Dispute Resolution analysis: In a case where a bankruptcy was annulled on the basis that the alleged tax liability was ill-founded and misconceived, HMRC has been ordered to bear the OR's and the trustees' costs of the bankruptcy.
Re Adjei  EWHC 1553 (Ch)
What are the practical implications of this case?
This judgment considers the appropriate costs orders following a successful application to annul a bankruptcy. This is an unusual case in that HMRC (and its witness) was subject to considerable criticism in relation to its pursuit of what turned out to be an ill-founded alleged tax liability. The judgment considers in some detail the authorities of Redbridge LBC v Mustafa  EWHC 1105 (Ch) and Amin v London Borough of Redbridge  EWHC 3100 (Ch) and how liability for the various costs which have been incurred when such an error leads to the making of a bankruptcy order. In this case, HMRC was held liable for both the OR's and the subsequent trustees' costs and expenses.
What was the background?
On 5 February 2020, HMRC presented a bankruptcy petition against Debra Adjei alleging a tax debt in the sum of £115,862.23. All but £2,064.65 of that sum was tax levied on the premise that Ms Adjei was an employer and partner in a medical practice. That was an erroneous premise, however, and Ms Adjei was, in fact, an employee. The remaining £2,064.65 amounted to late filing penalties and interest. These were imposed on the basis that Ms Adjei earned more than £50,000 from 2013 onwards. However, she earned less than £50,000 per annum and so was under no obligation to file self-assessment returns. The bankruptcy was obtained by virtue of a largely or entirely erroneous premise. Ms Adjei successfully applied to annul her bankruptcy under section 282(1)(a) of the Insolvency Act 1986. There was insufficient time at the hearing of the annulment application to determine consequential issues of costs and a further hearing was required to determine those issues. This is the judgment in respect of that consequentials hearing. Four issues arose for determination. (1) Whether Ms Adjei or HMRC should bear the costs of the petition. (2) Whether Ms Adjei or HMRC should bear the costs of the annulment application. (3) Whether HMRC should bear the Official Receiver's costs of the bankruptcy. (4) Whether HMRC should pay the trustee's costs and expenses of the bankruptcy.
What did the court decide?
It was apparent that the Court had significant concerns about the evidence of the representative from HMRC in this application. It was described as being disingenuous in places and inaccurate in others. In respect of issue 1, the Court determined that there should be no order as to costs in respect of the petition. The petition was not well-founded and it is a fundamental principle that taxation cannot be levied without due authority. It was noted that Ms Adjei did not file a notice of opposition or evidence in response to the petition, however, she was not at the time legal represented. On issue 2, again it was determined that there should be no order as to costs. The Court took into account the conclusion that the petition was ill-founded. However, when the Applicant belatedly adduced evidence demonstrating that, HMRC withdrew its opposition to the annulment application. This order accorded with that which the Applicant had sought at the hearing. On issue 3, HMRC was ordered to pay the OR's costs of the bankruptcy. HMRC acted appropriately, the bankruptcy order would never had been made and these costs would not have been incurred. On issue 4, HMRC was ordered to pay the trustees' costs and expenses of the bankruptcy. Notwithstanding the guidance given in authorities such as Amin, the conduct of HMRC was sufficiently blameworthy that it was appropriate it should bear these costs.
- Court: High Court of Justice, Business and Property Courts of England and Wales, Insolvency and Companies List
- Judge: Insolvency and Companies Court Judge Barber
- Date of judgment: 29 June 2023
Article by Phillip Patterson – first published by LexisNexis.
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