England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/02/2009

Miss Geraldine Andrews Q.C.:

1. This matter concerns a liability order ("the Order") made on 18^th August 2006 by a District Judge sitting at Camberwell Green Magistrates' Court on the application of the Defendant ("the Council"). The Order related to council tax in the sum of £1,243.47 that was said to have fallen due and remained unpaid in respect of premises at 90 Woolstaplers Way, Rotherhithe, London SE16. The Claimant, Mr Mohammed, was resident at those premises. According to the Summons for non-payment of council tax that led to the making of the Order, the sum of £1,243.47 comprised £297.35 in respect of the period of liability from 25^th November 2005 to 31^st March 2006, £881.02 in respect of the period of liability from 1 April 2006 to 31^st March 2007, and £65 costs.
2. Mr Mohammed seeks an order that the Order be quashed because, he says, it is unlawful and the Council should not have applied to the magistrates' court for a liability order against him in that or indeed any sum. Mr Mohammed does not dispute that he was the person who was liable to pay council tax in respect of those premises. However, he relies on the fact that a bankruptcy order was made against him on 25^th November 2005. At the time of the Order he was still an undischarged bankrupt. The Council was aware of this, because it was the petitioning creditor.
3. According to the witness statement of Laurence Fleming, who is a client officer in the Council's Benefits & Revenue Client Unit, the Order made on 18^th August 2006 covered sums falling due in respect of council tax for the period from 1^st April 2005 to 31^st March 2006 that had already been the subject of a previous liability order obtained by the Council in June 2005. This was a reference to the sum of £297.35 that is described in the Summons as relating to the period from 26^th November 2005 to 31^st March 2006. The element of duplication did not simply mean that the Order was for too great a sum. Mr Fleming also accepted that the Council should have proved in Mr Mohammed's bankruptcy for the element of indebtedness for the financial year 2005-2006 mistakenly encompassed in the August 2006 Order.
4. A further problem for the Council, which was very properly drawn to the Court's attention by Mr Sinai who appeared on its behalf, was that a creditor of the bankrupt in respect of a debt provable in the bankruptcy may only commence legal proceedings against the bankrupt before his discharge with the leave of the Court, which may impose terms on the grant of leave (section 285(3)(b) of the Insolvency Act 1986). Leave was neither sought nor granted before the Council sought the Order. There is a conflict of authority on whether such leave may be granted retrospectively so as to "cure" proceedings brought without permission, but I was not asked to address that question, as the Council did not seek to validate the process by which it obtained the Order in August 2006.
5. After Mr Justice Ouseley had granted Mr Mohammed permission to apply for judicial review on 13^th May 2008, the Council wrote to the Administrative Court on 11^th June 2008 and confirmed that it would not pursue the council tax for the period 26^th November 2005 to 31^st March 2006 and would instead treat the sum of £297.35 as a bankruptcy debt. The letter suggested that this removed any grounds for judicial review, but Mr Mohammed demurred.
6. At first sight, what Mr Fleming has told the Court only makes sense if Mr Mohammed was already liable in June 2005, when the original liability order was made against him, (or by the latest on 25^th November 2005 when he was adjudged bankrupt) to pay council tax in respect of the period between 26^th November 2005 and 31^st March 2006. For reasons that will become apparent later in this Judgment, the question of when a liability to pay council tax (or a sum on account of council tax) arises is a matter of some importance in this case.
7. The Council submitted that it should not have been named as the Defendant to this application for judicial review, but rather as an Interested Party, since the Order complained of was made by the magistrates' court. However, the statutory scheme by which such orders are made clearly envisages that the court acts upon the information provided to it by the billing authority, (in this case, the Council) which the court is entitled to assume is accurate, at least in the absence of contrary information from the taxpayer.
8. Regulation 32 of the Council Tax (Administration and Enforcement) Regulations 1992 defines a "liability order" as "an order under regulation 34 or regulation 36A(5)". Regulation 34 essentially provides that if an amount has fallen due under certain provisions in Part V of the Regulations to which I shall refer in detail later in this Judgment, and remains unpaid in whole or in part, then the billing authority may apply to a magistrates' court for an order against the person by whom it is payable. The billing authority institutes the application by making complaint to a justice of the peace and requesting the issue of a summons directed to that person to show cause why he has not paid the outstanding sum. The court shall make the order if it is satisfied that the sum has become payable by the defendant and has not been paid. It is therefore envisaged that the magistrates' court will rely upon on the information provided to it by the billing authority, unless the taxpayer is able to demonstrate that it is inaccurate. Once a liability order has been made, it authorises the Council to engage bailiffs to distrain upon the taxpayer's goods.
9. Regulation 36A provides a mechanism for quashing a liability order made pursuant to Regulation 34 if the authority on whose application the order was made "considers that it should not have been made". This Regulation also gives power to the magistrates' court to substitute for the quashed order a liability order in respect of a lesser sum payable, if the court is satisfied that an order in that sum could have been obtained the first time round. However, the only person that can bring an application under Regulation 36A is the billing authority. The disgruntled taxpayer cannot use that route to quash a liability order.
10. It follows that the statutory scheme expressly envisages that the failure by the court to issue a lawful liability order may be directly attributable to a decision by the Council to provide the court with information about the amount due that turns out to be incorrect. However, as I have already mentioned, the present case was not just a simple case of the Council mistakenly overstating the amount. As it now accepts, the Council should not have been going through this procedure at all, at least as regards the claim for £297.35, which was already subject to the bankruptcy regime and could not be enforced outside it. The fact that an unlawful Order was made was not Mr Mohammed's fault. Indeed, he contacted the magistrates' court in response to the Summons and informed a court official that he was an undischarged bankrupt. He even referred the official to s.382 of the Insolvency Act, on which he relies.
11. The essence of Mr Mohammed's complaint against the Council is that it was responsible for the magistrates' court making an unlawful Order, and in my judgment that is sufficient to found a claim against the Council for judicial review. Nothing would be gained by joining the magistrates' court to the proceedings. This Court can declare that the Council was not entitled to seek a liability order for £1,243.47 in these circumstances, and it has power to quash the Order made by the magistrates' court as a direct result of an application that should not have been made by the Council.
12. Given the consensus that the Council was not entitled to an Order in those terms and the Magistrates' court should not have made the Order, the next question that arises is whether the Court should quash it, or accept an undertaking offered at the hearing by Mr Sinai on behalf of the Council that it will not enforce the Order and will go through the Regulation 36A process.
13. Mr Mohammed, who very ably represented himself, submitted that the defect in the Order did not just encompass the £297.35 conceded to be a bankruptcy debt; it extended to the balance, because the council tax demanded for the period of liability from 1^st April 2007 to 31^st March 2006 (£881.02) was also a "bankruptcy debt". By section 281(1) of the Insolvency Act, the discharge of the bankrupt from bankruptcy released him from all bankruptcy debts. Mr Mohammed would have been discharged automatically from his bankruptcy after a year, that is, on 25^th November 2006.Thus, he submits, the Council cannot go back and seek a liability order against him in respect of the £881.02 plus costs either by means of Regulation 36A, or by making a fresh application for a liability order in that sum if this Court quashes the Order. It is obviously sensible for the Court to resolve this matter now, and I heard full argument on the point.
14. A "bankruptcy debt" is defined by s.382(1) of the Insolvency Act, so far as is material, as follows:

a. Any debt or liability to which [the bankrupt] is subject at the commencement of the bankruptcy;

b. Any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy….

"Liability" is defined by sections 382 (3) and (4):

3. For the purpose of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules….

4. In this Group of Parts, except in so far as the context otherwise requires, "liability" means … a liability to pay money or money's worth, including any liability under an enactment…..

15. These provisions are echoed by Rule 12.3(1) of the Insolvency Rules 1986 (SI 1986/1925) which provides that all claims by creditors are provable as debts against the bankrupt whether they are present or future, certain or contingent.
16. The liability to pay council tax is a liability under an enactment and therefore any liability on the part of the bankrupt to pay council tax falling within either subsections (a) or (b) of section 382(1) of the Insolvency Act would be a bankruptcy debt.
17. It was common ground that any arrears of council tax in respect of the period of occupancy up to and including 25^th November 2005 would qualify as a bankruptcy debt. However, Mr Mohammed contended that his liability to pay council tax for the whole period from the commencement of his bankruptcy until his discharge from bankruptcy a year later was a "contingent liability". He relied in particular on two authorities, R (Steele) v Birmingham City Council [2007] 1 All ER 73, and R(Balding) v Secretary of State for Work and Pensions [2007] 4 All ER 422 (QB) and [2007] EWCA Civ 1327 (CA). Neither of those cases concerned council tax but one of them does assist on the meaning of "contingent liability".
18. R (Steele) v Birmingham City Council ("Steele") concerned the situation where, after the claimant was adjudged bankrupt, the Secretary of State determined that he had been overpaid jobseeker's allowance in respect of a period prior to his bankruptcy because he had misrepresented his circumstances, and therefore there was a liability to repay the excess. The Court of Appeal decided that the liability to repay the benefit was not a "contingent liability" within the meaning of s.382 of the Insolvency Act and was therefore not a bankruptcy debt. The reason for this was that the obligation to make a repayment did not arise until the Secretary of State made the determination, and there was no certainty that the determination would be made.
19. The Court of Appeal rejected the argument (referred to in paragraph 10 of the Judgment) that the liability to repay arose immediately upon the making of the misrepresentation that led to the overpayment, and that it was contingent upon the issue of a formal decision by the Secretary of State. They specifically rejected the view taken by Gibbs J., the judge at first instance, that the liability to repay had already arisen, and that it could be contrasted with a liability to pay costs, which only arises upon future determination. Sir Martin Nourse referred at some length to the judgment of the Court of Appeal in Glenister v Rowe [2000] Ch 76 (a case about costs) and concluded, in paragraph 14, that the reasoning of the Lords Justices in that case was equally applicable to the present case. Until the Secretary of State made his determination there was no obligation on the claimant to repay the overpaid benefit. There was no present liability to pay, nor could there be a future liability, since there was no certainty that the determination would be made. Arden LJ emphasised at paragraphs 22 to 24 that in order for a contingent liability to arise for the purposes of s.382 there had to be an existing legal obligation even if that obligation would not have to be fulfilled until the happening of some future event.
20. R (Balding) v Secretary of State for Work and Pensions was also a case about overpaid benefits. The Divisional Court held in that case that the liability to repay the overpaid benefit was a "bankruptcy debt" because, unlike the situation in Steele, the decision that there had been an overpayment and the decision to recover it had been made prior to the date of bankruptcy. The Court of Appeal affirmed that decision. It held that it made no difference to the position that the Secretary of State had elected to recover the overpayment by deducting it from benefits payable to the bankrupt instead of pursuing recovery in the county court. As at the date of bankruptcy there was an existing liability to pay money under an enactment, and therefore there was a bankruptcy debt from which the bankrupt was released upon his discharge from bankruptcy. The Secretary of State therefore had no right to continue to make deductions from the prescribed benefits payable to the claimant after his discharge.
21. Mr Mohammed submitted that Steele was authority that all future debts are contingent liabilities. That is not correct; what Steele decides is that in order for a liability to qualify as a "contingent liability" for the purposes of the Insolvency Act, the bankrupt must be under an existing legal obligation as at the date of bankruptcy, although that obligation may be contingent upon the happening of a future certain event. An example of this is where the bankrupt has entered into a contract to purchase some goods on 30 days' credit and the goods have been delivered to him, but at the time of his bankruptcy the 30 days has not yet elapsed. The seller could not yet sue him for the price, but his claim for payment is a "bankruptcy debt" because the legal obligation to make payment in the future has already arisen at the date of the bankruptcy.
22. It is important to bear in mind that a person who is an undischarged bankrupt may still incur fresh liabilities and run up further debts. They will not be bankruptcy debts, because they did not exist at the date of the bankruptcy, unless they arose out of a pre-existing underlying legal obligation. The creditors in respect of those fresh debts are not obliged to prove in the bankruptcy, but may pursue their own remedies, although they may be required to wait until after the bankrupt is discharged before taking action to recover the money, so as not to prejudice the position of other creditors. If the obligation to pay council tax for any period post-dating the bankruptcy did not arise until after the date of the bankruptcy, Mr Mohammed's discharge from bankruptcy would not affect his liability to pay the tax in respect of that period.
23. The key question in the present case, therefore, is whether at the time of the bankruptcy (25^th November 2005) Mr Mohammed was under a legal obligation to pay council tax in respect of his future occupancy of the premises to which it related. The two periods covered by the Order were the period from 26^th November 2005 to the end of the relevant financial year, 31^st March 2006, and the period from 31^st March 2006 to April 2007. The answer, in my judgment, is that he was under such an obligation in respect of the first period (as conceded by the Council) but not the second.
24. Mr Sinai drew my attention to the relevant provisions of the Local Government Finance Act 1992. Section 1(1) deals with council tax in respect of dwellings. It provides that

"As regards the financial year beginning in 1993 and subsequent financial years, each billing authority shall, in accordance with this Part, levy and collect a tax, to be called council tax, which shall be payable in respect of dwellings situated in its area"

For these purposes the "financial year" runs from 1^st April to 31^st March.

25. Section 2 (1) provides that "liability to pay council tax shall be determined on a daily basis."

Section 6 defines the persons who are liable to pay council tax. It provides that

(1) The person who is liable to pay council tax in respect of any chargeable dwelling and any day is the person who falls within the first paragraph of subsection (2) below to apply…

(2) A person falls within this subsection in relation to any chargeable dwelling and any day if, on that day –

a. He is a resident of the dwelling and has a freehold interest in the whole or any part of it

b. He is such a resident and has a leasehold interest in the whole or any part of the dwelling which is not inferior to another such interest held by another such resident…

(emphasis added).

26. Thus a resident of the property is liable to pay council tax in respect of each day of his residence, and the liability accrues daily, which means that someone who moves house in the course of a financial year will be entitled to a rebate starting from the first day on which he became a non-resident. On the basis of those provisions, Mr Mohammed would not have been liable to pay council tax on 25^th November 2005 for the period of his occupation of the premises on 26^th, 27^th or 28^th November.
27. However, local councils do not collect council tax on a daily basis or (generally) in arrears. They issue demands at the beginning of the financial year for which the tax will fall due, and claim payment on account, based upon an assessment of how much tax the resident will be liable to pay, on the assumption that he will remain in residence for the whole of the financial year. Individuals will usually pay sums on account of their council tax liability by instalments, although they may be allowed to make payment of the whole assessed amount in one lump sum. Whatever form the payment takes, the taxpayer inevitably pays the bulk of the tax in advance and on account of a liability that is expected to accrue in future. That explains why the Council was able to seek a liability order in respect of the whole of the financial year 2005-2006 in June 2005, and why it sought a liability order in August 2006 which included sums in respect of the period from August 2006 to 31^st March 2007. A liability order can only be sought in respect of sums which are already payable and remain unpaid in whole or in part.
28. The Council Tax (Administration and Enforcement) Regulations 1992, which set out the regime under which liability orders are obtained, also deal with the billing of council tax. Under Part V of the Regulations, the Council must serve a demand notice on every liable person for the financial year to which the notice relates. The demand notice requires the making of payments on account of the Council's estimate of the "chargeable amount", which is defined as the amount which the person is or will be liable to pay (for that financial year). There is an express assumption for these purposes that the person to whom the notice is addressed will be liable to pay the council tax on every day after the issue of the notice.
29. The Regulations provide for payment of the estimated amount by instalments, and for the service of reminder notices if the instalments are not paid on time. Regulation 23(3) provides:

"If within the period of 7 days beginning with the day on which a reminder notice is issued, the liable person fails to pay any instalments which are or will become due before the expiry of that period, the unpaid balance of the estimated amount shall become payable by him at the expiry of a further period of 7 days beginning with the day of the failure."

Regulation 23(4) provides:

"If after making a payment in accordance with a reminder notice which is the second such notice as regards the relevant year, the liable person fails to pay any subsequent instalment as regards that year on or before the day on which it falls due, the unpaid balance of the estimated amount shall become payable by him on the day following the day of the failure".

(Emphasis added)

30. Regulation 33 applies to a sum which has become payable to a billing authority under Part V and which has not been paid. It provides that before a billing authority applies for a liability order it shall serve on the person against whom it is to be made a final notice setting out every amount in respect of which the authority is to make the application. A final notice may be served in respect of an amount at any time after it has become due. However, a final notice need not be served on someone who has already been served with a reminder notice under Regulation 23 in respect of the amount claimed.
31. A liability order under Regulation 34(1) can only be sought in relation to an amount which has fallen due under Regulation 23(3) or (4) and which is wholly or partly unpaid, or an amount stated in a final notice under regulation 33 which is wholly or partly unpaid at the end of a period of 7 days beginning with the day on which the final notice is issued.
32. It follows from the Regulations that if a resident to whom a demand for a payment on account of council tax is properly addressed fails to pay an instalment on time, or fails to respond quickly enough to a reminder notice, or a final notice, he may become liable to pay the whole balance of the estimated amount of tax for that financial year within a short period, normally 7 days. The Council will then be entitled to seek a liability order against him for that amount if it is wholly or partly unpaid. That is what appears to have happened in the present case, and that is why the Council was right to concede that the £297.35 in respect of the financial year 2005-2006 was a bankruptcy debt, even though on the face of the Summons it appeared to relate to a period after Mr Mohammed was adjudged bankrupt.
33. The liability that the Council was seeking to enforce was an existing liability under the Council Tax Regulations to pay a sum on account of Mr Mohammed's (future) liability to pay council tax. The liability to pay council tax for the rest of the financial year after 25^th November 2005 was contingent upon Mr Mohammed continuing to occupy the premises each day until the end of that financial year (as the Regulations assumed he would). However, the liability to make a payment on account of council tax under the Regulations arises before any liability to pay the council tax itself arises under s.2 of the Local Government Finance Act. On any view, therefore, as at 25^th November 2005 Mr Mohammed was already under a legal obligation to make a payment to the Council of the full £297.35 in respect of the financial year ending on 31^st March 2006.
34. The position in respect of the next financial year, from 1^st April 2006 to 31^st March 2007, was different. As at 25^th November 2005, Mr Mohammed had no accrued liability to pay the council tax itself, as that liability arose day by day under the Local Government Finance Act. Nor did he have any obligation to make a payment to the Council under the Regulations on account of that liability, because on the 25^th November 2005, the Council had not yet carried out its estimates or issued any demand notice for any "chargeable amount" in respect of the financial year 2006-2007. Mr Mohammed was no more under a "contingent liability" to pay the council tax for the next financial year, or any part of it, than he was under a "contingent liability" on 25^th November 2005 to pay the next quarter's gas or electricity or telephone bill. Applying the approach set out by the Court of Appeal in Steele there was no underlying legal obligation, at the date of the inception of the bankruptcy, to pay council tax for any period of residence in the premises on or after 1^st April 2006.
35. By the time the Council sought the liability order in August 2006, a fresh liability to pay the whole of the estimated council tax for the financial year 2006-2007 had arisen under the Regulations, presumably because the instalments in respect of that year's assessed council tax were not paid as and when they fell due. The £881.02 was not a "bankruptcy debt" as there was no liability (present or future, actual or contingent) to pay it or any part of it on 25^th November 2005. However, if the Council had wished to bring proceedings in August 2006 to obtain a liability order in respect of that sum alone, it would probably still have needed to ask the permission of the Court to do so under s.285(3)(b) of the Insolvency Act, as Mr Mohammed was still an undischarged bankrupt at that time and the Council was one of his creditors proving in the bankruptcy. Matters are different now, because Mr Mohammed has been discharged from his bankruptcy and his liability in respect of the £881.02 still subsists.
36. It seems to me that the preferable course in all the circumstances is for the Court to quash the Order made by the Magistrates instead of accepting the undertakings belatedly offered by the Council. The Order is defective not only because it is for too great an amount, but also because (a) it was obtained by taking proceedings without the permission of the Court in breach of section 285(3)(b) of the Insolvency Act, (b) part of the total sum claimed, relating to the financial year 2005-06, was a bankruptcy debt and unenforceable outside the bankruptcy and (c) it was duplicative because the Council had already obtained a liability order in respect of that debt. I doubt whether the provisions of Regulation 36A of the Regulations were intended by Parliament to cover a situation such as this. I also notice that the procedure under Regulation 36A enables the Council to include the costs of obtaining the first (defective) liability order in the substitute liability order. In the current situation that would not be fair to Mr Mohammed. In any event, quashing the Order will provide the parties with absolute certainty.
37. The only matter that remains for consideration is the question of the costs of the application for judicial review. Although Mr Mohammed did not persuade me that the £881.02 was irrecoverable, he did succeed in his legal challenge to the Order, and he did achieve more than the Council was prepared to concede in June 2008. The undertakings to follow the Regulation 36A route were only offered on the day of the hearing. Having taken into account the submissions of both parties on costs, I consider that in all the circumstances it would be appropriate for the Council to pay 75% of Mr Mohammed's costs. I have assessed that figure summarily in accordance with CPR 48.6 and the Costs Practice Direction, in the sum of £500. The Council will of course be entitled to set that sum off against the £881.02 still outstanding in respect of the unpaid Council Tax.