Bare rights and appeals against tax assessments

Frances Coulson looks at the bare right to appeal a tax assessment and whether that right is ‘property’ which can be assigned.

The court held that a bare right to appeal was not property within the meaning of the Insolvency Act 1986, s 436 (IA 1986) and hence it was not possible to assign the right as sought. The ruling in GP Aviation (GP Aviation Group International (in liq); Williams v Glover [2013] All ER (D) 41 (Jun))  looks at how, in future, directors will need to fund the company to appeal by the liquidator.
 

What issues did the case raise?

The key issues was whether a right of appeal against a tax assessment was ‘property’ for the purposes of the IA 1986, s 436 and thus capable of assignment to the directors who wished to pursue the appeals. The liquidator of GP Aviation had found the company issued with a £1.4 million assessment for corporation tax following a sale of company assets pre-liquidation which he did not accept was legitimate, and he was suing the directors for almost £700,000 paid to them for their shares pre-liquidation.

The directors argued that the liquidator should assign the appeals to them to prosecute, as the company was without funds to do so. The court had to consider whether that was in fact feasible.

The court decided that a bare right to appeal was not property within the meaning of the IA 1986, s 436 and, hence, it was not possible to assign the right of appeal as the directors sought. The court said the classical definition of a chose in action was that it described ‘all personal rights of property which could only be claimed or enforced by action and not by taking physical possession’.

A burden cannot be assigned, and so the liability to tax itself was not capable of assignment; and further, the right of appealing that liability was not capable of standing alone and being assigned. The court also compared it to the decision in McNulty v Revenue and Customs Comrs [2012] All ER (D) 92 (Aug) which concluded that a bankrupt’s right to appeal vested in his Trustee and the bankrupt had no locus to prosecute the appeal.

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

It is a very clear and decisive case. In future, directors will need to fund the company to appeal by the liquidator. In those circumstances, I would suggest they must also give the company security for adverse costs. The court was clear here that the appeal was only against a liability.

However, in some cases the appeal may be against a refusal to repay by HMRC and such a claim, eg for a VAT repayment, would satisfy the chose in action definition and so of itself be assignable as ‘property’, bringing with it the means to recover it (ie the right of appeal).

What are the implications for practitioners?

Practitioners will have to be robust in reviewing such assessments in the context of the evidence, and should take advice on the prospects of success. They will need to look at whether the appeal pertains to what would be an asset or a liability. In particular, if there are funds in the estate they need to consider the merits of the appeal—if there are any assets a successful appeal against the extant liability would increase any dividend to other creditors.

The difficulty is the vehemence of the directors in assessing the validity of the grounds to the appeal. Notwithstanding the directors’ position, by the company bringing the appeal, the directors would have left a company without any assets (to pay both costs and adverse costs) and therefore the company was unable to bring the appeal.

Are there still any grey areas or unresolved issues?

If the appeal brings a possible benefit to the creditors—either because there are assets and the appeal would reduce the creditor claims, or because it would increase the assets available—the safest thing to do will be to lodge an appeal/seek review as appropriate (in order to preserve time limits) and then obtain written advice.

If the appeal might secure an asset such as a VAT repayment but the liquidator does not consider the prospects of success sufficiently good to run himself (or he has no funds to do so), it should be possible to assign the claim to the directors for value. It would be advisable to take security against adverse costs in case the company or liquidator is held liable. The liquidator must beware assigning a hopeless case as it may render the liquidator liable to claim.

Are there any patterns or trends emerging in the law in this area?

This follows the case law in bankruptcy where the debtor is not permitted to run an appeal on tax assessments post-bankruptcy as the right vests in the trustee. It seems right that the decision likewise falls to a liquidator in a company situation whose role is to establish assets and liabilities.

The directors could not run any appeal themselves either. In Bhanderi v Customs & Excise Commissioners [2005] All ER (D) 246 (Apr) the tribunal took the view that only the provisional liquidator had the power to appeal on behalf of the company, the director had no locus and the tribunal treated the appeal as withdrawn.

 

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