THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTSOMS v DAVID GERALD VIVIAN FITZWILLIAM DE FREITAS

The court considered a bankruptcy petition presented by HM Revenue and Customs for unpaid self-assessment tax, interest and penalties totalling £130,812.26. The key legal issues were (i) whether the petition should be dismissed because of an ongoing complaints process; (ii) whether the debtor was able to pay his debts under s.271(3) Insolvency Act 1986; (iii) whether factual errors in the petition justified dismissal; and (iv) whether HMRC breached duties under the Equality Act 2010, including the public sector equality duty (s.149) and the duty to make reasonable adjustments (s.20).

The judge rejected the debtor’s grounds to dismiss the petition. The complaints process had been exhausted in successive stages and the debtor produced no substantive evidence that a further review would succeed or that any successful complaint would reduce the petition debt below the bankruptcy threshold. The court concluded that factual errors in the petition did not justify dismissal because the errors had been the subject of permission to amend and caused no material prejudice. The court found that HMRC had considered the debtor’s mental health and had complied with the public sector equality duty; having regard to HMRC’s guidance and the contemporaneous correspondence, HMRC had also not failed to make reasonable adjustments in circumstances where no further delay would likely avoid bankruptcy proceedings. Finally, the judge granted an adjournment rather than dismissal and gave the debtor a final opportunity to raise funds by equity release, extending the adjournment to 90 days.

Background and parties: HMRC presented a bankruptcy petition against Mr David de Freitas for unpaid self-assessment tax and associated sums across multiple tax years, in a total sum of £130,812.26. The debtor is a self-employed financial adviser and, for the purposes of these proceedings, was accepted to have a disability within the meaning of s.6(1) Equality Act 2010 arising from mental health issues. The petition followed an earlier petition dismissed in 2015 and subsequent complaints to HMRC, the Adjudicator and the Parliamentary and Health Service Ombudsman.

Nature of the application: The debtor sought dismissal of the petition on four principal grounds: (1) an ongoing complaints/ADR process; (2) ability to pay or offer to compound under s.271(3) Insolvency Act 1986; (3) defects/factual errors in the petition; and (4) that HMRC breached duties under the Equality Act 2010 (public sector equality duty and duty to make reasonable adjustments). Alternatively, the debtor sought an adjournment of 42 days (later extended to 90 days) to enable equity release to pay the debt.

Issues framed by the court:

• Whether the complaints process remained 'ongoing' so as to make pursuit of the petition an abuse of process.
• Whether the debtor demonstrated that he was able to pay all his debts under s.271(3) IA 1986 or that HMRC had unreasonably refused an offer to secure/compound.
• Whether factual errors in the petition justified dismissal as a matter of discretion.
• Whether HMRC breached the public sector equality duty (s.149 EA 2010) or the duty to make reasonable adjustments (s.20 EA 2010), such that the petition should be dismissed.
• If dismissal was not appropriate, whether an adjournment should be granted and for how long.

Court’s reasoning and conclusions: The court proceeded on the basis that the debtor retained a theoretical right to request review by the Ombudsman under a consent order but found there was no satisfactory evidence that such a review was likely to succeed or that a further review would reduce the petition debt below the bankruptcy level. On s.271(3) the judge noted the lack of authoritative guidance on whether the debtor must show cashflow or balance-sheet ability to pay; even if balance-sheet solvency were shown, HMRC would have limited comfort that payment would follow, so dismissal was not appropriate. Factual errors in the petition were corrected by permission to amend and did not cause material prejudice; dismissal to punish or deter was refused. On Equality Act issues the court analysed the distinction between the PSED (s.149) and the duty to make reasonable adjustments (s.20). Applying HMRC’s contemporaneous correspondence and internal guidance (including the Debt and Mental Health Evidence Form process), the judge concluded HMRC had given due consideration to the debtor’s mental health and had not failed to make reasonable adjustments in a way that would require dismissal of the petition.

Disposal: Rather than dismissing the petition, the court adjourned the hearing to permit the debtor a final opportunity to obtain an equity release to discharge the debt. An initial 42-day adjournment was granted on the hearing date; following submissions and without opposition from HMRC the court extended the adjournment to 90 days. The judge warned that a further adjournment would be unlikely.

This was a first instance hearing. The court refused to dismiss the bankruptcy petition and rejected each of the debtor’s four primary grounds of opposition (ongoing complaint/ADR, ability to pay as grounds for dismissal, factual errors in the petition, and breach of duties under the Equality Act 2010). The judge concluded that HMRC had considered the debtor’s disability and complied with the public sector equality duty and had not failed to make reasonable adjustments in circumstances that would warrant dismissal. Instead of dismissal the court adjourned the petition and granted the debtor a final opportunity to discharge the petition debt by equity release, extending the adjournment to 90 days. The rationale was that the debtor had not shown that further delay would secure a successful complaint or that dismissal was justified, but there was a reasonable prospect that the debt could be paid within a limited period.