High Court ruling on the position of council tax and NNDR arrears in Insolvency schemes.

[tomtubby]

Re: David Kaye v South Oxfordshire District Council & Certain Exhibitions Ltd

 

Yesterday a highly important Judgment was handed down in the High Court of Justice (Manchester District Registry) regarding the position with arrears of council tax/Non Domestic rates in cases where an individual debtor or company file for either personal bankruptcy, a Debt Relief Order, Individual Voluntary Arrangement, Liquidation or a Company Voluntary Arrangement.

 

Background

 

A company by the name of Certain Exhibitions Ltd suffered a serious fire on 21st April 2013 which destroyed their storage facility and led to the disruption to their business. Three weeks earlier on 12th March 2013 the respondent; South Oxfordshire District Council issued the company with a notice in respect of non domestic rates for the period 1st April 2013 to 31st March 2014 in the sum of £25,905.

 

Of significance is that accompanying this statement from the local authority was a direct debit confirmation which stated that in accordance with the Local Government Finance Act 1988 the company had a statutory right if they wished to pay the sum (of £25,905) by instalments with a 1st payment of £2,586 by 15th April 2013 and nine further payments of £2,591 on the 15th day of each month ending on 15th January 2014.

 

Due to the effect to the business of the fire damage the exhibition company entered into a Company Voluntary Arrangement (CVA) on 10th July 2013. The proposal was accepted by creditors at a meeting on that same day. The following day (11th July 2013) the exhibition company received a reminder notice from the local authority stating that the payment due of £2,591 for the June instalment had not been paid and that if this payment AND the one due on 15th July was not paid by 21st July 2013 that a summons would be issued and the full balance for the year to 31st March 2014 would become due.

 

The Insolvency Practitioner wrote to all creditors asking them to “prove” their debt and the local authority responded on 29th July 2012 to claim under the CVA a sum of just £1,918.26 which represented the period 1st April 2013 to 10th July 2013 (which is the date on which the CVA had been agreed).

 

The Supervisor to the CVA; Mr David Kaye wrote to the local authority questioning how the sum had been calculated and stating that the claim should be for the full year’s business rates and not just the amount up to the date on which the CVA had started. His reasoning being that the full year’s rates had become due on 1st April 2013, and accordingly, the full year’s liability should therefore rank as an unsecured creditor in the CVA.

 

The local authority argued that because the annual bill has been issued on 1st April full payment was not required on that date and instead, the ratepayer could if they wish pay the debt of £25,905 by way of ten instalments and furthermore; that at the date of the CVA the instalment option was still applicable. Neither party could agree and subsequently, in September the local authority issued a summons for approx £20,000 and the Supervisor issued proceedings in the High Court to resolve the legal position.

 

Conclusion:

 

After considering submissions from both parties, His Honour Judge Hodge QC confirmed in paragraph 56 of the Judgment that the local authority were wrong and that the correct position was that the full amount of the non domestic rates for the period 1st March 2013 through to 1st April 2014 must be a “provable”debt in the company voluntary arrangement.

 

Of huge significance is that under Paragraph 56 HH Judge Hodge QC also confirmed that his decision would be applicable to company liquidations AND also for personal bankruptcies (which will include IVA's and Debt Relief Orders).

 

It is my understanding that the Insolvency Service have confirmed today that they will be now be issuing a notice confirming that a council tax/non domestic “holiday” will now be able to be included as a debt in ANY form of insolvency including personal bankruptcy and Debt Relief Orders. This will mean that any individual or company declaring insolvency on or after 1st April 2014 will be able to include the ENTIRE year’s 2014 to 2015 council tax /non domestic rates as a debt.

 

Note:

 

If a company or an individual file for an insolvency scheme on for instance; 1st February 2014 they can include as a creditor council tax or non domestic for the period 1st Feb 2014 to 31st March 2014. However, if they wait a few weeks until 1st April 2014 (when the new council tax bill is issued) they can include in the insolvency not only any arrears for this current year but ALSO the whole of the year's council tax for the period 1st April 2014 through to 31st March 2015 !!!

 

The full judgment can be read here:

 

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4165.html

Edited January 22, 2014 by tomtubby

[brassnecked]

This will send a chill through council chambers nationwide, and if they apply for a liability order after April this year where there is a bankruptcy, and as councils especially ones infested by Capita will plough on with the usual procedure regardless of this, gain the LO and send the bailiff, the bailiff whan he finds out the LO is probably unenforceable as the debt is included in the bankruptcy will not be a happy bunny.

Edited January 22, 2014 by brassnecked

[tomtubby]

I can assure anyone reading this thread that this ruling has sent ' shock waves' through local authorities.

 

They are of the opinion ( and quite rightly so) that ALL forms of insolvency (personal bankruptcies, IVA's, Debt Relief Orders, Liquidations and Company Voluntary Arrangements) will dry up by tomorrow and instead, will be delayed until AFTER the 1st April when the new council tax bill is issued.

 

I have just come off the phone to a senior partner of a very large Insolvency Practitioners and he has stated to me that being able to include the entire 2014-2015 non domestic rate bill into Company Voluntary Arrangements will very likely see MORE CVA's succeed. The failure rate with both IVA's and CVA's is very high and more so in the first year.

 

I will publish the Practice Note from the Insolvency Service as soon as I receive a copy.

[tomtubby]

Just to be clear on the way in which this new ruling will work:

 

If a company or an individual were to file for an insolvency scheme on for instance; 1st February 2014 they can include as a creditor council tax or non domestic for the period 1st Feb 2014 to 31st March 2014.

 

However, if they wait a few weeks until 1st April 2014 (when the new council tax bill is due ) they can include in the insolvency not only any arrears for this current year but ALSO the whole of the year’s council tax for the period 1st April 2014 through to 31st March 2015 !!!

 

No wonder local authorities are worried !!!

 

I am pleased to see that this thread has been picked up by the online news service; SCOOP. Apparently their news items are sourced by way of google links, other search facilities and Twitter feeds. Well done to Consumer Action.

 

 

http://www.scoop.it/t/lacef-news

[unclebulgaria67]

I bet the government will legislate so that this case precedent does not have this impact on local authority budgets. Unless there is going to be an appeal beforehand with realistic chance of succeeding.

[brassnecked]

I bet the government will legislate so that this case precedent does not have this impact on local authority budgets. Unless there is going to be an appeal beforehand with realistic chance of succeeding.

The government will act to close this down as they did with taking Student Loans out of bankruptcy making the debt enforceable almost beyond death.

[tomtubby]

As I understand it, the local authority are NOT going to be appealing.

 

It would seem that LA's had been resigned to this verdict as the Judge ( quite rightly) had been heavily swayed by a previous Judicial Review in the case of : R (Mohammed) v London Borough of Southwark.

 

The Judge has made many references in the Judgment to the Mohammed case ( starting at paragraph 40 onwards)

[tomtubby]

UPDATE:

 

In light of the recent judgment in the matter of Kaye v South Oxfordshire District Council the Insolvency Service have issued the following advice:

 

 

[brassnecked]

What is the advice TT?

[tomtubby]

UPDATE:

 

In light of the recent judgment in the matter of Kaye v South Oxfordshire District Council the Insolvency Service have issued the following advice:

 

 

Following the recent judgments in Bloom v Pensions Regulator [2013] UKSC 52 and Kaye v South Oxfordshire DC [2013] EWHC 4165 (Ch); official receivers are advised that all outstanding liabilities for council tax and non-domestic (business) rates for the year in which the insolvency commences are provable debts.

 

"This applies whether or not the company /bankrupt was in arrears at the date of insolvency. In bankruptcy cases this will create a council tax ‘holiday’ similar to that enjoyed by bankrupts who pay income tax through the PAYE system.

 

Any temporary increase in income which arises from this relief should be included in any calculation for an income payments agreement / order.

 

Official receivers are reminded that the liability for council tax is a joint and several liability for all occupants of the property over the age of 18.

 

Consequently whilst the bankrupt may enjoy relief from the council tax liability the payment may still be a household expense."

 

With regard to DROs, the advice given to Official Receivers is that Debt Relief Orders are not contingent liabilities and therefore not qualifying debts. Therefore the advice to the DRO Unit remains the same -that only arrears of payments or a debt caught by a liability order would be a qualifying debt.

 

On the DRO issue it my reading that, as far as the Insolvency Service is concerned, the "old rules" apply and the only sums that are to be included within a Debt Relief Order are those due when the order is made.

 

So, for example; if a reminder is issued and seven days elapse without payment then the balance can be included as the right to instalments has been lost and the full balance is now due (as the future instalments are no longer contingent upon the arrival of future instalment dates as the instalments no longer exist).

[brassnecked]

"So, for example; if a reminder is issued and seven days elapse without payment then the balance can be included as the right to instalments has been lost and the full balance is now due (as the future instalments are no longer contingent upon the arrival of future instalment dates as the instalments no longer exist)."

 

OUCH councils are not going to like this, not one bit! So going forward if they bankrupt somebody for council tax they may be cutting their own throats?

[lookinforinfo]

Surely TT that the Law as always been that and the Judge has only clarified the position for those Councils who did not understand the position. It is the Councils own regulation that once the monthly payments have

been missed for a certain period, that the facility to continue to pay monthly has been forfeited and the whole amount is now due.

[Clunks]

I think the ruling is a disgrace to the genuine not defaulting payers.

 

And at the end of the day it will be the payers who suffer as the Local Authorities will have to increase the Council Tax to compensate for what I believe will be an increased loss in revenue.

[brassnecked]

I think the ruling is a disgrace to the genuine not defaulting payers.

 

And at the end of the day it will be the payers who suffer as the Local Authorities will have to increase the Council Tax to compensate for what I believe will be an increased loss in revenue.

If councils were a little more flexible and reinstated monthly payments for those who genuinely want to pay, and are offering payments, before going for enforcement it may be better all round. However that would not suit capita and their bailiff minions where they infest a council.

 

In some circumstances bankruptcy is justifies, but as by their own admission the opportunity to pay by instalment has been removed from the debtors options, it is obvious that the whole amount remaining must therefore be included in the bankruptcy. If it has an entirely different result for the council than the one intended, then that is their own fault.

[Clunks]

If councils were a little more flexible and reinstated monthly payments for those who genuinely want to pay, and are offering payments, before going for enforcement it may be better all round. However that would not suit capita and their bailiff minions where they infest a council.

 

In some circumstances bankruptcy is justifies, but as by their own admission the opportunity to pay by instalment has been removed from the debtors options, it is obvious that the whole amount remaining must therefore be included in the bankruptcy. If it has an entirely different result for the council than the one intended, then that is their own fault.

 

I don't believe that the majority of people go into bankruptcy because they owe Council Tax. Your talking an average yearly charge of what £1200? I would believe it is because of other debts that people go bankrupt and Council Tax is just included as a debt that the individual owes.

 

It is just plain wrong that because of this ruling Bankruptcies will now wait and just go through on or around 01st April to include 14/15 charge.

[lookinforinfo]

It is just plain wrong that because of this ruling Bankruptcies will now wait and just go through on or around 01st April to include 14/15 charge.

 

Clunks are you saying that it is wrong that potential bankrupts will wait until April or that the system is wrong that allows bankrupts to wait until April?

 

If the former, many individuals and Companies do not have a choice about when they are madebankrupt-only the ones who do it voluntarily could do it. And then again, if it was a Company that was ceasing

trading, they wouldn't be liable for CT on their premises after going into voluntary liquidation as the Company would have shut down and no longer be trading.

 

If the latter, the Councils could get round it by modifying their rules when a payment or two is missed by not insisting that the whole years CT is then payable. But they couldn't do that because

their poor bailiff friends wouldn't earn as much money and nor would the Councils because all those Court charges that are supposed to be non profit would be lost. It's swings and roundabouts.