This case considered the costs implications arising from the annulment, pursuant to section 282(1)(a) Insolvency Act 1986 (the Act), of a bankruptcy order made on the petition of HMRC on the basis that the order ought not to have been made.
A taxpayer was made bankrupt at a hearing in her absence in January 2021 on a petition presented by HMRC in the sum of £115,862.23. This sum related almost entirely of amounts HMRC claimed were due from the taxpayer as an employer and partner in a medical practice, with the remaining £2,064.65 claimed in respect of late filing penalties and interest on the basis that the taxpayer purportedly earned more than £50,000 and was liable to file self-assessment returns. The taxpayer was, however, a PAYE employee (whose role including dealing with PAYE), who earned less than £50,000 per annum and who was not under an obligation to file self-assessment returns.
In April 2021 the taxpayer applied for an annulment pursuant to section 282(1)(a) of the Act and for an order pursuant to rule 10.135 of the Insolvency Rules 2016 for a stay of an appointment of any trustee in bankruptcy other than the official receiver pending the outcome of the annulment application.
In July 2021 the taxpayer sent a letter to the self-assessment, debt management, and insolvency claims handling units at HMRC with documents in support of an appeal of the sums claimed in the petition. In response, HMRC stated wrongly that only the First-tier Tribunal (Tax Chamber) (FTT) could consider the appeal. In March 2022 the appeal was returned by the FTT. HMRC also failed to provide the demands and assessments on which the petition debt was based, despite the taxpayer’s repeated requests.
In December 2021 joint trustees in bankruptcy were appointed following a meeting of creditors.
It was not until July 2022, and despite numerous enquiries from the taxpayer, that HMRC responded to the appeal – and only in relation to the late filing charges. HMRC did not respond at all in relation to the bulk of the petition debt.
On 22 March 2023, the court annulled the bankruptcy order pursuant to section 282(1)(a), dismissed the petition and gave directions, including on who should bear the costs of the petition, the annulment application and the bankruptcy.
HMRC argued that in the absence of an assessment, the court should proceed on the basis that the petition debt was ‘due’ to HMRC at all material times up to an including the making of the bankruptcy order. HMRC sought to rely on section 25A of the Commissioners for Revenue and Customs Act 2005 (CRCA 2005) and a contention that written evidence of an HMRC witness stating that the petition debt was due from the taxpayer, would suffice for those purposes.
However, the court exercised its discretion and ordered that there be no order as to costs. In doing so, the court noted that the starting point is that rule 44.2(2) of the CPR applies and that a) the general rule is that the unsuccessful party pays; but b) the court may make a different order. CPR rule 44.2(4) also provides that the court will have regard to all the circumstances including the conduct of the parties.
The judge rejected HMRC’s argument that the witness statements adduced on HMRC’s behalf was a certificate under s25A of CRCA 2005. The judge noted, among other things, that neither of the witness statements on their face purported to be a certificate under CRCA 2005 and that, based on the witness’ testimony, it was clear that the witness had no knowledge of how the alleged debt had been calculated and had undertaken no investigations about it. In any event, the judge held that witness statements could not create a liability where none existed.
The court therefore found that HMRC had no lawful basis for demanding the sums making up the petition debt and therefore the statutory demand was ultra vires and a nullity. Further, the judge did not accept HMRC’s arguments that the taxpayer should have done more earlier – this was the wrong starting point, the correct starting point was that HMRC had never put forward a legitimate or persuasive basis for ever concluding that the taxpayer was liable for the petition debt.
The court also had regard to factors relating to HMRC’s conduct, including HMRC’s failure to consider the taxpayer’s documents or appeal, failure to produce copies of any demands or assessments on which the petition debt was based and failure to issue revised assessments.
The petitioner could not be treated as the ‘successful party’ and therefore each party must bear their own costs.
The judge made an order for no order as for costs in respect of the annulment petition following submissions by the taxpayer that such an order should be made.
The judge noted that the normal rule was that the applicant as successful party would be paid her costs but in making an order for no order as to costs the judge took into account that the taxpayer could have adduced evidence in support of her annulment application by providing a copy of her employment contract at an earlier stage. The judge did note that HMRC had initially opposed the application and had not acted promptly enough in withdrawing its opposition to the application until receiving the taxpayer’s contract of employment.
It would have been interesting to have seen whether the applicant would have been awarded her costs of the annulment application, if she had made submissions in support of the same.
The judge ordered that HMRC should bear the Official Receiver’s (“OR“) costs of the bankruptcy. The judge noted that, had HMRC acted appropriately, the bankruptcy order would not have been made, the OR would not have taken office, and the OR’s costs would not have been incurred. HMRC therefore had to bear the costs of its errors.
HMRC was also ordered to pay the trustees’ costs and expenses of the bankruptcy.
The judge rejected HMRC’s submission that there was no evidence of any behaviour on the part of HMRC that would merit an order that it pay the trustees’ costs. In reaching this conclusion the judge considered the fact that HMRC should not have pursued the petition, that HMRC had prolonged the annulment proceedings by actively opposing them and failing to deal with the Applicant’s appeal, and that HMRC should have conceded the application sooner once it had received the taxpayer’s employment contract.
Besides going over the errors made by HMRC in their approach to the taxpayer in this matter, this case highlights the costs risks to creditors generally when commencing bankruptcy proceedings on the basis of a debt that has not be properly investigated. As such, knowledge of the Court’s approach in these circumstances may be helpful to Insolvency Practitioners who are often in a position of pursuing debts on behalf of a company or individual in respect of whom they are appointed but about which they do not have first-hand knowledge.