Bankruptcy orders—to rescind or to annul? (Yang v Official Receiver and others)

Karen Troy, barrister at Exchange Chambers in Manchester, and who acted in the case, explains the implications of the Court of Appeal’s decision in Yang v Official Receiver and others.

Original news

Yang v Official Receiver and others [2017] EWCA Civ 1465, [2017] All ER (D) 65 (Oct)

The subsequent setting aside of council tax liability orders was not a ground for the annulment of a bankruptcy order made in respect of the appellant. So ruled the Court of Appeal, Civil Division, in dismissing the applicant's appeal against a judge's order upholding a district judge's decision by which he had dismissed her application to annul a bankruptcy order. That order had been made on a petition by the second respondent local authority. The appellant had argued that the bankruptcy order should be annulled because, while the liability orders had been extant at the time of the bankruptcy order, they had subsequently been set aside.

The Court of Appeal held, among other things, that the lower courts had correctly concluded that the statutory demand relating to the liability orders had properly been served. Further, it held that the only sensible interpretation of section 282(1)(a) of the Insolvency Act 1986 (IA 1986) was that regulation 49(1) of the Council Tax (Administration and Enforcement) Regulations 1992, SI 1992/613 (CTR 1992), deemed the liability orders to constitute a legally enforceable debt, regardless of the underlying factual position relating to the relevant property, unless and until those orders were set aside, under the specific statutory procedure laid down for doing so.

The court ruled that a bankruptcy court should not go behind liability orders, except in the event of fraud or some miscarriage of justice and held that, since the liability orders in the present case had not been set aside at the date that the bankruptcy order had been made, the effect of CTR 1992, reg 49(1), was, statutorily, to deem them as constituting a legally enforceable debt from the time they had been made, until the time they had been set aside. Accordingly, the bankruptcy order had correctly been made and the power to annul, under IA 1986, s 282(1)(a), had not been engaged.

What is the background to the case and the issues arising within it that are pertinent to insolvency professionals?

The principal issue in the Court of Appeal was whether District Judge Khan (affirmed by His Honour Judge Hodge QC in Yang v Official Receiver [2013] EWHC 3577 (Ch)) had been wrong to rescind a bankruptcy order made against the appellant (JY) in 2009 under IA 1986, s 375(1) instead of annulling that order under IA 1986, s 282(1)(a). Under IA 1986, s 282(1)(a), the court may annul a bankruptcy order if, ‘at any time’, it appears to the court that ‘on grounds existing at the time the order was made, the order ought not to have been made’.

The bankruptcy order had been made on a petition based on two council tax liability orders (CTLOs) that Manchester City Council (MCC) had obtained against JY in 2006, with a total value of just £1,102.54—CTR 1992 provide:

  • CTR 1992, reg 49(1) ‘where a liability order has been made … the amount due shall be deemed to be a debt for the purposes of IA 1986, s 267 (grounds of creditor’s petition)’, and
  • under CTR 1992, reg 57(1), a debtor wishing to challenge a CTLO must appeal to a valuation tribunal

JY had commenced an (ultimately successful) appeal to a valuation tribunal against the CTLOs founding her bankruptcy order only after she had issued her annulment application.

What were the main legal arguments raised?

JY relied on a dictum of Hoffmann LJ in RBS v Farley [1994] Lexis Citation 3153, [1996] BPIR 638 in which a bankruptcy order had been annulled following the subsequent setting aside of a default judgment, that ‘if it can be demonstrated by evidence subsequent to the bankruptcy order that the debt upon which the petition was founded did not exist’, it was right to say there was ‘a ground existing at the time the order was made on which it should not have been made’. She argued this should be preferred to contrasting authorities on tax liabilities, on which HMRC v Cassells [2008] EWHC 3180 (Ch), [2008] All ER (D) 52 (Dec) indicated that subsequent withdrawal of a tax assessment would not have been a ground for annulment and Dennis Rye Ltd v Bolsover DC [2009] EWCA Civ 372, [2009] All ER (D) 41 (May), found that the court should seldom look into or go behind CTLOs.

The MCC argued that CTR 1992, reg 49(1) rendered a CTLO a legally enforceable debt unless and until it is set aside. The MCC also relied on Cassells and sought to distinguish Farley, arguing that the later setting aside of a CTLO could not have a retrospective effect as ‘a ground existing at the time the bankruptcy order was made’ but was simply an exceptional change in circumstances after the date of the bankruptcy order, which is a ground for rescission but not annulment.

What did the court decide, and why?

Gloster LJ (with Sir Patrick Elias agreeing), dismissed the appeal because:

  • the scope of the power to rescind informs the scope of the power to annul in that subsequent proof of facts that existed at the date of a bankruptcy order is recognised as a material change of circumstances permitting rescission (and, by inference, is not a ground for annulment)
  • CTR 1992, reg 49(1) ‘deems’ a CTLO to be ‘a legally enforceable debt, regardless of the underlying factual position … unless and until the liability order is set aside under the specific statutory procedure laid down for doing so’
  • ‘dictates of certainty and expediency’ require that a bankruptcy court should not go behind CTLOs ‘except in the event of fraud or some miscarriage of justice’, and
  • the reasoning in Cassells and JSC Bank of Moscow v Kekhman [2015] EWHC 396 (Ch), [2015] All ER (D) 288 (Feb) (to the effect that, while the court can admit subsequently acquired evidence of such facts on hearing an annulment application, it can only take into account facts as they existed at the date the bankruptcy order was made), is compelling whereas the obiter approach of Hoffmann LJ in Farley gives no significance to the words ‘at the time the order was made’ in IA 1986, s 282(1)(a)

What are the practical implications of this case for insolvency lawyers advising their clients?

An individual facing potential bankruptcy on the basis of a CTLO—or any other form of tax or other assessment or order that is subject to a specific statutory review procedure (rather than susceptible to review by a court)—should be advised immediately to commence the relevant statutory review procedure so that, if a bankruptcy petition is presented, an adjournment can be obtained until the outcome of the statutory review is known. Otherwise, any bankruptcy order made on the petition will not be open to annulment (although it might still be rescinded).

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

The judgment confirms that annulment cannot be informed by hindsight, but leaves it unclear when annulment will be available in relation to default judgments, which bankruptcy courts have wide powers to review.

To what extent is the judgment unhelpful, and what practical lessons are there to be learned?

A conviction inconsistent with factual innocence can constitute a miscarriage of justice. The introduction into insolvency law of ‘miscarriage of justice’ as a basis for going behind an assessment or order that otherwise is reviewable only by a specific statutory procedure thus appears to undermine the indication that a bankruptcy court should not generally ‘go behind’ such matters.

Interviewed by Jenny Rayner.

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

Further Reading

If you are a LexisPSL Subscriber, click the link below for further information:

What is annulment, and in what circumstances can a bankruptcy order be annulled?

Reviews of orders from the insolvency court: what is the process and how can you appeal or review a decision and which court do you apply to?

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