MADZIYIRE v MAKWABARARA & ORS 2011 (1) ZLR 131 (H)

Flynote

Contract — illegality — contract entered into with aim of evading tax — such contract void ab initio — not enforceable in any way — par delictum rule — when may be relaxed — party not seeking such remedy — court not able to order restitution

Headnote

The applicant entered into an agreement with the first respondent, the sole shareholder in the second respondent, under which he would acquire all the shares in the second respondent and thereby acquire two pieces of land owned by the second respondent. Two written agreements were entered into. The first one reflected a price, a portion of which was to be paid as a deposit. The second, signed about two weeks later, showed the price as being half of that shown in the first contract, and without any requirement to pay a deposit. The applicant paid the higher price. The respondents alleged that the second agreement was drawn up in order to reduce the costs of transfer fees and stamp duties; the applicant alleged that the second agreement was intended to avoid problems with the first respondent's family about the purchase price. In any event, it was the second agreement that was submitted to the conveyancers; stamp duties, capital gains tax and conveyancing fees were calculated on the lesser sum. The applicant sought an order for specific performance.

Held, that the second agreement was a continuation of the first and if the purpose was to defeat the fiscus then the whole transaction was tainted by illegality. While under s 44 of the Stamp Duties Act [Chapter 23:09], an agreement made for the purpose of defeating the object of the Act is declared void, in this situation no stamp duty was payable. The properties were not being transferred to the applicant; he was acquiring the second respondent, which owned the properties. However, under the Capital Gains Tax Act [Chapter 23:01] the sale of shares is subject to capital gains tax on any amount remaining after the deduction of any amounts permitted by law. The first and second respondents were not persons entitled to exemptions in respect of such a sale. The conclusion of a second agreement on which the transfer or submission to the Revenue Authority for the assessment of capital gains would have resulted in a lesser sum being levied for payment. Although the Act does not specifically declare that agreements whose effect is to deprive the fiscus of tax are illegal, s 29 of the Act, as read with s 98 of the Income Tax Act [Chapter 23:06] makes it clear that such contracts fall foul of statutes providing for the collection of revenue. The fact that the Capital Gains Tax Act itself, unlike the Stamp Duties Act, does not declare that agreements for the avoidance of capital gains tax are void does not in itself detract from the illegal nature of the transaction. In any event, it is a universal principle of common law that any agreement whose aim is to deprive the fiscus of revenue is illegal and therefore void ab initio and incapable of being enforced.

Held, further, that the second agreement being a continuation of the first agreement, in that the first reflected the real contract between the parties and the second being intended to facilitate the underpayment by either one or both of parties of stamp duties and capital gains tax, the first agreement itself was an illegal agreement. An illegal agreement is void of legal effect. The effect of an agreement being illegal is that neither party can bring an action founded on the agreement. The fact that the applicant paid the full sum of the purchase price did not validate the agreement. Although in suitable cases the courts will relax the par delictum rule and order restitution to be made, the applicant had not sought that remedy. He only sought specific performance, which could not be granted.