Edward Agop Ahajot The Count Artsrunik v Kevin Waller (hm Inspector Of Taxes)

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:

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.

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.

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:

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

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.

From the evidence before me I find the following facts.

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.

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.

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.

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.

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.

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

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.

Meanwhile 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.

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.)

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.

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

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

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.

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.

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.

On 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.

I consider separately each of the questions for determination..

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.

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 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.

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

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.

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.

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.

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.

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.

In considering these arguments I first note that no penalties have in fact been assessed on the Appellant. The assessments under appeal are all assessments for income tax and national insurance contributions. As such, they are governed by the general rules 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. It is, therefore, hypothetical to consider whether, if assessments to penalties were made, they would consist of an action against the bankrupt personally which he could defend. If, however, that question had to be asked, the answer would be found in Hurren. There on 6 October 1981 the Inland Revenue commenced proceedings against Mr Hurren before the General Commissioners for the recovery of penalties under the 1970 Act. On 24 November 1981 Mr Hurren was adjudged bankrupt on the presentation of his own petition. A number of questions arose about the future conduct of the penalty proceedings. Walton J at 189D held that the penalties were provable debts in the bankruptcy; that the proceedings before the General Commissioners should be stayed; that the bankrupt, the trustee and the Inland Revenue should try to agree the amount of the penalties; but that if necessary there would be an order granting the trustee leave to agree or compromise the amount with the Inland Revenue. Thus I agree with Mr Jones that a penalty under the 1970 Act is provable in the bankruptcy with the result that the Appellant has already been released from any such debts by his discharge. That means that the Appellant does not have any personal interest in the appeals before the Special Commissioners and so the exception in Heath v Tang cannot apply to him.

For the Appellant Mr Ashford went on to argue that, even if the Appellant had no interest in the appeals, he was entitled under the letter from the trustee dated 23 April 1991 to continue the six existing appeals (for the years 1982/1983 to 1987/1988) and to commence the three new ones (for the years 1988/89 to 1990/1991) That was an irrevocable authority given by the trustee which could have been revoked but which was not revoked. For the Inland Revenue Mr Jones accepted that the trustee had authorised the Appellant's representatives to deal with his tax affairs but the appeals should have been continued in the name of the trustee. He argued that a principal could always act on his own behalf even if he did not revoke an authority given to an agent.

I accept that the letter from the trustee dated 23 April 1991 authorised the Appellant's then advisers to deal with his tax affairs and, in particular, to re-open the appeals for 1982/1983 to 1987/1988. However, at that time there had been no formal appeals against the assessments for 1988/1989 to 1990/1991 and so there must be some doubt as to whether that authority extended to the commencement of these new appeals. Be that as it may, the evidence before me indicated that, after the three new appeals (for 1988/89 to 1990/91) had been lodged and accepted in 1992 there was very little activity until the trustee began to lose patience in 1995. It seems to me that, by his letter of 28 March 1995, the trustee was resuming full control over the Appellant's tax affairs with the intention of bringing them to a speedy conclusion. Thus any authority given by the letter of 25 April 1991 was withdrawn in 1995 to the extent that the trustee himself proceeded to finalise the appeals.

For the Appellant Mr Ashford argued that the submission of a proof of debt and its admission was not final and could be re-opened because, under Rule 11.8(3) of the 1986 Rules, if the amount of a proof was reduced a creditor was liable to repay any amount overpaid by way of dividend for the credit of the insolvent estate. He argued that the correct procedure would be to follow Re Hurren at 187 and for the Special Commissioners to determine the appeals and then an approach could be made to the Bankruptcy Court for the bankruptcy to be reopened. For the Inland Revenue Mr Jones argued that, as the trustee had corresponded directly with the Inland Revenue in 1995 and 1996, and had accepted the proof of debt in respect of the assessments for 1988/89 and 1989/90 on the basis that the other assessments would not be pursued, none of the assessments could be further considered by the Special Commissioners. If the Appellant had disagreed with the Inland Revenue's proof of debt he should have applied to the bankruptcy court for that decision to be reversed or varied.

In considering these arguments I first refer to the legislative provisions. Section 322(1) provides that the proof of any bankruptcy debt, and the admission or rejection of proof, should take place in accordance with the rules. Rule 6.105(2) of the 1986 Rules provides that, if the bankrupt or a creditor is dissatisfied with the trustee's decision admitting or rejecting the whole or any part of a proof, he may apply to the court for it to be reversed or varied. Such application must be made within twenty-one days of his becoming aware of the trustee's decision. The court is the Bankruptcy Court. Section 324(1) provides that the trustee should declare and distribute dividends among the creditors in respect of the bankruptcy debts they have proved.

Accordingly, it seems to me that, if the Appellant were dissatisfied with the trustee's decision with respect to the proof of debt lodged by the Inland Revenue on 4 July 1996, his remedy was to apply to the Bankruptcy Court for it to be reversed or varied. It seems to me that that remains his remedy, subject of course to the Bankruptcy Court being willing to extend the time for such an application and subject also to my conclusions about section 54.

Mr Ashford suggested that the procedure mentioned in Re Hurren might be adopted so that the Special Commissioners should hear the appeals before any approach were made to the bankruptcy court. In Re Hurren at page 187G Walton J, having found that the penalties were debts provable in the bankruptcy, went on to consider how the amount of the penalties should be determined. He said:

It seems to me that that passage confirms the view that the first step is for the trustee and the Inland Revenue to try to agree a value for the liability. In this appeal the trustee and the Inland Revenue agreed a value in 1996. The suggestion that the amount should be determined by the general commissioners was only meant to operate in a case where the Inland Revenue and the trustee could not agree and so has no relevance in this appeal. Further, it is clear from the passage cited above that, if there were no agreement, it would be for the Bankruptcy Court to decide that the amount should be determined by the Special Commissioners and not for the Special Commissioners to determine the amount first and then to refer the matter to the Bankruptcy Court.

Having considered all the arguments on the first question for determination I conclude that, from the date of his appointment on 8 October 1990, the trustee in bankruptcy had sole responsibility for dealing with all these appeals. This is not a case where the Appellant had a personal interest in the appeals which did not directly concern his estate as vested in the trustee. No penalties have been imposed but, even if they were, they would be debts provable in the bankruptcy and the discharge of the Appellant means that he has already been released from such debts. Although the trustee gave the Appellant authority on 23 April 1991 to deal with his tax affairs, and to re-open the earlier appeals, in my view that authority was withdrawn in 1996 to the extent that the trustee then proceeded to finalise the appeals himself. If the Appellant were dissatisfied with the trustee's decision admitting the Inland Revenue's proof of debt he should have applied to the Bankruptcy Court for that decision to be reversed or varied. It would be for the Bankruptcy Court now to decide whether to extend the time for such an application. If the Bankruptcy Court were to re-open the bankruptcy and request the Special Commissioners to determine the amounts of the assessments then that Court could refer that matter to the Special Commissioners (subject to what is said below about section 54) but it is not for the Special Commissioners to determine the amounts without such a request. The Special Commissioners have no jurisdiction to re-open appeals settled by the trustee in bankruptcy.

The conclusion on the first question is that, by operation of the law of bankruptcy, the Appellant no longer has any right to pursue his appeals before the Special Commissioners. That conclusion means that I do not have to decide the second question but, as arguments were put, I briefly express my views.

The second question for determination is whether the trustee in bankruptcy had settled the appeals by agreement within the meaning of section 54 of the 1970 Act.

For the Appellant Mr Ashford argued that only the Appellant could reach a section 54 agreement. He also argued that Mr Cotton (who acted for the Inland Revenue in 1996) might not have been a proper officer within the meaning of section 54. Hw went on to argue that, even if the Appellant had entered into the agreement then it would be binding for tax purposes but not for insolvency purposes. The insolvency legislation should take priority over the tax legislation. He also argued that the language of the bankruptcy provisions was not framed in the language of agreement as the proof of a debt was not final and binding.

For the Respondent Mr Jones argued that the agreement reached between the Inland Revenue and the trustee constituted a section 54 agreement because in section 54 the word "appellant" had to be read as a reference to the trustee in bankruptcy. It followed that the appeals for the years 1988/89 and 1989/90 had been disposed of by the agreement of the trustee in bankruptcy and could not now be re-opened. He also argued that Mr Cotton was a proper officer within the meaning of the section.

In considering the arguments of the parties I begin with section 54(5). In my view the trustee was "a person acting on behalf of the Appellant in connection with the appeal" within the meaning of that subsection and so could enter into an agreement on behalf of the Appellant. Turning to subsection (1) it is clear that notices of appeal against the assessments for the years 1988/89 and 1989/90 were given in 1992 and that in 1996 the appeals had not been determined by any Commissioners. It is also clear that the Inland Revenue and the trustee (acting on behalf of the Appellant) came to the agreement in writing in 1996 that the assessments for the year 1988/89 and 1989/90 should be treated as upheld. Mr Ashford argued that Mr Cotton, who entered into the agreement with the trustee in 1996, might not be a "proper officer of the Crown" within the meaning of section 54(1). However, Mr Cotton was writing from the Office of the Solicitor of Inland Revenue and clearly had authority to reach agreement with the trustee in bankruptcy. I therefore conclude that he was a proper officer for the purposes of section 54.

I conclude that the trustee in bankruptcy, acting on behalf of the Appellant, settled the appeals by agreement in 1996 within the meaning of section 54 of the 1970 Act.

My decisions on the questions for determination are:

That means that the appeals must be dismissed.

During the hearing I raised with Mr Ashford the question as to why the Appellant was pursuing these appeals. Even if the Special Commissioners were to decide that the appeals against the assessments for 1988/89 and 1989/90 should be allowed the only practical effect would be that the Inland Revenue would have to repay the sum of £6,642.95 to the trustee in bankruptcy for distribution among the other unsecured creditors.

Mr Ashford stated that the Appellant accepted that, if he were to be successful in the present appeals, the money would have to be returned to the trustee in bankruptcy. However, the Appellant had been aggrieved for many years because he was of the view that the assessments made by the Inland Revenue were malicious and unlawful and that, if the assessments had not been made, he would not have been made bankrupt.

After the hearing of the appeals had concluded Mr Ashford's firm (Messrs Cripps Harries Hall) wrote to the Clerk to the Special Commissioners on 15 December 2993 to repeat these and similar comments and to say that what the Appellant sought to gain by the appeals was not simply the overturning of the assessments but also to give himself a platform from which to attack the bankruptcy order; the letter added that the effect of acceding to the Inland Revenue's arguments would be to remove these matters from public scrutiny. A copy of that letter was sent to the Inland Revenue who wrote on 17 December 2003 to say that they did not wish to comment further save to say that they were of the view that my Decision should be reached having regard only to the representations made at the hearing.

It will be clear from this Decision that the recent comments made on behalf of the Appellant cannot alter the legal position. It is not possible to give the Special Commissioners a jurisdiction that they do not have in order to provide a forum for an aggrieved Appellant to ventilate his views. If the Appellant wishes to pursue this matter he can either refer it to the Revenue Adjudicator (and he has already been provided with the relevant details) or he can consider whether to ask the Bankruptcy Court to re-open the bankruptcy. However, the considerable lapse of time since 1996 (the reasons for which delay were not explained to me) may make that course difficult. In any event the effect of section 54 would also have to be borne in mind.

Perhaps I should add that the Appellant has had many different advisers over the course of the years. His present advisers (Messrs Cripps Harries Hall) were instructed very recently and, since they were instructed, the appeals have been pursued with commendable expedition.