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Thursday, February 20, 2020 / 01:52 PM / by
Banwo & Ighodalo / Header Image Credit: Banwo & Ighodalo
Introduction
The propriety of an
administrative notice issued by the Federal Inland Revenue Service ("FIRS"),
directing a bank to freeze an account of a customer allegedly in default of a
tax obligation, seems to have been judicially settled [1]. Whether or not such
an administrative notice constitutes a lien, which can operate to impede the
attachment of an 'encumbered' bank account in a garnishee proceeding, however
remains an open issue which we seek to analyze and answer in this article.
The National Industrial Court of Nigeria ("NICN" or "the Court"), in Olusegun Omotosho vs. Japaul Oil & Maritime Services Plc ("Omotosho") [2], recently held that an administrative notice issued by FIRS to a bank, ostensibly freezing the account of a party in a garnishee proceeding alleged to be in default of a tax obligation, cannot operate as aid or be elevated to the status of an order of court, and cannot therefore operate to frustrate an order of court or impede its efficacy.
In this article, we examine
the issues raised in the Omotosho case, and the ruling of the NICN vis-Ã -vis
relevant statutory provisions and judicial precedents.
The Omotosho Case
In the Omotosho matter, the
judgment creditor brought an application to attach funds in certain bank
accounts maintained by the judgement debtor, in satisfaction of a judgment
debt. The court issued a garnishee order nisi and ordered each relevant bank
to file an affidavit to show cause, why the order nisi should not be made
absolute. One of the banks disclosed in its affidavit that, although it
held funds in the judgment debtor's account, that the funds were not available
for the purpose of the garnishee proceedings; due to lien placed on the account
by the FIRS.
On his part, the judgement
creditor argued that the FIRS' directive, being an administrative notice, could
not impede or frustrate the order nisi being made absolute. The judgment
creditor further contended that the administrative notice of the FIRS could not
oust the jurisdiction of the court to decide the case before it.
The court agreed with the
judgement creditor and proceeded to make the order nisi absolute. The NICN
noted that an order of court is superior to an administrative notice or other
communication issued to a party in a proceeding before the court.
Commentary
Whilst the NICN decision
in Omotosho may raise concerns as to whether a
garnishee order nisi should constitute a carte blanche for a judgment creditor
to take funds that are otherwise encumbered; we believe that the proper issue
for consideration should be whether an administrative directive of the FIRS,
which directs a bank to freeze a taxpayer's bank account (without the backing
of a court order) could create a legally enforceable and or defensible lien,
recognizable by a court of law.
Ordinarily, a lien (whether
statutory or equitable) created over a bank account that is subject of a
garnishee proceeding, should constitute constructive notice of the interest of
a third party and therefore should be taken into consideration by a court of
law. However, the legal weight to be attached to such lien would be determined
by the validity of the process by which the lien was created.
Section 8(1)(g) of the FIRS
(Establishment) Act, 2007 (the "Act") empowers the FIRS to adopt any
measure to identify, trace, freeze, confiscate or seize proceeds derived
from tax fraud or evasion. Further, under section 31 of the
Act, the FIRS has power of substitution, whereby it may, by a written notice,
appoint a person having custody of a taxpayer's property (such as a bank) as an
agent for recovering "any tax payable" to the FIRS.
There may be a presumption
that emanates from a combined reading of sections 8(1)(g) and 31 of the Act,
that FIRS has a statutory right of lien over a bank account which belongs to a
defaulting taxpayer. Such presumption would however be rebuttable or may be
flawed, if due attention is paid to the fact that the operative words in both
sections are "tax fraud or evasion" and "any tax payable".
In other words, FIRS' right
of lien does not, in all cases, cover the entire fund in an encumbered
taxpayer's bank account; except such amount equivalent to the sum of tax that
has become final and conclusive. This clearly suggests that a court of
competent jurisdiction must have first tried and found the taxpayer guilty of
either tax fraud or evasion and the taxpayer's right of appeal must have been
fully exhausted.
Thus, we believe that the
powers of the FIRS to freeze or restrict a defaulting taxpayer's bank account,
is exercisable only in relation to an amount equivalent to a tax assessment,
which has been determined to be final and conclusive, and such power must be
exercised pursuant to a valid and subsisting order of court. This was the
substance of the decision in Ama Etuwewe, Esq. (Carrying on legal
practice under the name and style of Ama Etuwewe & Co.) v Federal Inland
Revenue Service & Guaranty Trust Bank Plc [3], considered in our
Tax Alert 09 on the proper exercise of the powers of the FIRS to freeze
defaulting taxpayers' accounts and appoint banks as tax collecting agents.
We opine that the powers
vested in the FIRS under sections 8 and 31 of its enabling Act is exercisable
subject to restrictions. Thus, the creation of a lien pursuant to the powers
conferred on the FIRS by virtue of the relevant provisions of its enabling
statute, without more, is defective and of no moment, as pronounced in the Ama
Etuwewe matter and held in the Omotosho case.
Further, an administrative notice of the FIRS, issued pursuant to the sections of its enabling statute, is subordinate to a court order, and only applicable in distraining funds held in a bank account in satisfaction of a tax obligation.
Footnote
[1] See our Tax Alert 09 on "Proper exercise of the powers of the FIRS to freeze defaulting taxpayers' accounts and appoint banks as tax collecting agents".
[2] Unreported ruling delivered on January 27, 2020, by Hon. Justice I. J.
Essien of the NICN, Lagos Division, in Suit No: NICN/LA/62M/2019
[3] Unreported judgment of the Federal High Court, Warri Division, delivered on
September 30, 2019 by Hon. Justice Emeka Nwite in Suit No. FHC/WR/CS/17/2019
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