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The decision in Revenue and Customs Commissioners v Smart establishes the principles to be applied when a bankruptcy court is asked to go behind a judgment and when it is alleged that an offer to secure or compound has been unreasonably refused, as Katherine Hallet, barrister at Three Stone explains.
Revenue and Customs Commissioners v Smart  Lexis Citation 78,  All ER (D) 158 (Jun)
The Bankruptcy High Court made a bankruptcy order against the defendant on a petition of the Revenue and Customs Commissioners based on an unpaid county court judgment debt, entered as enforcement of a German tax debt under the EU mutual assistance regime. The court held that there had been no miscarriage of justice in the county court proceedings and no prospect of the defendant establishing that no debt was due. Further, the defendant’s offer to secure or compound for the judgment debt fell well outside the scope of any that it would be unreasonable for a hypothetical creditor in the position of the Revenue to refuse.
When a Member State seeks the assistance of the UK in enforcing a foreign judgment, the UK courts cannot conduct a review under Directive 2010/24/EU concerning the mutual assistance for the recovery of claims relating to taxes, duties and other measures (MARD) of whether that enforcement is contrary to UK public policy. Thus, no questions can be raised before the UK courts as to the liability on the foreign claim.
HMRC had issued a bankruptcy petition against Mr Smart, seeking to enforce a judgment of the Taunton County Court which was itself based on a tax liability due pursuant to an order of the German court. In order to enforce its judgment, the German tax authority requested HMRC’s assistance pursuant to MARD, as implemented in the UK by Schedule 25 to the Finance Act 2011 (FA 2011).
The chief registrar had to decide whether to make a bankruptcy order against Mr Smart.
Mr Smart raised two arguments:
The chief registrar reviewed the mutual assistance regime. Its effect was that the courts of the EU Member State in which the tax authority with the substantive tax claim to be enforced under MARD have exclusive jurisdiction to determine any disputes about the validity of the claim. Exceptionally, for public policy reasons, the bodies of the Member State in which the requested authority (here, HMRC) is situated may be authorised to review whether enforcement should be permitted. However, the UK Parliament had decided not to authorise the UK courts to conduct any such review under the mutual assistance regime. In any event, on the facts, no such public policy consideration arose.
After considering the fairness issue, the chief registrar concluded that there was no prospect of Mr Smart establishing that no debt was due. He restated the usual rule that it is only in exceptional circumstances that a bankruptcy court may go behind a judgment (see Dawodu v American Express Bank  BPIR 983,  All ER (D) 251 (Jan) at para ). Here, there was no allegation of collusion or fraud. That left miscarriage of justice.
Mr Smart had suggested two miscarriages of justice:
The chief registrar also rejected Mr Smart’s case on the offer to secure or compound. Having set out section 271(3) of the Insolvency Act 1986 and summarised the effect of Revenue and Customs Comrs v Garwood  BPIR 575, he concluded that an offer of, among other things, a charge over Mr Smart’s home not to be enforced until both he and his wife had died was not unreasonably refused. The offer entailed an unreasonable and open-ended delay in realising Mr Smart’s principal asset.
The case confirms the principles to be applied when a bankruptcy court is asked to go behind a judgment and when it is alleged that an offer to secure or compound has been unreasonably refused.
More interestingly, the judgment reviews the mutual assistance regime and establishes that the principle that, exceptionally, for public policy reasons, the bodies of a Member State in which a requested authority is situated may be authorised to review whether enforcement should be permitted applies to MARD, just as it applied to its predecessor. Thus, the possibility exists that a Member State may authorise its courts to review whether enforcement of a foreign claim under MARD is contrary to the public policy of that Member State. However, the UK Parliament has not authorised the UK courts to conduct such a review.
Katherine Hallett is a barrister at Three Stone, specialising in insolvency, property and commercial litigation, including advisory work. She is regularly instructed in claims which raise complicated issues in insolvency proceedings.
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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