Bankruptcy orders and the mutual assistance regime—Revenue and Customs Commissioners v Smart

06 Jul 2016 | 6 min read

The decision in Revenue and Customs Commissioners v Smart establishes the principles to be applied when a bankruptcy court is asked to go behind a judgment and when it is alleged that an offer to secure or compound has been unreasonably refused, as Katherine Hallet, barrister at Three Stone explains.

Original news

Revenue and Customs Commissioners v Smart [2016] Lexis Citation 78, [2016] All ER (D) 158 (Jun)

The Bankruptcy High Court made a bankruptcy order against the defendant on a petition of the Revenue and Customs Commissioners based on an unpaid county court judgment debt, entered as enforcement of a German tax debt under the EU mutual assistance regime. The court held that there had been no miscarriage of justice in the county court proceedings and no prospect of the defendant establishing that no debt was due. Further, the defendant’s offer to secure or compound for the judgment debt fell well outside the scope of any that it would be unreasonable for a hypothetical creditor in the position of the Revenue to refuse.

What practical lessons can those advising take away from this case?

When a Member State seeks the assistance of the UK in enforcing a foreign judgment, the UK courts cannot conduct a review under Directive 2010/24/EU concerning the mutual assistance for the recovery of claims relating to taxes, duties and other measures (MARD) of whether that enforcement is contrary to UK public policy. Thus, no questions can be raised before the UK courts as to the liability on the foreign claim.

What was the background to the hearing?

HMRC had issued a bankruptcy petition against Mr Smart, seeking to enforce a judgment of the Taunton County Court which was itself based on a tax liability due pursuant to an order of the German court. In order to enforce its judgment, the German tax authority requested HMRC’s assistance pursuant to MARD, as implemented in the UK by Schedule 25 to the Finance Act 2011 (FA 2011).

What were the legal issues the chief registrar had to decide?

The chief registrar had to decide whether to make a bankruptcy order against Mr Smart.

Mr Smart raised two arguments:

  • first, he said that the hearing in the German court was unfair and/or that HMRC had not conducted itself properly when obtaining judgment on the German judgment in the Taunton County Court (‘the fairness issue’)
  • second, Mr Smart argued that the petition should be dismissed on the basis that he had made an offer which had been unreasonably refused by HMRC (‘the offer to secure or compound’)

What did the chief registrar decide, and why?

The chief registrar reviewed the mutual assistance regime. Its effect was that the courts of the EU Member State in which the tax authority with the substantive tax claim to be enforced under MARD have exclusive jurisdiction to determine any disputes about the validity of the claim. Exceptionally, for public policy reasons, the bodies of the Member State in which the requested authority (here, HMRC) is situated may be authorised to review whether enforcement should be permitted. However, the UK Parliament had decided not to authorise the UK courts to conduct any such review under the mutual assistance regime. In any event, on the facts, no such public policy consideration arose.

After considering the fairness issue, the chief registrar concluded that there was no prospect of Mr Smart establishing that no debt was due. He restated the usual rule that it is only in exceptional circumstances that a bankruptcy court may go behind a judgment (see Dawodu v American Express Bank [2001] BPIR 983, [2001] All ER (D) 251 (Jan) at para [990]). Here, there was no allegation of collusion or fraud. That left miscarriage of justice.

Mr Smart had suggested two miscarriages of justice:

  • first, he said that he had been informed by HMRC in the Taunton County Court that it would only seek a charge on his home and it would not be enforce prior to the deaths of him and his wife. The chief registrar was sceptical that that had been said. However, even if it were true, it did not assist Mr Smart. The Taunton County Court judgment would not be set aside because FA 2011 prevented questions being raised in the UK as to liability on the foreign claim and—even if this court could raise such questions—the underlying (ultimately, agreed) claim in the German court would still remain, to which the county court judgment simply gave effect
  • second, Mr Smart alleged that there had been miscarriages of justice in the German proceedings because he was refused a translator and legal representation, and the judge bullied him into agreeing to pay a lower sum by threatening him with judgment in a higher sum. The chief registrar was ‘unimpressed’ with the first point and the second was a ‘bad’ one. There was no explanation for the translator point and Mr Smart had been assisted by a German speaker. If Mr Smart had been bullied, his remedy was to appeal, which he had not done.

The chief registrar also rejected Mr Smart’s case on the offer to secure or compound. Having set out section 271(3) of the Insolvency Act 1986 and summarised the effect of Revenue and Customs Comrs v Garwood [2012] BPIR 575, he concluded that an offer of, among other things, a charge over Mr Smart’s home not to be enforced until both he and his wife had died was not unreasonably refused. The offer entailed an unreasonable and open-ended delay in realising Mr Smart’s principal asset.

To what extent is the judgment helpful in clarifying the law in this area?

The case confirms the principles to be applied when a bankruptcy court is asked to go behind a judgment and when it is alleged that an offer to secure or compound has been unreasonably refused.

More interestingly, the judgment reviews the mutual assistance regime and establishes that the principle that, exceptionally, for public policy reasons, the bodies of a Member State in which a requested authority is situated may be authorised to review whether enforcement should be permitted applies to MARD, just as it applied to its predecessor. Thus, the possibility exists that a Member State may authorise its courts to review whether enforcement of a foreign claim under MARD is contrary to the public policy of that Member State. However, the UK Parliament has not authorised the UK courts to conduct such a review.

Katherine Hallett is a barrister at Three Stone, specialising in insolvency, property and commercial litigation, including advisory work. She is regularly instructed in claims which raise complicated issues in insolvency proceedings.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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