A recently-delivered judgment from the high court in Uganda has made judicial history: the judge held that, under some circumstances, a company ‘dissolved’ as part of insolvency proceedings could be brought back to life, as it were, and the official dissolution set aside, in matters where it was in the public interest to do so. In this case, Uganda’s tax authorities claimed that the ‘dissolved’ company had been at the heart of a significant tax scam, and that insolvency proceedings were aimed at frustrating attempts to extract due tax from it.
Read judgment
The judge heading Uganda’s high court commercial division, Stephen Mubiru, has delivered a major decision that will give the Uganda Revenue Authority (URA) more power to help nail tax fraudsters.
Behind the decision lies a group of closely-related companies involved in what appears to be a major tax scam. When it became clear that the URA was investigating and had begun to close in, the entity began insolvency proceedings.
Though the URA brought court action to prevent the company from being dissolved, a dissolution certificate was issued before the case could be heard. The question then was whether the court would be willing to ‘defer’ dissolution, effectively bringing the company back to life until the URA’s investigations were complete.
The judge held that, while finality was a crucial consideration, there was another principle for the court to consider in such a case: public interest. He found that a company could be ‘revived’ after dissolution if a court was ‘convinced’ that it was in the best interests of the general welfare of the public for this to be done. But a decision to resurrect a dissolved company should only be made in exceptional circumstances, he said, and would have to be ‘dependent on very strong public interest grounds.’
Whistleblower tips off tax authorities
Four of the five companies investigated by the URA in this case were involved in the motor vehicle trade, while the fifth owned the property from which the businesses were run. A whistleblower tipped off the URA and the tax authority began investigating the five companies.
What was established? They shared the same tiny shareholder group, they carried on similar or even related business, and in addition to their handful of common shareholders, they also had common directors, employees and even the same address.
The URA also found that one of the companies, Crane Enterprises, was incorporated in Uganda, but had opened a branch in Dubai. Another of the companies, East African Motor Supplies (EAMS), had ordered a number of heavy-duty trucks and spare parts from a Russian-based company at a cost of $1.3m for sale to the security forces in Uganda.
But the Russian company supplied the trucks to Crane Enterprises in Dubai, instead of to EAMS, charging factory prices for the vehicles. EAMS, instead of buying the trucks from the Russian company, now bought them from Crane in Dubai at a mark-up. EAMS, in turn, then sold the same trucks to governments in various East African countries including Uganda and Rwanda.
Finally, the Dubai branch of Crane paid one of the shareholders what it termed ‘management fees’, but these significant fees were not declared to the URA.
Winding up resolution followed tax dispute
According to the URA, tax should have been declared and paid on the income earned by Crane in Dubai. But there had been no tax either declared or paid since 2002. During 2022, there was a year-long skirmish between the parties, the URA and Crane, over how much tax should have been paid, and, in 2023, there was a major shake-up in Crane.
First, the original shareholder and director passed his shares on to someone else and then in March 2023, Crane’s shareholders approved a resolution to wind up the company.
The URA tried to halt the company’s dissolution, but before its applications could be heard and decided by the courts, Crane was officially dissolved.
‘Improper transfer of profits to tax haven’
The question for the court now was this: could the dissolution be undone?
In his decision the judge wrote that it wasn’t uncommon for companies ‘associated with fraudulent activities to be wound up upon the unravelling of fraud.’ But because fraud was carried out secretly, its full extent was often not known for some time and by the time it was properly uncovered, the corporation responsible for the fraud ‘was insolvent or stripped of assets’.
He added that the dealings between EAMS and the Dubai branch were ‘in essence a profit split constituting an improper transfer of profits to a tax haven, to avoid or minimise taxation in Uganda where it has a substantial business presence. The scheme lacks economic substance and has no business purpose other than tax avoidance.’ And it was part of an even wider scheme for unlawfully avoiding tax payment at all.
‘The dead cannot be brought back to life’
What should the court do about the dissolution, already achieved by Crane? The liquidator argued that nothing could now be done: dissolution was the equivalent for a company of a person being declared dead. Once this had happened, ‘the dead could not be brought back to life’. But Mubiru had a different take on the question.
Quoting from decisions in other jurisdictions, the judge said that the need for certainty and finality about dissolved entities was not the only issue to consider and that other countries had been willing to ‘undo’ a company’s dissolution in exceptional circumstances involving allegations that the dissolution was part of a cover-up of fraud.
Just as the presumption of death in the case of humans could be rebutted if there was evidence to the contrary, so the presumption of dissolution of a company ‘ought to be rebutted’ if the court was satisfied that it would be ‘just’ to do so, Mubiru wrote.
‘Exceptional public interest grounds’
‘I reject … argument that a company deemed dissolved cannot be revived,’ Mubiru said. ‘Such a construction substantially emasculates the effectiveness of the power of court to deal with exceptional situations that emerge after dissolution, such as purported dissolutions vitiated by fraud’.
He added that the court’s power to defer dissolution should be exercised ‘exceptionally’ and in cases where the court was convinced that there were good commercial reasons for an order revoking the dissolution of a company. It should only happen when it would serve the ‘general welfare of the public, the promotion or good order and functioning of community and governmental affairs’.
In this case, he said there were indeed ‘exceptional public interest grounds’ to justify an order that the dissolution be revoked. ‘There is an obvious public interest in the pursuit of undoing a reasonably suspected unlawful tax avoidance scheme.’ It was important to preserve the ‘finality of dissolutions’ but the evidence in this case showed that finding in favour of finality ‘would result in extreme and irreparable prejudice’ to the URA, the sole creditor of the company.
He thus formally revoked the dissolution of Crane for six months, though he allowed for that period to be extended even further.
More than a thunderclap
Mubiru’s decision on dissolution has already been welcomed in Uganda. Among others, Ugandan members of the law firm ENS hailed it as more than a thunderclap, and as a finding that breaks new ground in Uganda. They predict that the judgment would embolden the URA and that it would now, guided by the decision, ‘go after’ similar cases.
In their view, it would also lead to increased information-sharing between countries to fight tax evasion, and they advised group companies, involved in trade with Uganda, to consider an ‘audit of their transfer pricing policies and practices.’