Revenue and Customs v Cassells

This is an appeal of Her Majesty’s Revenue and Customs, brought with the permission of the judge, from the order of District Judge Henthorn, sitting in the Liverpool County Court and made on 8 September 2008. By that order he ordered that the bankruptcy order made against Mr Cassells on the petition of the Revenue and Customs on 1 May 2003 be rescinded under s.375 of the Insolvency Act 1986. Section 375(1) provides as follows:

“Every court having jurisdiction for the purposes of the Parts in this Group may review, rescind or vary any order made by it in the exercise of that jurisdiction.”

The parties before me accept that the exercise of that wide discretion is to be informed by the propositions formulated by the late Laddie J in Papanicola v. Humphreys [2005] 2AER 218 in paragraph 25, I quote:

“It seems to me that a number of propositions can be formulated in relation to s.375. Some of them are derived from the passages cited above:

(1)

The section gives the court a wide discretion to review vary or rescind any order made in the exercise of the bankruptcy jurisdiction.

(2)

The onus is on the applicant to demonstrate the existence of circumstances which justify exercise of the discretion in his favour.

(3)

Those circumstances must be exceptional.

(4)

The circumstances relied on must involve a material difference to what was before the court which made the original order. In other words there must be something new to justify the overturning of the original order.

(5)

There is no limit to the factors which may be taken into account. They can include, for example, changes which have occurred since the making of the original order and significant facts which, although in existence at the time of the original order, were not brought to the court’s attention at that time.

(6)

Where the new circumstances relied on consist of or include new evidence which could have been made available at the original hearing, that, and any explanation by the applicant given for the failure to produce it then or any lack of such explanation, are factors which can be taken into account in the exercise of the discretion.”

I would emphasise the point made in the second of the stated principles, which echoes the dictum of Millett LJ as he then was, in Fitch v. Official Receiver [1996] 1 WLR 242 at page 249, namely that the circumstance must be one which justifies the exercise of the statutory discretion in favour of the Applicant.

I turn then to the facts of the appeal. Between 1998 and 2003 the First Respondent, Mr Cassells worked in partnership with his wife in a business of data communications under the name of Data Solutions. Their work was undertaken as sub-contractors in the construction industry with the consequence that their fees were paid, after deduction of tax at 18 per cent in pursuance of the construction industry taxation scheme.

In 1998 to 2002 Mr Cassells underwent a number of serious personal problems, including the suicide of his brother, a serious flood in which his computer and other records were destroyed, the post-natal illness of his wife and the serious illnesses of both his parents. Whether as a consequence of those problems or not, he did not file any self-assessment tax returns for the years 1998/1999 to 2001 to 2002 inclusive, notwithstanding frequent reminders from the Inspector of Taxes to do so. Accordingly the Revenue and Customs obtained a number of assessments under s.28(c) of the Taxes Management Act 1970 for those years in respect of income tax and national insurance contributions amounting in the aggregate to some £4,533.64. Mr Cassells did not pay those liabilities and on 5 August 2002 the Revenue and Customs issued a statutory demand addressed to Mr Cassells requiring payment of the sum of £4,533 odd. It was served by post on 13 September 2002, but again Mr Cassells ignored it. Accordingly, on 7 January 2003 the Revenue and Customs issued a bankruptcy petition and presented it to the High Court in London based on the statutory demand to which I have referred.

Again, on 13 March 2003 they had to obtain an order for substituted service of the petition by post. It was duly served two weeks later and the bankruptcy order was made by the District Judge on 1 May 2003. That is the order that was rescinded by the District Judge by the order now under appeal.

On 20 June 2003 the Official Receiver produced a statement of assets and liabilities for the purpose of the meeting of creditors to be held shortly. It indicated in the aggregate creditors of some £13,562 of which £4,533 was claimed by the Revenue and Customs and assets of some £40,000, being based on Mr Cassells’ own valuation of the matrimonial home, which he held in equal shares with his wife, but subject to a substantial mortgage. If the valuation were sound and if the house were realised it would generate sufficient assets at that price to produce a surplus of £26,484. A meeting of creditors was duly held on 17 July 2003 and the Second Respondent was appointed the Trustee in Bankruptcy of Mr Cassells.

There followed further correspondence between the Revenue and Customs and Mr Cassells. On 18 December 2003 the Revenue indicated that, based on Mr Cassells return for 1998 to 1999 and further calculations for the years to 1999 to 2000, which he had recently provided, he had overpaid tax and was entitled to a refund of £6,113.17. Whether as a result of that letter or otherwise, on 17 February 2004 Mr Cassells rang the Revenue and indicated that he did not, in his opinion, owe them anything and would be applying for an order to annul his bankruptcy.

On 14 July 2004 the Second Respondent, the Trustee in Bankruptcy, made a report to the court in support of an application to suspend the automatic discharge of Mr Cassells, because of his non-cooperation with the Trustee. In his report he set out in detail the failure of Mr Cassells to cooperate with him as his Trustee. In addition, he described how on many occasions he advised Mr Cassells that any annulment application would need to be supported by evidence of funds with which to pay all his creditors and the costs of the Trustee. By 20 August 2004, all outstanding tax returns had been submitted by Mr Cassells to the Revenue and Customs. On 16 September 2004 the Revenue calculated Mr Cassells’ tax liability to be £3,890 odd and so informed him; we now know it should have been calculated as nil.

The application for the suspension of Mr Cassells’ discharge resulted, on 7 December 2004, in an order suspending his discharge indefinitely. On 23 August 2005 the Revenue and Customs, wrongly, as they now accept, advised Mr Cassells that he could only obtain credit for the sub-contractor tax deductions by making a separate claim for them and thereafter setting them off against his liability for tax under the assessments.

On 30 January 2007 the Trustee in Bankruptcy applied for an order for the sale of the matrimonial home of Mr Cassells and his wife at 4 St Brendon’s Close, Huyton, which was in their joint names. That prompted Mr Cassells to write to his Member of Parliament. On 22 October 2007, Mr Cassells’ Member of Parliament wrote to the Revenue and Customs asking for an investigation of Mr Cassells’ case. The order for sale sought by the application to which I earlier referred was made by District Judge Fitzgerald on 6 November 2007 and a week later, on 14 November 2007, the Revenue and Customs, having reviewed Mr Cassells’ liability, accepted that he had been in credit to the tune of £10,019.35 and that that would extinguish their claim in the bankruptcy. They so informed Mr Cassells’ Member of Parliament. Two weeks later on 27 November Mr Cassells issued an Appellant’s notice by way of appeal upon the order for sale made by the District Judge. On 13 December 2007 Revenue and Customs told Mr Cassells that they had no claim in his estate in the light of their recalculation of his non-existent tax liability.

On 20 December 2007 Mr Cassells applied for an order to annul the bankruptcy order made on 1 May 2003 or alternatively to rescind it. By that time six other creditors had submitted proofs of debt in his bankruptcy aggregating in all in the sum of £11,648 odd, the Trustee having incurred further costs and expenses of £64,524 of which £52,617 had been incurred since 1 September 2004.

On 8 January 2008, His Honour Judge Hodge QC, stayed the order for sale of the matrimonial home of Mr Cassells and his wife pending the hearing of Mr Cassells’ annulment application, which had been issued two weeks before. Mr Cassells obtained legal aid. He put in an affidavit in support of his application for annulment and rescission and this was answered by a witness statement from Mr Bennett for the Revenue and Customs.

The matter came before District Judge Henthorn on 6 May 2008. The principal claim was that the District Judge should annul the bankruptcy order under s.282 of the Insolvency Act 1986. That section enables the court to annul a bankruptcy order on either of two grounds. They are and I quote from s.282(1):

“(a)

That on any grounds existing at the time the order was made the order ought not to have been made or;

(b)

That to the extent required by the rules the bankruptcy debts and the expenses of the bankruptcy had all, since the making of the order, been either paid or secured for or to the satisfaction of the court.”

Having heard argument the District Judge reserved his judgment and he circulated a draft to those representing the parties on 11 June 2008. He considered that the bankruptcy court could not go behind the assessments to tax regularly made on Mr Cassells under s.28(c) of the Taxes Management Act 1970 with the consequence that both the statutory demand and the bankruptcy petition were founded on valid debts. Accordingly, the court had no power to annul the bankruptcy order under s.282(1)(a). In the absence of payment of or security for the other debts, no application was made before him for annulment under s.282(1)(b) and the District Judge did not consider it. The District Judge correctly directed himself by reference to the terms in s.375 of the Insolvency Act and the judgment of Laddie J in Papanicola that an applicant for a rescission must show: “exceptional circumstances,” including a material change in circumstances arising after the making of the bankruptcy order. He considered that Mr Cassells’ personal difficulties, which he recognised would have been serious, did not amount to exceptional circumstances for the purposes of s.375. Similarly, he considered that the fact that had tax returns been promptly submitted by Mr Cassells it would have been seen that he did not owe anything for tax was not exceptional either.

He then proceeded on page 10 of his judgment, as subsequently handed down, in these terms:

“Does the Inland Revenue’s failure to notify Mr Cassells in September 2004 that there was no liability for tax amount to an exceptional circumstance. There is more strength in this argument. If the Inland Revenue had done what they ought to have done and notified the taxpayer in 2004 that he no longer owed any income tax then he would have been in a position if he wished to apply to the court at that stage to have the bankruptcy order annulled. At that stage the Applicant still owed £5,748.65 to his bankruptcy creditors and there were costs of £11,907.67. The bankruptcy would not have been annulled under s.282(1)(b) unless Mr Cassells was in a position to pay that amount. I cannot find, given his inertia up until 2004 that he would have made an application to annul. However, he was deprived of an opportunity to do so when the overall costs were not excessive. He is now faced with the expense of the bankruptcy totalling £64,524.78 including VAT and solicitors’ costs, but excluding any other disbursements and counsel’s fees. This is a huge increase and whilst the Inland Revenue can reasonably argue that Mr Cassells’ inertia from 1998 onwards brought about his bankruptcy and also, that he continued to fail to cooperate properly with the Trustee, thereafter I find that the main cause for the huge increase in costs since September 2004 was the failure of the Inland Revenue to notify Mr Cassells at that time what the true position was in relation to his liability to the Inland Revenue. That is depriving him of the opportunity to apply for annulment under s.282(1)(b) at that stage.”

The District Judge handed down his judgment on 8 September. He made no alterations to it, notwithstanding a letter from the solicitor for the Revenue pointing out a number of matters which they considered he had not dealt with and also having considered draft grounds of appeal which were put before him. In the light of his draft judgment he made the order for rescission against which this appeal is now brought. Thus the ground on which the District Judge made the order to rescind the bankruptcy was that the failure of Her Majesty’s Revenue and Customs in September 2004 to inform Mr Cassells that he was not liable for the tax deprived him of the opportunity to apply under s.282(1)(b) for an annulment of the bankruptcy order at a time when the overall costs were not excessive.

The appeal is brought with the permission of the District Judge and the Appellant’s notice was duly issued on 26 September 2008. Mr Cassells issued a Respondent’s notice on 16 October in which he invited me to conclude affirmatively that, had Mr Cassells been properly informed as he should have been in September 2004, he would have applied then for the annulment of the bankruptcy order.

The case of the Revenue and Customs on this appeal recognises that the appeal is against the exercise of the discretion by the District Judge. Accordingly the appellate court may only interfere on the conventional grounds of misdirection, error of law or plain mistake. It was submitted by counsel for the Revenue and Customs that an appellate court can also interfere if the judge attached too much or too little weight to individual material considerations. I shall refer to that point later.

The Revenue claim that this court can interfere with the order of the District Judge in this case, because the loss of an opportunity to seek annulment cannot be enough and is in any event wrong, because there is no evidence that, given the other creditors’ and the Trustee’s costs he could have done so in September 2004. In addition his failure to cooperate would be likely to have precluded an annulment order. They submit that the District Judge took no account of the fact that Mr Cassells’ did not adopt one or other or both of the alternative remedies open to him of challenging the Revenue’s debt under Insolvency Rule 6.105(2) or claiming for sub-contractor tax deductions as advised by the Revenue in their letter to Mr Cassells dated 23 August 2005. Counsel submits that the rescission of the bankruptcy order made on 1 May 2003 would prejudice the claims of other creditors in that they are likely now to be statute barred; a point which the District Judge failed to consider. She submits that the District Judge was wrong not even to consider whether the matters arising after the making of the bankruptcy order on 1 May 2003 would have enabled or precluded the making of an order for annulment if he had applied for one to be made.

Counsel has appeared for the Second Respondent, the Trustee in Bankruptcy. He stressed his neutrality in this dispute. He submits that the test for this court is the usual one on an appeal from the exercise of a discretion, namely misdirection, error of law or plain mistake. He submits that the District Judge should have taken account of the delay between the making of the order and the application to annul or to rescind, namely something over four years and seven months from 1 May 2003 to 20 December 2007.

He submits that the Revenue and Customs failure to notify Mr Cassells in September 2004 that no tax was due cannot be an exceptional circumstance for the purposes of s.375, because the petition and the order was based on a properly established debt under the Taxes Management Act and because of Mr Cassells’ persistent default, which the court should not condone. He submitted and observed that Mr Cassells complains that he made frequent protests to the Revenue and Customs and was denied the opportunity to seek an annulment, yet he took none of the steps open to him to establish that he was not liable for the amount of tax that the Revenue claimed. In those circumstances he submitted the opportunity the District Judge considered that Mr Cassells had lost is illusory.

He also provided helpful up-to-date information as to the position in the administration of Mr Cassells’ estate in bankruptcy. The total creditors amount now to £11,514, to which must be added interest at eight per cent since the making of a bankruptcy order amounting to a further £5,148 making total debts of £16,663. He informed me that the Trustee’s costs to-date on time costs are, £30,553 on legal costs of £37,062 and on disbursements are £8,500. Thus the total liabilities in the bankruptcy are, on his figures, £92,778. By contrast the assets remain Mr Cassells’ half interest in the equity of redemption of the matrimonial home, which remains at Mr Cassells’ own valuation of some £40,000, there having been no professional valuation either at the date of the bankruptcy or thereafter. On these figures there is therefore now a deficiency of £52,778.

Counsel for Mr Cassells submitted that the argument for the Revenue and Customs showed no ground for interfering with the decision of the District Judge given the generous ambit within which there may be disagreements as to the proper exercise of the discretion, which was referred to by Lord Fraser of Tullybelton in the well known case of G v. G [1985] 2 All ER 225 at page 229. She submitted that in particular, there is no ground for rejecting the loss of an opportunity as a sufficient ground for rescission and in particular, she submitted questions for causation simply do not arise on an application under s.375. That submission was directed to a counter submission which referred me to principles of causation in contract.

She went on to submit that the court should in any event uphold the order of the District Judge on a number of additional grounds. She submitted that the District Judge should have concluded that if Mr Cassells had been told of the true position in September 2004 he would have applied for annulment, because he had maintained throughout that he did not owe them anything. By then all relevant returns had been made. He had been left in the dark for over three years from September 2004 to November 2007, but when informed of the true position on 14 November 2007 immediately, that is to say on 20 December, applied for rescission of the order and annulment.

She observed that on any view the later accrual of costs and expenses, some £52,000 since 1 September 2004, is properly to be regarded as an exceptional circumstance. She accepted that the District Judge did not mention the failure of Mr Cassells either to challenge the proof of debt submitted by the Revenue and Customs, or to claim credit for the sub-contractor tax deductions, but submitted that neither made any difference to the outcome. She disputed that the District Judge had failed to take adequate account of the suspension of Mr Cassells’ discharge from bankruptcy as he had, in fact, mentioned it in two other contexts in his judgment. But she accepted that the District Judge had failed to mention the other creditors or the lapse of time, but suggested that neither of those omissions was sufficient ground to interfere with the decision of the District Judge.

This appeal is from the exercise by the District Judge of the very wide discretion afforded to him by the terms of s.375 of the Insolvency Act 1986. The grounds on which I am entitled to interfere with his decision are limited. They are set out in a number of places, but I will take the citation to which I was referred from AEI Rediffusion Music Limited v. Phonographic Performance Limited [1999] 2 1 WLR 1507 at page 1523 from the judgment of Lord Woolf M.R:

“It was correctly accepted by the judge that his right to interfere with the tribunal decision on costs was constrained in the same way that this court’s discretion is constrained in relation to decisions of judges at first instance. The conventional approach of this court is conveniently summarised by Stuart-Smith LJ in Roache v. News Group Newspapers Ltd [1999] E.M.L.R. 161, 172 in these terms:

‘Before the court can interfere it must be shown that the judge has either erred in principle in his approach or has left out of account or taken into account, some feature that he should, or should not have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale. See per Griffiths LJ in Alltrans Express Ltd v. C.V.A. Holdings Ltd [1984] 1 W.L.R. 394, 403G.’”

As I previously observed, counsel for the Revenue and Customs also submitted that the failure of a judge to attach sufficient weight to a material factor or to attach too much weight to it is enough in itself to justify an appellate court interfering with the exercise of his discretion. She based this submission on a passage in G v. G, to which I have already referred at page 229 where Lord Fraser of Tullybelton quoted with approval a passage from a judgment of Bridge LJ in Re F [1976] Fam 238 at 266. Part of the quotation reads as follows:

“On the view I take, his error was in the balancing exercise. He either gave too little weight to the factors favourable, or too much weight to the factors adverse to the father’s claim that he should retain care and control of the child.

The general principle is clear. If this were a discretion not depending on the judge having seen and heard the witnesses, an error in the balancing exercise, if I may adopt that phrase for short, would entitle the appellate court to reverse his decision.”

But as is apparent from higher up on the same page in G v. G, that that was said in the context of a decision which was plainly wrong by way of explanation of how the error must be assumed to have arisen when the court was unable to identify an error of law or a material misdirection. I reject the submission that questions of weight alone are sufficient to warrant interference with a discretion, the exercise of which cannot be stigmatised as: “Plainly wrong.” Were it otherwise there would be no restriction on the ability of an appellate court to interfere with the exercise of a discretion by a judge at first instance.

That said, there are a number of grounds on which I consider that I may and indeed should interfere with the exercise of the discretion of the District Judge in this case. First, I consider that the ground on which he made his order was inadequate, because the circumstance on which he relied was insufficient without more to justify the order he made. True it is that the Revenue and Customs failed to inform Mr Cassells in September 2004 of the fact that there was no debt due by him to the Revenue and Customs. True it is that at all times after the bankruptcy order was made Mr Cassells might, as he frequently threatened, have applied for its annulment under s.282. Those two facts can only be relevant if it can be established that if Mr Cassells had been so informed he would then have made the application and if he had made the application he would have obtained the annulment he sought or some other material advantage. But those additional conditions cannot be established.

Notwithstanding repeated indications in the period 2003 to 2005 that he would do so, Mr Cassells never did apply for annulment, nor did he seek to exercise any of the alternative remedies open to him by way of challenging the proof of debt submitted by the Revenue and Customs or claiming the credit from sub-contractors tax deductions even after the Revenue and Customs had told him that such a claim was necessary. The first action he took was when he wrote to his Member of Parliament on 22 October 2007. I decline to infer, contrary to the holding of the District Judge that, Mr Cassells would have applied for annulment in September 2004 if he had been informed by the Revenue and Customs that he was not indebted to them. Such an inference would, in my judgment, be wholly inconsistent with the evidence which demonstrated much protest, but no action. In particular, if Mr Cassells took no action when he was informed in August 2005 that he should claim credit for the sub-contractor’s tax deductions I see no good ground for inferring that had he been told 11 months before that he did not owe the Revenue and Customs anything that he would then have applied for an annulment.

But that is not the end of the matter. It is quite clear that had he done so his application would have failed. He could not have succeeded under s.282(1)(a), because there is no doubt that the assessments under s.28(c) of the Taxes Management Act 1970 gave rise to legally enforceable debts. Accordingly, the order was rightly made when made. He could not have succeeded under s.282(1)(b) without paying or securing all his debts and the costs and expenses of the Trustee in Bankruptcy. There is no evidence that he could have done so then and indeed there is no evidence that he could do so now. But even if he could have satisfied those conditions to the making of an order under s.282(1)(b) there would still have been need to satisfy the court that in the exercise of its discretion the order should be made. A consideration relevant to that would have been the lack of cooperation by Mr Cassells with his Trustee and the fact that his discharge had been suspended indefinitely. Compare Hilabi v. Camden London Borough Council [2008] Bankruptcy and Personal Insolvency Reports 370 at page 376 para 21. The District Judge had not considered that in the context of the making of an order for a rescission of the bankruptcy order.

In all these circumstances the loss of opportunity on which the District Judge relied could not on its own justify the rescission of the bankruptcy order. It had no bearing upon whether the order should have been made in the first place or maintained when the error of the Revenue and Customs became apparent. It was not such a circumstance as was referred to by Millett LJ in Fitch v. Official Receiver or by Laddie J in Papanicola. I would add that, I am by no means satisfied that the subsequent costs incurred by the Trustee in Bankruptcy were in any way excessive given the apparent need for the application to suspend the automatic discharge of Mr Cassells and the application for an order for sale of the only asset in his estate. So the circumstances, even if material, are not, I think, exceptional.

But that is not the end of the matter either. The existence of other unpaid ordinary unsecured creditors and the lapse of time since the bankruptcy order had been made were each of them material considerations as well, but the District Judge did not refer to either of them. The lapse of nearly five years had the consequence of increasing liabilities to the unsecured creditors by the amount of the interest accruing in that period, some £5,148. In addition, it meant that if the order were rescinded those creditors might lose any remedy against either Mr Cassells or his estate because of the expiration of the six year limitation period. See Re Benzon [1914] 2 Ch 68 pages 75 and 76 and Anglo Manx Group Limited v. Aikin [2002] BPIR 215. The position of the creditors was not alluded to by the District Judge at all. Even if he had been minded to rescind the bankruptcy order he should have considered how to protect the interests of the other members of the same class of unsecured creditor whether by a conditional order, the condition being that they should be paid in full or, as in Fitch v. Official Receiver, restoration of the original petition so that one of them, if remaining unpaid, might obtain an order for substitution and pursue the petition for a further bankruptcy order.

The error of law and the omission of any consideration of the material facts I have mentioned entitle and require me to exercise the discretion conferred by s.375 anew. In addition, they point clearly to the manner in which I should exercise it. The lost opportunity to which the District Judge referred is only theoretical and for that reason of no relevance to the question of whether or not to rescind the order. Not only on the evidence would it have remained only an opportunity, but if taken would have failed to achieve any annulment or other worthwhile practical advantage for Mr Cassells. In real terms the opportunity was worth nothing so he lost nothing.

Further, an order for rescission would, without more, prejudice all the other creditors who proved in the bankruptcy. There is no evidence that Mr Cassells could or would pay them with interest in full. Nor is he able to pay or provide for the costs incurred by the Trustee in Bankruptcy. An order for rescission would unjustly prejudice the creditors if their debts thereby became statute barred. Further, it would be a waste of time and money if, as seems inevitable, it were to be followed by a further bankruptcy order obtained by a substituted creditor on the same petition.

Finally, there is the failure of Mr Cassells to cooperate with his Trustee. This was sufficiently serious and prolonged as to justify an order for the indefinite suspension of his discharge. If a court is to make an order under s.375 it must be satisfied that it is in possession of all material facts. If a bankrupt fails to cooperate with his Trustee then the court cannot have that confidence. In addition, to make the order for rescission sought by Mr Cassells would achieve the same practical consequences of a discharge from his bankruptcy. In my view, the court should not exercise its discretion under s.375 in such circumstances unless it is satisfied by evidence that it is appropriate for the bankrupt to be discharged. There is no such evidence before me.

For all these reasons I am satisfied that the District Judge was wrong and accordingly I allow the appeal. I set aside paragraphs 1, 5 and 6 of the District Judge’s order and dismiss the application. I will hear argument as to the form of my order and on questions of costs both here and before the District Judge.