JURISDICTION -Effect of Bankruptcy on Appeals - Income Tax Assessments Made in 1988 And

JURISDICTION -effect of bankruptcy on appeals - income tax assessments made in 1988 and 1989 - Appellant made bankrupt in 1990 - in 1991 trustee in bankruptcy permitted Appellant to instruct accountants to deal with his tax affairs - appeals lodged in 1992 - in 1996 trustee in bankruptcy corresponded directly with the Inland Revenue and agreed Inland Revenue's claim - shortly thereafter a dividend of 3.6 pence in the £ paid by trustee to all unsecured creditors including Inland Revenue - whether under the law relating to bankruptcy the Appellant has the right to continue the appeals before the Special Commissioners - no - whether appeals settled by the agreement of the trustee in bankruptcy - yes - appeals dismissed - The Insolvency Act 1986; The Insolvency Rules 1986 SI 1986 No. 1925; TMA 1970 S54(1) and (5)

THE SPECIAL COMMISSIONERS

EDWARD AGOP AHAJOT

THE COUNT ARTSRUNIK

Appellant

- and -

KEVIN WALLER

(HM INSPECTOR OF TAXES)

Respondent

SPECIAL COMMISSIONER: DR NUALA BRICE

Sitting in public in London on 14 November 2003

Peter Ashford, of Messrs Cripps Harries Hall Solicitors, for the Appellant

Philip Jones of Counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2003

DECISION

The appeals

1. Mr Edward Agop Ahajot, the Count Artsrunik (the Appellant) originally appealed against eleven assessments to income tax and national insurance contributions. Appeals against the assessments for nine of these years were transferred to the Special Commissioners on 24 April 1995. Details of the nine transferred appeals are:

YearDateTaxNational

ofissuedinsurance

assessmentcontributions

1982/8331.12.86£47,231£453

1983/8431.12.86£46,274£516.60

1984/8531.12.86£69,557£570.15

1985/8631.12 86£114,252£606.69

1986/8717.11.87£113,505.80£653.31

1987/8817.11.87£88,965£677.25

1988/8909.11.88£88,965£699.93

1989/9016.08.89£88,745.40£746.55

1990/9118.10.90£89,932.20£803.25

2.The Appellant was made bankrupt in 1990 and in 1991 the trustee in bankruptcy permitted the Appellant to instruct accountants to deal with his tax affairs. In 1996 the trustee in bankruptcy corresponded directly with the Inland Revenue. On the basis of information supplied by the trustee about the net assets the Inland Revenue proposed to discharge the assessments for 1982/83 to 1987/88 and for 1990/91 and to limit its claim to the assessments for 1988/89 and 1989/90 with interest knowing that it would receive only a small proportion of its claim. This proposal was agreed in writing by the trustee who, on 22 August 1996, paid the Inland Revenue the sum of £6,642.95 as a first and final dividend.

3.The hearing on 14 November 2003 was arranged to hear a preliminary issue relating to the assessments for 1988/89 and 1989/90, namely, whether the Appellant had the right to continue these two appeals before the Special Commissioners.

The legislation

4.At the relevant time the legislation relating to bankruptcy was contained in the Insolvency Act 1986 (the 1986 Act) and the Insolvency Rules 1986 SI 1986 No. 1925 (the 1986 Rules). The relevant provisions are referred to later in this Decision. The legislation relating to the settling of tax appeals by agreement was contained in section 54 of the Taxes Management Act 1970 (the 1970 Act) the relevant parts of which provide:

"54 Settling of appeals by agreement

(1)Subject to the provisions of this section. where a person gives notice of appeal and, before the appeal is determined by the Commissioners, the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it as the case may be. …

(5)The references in this section to an agreement being come to with an appellant … include references to an agreement being come to with … a person acting on behalf of the appellant in relation to the appeal."

The issues

4.Having heard the arguments of the parties I identified the following questions for determination:

(1)whether, by operation of the law of bankruptcy, the Appellant no longer had any right to pursue his appeals before the Special Commissioners; or

(2)whether the trustee in bankruptcy had settled the appeals by agreement within the meaning of section 54.

The evidence

5.The Appellant produced a bundle of documents as attached to his statement of case lodged on 4 April 2003. The Respondent produced another bundle of documents.

The facts

6.From the evidence before me I find the following facts.

1986-1992 - the assessments and the proceedings before the General Commissioners

7.All the assessments under appeal were for income tax assessed under Cases I and III of Schedule D and national insurance contributions. The substantive issues in all the appeals were: first, whether the Appellant was resident in the United Kingdom in the respective years of assessment (as argued by the Inland Revenue) or whether the Appellant was resident in Nigeria in those years (as argued by the Appellant); secondly, whether insurance commissions had been earned in the United Kingdom during those years (as argued by the Inland Revenue) or in Nigeria (as argued by the Appellant); and, thirdly whether double taxation relief could be claimed.

8.Assessments on the Appellant for the six years 1980/81 to 1985/86 were made on 31 December 1986 and appeals were lodged on 7 January 1987. Assessments for the two years 1986/87 and 1987/88 were issued on 17 November 1987 and appeals were lodged on 2 December 1987. On 19 January 1989 all eight appeals were heard by the General Commissioners. The Appellant was not present or represented. The General Commissioners allowed the appeals for 1980/81 and 1981/82 but confirmed the assessments for the years 1982/83 to 1987/88.

9.On 16 July 1990 the Appellant's then representatives applied to the General Commissioners for the appeals for the years 1982/83 to 1987/88 to be re-opened. On 1 October 1990 the Clerk to the General Commissioners wrote to both parties to say that the application would be heard on 24 October 1990. However, the letter was not received by the Appellant's representatives until 8 October 1990 when a postponement of the hearing on 24 October was requested.

1990 -1996 - the bankruptcy

10.Meanwhile, on 2 October 1990, the Appellant was made bankrupt by order of the High Court. The petitioning creditor was the Inland Revenue and there were other supporting creditors. On 8 October 1990 Mr Raymond Hocking of the firm of Messrs Stoy Hayward was appointed trustee in bankruptcy.

11.On 26 March 1991 the Appellant's new advisers applied to the General Commissioners to see if they would re-open the appeals for the years 1982/83 to 1987/88.

12.On 23 April 1991 Messrs Stoy Hayward wrote to the Appellant's then advisers in the following way:

"I would advise that I have no objection to the above debtor instructing a firm of accountants to deal with his tax affairs on the basis that he will be responsible for all of their costs. I understand a hearing for 25 April with the General Commissioners is to be heard to re-open the tax assessments and scheduled for the years 1980/81 to 87/88 inclusive. I would advise that I have no objection for these appeals being re-opened bearing in mind the above comments."

13.On 25 April 1991 the General Commissioners decided to re-open the appeals for the years 1982/83 to 1987/88 with a hearing on a date to be fixed. I was not informed how the appeals then progressed until the transfer to the Special Commissioners on 24 April 1995.

14Meanwhile three further assessments had been made. An assessment for the year 1988/89 was made on 9 November 1988; an assessment for the year 1989/90 was made on 16 August 1989; and an assessment for the year 1990/91 was made on 18 October 1990. No notices of appeal were lodged until 23 April 1992 when the Appellant's advisers formally appealed against these assessments. The appeals were accepted by the Inland Revenue on 21 May 1992.

15.On 5 November 1993 the Appellant was discharged from bankruptcy. (Section 279(2)(b) of the 1986 Act provides that a bankrupt is discharged from bankruptcy three years after the bankruptcy order was made. Section 281(1) provides that the discharge releases the bankrupt from all the bankruptcy debts but has no effect on the functions of the trustee so far as they remain to be carried out and the discharge does not affect the right of any creditor to prove in the bankruptcy for any debt from which the bankrupt is released.)

1995-96 - the conclusion of the bankruptcy

16.On 28 March 1995 the firm of Messrs BDO Stoy Hayward wrote to the Inland Revenue to say that if, within twenty one days, a date were not set for the appeals to be heard, the Inland Revenue's claim (for £1,100,893.30) would be rejected in full and the balance distributed to the remaining creditors.

17.On 22 March 1996 Mr M J Cotton, of the Solicitor's Office of the Inland Revenue, wrote to Messrs BDO Stoy Hayward in a letter headed "without prejudice" in the following terms:

"On the basis of the information supplied to me orally (1) that the net assets that you have available for distribution are approximately £16,000 and (2) that the claims of other creditors amount to approximately £200,000, I have received instructions … to endeavour to settle the matter on the following basis:

(1)that the Revenue would agree to a discharge of the assessments for the years 1982/83 to 1987/88 inclusive and for the year 1990/91;

(2)that the Revenue's claims against the bankrupt's estate would be limited to the assessments for the years 1988/89 and 1989/90 and the interest for the year 1988/89 amounting to £185,226.55 …

(3)and that as a result of this compromise, the Revenue would end up with receiving by way of distribution an amount in the region of £8,000 or roughly half the net estate of £16,000."

18.On 1 April 1996 Mr Hocking of Messrs BDO Stoy Hayward wrote to the Inland Revenue in the following way:

"I confirm that I am in agreement with your claim of £185,226.55 and therefore look forward to receiving a proof of debt form in this amount."

19.On 4 July 1996 the Inland Revenue lodged a proof of debt form in the amount of £185,226.55

20.On 22 August 1996 Mr Hocking informed the creditors of the Appellant that the final general meeting of the creditors would be held on 26 September 1996. He sent a summary of his receipts and payments which showed receipts of £63,172.98, payments of expenses of £47,168.12, and unsecured creditors of £422.030. His letter declared a first and final dividend of 3.6 pence in the £ and he sent to the Inland Revenue a payable order for £6,642.95. He said that no further dividend would be paid as the funds realised had already been used or allocated for defraying expenses.

1995 - 2003 - the proceedings before the Special Commissioners

21.Meanwhile, on 24 April 1995 the appeals were transferred from the General Commissioners to the Special Commissioners with a list of the nine transferred appeals but with no further information. The appeals were first listed for hearing on 13-17 November 1995 but the hearing was postponed at the request of the Appellant because of his ill-health and because he needed time to instruct a new representative. The appeals were re-listed for hearing on 15-19 April 1996 which hearing was postponed at the request of the Appellant because of his ill-health. The appeals were listed again for hearing on 6 October 1997 which hearing commenced but was adjourned to enable the Appellant to seek further representation.

22.On 26 March 2001 the Special Commissioners gave notice to the parties that these proceedings would be facilitated by holding a preliminary hearing and a preliminary hearing was held on 27 January 2003 when the Special Commissioners considered an application of the Respondent that the appeals for the years 1982/83, 1983/84, 1984/85, 1985/86, 1986/87, 1987/88 and 1990/91 be allowed by consent and the assessments discharged on the basis that, if there were valid appeals for 1988/89 and 1989/90, they had been settled by the trustee in bankruptcy and could not now be re-opened. It was then directed that unless, within six weeks, the Appellant lodged a statement of case setting out, in respect of all the appeals, his full grounds of appeal, his outline arguments and the matters and facts upon which he intended to rely and, in respect of the appeals relating to the years 1988/89 and 1989/90, why he argued that there were still valid appeals and that they had not been settled by the trustee in bankruptcy, the proceedings would be determined on the basis applied for by the Respondent.

23On 4 April 2003 a statement of case was lodged on behalf of the Appellant and on 8 July 2003 the Inland Revenue applied for the hearing of this preliminary issue.

Reasons for decision

24.I consider separately each of the questions for determination..

Issue (1) - What is the effect of the bankruptcy legislation?

25.The first question is whether, by operation of the law of bankruptcy, the Appellant no longer has any right to pursue his appeals before the Special Commissioners.

26.There was a measure of agreement between the parties as to the general position under the bankruptcy law. However, the Appellant argued that the general position did not apply either because he had a personal interest in the outcome of the appeals because of the possibility of penalties or because of the authority given by the trustee to the Appellant on 23 April 1991. The Appellant also argued that a proof of debt could be re-opened and that the Special Commissioners should determine the amounts of the assessments after which an approach could be made to the Bankruptcy Court for the bankruptcy to be re-opened. I consider all these matters separately.

The general position

27.The parties agreed that, as there are no specific provisions either in the 1970 Act or in the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 SI 1811 about the effect of bankruptcy on the progress of an appeal it was necessary to consider the bankruptcy legislation (in the 1986 Act and the 1986 Rules) in order to establish the position.

28.Chapter IV of Part IX (sections 305 to 335) of the 1986 Act deals with administration by the trustee. Section 305(2) provides that it is the function of the trustee to get in, realise and distribute the bankrupt's estate using his own discretion. Section 306 provides that the bankrupt's estate vests in the trustee immediately on his appointment taking effect. The bankrupt's estate is defined in section 283 as all property belonging to or vested in the bankrupt at the commencement of the bankruptcy. Section 382(1) defines a bankruptcy debt as any debt or liability to which he was subject at the commencement of the bankruptcy or to which he might become subject after commencement of the bankruptcy by reason of any obligation incurred before the commencement of the bankruptcy. Section 436 defines "property" so as to include things in action, obligations and every description of interest arising out of or incidental to property

29.The effect of section 306, under which a bankrupt's estate vests in the trustee immediately upon his appointment, is that the bankrupt is divested of his interest in his property and of any liability for his debts. The trustee has sole responsibility for determining the debts outstanding and for accepting or challenging them. Accordingly, it is normally the trustee who should continue any existing proceedings or start new proceedings. Mr Jones (for the Inland Revenue) relied upon Heath v Tang [1993] 1 WLR 1421 at 1424-7.

30.In Heath v Tang the applicant had been adjudicated bankrupt and sought to appeal against a judgment for a liquidated sum on which the bankruptcy petition had been brought. The application was refused and the Court of Appeal held that no special considerations applied to the judgments on which the bankruptcy orders were founded to justify departing from the general principle that, on adjudication, a bankrupt was divested of an interest in his property and liability for his debts and that accordingly he did not have the locus standi to institute an appeal. At 1424E Hoffmann LJ said that the supervision of the insolvency administration by the bankruptcy judge protects the bankrupt from injustice which might otherwise be caused by his inability to bring proceedings outside the bankruptcy jurisdiction. At 1425G he confirmed the principle that a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in the trustee.

31.Applying those principles and the legislative provisions to the facts of this appeal I conclude that the Appellant's estate vested in the trustee in bankruptcy on the date of trustee's appointment, namely, on 8 October 1990. On that date the Appellant became no longer liable for his bankruptcy debts which included all nine assessments the subject of this appeal. Although the appeals against the open assessments (for the years 1982/83 to 1987/88) should have continued in the name of the trustee, and the appeals for the years 1988/89 to 1990/91 should have been commenced in the name of the trustee, nevertheless the trustee, on 23 April 1991, gave the Appellant authority to deal with his tax affairs so long as the Appellant was responsible for all his costs. For this reason it was accepted by the Inland Revenue that there were valid appeals for the years 1988/89 to 1990/91. However, under the principles in Heath v Tang the conduct of the appeals was undertaken on behalf of the trustee.

Does the Appellant have a personal interest in the appeals?

32.For the Appellant Mr Ashford argued that the general principle in Heath v Tang did not apply in this appeal because this was a case where the Appellant had a personal interest in the appeals. He argued that the Appellant was potentially subject to penalties or criminal sanctions from which it followed that he had a personal interest in the appeals. He relied upon Heath v Tang at 1424G for the principle that actions against the bankrupt personally which did not directly concern his estate could be maintained against the bankrupt himself and he was entitled to defend them. He argued that the penalties were not provable in the bankruptcy and so the effect of the discharge was not to release the Appellant from these contingent liabilities.

33.For the Inland Revenue Mr Jones accepted that Heath v Tang was authority for the view that a bankrupt could defend an appeal if it had an impact on him personally and did not directly concern his estate as vested in the trustee. However, he argued that any penalties, if arising from matters which occurred prior to the bankruptcy order, were provable debts in the bankruptcy and, as the Appellant had already been released from all provable debts on his discharge, it was not open to him to argue that the prospect of the imposition of penalties gave him a personal interest in the appeal. He relied upon In Re Hurren [1983] 1 WLR 183. In addition Mr Jones referred to Rule 12.3(2)(a) of the 1986 Rules which provided that a fine imposed for an offence was not provable in the bankruptcy. However, he pointed out that Rule 12.3(2) provided that "fine" had the meaning given by section 281(8) of the 1986 Act which in turn provided that it meant the same as in the Magistrates' Courts Act 1980. That defined a "fine" as including any pecuniary penalty or pecuniary forfeiture or pecuniary compensation payable under a conviction. From this he argued that a penalty under Part X of the Taxes Management Act 1970 was not a penalty imposed for an offence or under a conviction and so was provable in the bankruptcy.