Bankruptcy court has no control over HMRC's third party notices—Revenue and Customs Commissioners v Ariel

How does an insolvency office-holder deal with a third party information notice served on him by HMRC with the approval of the First Tier Tribunal (FTT)? Joseph Curl, barrister at 9 Stone Buildings, considers the significance of the recent appeal decision in Revenue and Customs Commissioners v Ariel.

Original news

Revenue and Customs Commissioners v Ariel (as Trustee of the Estate in Bankruptcy of Halabi) [2016] EWHC 1674 (Ch), [2016] All ER (D) 151 (Jul)

The Chancery Division, in allowing the Revenue and Customs Commissioners' appeal against a Registrar's decision, held that the Registrar had erred in giving directions to the respondent trustee in bankruptcy at the hearing of an application for directions in respect of a third party notice under Sch 36 of the Finance Act 2008 (FA 2008). The Registrar's decision had anticipated that a Registrar might actually make an order inconsistent with a notice. That more than hinted at a parallel jurisdiction, and was wrong.

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

This case was about the interaction between the powers of HMRC and the FTT under FA 2008, Sch 36 and the power to give directions under section 303 of the Insolvency Act 1986 (IA 1986). The lessons to take from this decision are:

  • HMRC has far-reaching powers to issue notices (information notices) requiring disclosure of information and documents against third parties, including trustees in bankruptcy (trustees)
  • the bankruptcy court has no control over such notices, which are outside the bankruptcy regime
  • the FTT has exclusive jurisdiction over such notices
  • third parties, such as trustees in bankruptcy, have no right to be heard on an application for a third party notice
  • the only avenue of appeal against a third party notice is judicial review

What was the background to the case?

HMRC appealed from the decision of Registrar Derrett ([2016] BPIR 373) to give directions on an application made pursuant IA 1986, s 303 by a trustee. The judgment of Mann J discloses a fundamental difference in approach compared with that of the Registrar.

The relevant statutory provisions are straightforward. FA 2008, Sch 36, para 2 enables HMRC to serve a notice on a third party requiring that third party to provide information or produce a documents if the information or document is reasonably required for the purpose of checking the tax position of another person. FA 2008, Sch 36, para 2 provides that a third party notice should not be given unless it is given with the agreement of the taxpayer or the approval of the FTT. Mann J noted that 'the statute does not seem to provide any mechanism for the intended recipient to have any direct input into the process of deciding whether a notice should be approved.' All the third party is entitled to do is make representations to HMRC, which HMRC then summarises to the FTT (para [5] of the judgment).

Remarkably, FA 2008, Sch 36, para 30 provides that the third party only has a right of appeal when the notice is issued with the agreement of the taxpayer—where the FTT gives approval, there is no right of appeal on the part of the third party.

In the present case, the trustee had been appointed about two years after the debtor’s automatic discharge and had also been appointed liquidator of about 25 associated insolvent companies in Jersey. HMRC had submitted a proof of debt in the bankruptcy of circa £85m. It was plain that the debtor’s affairs were complex. HMRC indicated to the trustee in correspondence that it intended to apply to the FTT for permission to issue the trustee with a third party notice under FA 2008, Sch 36. The wording of the notice sought by HMRC was very wide, covering all the bankrupt’s personal and financial interests. The trustee indicated that it would not be appropriate for the notice to extend to documents held in his capacity as liquidator or to his firm’s working papers (para [15]). There was also a concern on the part of the trustee that certain documents had been obtained by the trustee under compulsion or pursuant to orders of foreign courts. HMRC contended that it was not its responsibility to exclude information or documents from the scope of the notice (para [19]).

An application was made to the FTT without formal notice to the trustee. The trustee filed written submissions objecting to the hearing being without notice, objecting to the issue of a third party notice, and objecting to the scope and content of the notice. The trustee also asserted an intention to apply to the court for directions under IA 1986, s 303 and submitted that it would not be appropriate for the FTT to approve the notice until those directions had been given (para [20]). HMRC resisted any adjournment, but the FTT adjourned to give the trustee the opportunity to apply for directions under IA 1986, s 303 (para [22]). As is well known, IA 1986, s 303 gives the bankruptcy court a general control mechanism over all matters arising in bankruptcy and enables a trustee to apply to the court for directions.

The trustee applied under IA 1986, s 303 for answers to the following questions:

  • whether as trustee, he could properly provide documents in response to a request made under FA 2008, Sch 36, para 2. If so:
    • how the costs of that exercise fell to be paid, and
    • which categories of documents would the trustee be obliged to provide pursuant to an information notice issued under the above-mentioned provision

At first instance, Registrar Derrett delivered a detailed reserved judgment and gave very detailed directions (para [25]). The Registrar concluded that the questions raised by the trustee did not fall within the exclusive jurisdiction of the FTT but arose under the bankruptcy within the meaning of IA 1986, s 303. Other notable directions given by the Registrar included a provision that the trustee was not required to provide documents under any third party notice that the FTT might approve unless HMRC first paid all the trustee’s reasonable costs of doing so. Classes of documents that may be provided by the trustee were also specified. In respect of documents provided under compulsion or pursuant to orders of courts outside the jurisdiction, the Registrar directed that the trustee was not required to provide such documents under any notice issued by the FTT unless HMRC gave notice to specified interested parties.

What were the issues before the Chancery Division?

The issues can be shortly stated. HMRC appealed on the basis that the Registrar did not have the power to give the directions she gave and that the application should not have been made. The regime in FA 2008, Sch 36, HMRC contended, was a self-contained regime that did not come under the jurisdiction of the bankruptcy court. By contrast, the trustee contended that the bankruptcy court had jurisdiction, which had been recognised by the FTT itself in its decision to adjourn HMRC’s application to enable the trustee to seek directions.

What were the main legal arguments put forward?

Mann J’s judgment contains very little note of the legal arguments put forward. It is clear, however, that the trustee submitted that if HMRC was correct in its analysis, then a third party notice would be a way of allowing HMRC to gain access to information and documents that they would not be able to get themselves without the powers of a trustee. That meant that it was appropriate for the bankruptcy court to have a level of control (para [65]). On the question of costs, the trustee further submitted that if insolvency practitioners (IPs) thought that they would come under such onerous obligations with no funds to discharge them, it would decrease the willingness of trustees to take appointments. HMRC submitted in response that it was not unfair for trustees to have to bear the cost, because HMRC was acting for the public purse and in the public interest (para [71]).

What did the court decide, and why?

Mann J allowed the appeal. His Lordship considered that the proceedings were 'oddly constituted, and oddly conceived by the trustee.' The real question was whether the FTT had 'the only say' in whether to issue a third party notice, or whether the bankruptcy court also had jurisdiction to decide whether and to what extent the terms should be complied with by the trustee. But that question, Mann J considered, could only be addressed if there was a notice in existence whose terms were known so that if the Registrar had jurisdiction to intervene, the extent of compliance could be determined (para [33]). That was not the case here, because the FTT had not approved any notice at the time of the trustee’s application for directions.

Nonetheless, Mann J proceeded on the assumption that the FTT would in due course approve a notice in the form sought by HMRC, to enable his Lordship to provide guidance on the point.

Registrar Derrett had cited in her judgment the first instance decision in Derrin Brother Properties Ltd v HMRC [2014] EWHC 1152 (Admin), [2014] All ER (D) 158 (Apr), which had been a challenge by way of judicial review to the issue of a third party notice. Between the hearing before the Registrar and the appeal to Mann J, Derrin had itself been the subject of an appeal to the Court of Appeal. The decision of the Court of Appeal in Derrin ([2016] EWCA Civ 15, [2016] All ER (D) 124 (Jan)) heavily informed Mann J’s approach.

Their Lordships in Derrin had set out the background of tax evasion and 'the scope for delay and obfuscation' that gave rise to the powers in FA 2008, Sch 36 (para [42]). They went on to record that Parliament had deliberately chosen a judicial monitoring scheme (rather than a system of adversarial appeals from third party notices), with very limited scope for objection to HMRC’s request for the production of documents and information. Mann J held that this expression of purpose was 'antithetical to the idea that another tribunal would have a further role to play in what ought to be done in relation to a third party notice' (para [43]). Given this, Mann J considered that it would require clear wording in another statute if it were to displace part of the apparent regime with the discretion of another person. Crucially, IA 1986, s 303 was concerned only with 'matters within the bankruptcy itself' and did not extend to 'the rights of others who have acquired those rights entirely independently of the bankruptcy' (para [53]). The right to issue a third party notice under FA 2008, Sch 36 fell into the latter category and the bankruptcy court had no role to play. Appeal was possible only by way of judicial review.

The concerns about disclosure of material obtained by the trustee under compulsion or pursuant to orders of foreign courts was 'sensitive'. This did not mean that such information should not be disclosed, but that the interests of those from whom the material was obtained in the first place must be given 'proper consideration'. But, held Mann J, the real question was who had to give that consideration. Mann J concluded that '[l]ike all matters of scope and compliance they fall within the jurisdiction of the FTT…The bankruptcy court does not have the power to take those decisions for the FTT, or to modify compliance with notices once served' (para [67]).

As to the costs of compliance, Mann J made clear that he would not prejudge the issue, which was also one for the FTT. His Lordship, however, noted that it would be within the jurisdiction of the FTT to require HMRC to pay the reasonable costs of compliance with any third party notice, which was a requirement commonly imposed in various other third party disclosure orders, such as Norwich Pharmacal orders (para [69]). There was no reason why information to be deployed for the public good should not be funded by the public purse, as opposed to the particular insolvency practitioner (para [72]).

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

This judgment certainly clarifies the law, although it will be unwelcome news to IPs that the bankruptcy court has no role to play in directing compliance with third party notices. While the regime has yet to be fully worked out, it is to be hoped that, when approving the issue of third party notices against statutory office-holders in the future, the FTT follows the common practice where third party disclosure is sought elsewhere, and ensures that the party seeking disclosure is responsible for the reasonable costs of providing it.

It will be interesting to see whether this matter goes further. Given the importance of the point for the insolvency industry, it may well satisfy the more strenuous test for a second appeal to the Court of Appeal.

Joseph Curl specialises in commercial Chancery, with the emphasis on insolvency. He also practises in the areas of banking and financial services, civil fraud, mortgages and real property. He is ranked as a leading junior in both the major legal directories.

Interviewed by Stephen Leslie.

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

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