffs' performance-based approach and held that VAT is levied on consideration invoiced or received, not on physical delivery alone, and that progress or milestone payments are deemed supplies under the VAT Act. VAT liability arose on the full invoiced consideration. There was accordingly no "excess" payment made without value [45, 46, 48].
The court noted that to permit recovery would shift the financial consequences of an unlawful and corrupt procurement process onto the public fiscus, contrary to the public-interest considerations emphasised in the earlier review proceedings [49].
Outcome
The court declared that the VAT payments made by Swifambo were made for "value" within the context of and as contemplated in section 26 of the Insolvency Act [51(1)].
The plaintiffs' action was dismissed with costs, including the costs of two counsel, senior counsel at scale C and junior counsel at scale B [51(2)].
Major issues / areas of contention
- Whether VAT payments made by an insolvent company constitute dispositions made 'for value' within the meaning of section 26(1) of the Insolvency Act 24 of 1936.
- Whether the retrospective judicial invalidation of the underlying purchase agreement extinguished VAT liability that had already arisen at the time invoices were issued and payments received.
- Whether the factual delivery of 13 locomotives and the issuance of tax invoices by Swifambo to PRASA, notwithstanding the subsequent setting aside of the purchase agreement, constituted a 'supply' for purposes of section 7(1)(a) of the VAT Act 89 of 1991.
- Whether Swifambo was carrying on an 'enterprise' as defined in section 1 of the VAT Act, given that it was characterised by the plaintiffs as a shelf company engaged in a once-off and unlawful transaction.
- Whether VAT paid on progress or milestone invoices in excess of the value attributable to the 13 locomotives actually delivered constituted an 'excess' payment made without value and recoverable under section 26 of the Insolvency Act.
- Whether an illegal or subsequently invalidated contract can nonetheless give rise to enforceable fiscal consequences under the VAT Act.