England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		12/01/2010

Mr Justice Henderson:

Introduction and background

1. These are appeals by Alastair John Ross ("Mr Ross") and Darrell Simon Holmes ("Mr Holmes") from bankruptcy orders made against them on 28 July 2009 by Chief Registrar Baister. The petitioning creditors were the Commissioners for Her Majesty's Revenue and Customs ("HMRC"), who had served statutory demands on Mr Ross and Mr Holmes in June 2008 in respect of unpaid partnership and self assessment tax liabilities dating back in the case of Mr Ross to the tax year 2004/05 and in the case of Mr Holmes to the tax year 2003/04.
2. Mr Ross and Mr Holmes are solicitors, and for a number of years they had been the only partners in the firm of Walter Scott & Ross ("the Firm") which carried on business in Ilkeston, Derbyshire. At all material times Mr Ross was the senior and sole equity partner. Mr Holmes had been the junior partner since 1994, and was entitled to a fixed share of the profits amounting (at least from 2004 onwards) to £40,000 a year. The Firm had been founded in 1931, and although it had only two partners it had up to 30 employees. It carried on business from a number of freehold and leasehold premises owned by Mr Ross. The Firm made up its accounts on a calendar year basis, and the accounts for the years ended 31 December 2005 and 2006 were in evidence before the Registrar.
3. The amount claimed in the statutory demand served on Mr Ross was £339,168.85. It consisted of unpaid partnership liabilities (Class 1 and Class 1A National Insurance Contributions ("NICS") plus interest and penalties and PAYE income tax plus interest) dating back to 2005/06, and unpaid individual liabilities (self-assessment payments on account, self-assessment tax plus interest, penalties and surcharges) dating back to 2004/05. The amount claimed in the statutory demand served on Mr Holmes was £256,543.36, consisting of the same partnership arrears (for which they were jointly and severally liable) and unpaid individual liabilities (self-assessment payments on account, determinations, interest, penalties and surcharges) dating back to 2003/04. The sum claimed from Mr Holmes also included the unpaid balance of £17,565.77 due under a judgment obtained against him in the Nottingham County Court on 25 February 2006, together with associated interest of £2,680.98.
4. No application was made to set aside the statutory demands, and bankruptcy petitions were presented on 1 September 2008 and served on Mr Ross and Mr Holmes on 22 September 2008. The petition debt in the case of Mr Ross was £20,000 less than the amount of the statutory demand, i.e. £319,168.65. The difference was accounted for by a payment of £20,000 which had been made since the date of issue of the demand. The petition against Mr Holmes was in the sum of £179,055.47, credit having been given for the same payment of £20,000 and also for an amount of £57,487.89 attributable to his personal liabilities.
5. On 17 September 2008 a further payment of £100,000 was made in respect of the partnership liabilities, thereby reducing the petition debts to £219,168.65 and £79,055.47 respectively.
6. I will need to trace some of the early history of the bankruptcy proceedings in more detail later in this judgment. For the moment, it is enough to say that Mr Ross and Mr Holmes initially opposed the petitions on the grounds that:

(a) HMRC had unreasonably refused an offer to secure or compound for the debt first made in a letter from Mr Ross dated 3 June 2008;

(b) their assets comfortably exceeded their liabilities; and

(c) their debts would be paid in full if they were allowed enough time to raise the necessary money by borrowings charged on their assets.

7. At the second hearing of the petitions, on 20 January 2009, the court granted a three month adjournment until 21 April 2009 to allow time for payment to be effected, even though by that date substantial further tax arrears had already accrued, and a without prejudice offer of settlement made by Mr Ross on 12 January had been rejected.
8. Nearly two months after the adjournment was granted, and when (according to Mr Ross) arrangements to borrow the necessary sums were nearly complete, an unexpected event occurred. On 19 March 2009 the Solicitors Regulation Authority ("the SRA") intervened in the practices of Mr Ross and Mr Holmes, pursuant to a resolution to intervene of which Mr Ross was first informed in a telephone call from the SRA at 4.30 pm on 18 March. According to Mr Ross, the grounds of the intervention were that there had been serious errors in the Firm's book-keeping and breaches of the Solicitors Accounts Rules, and the SRA also had reason to suspect dishonesty within the Firm: see section 35 of the Solicitors Act 1974 and Schedule 1 paragraph 1(1)(a) and (c). I am unable to state the grounds for the intervention with any greater precision, because Mr Ross and Mr Holmes chose not to put any of the documentation relating to the intervention in evidence in the bankruptcy proceedings, and gave only a brief and generalised account of it in their joint witness statements. It is clear, however, that an intervention agent was appointed to take possession of the books and papers of the Firm in the usual way, and all sums of money held in connection with the practice vested in the Law Society, together with the right to recover or receive all debts owing to the Firm, to be held on the statutory trusts set out in Part II of Schedule 1 to the 1974 Act.
9. In fairness to Mr Ross and Mr Holmes, I should also quote their unchallenged evidence in their third joint statement, dated 20 April 2009, about the suspected dishonesty within the Firm:

"It should be noted in this context that the only aspect of dishonesty which was alleged at any point against the partners was that failure to deal with the book-keeping entries made by others and/or the possible dishonesty of others over a period might, itself, amount to dishonesty. Or at least that is the understanding of the allegation that was made which we have. We appointed forensic compliance staff from a consultancy who found book-keeping difficulties with our account staff but no dishonesty and said so in a report. It is however clear that there may be a shortfall on client account caused by book-keeping errors and omissions which have impacted upon reconciliations done by account staff on client account. The reconciliations were in themselves correct and balancing but they may have been unreliable due to errors on ledgers."

10. In practice, the result of the intervention, as is almost invariably the case, was to make it impossible for Mr Ross and Mr Holmes to continue their practices, and it is common ground that the Firm permanently ceased to carry on business on 19 March 2009. A further consequence was that their efforts to arrange loans from commercial lenders to pay their debts had to be abandoned, not least because in the absence of a continuing business they no longer had any regular earnings with which to service the interest on the loans. A connected problem in this context is that one of the automatic results of an intervention by the SRA into a solicitor's practice is the suspension of the solicitor's practising certificate. Although it is possible for the solicitor to apply for the suspension to be lifted, and both Mr Ross and Mr Holmes promptly took steps to do so, any lifting of the suspension is likely to be on more or less stringent terms which may make it difficult for the solicitor to find employment, particularly in the current financial climate.
11. Despite these setbacks, however, the intervention and the permanent cessation of the Firm's business were perceived by Mr Ross and Mr Holmes as opening the door to two possible ways of averting the now imminent threat that bankruptcy orders would be made when the petitions next came before the court on 21 April. First, the properties that Mr Ross had intended to use as security for third party loans could now be offered again to HMRC as security for the petition debts and the further arrears of tax which had accrued in the meantime. Secondly, the permanent cessation of the business was likely to generate very substantial terminal losses, which they would be entitled to claim to carry back and set against the profits of the business for the three previous tax years in accordance with the detailed rules set out in sections 89 to 91 of the Income Tax Act 2007. In addition, the accounting irregularities in the books of the Firm which had come to light as a result of the intervention might be expected to give rise to substantial "error or mistake" claims under sections 33 and 33A of the Taxes Management Act 1970 (dealing respectively with errors or mistakes in personal, and partnership, tax returns). Such claims, it was hoped, would lead to the grant of appropriate relief over a period which could go back for as long as (approximately) six years. The intention was that by one or other or a combination of the above routes (i.e. the carry back of terminal losses and/or the making of error or mistake claims) the debts owed to HMRC might be eliminated, or at least reduced to a level in the region of £20,000 to £30,000 which they would be able to discharge from their own immediate resources (including, if necessary, by borrowings from family members).
12. In the light of these considerations, a two-pronged policy was adopted by Mr Ross and Mr Holmes. The first prong was to make a renewed offer of security to HMRC, in terms designed to ensure that refusal of the offer would be unreasonable within the meaning of section 271(3) of the Insolvency Act 1986 and would therefore lead to the dismissal of the petitions. The second prong was to argue that the prospect of making successful terminal loss and/or error or mistake claims gave rise to a valid set-off or cross claim sufficient to extinguish the petition debts, or alternatively evidenced an ability to pay the debts in full within a reasonable period so that the court might be persuaded to grant a further adjournment for that purpose.
13. On 20 April 2009, the day before the adjourned hearing, Mr Ross and Mr Holmes wrote to HMRC offering a number of legal charges as security for payment. The offer comprised:

(a) a first charge on premises at 196 Cotmanhay Road, Ilkeston, consisting of a doctor's surgery and former offices of the Firm, and said to be worth a minimum of £320,000 (or up to £420,000 if a new planning consent was obtained and various proposed lettings were effected);

(b) a first charge on some building land adjoining 48 St Mary's Street, Ilkeston, said to be worth £45,000 in its current state and either £85,000 or £175,000 if various planning consents were obtained;

(c) a third charge on the Firm's former main offices consisting of three "very large Victorian villas", which were now vacant and ripe for conversion into residential units. They said that the estimated value of the property, with planning permission (mostly still to be obtained), "may well exceed £450,000", but there were prior charges in favour of Britannia Building Society and National Westminster Bank Plc totalling £235,000, so the net equity available "may be as much as £215,000" and was "unlikely to be less than £100,000"; and

(d) a second charge on 2 Gregory Street, Ilkeston, the equity in which was said to be £50,000.

The above properties were owned by Mr Ross, with the exception of 2 Gregory Street which was owned by Mr Holmes.

14. The offer went on to say:

" The security being offered would be on the basis of sale after obtaining the planning consents or commencement of marketing at the end of 6 months whichever should first occur.

The security offered would be by way of legal mortgage to secure a minimum of £515,000 and up to £860,000. The latter figure is not unrealistic even in this market."

15. In their second joint witness statement, also dated 20 April 2009, Mr Ross and Mr Holmes explained how the SRA had intervened into their practices, how Mr Ross' well-advanced plans to raise money on the security of his property interests had been frustrated, and how they now hoped to extinguish the petition debt in one or other of the ways which I have mentioned. They also set out a table of their assets, including the properties offered to HMRC as security, with an estimated total value of between £1.97 million and £2.93 million. They concluded in paragraph 30:

"It would be our proposal to pay all debts in full within 6 months in default of which such security could be realised. We should be absolutely clear. We intend to clear our proper debts in full. And we wish to secure our professional futures and go back to earning our living in the legal profession which requires that we are not bankrupt."

16. The statement also dealt with a number of other matters to which I need not refer in any detail, including a proposal for an IVA, which was not pursued, and negotiations with the one supporting creditor, Mrs Ross, who was owed substantial sums as a result of protracted and difficult matrimonial proceedings which had occupied much of her husband's time and energy since mid-2004.
17. The adjourned hearing of the petitions on 21 April was ineffective. Only a few minutes had been allocated for it, on the assumption that the petition debts would by then have been discharged. The petitions were again adjourned to 26 May, with a time estimate of sixty minutes for the adjourned hearing.
18. On 7 May 2009 a meeting took place at HMRC's debt management office in Worthing between Mr Ross and Mr Holmes, and Mr Jamie Webber and Mr Malcolm Challis of HMRC. According to Mr Webber's note of the meeting, he explained in answer to a question from Mr Ross that it was not HMRC's policy to accept a legal charge as security for unpaid tax, and settlement of the debt was required by payment. Mr Challis pointed out that, if HMRC accepted legal charges, there would be no guarantees as to when the debt would be paid. With regard to the possible terminal loss and error or mistake claims, Mr Ross and Mr Holmes were advised to supply the relevant information to their Inspector of Taxes for consideration. If the figures were agreed, the petition debts would be adjusted accordingly. Until that was done, however, the petition debts would remain legally due and payable.
19. On 12 May Mr Webber wrote to Mr Ross confirming the advice which had been given at the meeting, and saying that HMRC's position would be explained to the Registrar at the hearing on 26 May. The letter included this statement of HMRC's policy in relation to the acceptance of legal charges:

"As advised at the meeting and in previous discussions, [HMRC] will not accept legal charges on properties. To maintain the flow of funds to the exchequer, payment is required to settle the debt."

20. On 21 May Mr Ross and Mr Holmes served a further unsigned witness statement, their third. They gave their own version of the meeting at Worthing on 7 May, and said that according to Mr Webber and Mr Challis HMRC refused to accept real property as security, even if it was sufficient in amount, because it was difficult to administer and it was difficult to monitor its sale. They then gave details of accounting errors which had been made in relation to one client in 2008, and provided an estimate of terminal losses made up as follows:

(a) The SRA's costs of the intervention: £25,000.

(b) The costs of the SRA's intervening agent: about £120,000 to date, and probably £200,000 when the work was completed.

(c) Net redundancy payments to staff: £60,000.

(d) Unsecured bank overdraft: £15,000.

(e) Trade creditors: £50,000.

(f) Professional fees paid by Mr Ross and Mr Holmes to solicitors and forensic accountants in connection with the intervention: £30,000.

(g) Insurance run off premium: £78,750.

The total amount of these heads of expenditure is £458,750, but in paragraph 6 they expressed the view that "[i]n round terms there are sums of £600,000 to put against whatever profits there may have been for previous years". The difference between the two figures is presumably accounted for by an estimate of the value of the error or mistake claims, and/or of the amounts that Mr Ross and Mr Holmes might be required to restore to the Firm's client account.

21. They accepted that, on the credit side, there was substantial work in progress to be billed to the date of closure, but said that recovery was a difficult process and subject to many allowances and counterclaims for incomplete work etc. They also pointed out that the debts due to the Firm were subject to the statutory trusts in favour of the SRA. Nevertheless, they asserted in paragraph 10:

"In the result it is quite impossible to say that the debt to the Revenue is presently due and we shall as soon as the figures are available be making claims for the errors and omissions and terminal losses to be assessed and agreed and if not so assessed and agreed to be determined by the Revenue Commissioners."

To similar effect, they said in paragraph 22 by way of summary:

"The debts owed, if any, are at the date of this statement not established as being due if only due to supervening events."

They added in paragraph 23:

"If that were not the case Mr Ross and Mr Holmes have offered security which was more than adequate and has not been contested."

In paragraphs 19 and 20 they had given a brief update on the properties offered as security, including the fact that Mr Ross had found a dentist to take a lease of 196 Cotmanhay Road.

22. Meanwhile, HMRC served a short witness statement by Mrs Shanthy Joharatnam in response to Mr Ross' and Mr Holmes' statement of 20 April. Although dated 15 May, this statement must have been completed a few days later because it exhibited a letter sent by Mr Webber to Mr Ross and Mr Holmes on 18 May in reply to their offer letter of 20 April. The letter added nothing of any substance to Mr Webber's earlier letter of 12 May. It reiterated that HMRC did not accept legal charges on properties, that the debts remained due and owing unless and until any adjustments were made by the Inspector, and that they could only be settled by payment.
23. At the hearing on 26 May Mr Registrar Nicholls again adjourned the hearing of the petitions to 20 July 2009 and gave directions for the filing of further evidence. He limited the evidence of Mr Ross and Mr Holmes at the final hearing to their three earlier statements, together with one further statement in answer to Mrs Joharatnam's statement of 15 May. He also ordered them to file an amended notice of opposition setting out their new grounds for opposing the petitions, limited to issues regarding the offer of security and issues regarding the availability of relief for losses, errors and omissions following the intervention in their practice. HMRC were ordered to file one further witness statement in reply by 7 July.
24. Amended notices of opposition were duly served by Mr Ross and Mr Holmes on 18 June. The notices were in identical form, and they relied upon all of the new grounds which I have mentioned. Both the terminal losses and the errors and omissions were said to be "of such moment that any indebtedness to the Petitioner is excluded", either on the footing that they extinguished the debt or because they amounted in effect to a cross-claim. They said that they were able to pay their debts, and that HMRC's refusal of their offer of security was unreasonable.
25. On 23 June Mr Ross and Mr Holmes served their fourth witness statement, which was dated 18 June. The statement added little of substance to their second and third statements, but exhibited some documentary material in support of the alleged terminal losses, including copy bills for professional fees, a spreadsheet giving details of claims by employees for unfair dismissal and redundancy, and a run-off insurance premium in the sum of £78,750. The maximum amount of the employee claims was now estimated to be about £150,000, and the total costs of the SRA and the intervening agent were estimated at £250,000. The effect of these revised estimates was to increase the total amount of expenditure said to be eligible for terminal loss relief to not far short of £600,000. However, no draft trading accounts of any kind were produced for the period to cessation, nor was there any letter of advice or computations from an accountant. Instead, Mr Ross and Mr Holmes merely said:

"3.3 In such circumstances we respectfully submit that intervention has caused discovery of errors and omissions which are substantial and which may be carried back six years and therefore set against the taxes due. We also submit that the same and additional sums as set out above will constitute losses of such moment that it is certain in taking them back over relevant periods (in the case of losses for 3 years) the entire Revenue debt will be eradicated.

4. Such losses do exist now and so do the errors and omissions. The fact the Revenue and we cannot quantify them exactly for a period does not alter their significance or likely size. Nor the right to have them set against prior taxation in diminution or extinction thereof on normal principles."

26. The evidence was finally completed by a witness statement of Mr Jamie Webber on behalf of HMRC dated 24 June 2009. In this statement he explained HMRC's position from the date of the statutory demand onwards, and gave details of the very substantial further arrears of PAYE income tax, NICs and personal tax liabilities which had accrued since the date of the demands. In paragraph 4.6 he said that the debtors owed £126,000 of further arrears not subject to the bankruptcy petitions. In fact the true figure appears to have been even higher, because in letters dated 27 April 2009 sent by Mr Webber to Mr Ross and Mr Holmes the total amounts due from them in respect of further arrears and interest were shown as £90,342.53 and £55,081.46 respectively.
27. The principal reasons given by Mr Webber for the refusal of the offer of security were as follows:

"4.1 HMRC is not prepared to accept legal charges on properties as there is no guarantee as to when payment will be forthcoming.

4.2 To maintain the flow of funds to the exchequer, settlement of the debt is required by payment in full.

4.3 HMRC is not resourced to monitor and administer property sales to pay tax debts. It is not the role of the creditor to realise assets.

4.4 The debtors have had a significant amount of time to raise finance on their properties. The first letter issued by Enforcement & Insolvency in Worthing was on 20 February 2008. Prior to this, Nottingham Tax office was attempting to recover the unpaid debts. HMRC contends that funds should have been obtained well before the filing of bankruptcy petitions.

4.5 It would be unfair to other taxpayers who make provision to pay their taxes on time, if HMRC were to accept legal charges in this case."

The decision of the Chief Registrar

28. The hearing of the petitions on 20 July 2009 took place before the Chief Registrar. Mr Ross and Mr Holmes appeared in person, and Mr Ross spoke for them both, as he has before me. HMRC were represented by counsel for the first time, Mr Jonathan Lopian, who has also appeared for them on the appeal to this court. The Registrar delivered his reserved judgment on 28 July.
29. After summarising the history of the matter, he recorded in paragraph 12 of his judgment that he had to deal with three issues:

(1) whether the offer of security made on 20 April 2009 had been unreasonably refused;

(2) whether the terminal losses could be said to constitute either a set-off, counterclaim or cross demand equal to or in excess of the petition debt, or alternatively whether they operated as a reduction of the petition debt; and

(3) whether an error or omissions claim would similarly reduce or extinguish the debt.

He then proceeded to deal with each of the issues in turn.

(1) The refusal of the offer of security

30. The Registrar began by referring to section 271(1) of the Insolvency Act 1986, which provides that:

"The court shall not make a bankruptcy order on a creditor's petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either –

(a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured or compounded for …"

Rather curiously, he did not go on to cite subsection (3), although he must have had it well in mind. Subsection (3) provides as follows:

"(3) The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied –

(a) that the debtor has made an offer to secure or compound for a debt in respect of which the petition is presented,

(b) that the acceptance of that offer would have required the dismissal of the petition, and

(c) that the offer has been unreasonably refused;

and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities."

31. The Registrar then referred to three authorities. The first was In re A Debtor (No. 32 of 1993) [1994] 1WLR 899, a decision of Mr Timothy Lloyd QC, as he then was, and which the Registrar described as "probably still the leading authority on the topic". The second was the decision of Robert Walker J (as he then was) in IRC v a Debtor [1995] BCC 971. The third, which the Registrar described as "perhaps less well-known", was HM Customs & Excise v Dougall [2001] BPIR 269, from which he cited the following summary of the relevant principles given by Lightman J at 272. With the correction of an obvious error in the report, the summary reads as follows:

"First, the test of unreasonableness is whether a reasonable creditor in the position of the petitioning creditor and in the light of the actual history as disclosed to the court could have reached the conclusion that the petitioning creditor reached. There may be a range of reasonable positions on the part of the hypothetical reasonable creditors and a rejection of an offer by the petitioner is only to be categorised as unreasonable if no reasonable creditor would have refused the offer and accordingly the refusal is beyond the range of reasonable responses to it. Secondly, the test is objective, namely the response of the hypothetical reasonable creditor. The court is not limited to considering the considerations that were taken into account by the petitioning creditor himself when he refused to agree to the offer. The court must look at all the relevant factors and decide what are the relevant factors and what impact those relevant factors would have on the hypothetical reasonable creditor. The third proposition is that the debtor must be full, frank and open and provide all the necessary information to enable an informed decision to be made by the creditor."

32. Having thus directed himself, the Registrar then stated his conclusions on this issue:

"14. Dealing with that third principle I can say simply that there has not been any suggestion that Messrs Holmes and Ross have been other than full and frank in relation to their disclosure. The relevant matters I think I have to look at are the history and whether, in the light of that and all the relevant factors the reasonable hypothetical creditor posited by Timothy Lloyd QC could be said to have been reasonable in rejecting that offer, and I can deal with that really quite shortly. The first offer was to the effect that the Inland Revenue would be paid by October or November 2008 and it is common ground that they were not. Secondly, it was then said by Mr Holmes and Mr Ross that the debts would be paid by 31 March 2009 and again it is common ground that they were not – or at least they were not paid in full. Those factors alone, it seems to me, make it reasonable for the reasonable hypothetical creditor to reject a further offer, but there are other reasons as well. Thirdly, there was a cheque for £50,000 that was received on 27 October 2008 that was returned unpaid; and fourthly, there is or has been, as Dr Lopian has said, and as is clear from the correspondence I have already referred to, a history of disorder in the tax affairs of both debtors and failure to make returns on time and a history of failure to pay on time. The fifth factor is one that goes to Mr Holmes' position only. He has an unsatisfied judgment – or balance of a judgment debt going back to 2006 which, as far as he is concerned, is something that the petitioners are entitled to take into account as they are, finally, the fact that further arrears have been accruing as I understand it since these petition debts were incurred [he then referred to the letters from HMRC dated 27 April 2009 mentioned in paragraph 26 above]. It cannot, to my mind, be said to be unreasonable for a creditor to refuse an offer where previous promises, whether rejected or not, have been unfulfilled, a cheque has bounced and further sums have fallen due.

15. As to the question of the offer of security I would say it is unfortunate and perhaps ill-advised that the petitioners have given a glimpse of what appears to be (and appears to have been) a long established policy stance indicating that they reject offers of security out of hand without giving them individual consideration. But it is unnecessary for me to consider that today because even the offer of security as most recently made is hedged around. Not all the charges will be first charges, which is arguably not of crucial importance, but the ability to realise the security will, on the basis of the offer as made, be deferred for up to six months, so the purpose of granting it, namely an immediate ability to realise the asset and turn it into money, is defeated or deferred amounting to yet a further delay in payment of the debt.

16. For all those reasons I reject the s.271(1) ground of opposition."

(2) Terminal losses

33. The Registrar began his discussion of this topic by saying that the argument was put extremely attractively by Mr Ross, but in the end it seemed to him that the attraction was superficial. He then quoted section 89(1) of the Income Tax Act 2007, and referred to the three year carry back provision in subsection (2).
34. For convenience, I will at this point set out the main relevant provisions of sections 89 to 91 of the 2007 Act:

"89 Carry back of losses on a permanent cessation of a trade

(1) A person may make a claim for terminal trade loss relief if the person –

(a) permanently ceases to carry on a trade in a tax year ("the final tax year"), and

(b) makes a terminal loss in the trade (see section 90).

(2) The claim is for the total amount of terminal losses made in the trade by the person ("the relievable loss") to be deducted in calculating the person's net income for the final tax year and the 3 previous tax years …

(3) But a deduction for that purpose is to be made only from profits of the trade.

(4) This section applies to professions and vocations as it applies to trades …

(5) This section needs to be read with –

(a) section 91 (how relief works),

(b) …

90 Losses that are "terminal losses"

(1) Each of the following is a terminal loss made in the trade –

(a) the loss (if any) made in the trade in the period beginning with the start of the final tax year and ending with the cessation, and

(b) the loss (if any) made in the trade in the period consisting of so much of the previous tax year as falls in the 12 months prior to the cessation.

(2) The profit or loss of a period mentioned in subsection (1)(a) or (b) (a "terminal loss period") is determined by reference to the profits or losses of periods of account of the trade (calculated for income tax purposes).

(3) If no period of account coincides with a terminal loss period, any of the following steps may be taken if they are necessary in order to arrive at the profit or loss of the terminal loss period –

(a) apportioning the profit or loss of a period of account between the part of the period that falls in the terminal loss period and the part that does not, and

(b) adding the profit or loss of a period of account (or part of a period) to profits or losses of other periods of account (or parts).

…

(6) In the case of a notional trade carried on by a partner in a firm –

(a) the periods of account of the notional trade are taken to be the periods of account of the actual trade, and

(b) the references in subsections (2) and (3) to the profits or losses of periods of account of the trade are to the partner's share of the profits or losses of the actual trade determined in accordance with sections 849 and 850 of ITTOIA 2005.

91 How relief works

This section explains how the deductions are to be made.

The amount of the relievable loss to be deducted at any step is limited in accordance with sections 25(4) and (5).

Step 1 Deduct the relievable loss from the profits of the trade of the final tax year.

Step 2 Deduct any part of the relievable loss not deducted at Step 1 from the profits of the trade of the previous tax year.

Step 3 Deduct any part of the relievable loss not deducted at Step 1 or 2 from the profits of the trade of the tax year before the previous one.

Step 4 Deduct any part of the relievable loss not deducted at Step 1, 2 or 3 from the profits of the trade of the tax year before that one.

Other claims

If the relievable loss has not been deducted in full at Steps 1 to 4, the person may use the part not so deducted in giving effect to any other relief under this Chapter (depending on the terms of the relief)."

35. In paragraph 18 of his judgment the Registrar referred to the approximate losses set out in Mr Ross' and Mr Holmes' statement of 18 June 2009, and continued:

"In the course of the hearing we did a "back of the envelope" calculation and came up with possible losses of some £500,000, but query of course whether the intervention costs would be allowable as an expense, and there is also, as is quite properly conceded in the witness statement … , a difficulty about quantification because it is early days yet. I will nonetheless proceed on the basis that £500,000 or thereabouts is an arguable figure for the losses. They are, it seems, backed by documents; we have not trawled through the documents … , but I will accept at face value the figures put forward."

36. The Registrar then described the stance adopted by HMRC in their letter of 18 May 2009 to Mr Ross, and continued:

"20. It is common ground as I understand it that in order to avail themselves of the losses some sort of accounts will have to be drawn up, figures will have to be put forward and, as I understand it, accepted by the Revenue. But what Dr Lopian points out is that the losses, if indeed there are any, can only be set off against the profits, they do not operate against [NICs] and PAYE deductions and so on, and I presume for that matter that it is unlikely they will operate to undo penalties either. What the proper analysis of that claim might be is something that we discussed at the hearing, when I thought it was probably best formulated as some sort of set-off, counterclaim, or cross demand against the petition debt, but I am not so sure about this. It might be better to look at it as operating to reduce the petition debt, but I am not very sure that it matters what the precise legal analysis is. If the loss claims do operate as a set-off it seems to me that they will not arise until they are crystallised by the preparation of accounts and the acceptance of the figures in those accounts. At present they remain in the air and remain speculative in spite of the no doubt entirely reasonable estimates that have been put forward on behalf of the debtors.

21. If the second analysis is right and those losses simply operate to reduce the petition debt, then it seems to me that they operate in a way analogous to payment, and what the debtors are asking the court to do is effectively to adjourn yet again to allow further time for those losses to be prepared, put in and accepted, which is akin to asking for yet another adjournment to pay. The time for that has long passed. The petition debts are due now, the losses may not crystallise in the future, but the petition debts are unimpugned and are undoubtedly due now.

22. The further problem seems to me to be this: if the loss claims do exist when will they be finally calculated and when will they finally be submitted? I have no idea. What I can assume is that it is unlikely that these steps will be taken quickly, and I think I am entitled to say that, not only because I recognise the complexity of winding-up the affairs of a partnership, but also because I have in mind the dilatory manner in which Mr Ross and Mr Holmes have dealt with their tax affairs in the past. Accordingly, it seems to me that the losses are not available as a defence by way of a reduction in the petition debt at this time and they do not constitute a reason not to make the order, either in relation to the debt or in relation to the exercise of the discretion, to which I will come in a moment."

(3) Error or mistake claims

37. The Registrar also rejected this ground of opposition, on the basis that the claim was "somewhat vague" and in any event "no formal claim [had] yet been made, much less accepted". I will not deal with this part of the case in any greater detail, because in the course of the hearing before me Mr Ross, wisely in my view, decided to abandon the point.

(4) Discretion

38. Having rejected the three grounds of opposition relied upon by Mr Ross and Mr Holmes, the Registrar then turned to the final question of whether he should grant a further adjournment of the petitions in the exercise of his discretion. He dealt with the matter as follows in paragraph 25 of his judgment:

"That leaves the final question which is the exercise of the discretion. We discussed in the course of the hearing whether in the exercise of the court's discretion I ought to decline to make a bankruptcy order now but give time for the losses to crystallise, and the error or mistake claims to be properly submitted to the board. As I have already adumbrated, I would often be sympathetic to doing this, but in this particular case I must have regard to the history of delay in dealing with these gentlemen's tax affairs, the history of the broken promises, the history of the petition itself, the fact that these matters only arise as a result of an intervention not brought about by any act of the petitioners; and finally, I think, to the principle that taxpayers must pay their tax as and when it falls due."

Permission to appeal

39. The Registrar refused permission to appeal on the first issue, but "with misgivings" granted permission to appeal limited to:

"(a) whether the error or mistake claims under section 33 or 33A Taxes Management Act 1970 and/or the losses under section 89 of the Income Tax Act 2007 constitute a set-off, counterclaim or cross demand or operated in reduction of the petition debts;

(b) whether, if they did, it was right to exercise the discretion of [sic] to make an immediate Bankruptcy Order."

40. In their appellant's notices Mr Ross and Mr Holmes asked for permission to appeal on the first issue, and also on various procedural grounds relating to a letter which HMRC sent to the Registrar, and copied to Mr Ross and Mr Holmes, on 21 July 2009 concerning a dispute which had arisen in the course of the hearing about the allocation of a credit of £20,000.
41. By orders dated 31 July 2009 Briggs J granted a stay of the bankruptcy proceedings and prohibited advertisement of the bankruptcy orders. He gave HMRC liberty to apply on notice to vary or discharge this order, but they have not done so, so the position remains that the bankruptcy proceedings are stayed. Briggs J was unable to deal with the outstanding applications for permission to appeal, because a transcript of the Registrar's judgment had not yet been obtained. There matters rested until shortly before the hearing of the appeals, which had been fixed for 1 or 2 December 2009. It appears that Mr Ross and Mr Holmes then applied on paper to Briggs J for an adjournment of the appeals. By a further order dated 27 November 2009 Briggs J refused the application for an adjournment and directed that the outstanding applications for permission to appeal should be dealt with after oral argument at or before the commencement of the hearing of the appeals.
42. In the event, the appeals came on for hearing before me on 3 December. I found it more convenient to permit Mr Ross to open the appeals on all the points which he wished to argue, rather than dealing with the issues of permission to appeal as a separate preliminary matter. In the course of the hearing, he abandoned the procedural grounds relating to the letter of 21 July, so the issues on which I heard full argument, and which I now need to decide, are the two issues for which the Registrar gave permission to appeal and the issue whether HMRC acted unreasonably in refusing the offer of security first made on 20 April 2009 and repeated on a number of subsequent occasions.

Discussion

(1) The offer of security

43. Like the Registrar, I will begin with the offer of security. Mr Ross argued that HMRC acted unreasonably in refusing the offer, for a number of reasons which I would summarise as follows:

(1) The security offered was amply sufficient to cover all the sums owed by Mr Ross and Mr Holmes to HMRC, including the further liabilities which had accrued since the date of the petitions.

(2) Their offer was never considered on its merits, but was rejected out of hand in reliance on a rigid policy that in no circumstances would HMRC accept security on real property.

(3) Since the security would more than cover the outstanding debts, and would thus enable them to be paid in full, it is irrational to treat the previous history of non-payment, broken promises and defaults, as the Registrar did, as good reasons for not accepting the offer. On the contrary, the purpose of the offer was to provide the certainty of payment which had previously been lacking.

(4) Although the offer was admittedly expressed to be on the basis of a sale after six months or the earlier receipt of planning permission, Mr Ross resiled from that position in the course of the hearing before the Registrar, and said to him "the only thing I want to do is to make sure the properties are realised at best" (page 49 of the transcript). In any event, a sale after six months would in practice involve no more, and probably less, delay than a sale by a trustee in bankruptcy.

(5) HMRC's refusal of the offer was all the more unreasonable when taken in conjunction with the intended terminal loss claims, which were likely either to eliminate, or at least greatly to reduce, the debts owed to HMRC.

44. I have already set out in paragraph 31 above the helpful summary of the relevant legal principles given by Lightman J in HM Customs & Excise v Dougall [2001] BPIR 269 at 272. There are, however, some further points which can usefully be gleaned from the authorities.
45. First, in In re A Debtor (No. 32 of 1993), loc.cit., Mr Timothy Lloyd QC held that the district judge had erred in attaching little significance to the past history of offers and payments in that case. He said at 910F:

"It seems to me that the past history would be of substantial relevance to the hypothetical reasonable creditor when deciding whether or not to accept an offer or rather to press for a bankruptcy order."

Having commented that there was "a good deal of justification" for describing the debtor's attitude as one of prevarication and delay, the deputy judge said again at 910H that in his view

"the hypothetical reasonable creditor, on the facts of this case, might well be influenced, in deciding whether to accept the offer or to press for a bankruptcy order, by the unsatisfactory record of the debtor's past dealings."

46. It follows from these observations, with which I respectfully agree, that the Registrar in the present case cannot in my judgment be criticised for having had regard to the history of the matter as a factor which a reasonable creditor would have taken into account in deciding whether or not to accept the offer of security. Of course it is true that the purpose of such an offer is to guarantee that payment will be made in full at a future date, but in the light of a history of default, partial payments and promises which come to nothing, there comes a time when a reasonable creditor may prefer to press for an immediate bankruptcy order. That is particularly so where, as in the present case, the debtor appears to have ample assets to meet his debts, with the consequence that the making of a bankruptcy order is still likely to lead to full recovery for the creditor, albeit at a considerably greater cost to the debtor (because of the costs of the bankruptcy, and the forced realisation of assets by the trustee).
47. Secondly, and following on from the point which I have just made, in IRC v a Debtor, loc.cit., Robert Walker J said at 974B that it seemed to him reasonably clear:

"that in considering an offer a creditor is entitled to have regard to his own interests (so long as they are his interests as a creditor, and not in some other capacity so as to bring in collateral considerations). The creditor is not required to balance his interests against those of the debtor, or to take a chance, or to show patience or generosity, even though some creditors might do so. As Lord Phillimore put it in Viscount Tredegar v Harwood & others [1929] AC 72 at p.82, acting reasonably is not the same as acting justly, fairly or kindly. That was a landlord and tenant case but this point at least is of general application."

48. In the same case, the judge made some pertinent comments about the position of the Revenue, which had refused an offer of a third charge over the debtor's house to secure a debt of about £36,000. The house was worth around £150,000, but was subject to first and second charges totalling about £80,000 and there was evidence that enforcement by sale would probably be difficult and protracted: see in particular 976F-G. The judge doubted (differing on this point from Mr Timothy Lloyd QC) whether there could be any strong presumption that large and impersonal creditors, such as the insurance company in In re A Debtor (No. 32 of 1993) or the Revenue, are unlikely to act unreasonably. As he said at 974G:

"Large and impersonal bodies are much less likely to act unreasonably from motives of personal vindictiveness … but bureaucratic inflexibility can sometimes produce an impersonal sort of oppression. On the other hand, large organisations constantly have to take decisions affecting large numbers of debtors (whether they are taxpayers, borrowers or trade debtors) and they can sensibly do so only by delegating the decisions to be made in accordance with coherent in-house policies."

49. After setting out the factors which weighed both for and against the taking of security, Robert Walker J stated his conclusion at 976G:

"Having looked at the rival submissions in some detail I remind myself that the crucial question is: am I satisfied that the Revenue has acted unreasonably in rejecting the offer? The Revenue is, as Mr Tidmarsh says, under a statutory duty to collect tax (and interest on tax) that is due but unpaid. The officials of the Revenue concerned with collection ought not (and therefore are, on the face of it, unlikely) to refuse an offer which increases the likely net recovery to public funds. But the Revenue is, on the face of it, the best judge of what internal costs and diversion of resources may be involved in accepting security in a case like this. Without going back on what I have said about the possibility of institutional oppression, I see no real evidence of it in this case. At worst some officials have been careless and imprecise in explaining the Revenue's position."

Bearing in mind the range of reasonable positions open to the hypothetical creditor, the judge held, reversing the decision of Mr Registrar Rawson, that the Revenue had not gone outside that range and acted unreasonably.

50. Thirdly, the decision of Lightman J in HM Customs & Excise v Dougall is of interest because one of the arguments advanced by the debtor was that the Commissioners operated a rigid institutional policy of conceding nothing to a debtor who had defrauded them. The judge said at 273H that it was clear to him that the Commissioners did not regard themselves as bound to adhere to any rigid policy, and they viewed the debtor's proposal on its merits, as they were obliged to do. He then referred to certain aspects of the evidence which supported this conclusion, and continued at 274A:

"I should, however, add, that even if I had held that there was a rigid policy which constrained the [Commissioners] in regard to the proposal made, I would not have regarded that as a matter of any significance for this simple reason: the exercise required, as I have already said, is an objective valuation of the offer and subjective considerations which operated on the mind of the creditor are not matters of any weight."

51. This last point is a significant one, because like the Registrar I find it disturbing that Mr Ross and Mr Holmes were repeatedly told that it was the policy of HMRC not to accept security in the form of legal charges over land. A variety of explanations for this policy were given, but its existence was never denied, and consistently with its existence there is no indication that the security offered by Mr Ross and Mr Holmes was ever considered on its merits. In the course of the hearing Mr Lopian told me, on instructions, that despite all appearances to the contrary in the present case HMRC do not, in fact, have a rigid policy, and all offers of security are (or should be) considered on their merits. I do not doubt that Mr Lopian's instructions were to this effect, but I have to say that there is no evidence in the present case of the application of a flexible policy of that nature, and there is instead every indication that the offer of security was rejected out of hand without any serious consideration. I think it is regrettable, to say the least, and especially so in view of the comments made by Robert Walker J in IRC v a Debtor, that if HMRC do have a coherent in-house policy in this area, effective steps have apparently not been taken to ensure that it is known to, and applied by, the enforcement officers who actually deal with debtors. In the circumstances, it is not surprising that Mr Ross and Mr Holmes gained the firm impression that their offer of security was for all practical purposes ignored. Furthermore, there is in my judgment a real risk of institutional oppression if a rigid policy is unthinkingly applied, and debtors are fobbed off with inadequate or generalised justifications for the policy.
52. It is worth at this point making some brief comments on the justifications proffered by Mr Webber in his witness statement. First, it is said that HMRC are not prepared to accept legal charges "as there is no guarantee as to when payment will be forthcoming". That is of course true, but the purpose of security is normally to ensure that payment in full will be made when the security is realised, and it will often be the case that the prospects of obtaining payment in full are far less certain if the offer is refused and a bankruptcy order is made. Secondly, it is said that immediate settlement of the debt is required "to maintain the flow of funds to the exchequer". But where enforcement proceedings have reached the stage of an offer of security, the debtor will long since have failed to settle his taxation liabilities when they fell due, and the issue is rather how to maximise the likely net recovery to public funds (as Robert Walker J said at 976H). The third reason is that HMRC do not have the resources to act as mortgagees and to administer the sales of mortgaged property. This, by contrast, appears to me to be a highly material consideration, and in my view debtors cannot reasonably complain if in the general run of cases HMRC decline to incur such responsibilities. Their primary function, after all, is to collect tax, not to act as an institutional lender. The fourth reason is that Mr Ross and Mr Holmes had already had plenty of time to raise money on the security of their properties. This, too, was in my judgment a relevant consideration, and it formed part of the history which, as the deputy judge said in In re A Debtor (No. 32 of 1993), the creditor is entitled to take into account. Finally, it is said that it would be unfair to other taxpayers who pay their taxes on time if HMRC were to accept legal charges in the present case. This seems to me a bad reason. In general, fairness to other taxpayers will best be achieved by adopting the policy which is best calculated to maximise the net recovery to public funds. It seems to me fanciful to suppose that acceptance of the charges offered by Mr Ross and Mr Holmes, over a substantial portfolio of properties, would somehow have encouraged other taxpayers not to pay their taxes on time, or penalised them for doing so.
53. A related question is how far the hypothetical reasonable creditor should be taken to have the actual characteristics of the petitioning creditor. This is not a question which has been much explored in the authorities, but it seems to me that the test only makes sense if the hypothetical creditor is regarded as having at least the main characteristics of the petitioning creditor and as standing in his shoes. Thus Mr Timothy Lloyd QC formulated the relevant test as being "whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer": see [1994] 1 WLR 899 at 910C, followed by Lightman J in HM Customs & Excise v Dougall, loc.cit., at 272F. Accordingly, in the present case the hypothetical creditor must in my view be regarded as a national revenue authority in the same position, and subject to the same constraints, as HMRC, and the test has to be applied in the light of the actual history as set out in the evidence before the court.
54. I have already recounted much of the relevant history in the first section of this judgment, but I now need to fill in some of the earlier stages in the story. The first offer to clear the outstanding debt came in a letter dated 3 June 2008 from Mr Ross, who said he was also writing on behalf of Mr Holmes, to Mr Challis in Worthing. Mr Ross said that the position in his matrimonial proceedings had now been clarified, and he listed the assets which he would still have available to him. He said that the debt owed to HMRC was due to a combination of his matrimonial difficulties and the fact that one major client of the Firm owed a sum of between £200,000 and £250,000 exclusive of VAT which was likely to be paid before the end of October 2008. He also said that an uncle of his had died in Canada on 30 December 2007 and had left him a legacy of £150,000 which he expected to receive by no later than 1 December 2008. He said that the total value of his assets, ignoring the value of the business, was £1.72 million, and his non-Revenue debts were £820,000. He offered to discharge the Revenue debt within six months in the following way:

(1) he would pay the £150,000 legacy to the Revenue on receipt;

(2) he would in any event pay £120,000 over the next six months by monthly instalments of £20,000 at some time during each calendar month, beginning in the first week in July 2008 and ending in December 2008; and

(3) he was prepared to sell 2 Jackson Avenue within the next four months for redevelopment, and this was estimated to bring in £160,000 to £170,000.

He then said:

"The total monies so raised should be in excess of £430,000 and I could offer the Revenue some security shortly by the way of eg a first legal charge on 196 Cotmanhay Road Premises."

55. HMRC replied to this letter on 5 June 2008, saying that the proposals were unacceptable for a number of reasons, including the fact that PAYE returns and payments were still in arrear and the partnership self-assessment returns for the tax years 2004/05, 2005/06 and 2006/07 had still not been submitted. Mr Holmes was also asked to provide a written authority if he wished Mr Ross to deal with his tax affairs on his behalf.
56. By mid-July the outstanding partnership and self-assessment returns had been submitted, and on 16 July HMRC wrote again to Mr Ross. They said that if the filing of a bankruptcy petition was to continue to be deferred Mr Ross would need to satisfy the following conditions:

(a) provision of Mr Holmes' written authority to deal with his tax affairs;

(b) the making of monthly payments of £20,000 as proposed in the letter of 3 June;

(c) the immediate settlement of post-statutory demand underpayments of PAYE amounting to approximately £40,000 and a self-assessment surcharge of £3,000 payable by Mr Ross;

(d) continuing to make all future payments due to HMRC by the due date in each case;

(e) making an additional payment of £160,000 to £170,000 from the sale of 2 Jackson Avenue by 3 October 2008; and

(f) making payment of the outstanding balance by no later than 3 December 2008.

The letter went on to say that the papers would be reviewed on a monthly basis, and if any of the above requirements were not adhered to the bankruptcy proceedings would immediately be reinstated.

57. As Mr Webber explains in his witness statement, none of the above conditions was in fact satisfied. No written authorisation has ever been provided by Mr Holmes. No sum was paid from the sale of 2 Jackson Avenue, and the property remains unsold today. Mr Ross and Mr Holmes have not kept up to date with their tax payments, and by the date of the hearing before the Registrar their post-petition tax liabilities were very substantial: see paragraph 26 above. Furthermore, a cheque for £50,000 received by HMRC on 27 October 2008 was returned by the bank unpaid. Even the obligation to pay six monthly instalments of £20,000 was not honoured, although a total of £120,000 was paid by means of a payment of £20,000 in late August 2008 and a further payment of £100,000 made on 17 September 2008. An earlier payment of £20,000 on 5 July 2008 had been returned by the bank unpaid, and although a further payment of £20,000 was sent by telegraphic transfer there is an unresolved dispute about its allocation.
58. It was against this background of non-compliance that the bankruptcy petitions against Mr Ross and Mr Holmes were presented on 1 September 2008, with a first return date of 25 November. On 17 November 2008 Mr Ross and Mr Holmes filed notices of intention to oppose, on the grounds that they were able to pay their debts, HMRC had unreasonably refused the offer contained in Mr Ross' letter of 3 June, and the petition should be adjourned for those matters to be heard and/or to permit payment.
59. In their first joint witness statement, also dated 17 November 2008, Mr Ross and Mr Holmes described Mr Ross' matrimonial proceedings and the disruption to the practice of the Firm which they had caused. They exhibited a statement of assets and liabilities, showing the values which had been used in the divorce proceedings pursuant to a valuation carried out in March 2008. The statement showed that, depending on various assumptions, and adopting a conservative approach, Mr Ross' assets exceeded his liabilities by between £375,000 and £465,000, while in the case of Mr Holmes there was an excess of £179,000. Proposals were made for settlement of the petition debts over the period to 31 March 2009, to be financed principally by borrowings secured on the practice properties and the sale of 2 Jackson Avenue. The delay in the sale of the latter property was explained on the basis that obtaining planning permission had taken longer than expected and the downturn in the market had also not helped. There was, however, at least one prospective purchaser. A loan of £250,000 had already been approved in principle by Lloyds TSB, and in one way or another they expected to have a total of at least £460,000 available to clear their debts.
60. At the first hearing of the petitions on 25 November 2008, the court adjourned them to 20 January 2009 to allow HMRC the opportunity to respond. This they did by a letter dated 28 November 2008. The letter pointed out that none of the conditions in HMRC's letter of 16 July 2008 had been met, and that further substantial tax and NIC liabilities had accrued which were not reflected in the petitions. The letter made it clear that further adjournments would be opposed, and ended by saying:

"You should therefore ensure that your Tax & National Insurance affairs are brought fully up to date by the date of the adjourned hearing."

61. On 12 January 2009 Mr Ross made a without prejudice offer to HMRC, which was rejected on the following day. No similar offer was made by Mr Holmes. Despite HMRC's opposition, on 20 January 2009 the court again adjourned the petitions for three months to 21 April in order to allow time for payment. On 21 January Mr Webber wrote to Mr Ross saying that the total amount now due from him was £307,113.94, comprising the petition debt of £219,168.85 and further arrears and interest of £87,945.09. He said that if payment in full of the petition debt had not been received before 21 April, HMRC would seek a bankruptcy order. I assume that a similar letter was sent to Mr Holmes, although it does not appear in the bundle.
62. Having now set the scene, at I fear considerable length, and referred to the guidance to be found in the authorities, I can state my conclusions on this part of the case. It seems to me that, viewed objectively, HMRC's refusal to accept the April 2009 offer was well within the range of reasonable responses open to a hypothetical creditor in HMRC's position. By the date of the hearing on 20 July 2009, well over a year had elapsed since service of the statutory demands, and over 10 months since presentation of the petitions. The debtors' tax affairs were still in a state of disarray, no up to date accounts were available, and there were very substantial post-petition tax and NIC liabilities which remained unpaid. Despite numerous adjournments, the promised payment in full of the petition debts had not materialised, and two substantial cheques had been dishonoured on presentation. In addition, the SRA had intervened into the debtors' practices on grounds which included accounting irregularities and suspected dishonesty. In those circumstances it would in my judgment have been perfectly reasonable for the hypothetical creditor to take the view that the time for negotiation had passed and the interests of the exchequer would be best served by pressing for bankruptcy orders to be made.
63. In the light of the evidence of assets, the prospects of receiving payment in full from a trustee in bankruptcy were good. Nor was there any clear timing advantage to be gained by accepting the offer of security, in view of the fact that several planning matters remained to be sorted out and the offer was apparently made subject to the condition that marketing should not even begin until 6 months had elapsed (or, if earlier, the hoped for planning consents had been obtained). The security offered was over a portfolio of properties, and included second and third charges as well as first charges. If accepted, HMRC might well have been obliged to become involved in planning and marketing decisions, and in negotiations with prior encumbrancers. They do not have the resources for such activities, and if offers of this kind were regularly accepted they might soon find themselves, as the Registrar memorably put it in the course of argument, as "the biggest property owner in the country".
64. During his oral submissions Mr Ross accepted that it would have been more sensible to confine the offer of security to a first legal charge on the premises at 196 Cotmanhay Road. However, that is not the offer which was made and which HMRC had to consider. Nor can I attach any significance to his purported withdrawal of the six month condition in the course of the hearing. The passage in the transcript which Mr Ross relies upon for this purpose is in my judgment far too imprecise and informal to bear the weight which he attributes to it. In any event, HMRC could hardly be criticised for not accepting a revised offer which was only put forward in the course of the hearing and was never properly formulated.
65. I have already quoted the Registrar's conclusions on this part of the case in paragraphs 14 and 15 of his judgment. In substance, I respectfully agree with his approach and his conclusion. I have dealt with the matter in greater detail, in deference to the clear and attractive submissions advanced to me by Mr Ross; but in the end I feel no real doubt about the answer. In the circumstances, I would grant Mr Ross and Mr Holmes permission to appeal on the first issue, but would dismiss this ground of appeal.

(2) Terminal losses

66. Rule 6.5(4) of the Insolvency Rules 1986 provides that the court may set aside a statutory demand if

"(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand."

There is no equivalent of this provision in either section 271 of the Insolvency Act 1986 or Rule 6.25 of the Insolvency Rules relating to the hearing of the bankruptcy petition, but it is well established that the court will dismiss a petition if there is a genuine triable issue as to the existence of the petition debt: see Muir Hunter on Personal Insolvency, paragraph 3-414, and Markham v Karsten [2007] EWHC 1509 (Ch), [2007] BPIR 1109. According to Briggs J in Markham v Karsten, the test for the existence of a genuine triable issue in relation to the defence to a bankruptcy petition should be no more stringent than that applied to an application for summary judgment under CPR Part 24, and the two tests are broadly equivalent: see paragraph 45 of his judgment.

67. The fundamental problem facing Mr Ross and Mr Holmes is that the items of expenditure upon which they sought to rely as giving rise to terminal losses available for carry back were, at best, no more than items of expenditure, many of them yet to be quantified, which would enter into a computation of the terminal losses of the Firm's business. The terminal losses, as defined in section 90 of the Income Tax Act 2007, would be the losses shown in a properly prepared set of trading accounts, after deducting allowable items of expenditure from the gross income of the Firm for the relevant period, and after making all necessary or appropriate adjustments in accordance with recognised accountancy principles. Unless and until such an exercise was performed, there were no terminal losses in existence, and therefore nothing available to be carried back. Furthermore, relief for terminal losses required a claim to be made (see section 89(1) of the 2007 Act), so even after the losses had been ascertained a claim would still have to be made and accepted before effect could be given to the relief in the manner laid down in section 91.
68. None of these steps had been taken before the hearing in July 2009, and as I have already said the evidence of Mr Ross and Mr Holmes was unsupported by any professional advice or draft calculations. In those circumstances the petition debts remained due and owing, and the most that could be said was that some of the debts (those relating to the personal tax liabilities of Mr Ross and Mr Holmes) might be reduced on some future date if and when claims for terminal loss relief were made by them and accepted. In my judgment a contingent and unquantified future prospect of reducing part of the petition debts could not properly be regarded as giving rise to a genuine triable issue at the date of the July hearing. As matters then stood, there was no defence to the sums claimed (with the possible exception of the disputed credit of £20,000), and the probability that the debtors would in due course be able to make valid and substantial terminal loss claims did not at that stage amount to a counterclaim, set-off or cross demand. In the terms of section 271(1)(a) of the Insolvency Act 1986, the debts were ones which had been payable at the date of the petitions, and they had not been paid, secured or compounded for. The court therefore had jurisdiction to make bankruptcy orders, and was prima facie bound to do so unless there were good grounds for granting yet another adjournment.
69. For these short reasons I am satisfied that there is no merit in this ground of appeal, and I find myself in substantial agreement with the reasoning and conclusion of the Registrar in paragraphs 20 to 21 of his judgment.
70. Mr Ross told me in the course of his submissions that terminal loss claims have now been agreed by HMRC, and I was shown some recent statements of account which indicate that the petition debts have now been reduced to £44,841.10 in the case of Mr Ross and to £46,830.47 in the case of Mr Holmes. However, these adjustments were only made, as I understand it, in early November, and in my judgment they cannot alter the fact that the position in July was as I have described it. Furthermore, even the latest figures come nowhere near reducing the petition debts to below the bankruptcy threshold of £750. The basic problem here, as the Registrar rightly recognised, is that terminal loss relief can only operate to reduce the personal tax liabilities of the partners. It cannot have any effect on the Firm's PAYE or NIC liabilities, nor can it reduce or extinguish penalties properly imposed for past defaults.
71. I add one further comment by way of footnote. The Registrar doubted whether the costs of the intervention would be allowable as deductible expenses: see paragraph 18 of his judgment. My instinctive reaction was the same, but in the light of the principles expounded by the House of Lords in McKnight v Sheppard [1999] 1 WLR 1333 I see no reason to doubt that legal and other professional expenses incurred by Mr Ross and Mr Holmes as a result of the intervention are properly deductible as expenses incurred wholly and exclusively for the purposes of their business, nor would their deduction be prohibited by considerations of public policy.

(3) Discretion

72. I come finally to the question of discretion, and whether the Registrar should have granted a further adjournment. There is no doubt that the court retains a discretion not to make a bankruptcy order, even where the petition debt has been clearly established and any grounds of opposition have been dismissed. However, the authorities establish that in such circumstances the discretion to adjourn should only be exercised if there is a reasonable prospect of the petition debt being paid in full within a reasonable period: see Harrison v Seggar [2005] EWHC 411 (Ch), [2005] BPIR 583, at paragraph 7 per Blackburne J, and Re Gilmartin (a bankrupt) [1989] 1 WLR 513 at 516 F-G per Harman J. Furthermore, as Blackburne J said, "[t]here must be credible evidence to support such a prospect if the court is to grant an adjournment for payment".
73. Accordingly, the first question is whether there was credible evidence before the Registrar on 20 July to establish a reasonable prospect that the petition debts would be paid in full within a reasonable time. In my judgment there was not. In the context of the long-drawn out history of the petitions, and the adjournments which had already been granted, it seems to me that a reasonable time for payment in full of the petition debts could have been no more than a further two or three months at the most. There was no credible prospect of payment being received within such a timescale, because the offer of security contemplated that nothing would probably happen for at least six months, and the terminal loss claims were still inchoate and unsupported by any draft accounts. In view of the past history of delay and broken promises, it was in my judgment appropriate to take a fairly hard line and to accord priority to HMRC's undoubted prima facie right to obtain bankruptcy orders over protestations that a further adjournment might finally yield the payment in full which had so signally failed to materialise in the past. Furthermore, the court would in my opinion have been justified in harbouring a suspicion that the predominant purpose of the adjournment, from the debtors' point of view, was to enable them to realise their assets at a time of their choosing in a difficult property market.
74. The Registrar dealt with the matter rather differently in paragraph 25 of his judgment. He did not expressly direct himself by reference to the legal principle which I have identified, and although I am sure that he was well aware of it in general terms, I think he may have approached the question on the footing that he had a wider discretion than is warranted by the authorities. As to the matters which he expressly took into account, he was in my judgment right to have regard to the history of delay by the debtors in dealing with their tax affairs, the history of broken promises, and the history of the petition itself. I would, however, respectfully question the relevance of the two final matters to which he referred, namely the fact that the intervention (which gave rise to the terminal losses and the error or mistake claims) was not brought about by any act of HMRC, and the principle that taxpayers must pay their tax as and when it falls due. The fact that the intervention was external and had unexpected results was, if anything, a factor which told in favour of granting extra time for payment, although it was also relevant to bear in mind that four months had already elapsed since it took place. The principle that taxpayers must pay their tax as and when it falls due, although undoubtedly correct, was in my view completely irrelevant to the question whether these defaulting taxpayers should be granted a final opportunity to pay the petition debts in full within a reasonable time.
75. For these reasons, I consider that the Registrar exercised his discretion on a flawed basis and I must therefore consider the matter afresh. Having done so, I feel little doubt that the Registrar's conclusion was nevertheless the right one. As I have already explained, there was in my view no reasonable prospect of payment in full being made within a reasonable time.

Conclusion

76. These appeals must accordingly be dismissed.