Ross & Anor v HM Revenue & Customs

In deciding whether a bankruptcy petition should be dismissed or adjourned, the court applies an objective test based on the response of a reasonable creditor in the position of the petitioning creditor and in light of the actual history. A creditor may consider defaults, broken promises, dishonoured cheques, continuing arrears, enforcement costs and the practical difficulties of realising offered security. The creditor need not act generously or prefer the debtor’s interests. A contingent, unquantified and unclaimed prospect of terminal loss relief does not constitute a present counterclaim, set-off or cross-demand, or create a genuine triable issue as to the petition debt. An adjournment requires credible evidence of a reasonable prospect of payment in full within a reasonable period.

HMRC presented bankruptcy petitions against two solicitors for unpaid partnership and personal tax liabilities. The Chief Registrar made bankruptcy orders after rejecting their arguments that HMRC had unreasonably refused security, that prospective terminal losses and error or mistake claims reduced or extinguished the debts, and that further time should be allowed.

On appeal, the appellants challenged the refusal of security, the treatment of prospective tax relief as a defence, and the Registrar’s refusal to adjourn the petitions. The appeal required the court to determine whether the petition debts were presently due and whether there was a credible prospect of payment in full within a reasonable period.

1. Appeals dismissed. The court granted permission to appeal on the security issue but rejected all grounds of appeal.
2. The test under section 271(3) of the Insolvency Act 1986 is objective. The question is whether a reasonable creditor in the position of the petitioning creditor, and in light of the actual history, could have refused the offer. There may be a range of reasonable responses.
3. A reasonable creditor may consider the debtors’ history of non-payment, broken promises, dishonoured cheques, continuing tax arrears, the time already allowed, and the practical burden and delay involved in realising a portfolio of properties. HMRC’s primary function was tax collection, not property management. Its refusal of the proposed security was within the reasonable range, notwithstanding the troubling evidence that a rigid policy against legal charges may have been applied without individual consideration.
4. Terminal loss relief under sections 89 to 91 of the Income Tax Act 2007 required properly prepared accounts, ascertainment of the losses, and a claim which had been made and accepted. Until then, the alleged losses were contingent and unquantified. They could reduce only relevant personal tax liabilities, not partnership PAYE or NIC liabilities or properly imposed penalties. They therefore did not constitute a counterclaim, set-off, cross-demand or genuine triable issue at the hearing date.
5. The discretion to adjourn after a petition debt is established should be exercised only where credible evidence shows a reasonable prospect of payment in full within a reasonable period. The Registrar had approached the discretion on a flawed basis by treating the general principle that tax should be paid when due as relevant, but the High Court reconsidered the matter and reached the same result. The history and the absence of credible evidence justified immediate bankruptcy orders.

• High Court (Chancery Division): Ross & Anor v HM Revenue & Customs, [2010] EWHC 13 (Ch). Appeals from the Chief Registrar’s bankruptcy orders were dismissed.
• Chief Registrar: Bankruptcy orders were made on 28 July 2009 after the objections based on security, prospective tax relief and adjournment were rejected. No citation for that decision is stated in the judgment.