According to the court, holding that dissolution automatically extinguishes tax liabilities would create a perverse incentive structure.

“It would mean that companies could divest themselves of tax liabilities through dissolution and effectively obtain an extra-legal waiver of taxation,” the court in Mombasa stated.

The judge observed that the money claimed by KRA accrued while the company was in existence and, therefore, survived its dissolution.

“They remain due, payable and recoverable in accordance with the Tax Procedures Act and the Companies Act unless successfully challenged through the available legal avenues,” the court added in the June 26 ruling.

The decision closes what the court described as a potentially dangerous loophole that could have enabled companies to evade taxes through deregistration.

It affirms that striking a company off the register does not extinguish tax liabilities incurred during its existence, reinforcing the principle that corporate dissolution cannot be used to evade statutory tax obligations.

The KRA moved to the High Court in April last year seeking orders compelling the Registrar of Companies to restore Bristol Estate Limited to the roll, arguing that its removal was in breach of the Companies Act and tax laws.

KRA told the court that the firm was struck off the register through Gazette Notice 3876 of June 5, 2020, following an application for voluntary striking off under Section 897(4) of the Companies Act.

At the time of its dissolution, KRA said, the company owed Sh475.8 million, comprising unpaid income tax of Sh372.6 million and value added tax of Sh103.3 million, exclusive of accrued interest and penalties.

KRA added that Bristol Estate had incurred an additional Sh1 million penalty for failing to apply for deregistration of its tax obligations as required under Section 81 of the Tax Procedures Act.

“Despite the outstanding tax liabilities, the company neither served KRA with the application for voluntary striking off as required under Section 900 of the Companies Act nor sought cancellation of its tax obligations and Personal Identification Number in accordance with the Tax Procedures Act and the Value Added Tax Act,” the authority said.

Maintaining that it remained a creditor of the company, KRA asked the court to restore Bristol Estate to the register to enable it to pursue the outstanding taxes.

The agency sued Bristol Estate Limited, Pietro Bongiovanni, Ernesta Sciarra and the Registrar of Companies.

Despite being served with court papers, none of the respondents entered an appearance, filed a response or opposed the application, prompting the court to determine the matter as unopposed.

The High Court found that KRA produced the company’s tax ledger showing outstanding tax liabilities of Sh475.8 million at the time of its dissolution, comprising income tax and VAT, together with accruing penalties and interest.

The judge held that a tax debt arises by operation of law once a taxable event occurs and the tax obligation crystallises, with non-payment giving rise to the right by the government to recover the amount.

“These owed taxes remain a legally binding debt until they have been challenged successfully. KRA has demonstrated sufficient reason for the grant of the orders sought to reinstate the company,” the court said.

The judge also found that the company’s striking off failed to comply with the mandatory provisions of Section 900 of the Companies Act, which requires a firm applying for voluntary dissolution to notify every creditor within seven days of making the application.

The judge observed that the use of the word “shall” in the law makes the requirement mandatory and is intended to protect creditors from suffering loss or prejudice without notice or an opportunity to be heard.

“The applicant was entitled to be notified of the intended dissolution and afforded an opportunity to object thereto and safeguard its interests,” the court said.