England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

ON APPEAL FROM THE COUNTY COURT AT CROYDON Case No. 0775 of 2014
ORDER OF DJ BISHOP DATED 9/6/15
IN BANKRUPTCY
RE: NKOYO OKON

		18 April 2016

Mr. Robin Hollington QC:


1. On 2 June 2015 at 11.34am a bankruptcy order was made against the Applicant, Ms. Okon, upon a petition presented by the Respondent, the London Borough of Lewisham, on 14 October 2014 in the absence of Ms. Okon or anyone representing her. In fact, Ms. Okon had instructed Miss Bailey of Counsel to appear for her on that occasion by direct access but due to a breakdown in communication at court Miss Bailey's message, that she had been delayed due to problems with the trains, did not reach the Court before it made the order. The court quite rightly relisted the matter for a further hearing and it was entered into the general list on 9 June 2015. At that hearing, District Judge Bishop ("the Judge") declined to set aside the bankruptcy order, on the ground that, having heard Miss Bailey's submissions and those advanced by the Respondent's agent, there was no arguable basis upon which the making of a bankruptcy order could be opposed. I have been provided with transcripts of that hearing, of both the argument and the judgment delivered by the Judge ("the Judgment").
2. Ms. Okon has applied for permission to appeal against that decision, on the grounds (in summary) that, very little time being available for the hearing on 9 June 2015, the District Judge should at the very least have adjourned the matter for more extensive argument than time allowed at that hearing, and that a bankruptcy order should not have been made.
3. By order dated 7 July 2015, Mrs. Justice Rose stayed the bankruptcy order pending the determination of this application for permission to appeal.
4. It is common ground between the parties that, if minded to grant permission to appeal, I should treat the hearing before me as that of the appeal itself.
5. I have had the considerable advantage, not enjoyed by the Judge, of having had over a day's oral argument in this matter from Counsel for both sides, extensive supplemental written submissions (in addition to earlier skeleton arguments which, for the reasons set out below, could have been more helpful), and time to consider my judgment.
6. The bare bones of this dispute are as follows. The Applicant owned two properties, 18 Hillbrow Road, Bromley, and 298 Southend Lane, Catford. The first property was subsequently divided so that a separately rateable property, 18A Hillbrow Road, came into existence. The Respondent's case is that the Applicant owes £14,097.59 in respect of unpaid domestic council tax on these three properties. The Applicant's case is that she owes nothing, because the properties were tenanted, so that the tenants were liable for the council tax, and that in any event 18A Hillbrow Road had ceased to be a separately rateable property.
7. The sum claimed by the Respondent is the total of a number of Liability Orders made by the Bromley and Greenwich Magistrates respectively in respect of the three properties. These Orders are set out in the "Particulars of Debt" section of the statutory demand dated 21 July 2014, which was served at the beginning of August 2014. The four Liability Orders in respect of 298 Southend Lane totalled £2,448 67, were made between March 2009 and January 2014, and relate to the years 2008/09, 2009/10, 2010/11 and 2013/14. The five Liability Orders in respect of 18 Hillbrow Road totalled £8,158.47, were made between February 2012 and May 2014, and relate to the years 2009/10, 2011/12, 2012/13, 2013/14 and 2014/15. The four Liability Orders in respect of 18A Hillbrow Road totalled £3,490.45, were made between October 2010 and May 2014, and relate to the years 2011/12, 2012/13, 2013/14 and 2014/15.
8. How did it come about that so many Liability Orders were made against the Applicant without any direct challenge from her to them, either after the proceedings for them had been commenced or once they had been made, bearing in mind that notice of the proceedings and of the making of the orders would have been sent to the properties in question? In my view, this is a significant question in this appeal, which I will have to consider. As appears from the statutory framework for domestic council tax, which is contained in the Local Government Finance Act 1992 ("the 1992 Act") and The Council Tax (Liability for Owners) Regulations 1992 made under it ("the 1992 Regulations"), Liability Orders have very important consequences and are not to be taken lightly. This is because regulation 49(1) of the 1992 Regulations provides:

"49.— Insolvency

(1) Where a liability order has been made and the debtor against whom it was made is an individual, the amount due shall be deemed to be a debt for the purposes of section 267 of the Insolvency Act 1986 (grounds of creditor's petition)."

9. To return to the bare bones of this dispute, the Respondent presented its bankruptcy petition against the Applicant on 14 October 2014, returnable on 3 February 2015. The Respondent was represented by an agent and Miss Bailey appeared for the Applicant. It appears that the petition was adjourned until 2 June 2015. The Applicant says that it was adjourned for the purpose of enabling her to apply to the appropriate Magistrates Court to set aside the Liability Orders: see paragraph 2 of her 2^nd witness statement dated 2 June 2015. The order itself does not record this purpose. The Respondent says that the petition was adjourned: para. 16 of Mr. Sayer's affidavit dated 26 January 2016. Mr. Sayer is an employee of the Respondent.
10. In any event, the Applicant's next step was to apply in person to the Bromley Magistrates' Court to set aside the Liability Orders. Her witness statement dated 25 February 2015 sets out at length her case why she was not liable for the council tax, which was the subject matter of the Liability Orders. And she received in response a letter dated 17 March 2015 from the Administration Centre for Bexley/Bromley/Greenwich, Bromley Magistrates Court. In that letter the court referred her to the case of R. (on the application of Brighton & Hove City Council) v. Hamdan [2004] EWHC 1800 (Admin) ("Hamdan") as authority for the following:

" [it] gave clear guidance that a decision to set aside a liability order should only be made in the most exceptional cases and that the following would be the grounds on which an application could be made.

(1) That there is a genuine and arguable dispute as to the defendant's liability for the rates in question

(2) The order was made as a result of a substantial procedural error, defect or mishap

AND

(3) The application to the justices for the order to be set aside is made promptly after the defendant learns that it has been made or has notice that an order may have been made."

11. This letter is a precis of paragraph 31 of the judgment of Stanley Burnton J (as he then was) in the Hamdan case but it missed the subtlety of the distinction between the ground for setting aside, i.e. procedural defect and promptness, and the condition precedent, namely arguability on the merits, and misdescribed the condition precedent as a ground for setting aside:

".. That there is a genuine and arguable dispute as to that liability is a necessary condition for a decision by justices to set aside a liability order, but it is not a sufficient condition. The power of a magistrates' court to set aside a liability order it has made is an exceptional one, to be exercised cautiously. In my judgment, in general a magistrates' court should not set aside a liability order unless it is satisfied, in addition to there being a genuine and arguable dispute as to the defendant's liability for the rates in question, that:

a. the order was made as a result of a substantial procedural error, defect or mishap; and

b. the application to the justices for the order to be set aside is made promptly after the defendant learns that it has been made or has notice that an order may have been made."

12. So, in Hamdan the court did not find that the magistrates court itself could and should, on an application to set aside a liability order, go into the substantive merits of the case: on the contrary, it seems to me more likely that it was there being assumed (without deciding the point) that the magistrates court could and should not do so, going no further than satisfying itself that there was an arguable case on the merits before setting aside the liability order on the above ground. What the letter did not say, as I find to be the law, is that the magistrates court had no jurisdiction to go into the merits of the liability order on an application to set it aside and that the aggrieved council tax payer had also to appeal to the Valuation Tribunal if he or she wished the merits to be investigated.
13. In its subsequent letter dated 29 May 2015, the court again failed to make the point to the Applicant that she had to appeal to the Valuation Tribunal if she challenged the underlying, i.e. substantive, merits of the Liability Order. That letter was received by the Applicant shortly before the hearing on 9 June 2015.
14. On 29 May 2015, that is to say the week before the adjourned hearing of the bankruptcy petition, the Applicant and Respondent were back in court against each other, this time at the Bromley Magistrates Court at the hearing of the Respondent's proceedings seeking the making of fresh Liability Orders against the Applicant. Miss Bailey appeared again for the Applicant and submitted that her client was not liable on the facts for the council tax in question. I accept for present purposes that it came as a rude shock to Miss Bailey, therefore, for the Court to accept the Respondent's submissions on that occasion, with Mr. Sayer in attendance, that the court had no power to go into the substantive merits: it only had power to consider whether the Respondent had followed the correct procedure in making the application for Liability Orders and that a challenge to the merits of the liability order had to be raised by way of an appeal to the Valuation Tribunal. I accept for present purposes that this was not appreciated by anybody who participated at the first hearing of the bankruptcy petition on 3 February 2015.
15. As a result of this hearing, Miss Bailey realised that her client, the Applicant, may well be barking up the wrong tree in trying to set aside the Liability Orders, and that she should perhaps instead be making an application to the Valuation Tribunal by way of an appeal against them. The Applicant's appropriate remedy turns upon the true construction of certain important provisions in the 1992 Regulations, namely section 16 of the 1992 Act and reg. 57(1) of the 1992 Regulations. Section 16 provides that a person aggrieved by "any decision of a billing authority that a dwelling is a chargeable dwelling, or that he is liable to pay council tax in respect of such a dwelling" may appeal to the valuation tribunal. And reg. 57(1) provides that any "matter which could be the subject of an appeal under section 16 of the Act may not be raised in proceedings under this part [i.e. Part VI: Enforcement which includes reg. 34 (Application for liability order)]". The courts have reached divergent views as to whether reg. 57(1) is effective to bar the council tax payer from raising the substantive merits before the Magistrates Court in proceedings for the making of liability orders, but it seems to me to be clear (and it is indeed now common ground between the parties, as appears from paragraph 16 of the Respondent's supplemental Skeleton Argument) that it does have this effect, and I propose to follow the recent but relatively unknown decision on this point of Mr Justice William Davis, in Wiltshire Council v. Piggin [2014] EWHC 4386 (Admin). I say this decision is relatively unknown because neither counsel appearing before me had any knowledge of it until Miss Bailey found it and cited it to me on the second day of submissions before me. The Respondent's original Skeleton Argument had referred me to the Hamdan case and the decision of Mr Justice Henderson in Dias v. Havering [2011] EWHC 172 (Ch), but that was a non-domestic rates case where the Court found at para. 33:

"It is apparent from the provisions cited above that liability orders can be made only after a fairly elaborate procedure has been followed, and the defendant has been given an opportunity to explain why he has not paid. The court may make the order only if it is satisfied that the sum has become payable, and that it has not been paid. If the defendant thinks that the order has been wrongly made, he is in principle entitled to challenge it either by judicial review or by an appeal by case stated. "

On that basis, the position in non-domestic council tax cases on this issue is the precise opposite of what it is in domestic council tax cases such as the present.

16. At the hearing before the Judge on 9 June 2015 Miss Bailey appeared for the Applicant. It appears that she came armed with a further witness statement of the Applicant dated 1 June 2015. In this she complains bitterly of the bureaucratic nightmare she feels she encountered at the Magistrates Court in trying to set aside the Liability Orders, upon which I express no view. She also notes that she has instructed Miss Bailey both to appeal against the orders made on 29 May 2015, which seems to be based on the proposition that the court should have gone into the merits at that hearing, and to appeal to the Valuation Tribunal, which seems to be based on the reverse proposition. At the hearing before me, Miss Bailey, having as I said now found the Piggin case, submitted that the Applicant's appropriate remedy was by way of appeal to the Valuation Tribunal.
17. At the hearing on 9 June 2015 it is obvious from the transcript that the Judge was well aware of the limited amount of time available for the hearing and was doing her level best to case manage the matter efficiently, as she is urged to do from every quarter. It seems to me from reading the transcript that the Judge would have realised that Miss Bailey was asking her to adjourn the matter because of the inadequacy of the time available. Miss Bailey also asked for the bankruptcy order to be set aside, but the Judge did not need to do that as well. Miss Bailey raised the intended appeal to the Valuation Tribunal but was somewhat interrupted by the Judge in this part of the argument.
18. In the event, in her Judgment the Judge in effect confirmed the bankruptcy orders. She focussed on the application to set aside the Liability Orders and the court's letter dated 29 May 2015, not mentioning the intended appeal to the Valuation Tribunal. She held:

" the Applicant had not taken such action as is necessary or required ... She has not acted promptly to deal with this matter. She was given an adjournment in February to do so, and she has not."

19. This is a true appeal, not a re-hearing. The Judge's decision can only be challenged on the basis that she made an error of law or principle or reached a conclusion that no Judge could properly have reached on the material before it. It is not enough that I would have exercised the discretion she had in a different way.
20. I begin by asking what was the issue before the Judge under the provisions of the Insolvency Act 1986. This was in effect the second hearing of a bankruptcy petition. The Applicant's application to set aside the Liability Orders was hopeless, because she had identified no procedural defects in their making. What she intended to do was to appeal to the Valuation Tribunal in order to challenge the fact that she was truly liable, and the Valuation Tribunal was the only body which had jurisdiction to decide the issue of true liability and it could do so notwithstanding the fact that Liability Orders had been made.
21. As to the manner in which the Judge should have approached the issue before her, I have derived considerable assistance from the summary of the law given by HH Judge Hodge QC in Yang v. The Official Receiver. Manchester City Council [2013] EWHC 3577 (Ch). That was a case where a bankruptcy order had been made on the basis of council tax liability orders, and the bankrupt had thereafter succeeded on appeal to the Valuation Tribunal in respect of her liability. I would doubt whether the bankrupt had any standing to pursue such an appeal after the bankruptcy order, but that does not affect the reasons given by the learned Judge: see Muhammed v. Robert [2014] EWHC 4800 (Ch). Following the successful appeal the bankrupt applied to annul the bankruptcy order. The learned Judge held that the bankruptcy order should be annulled. In reaching that conclusion, he said this:

"20. .... I acknowledge that on the hearing of a bankruptcy petition it may be permissible to go behind a default judgment, or a judgment entered otherwise than after a full trial on the merits of the case. However, merely because a bankruptcy petition is founded on orders for council tax liability which at a later date, and subsequent to the bankruptcy petition being heard, are set aside, that does not, in my judgment, mean that the case is one for annulment under Section 282(1)(a) rather than for rescission under Section 375(1) of the Insolvency Act 1986. It seems to me that one has to have regard to the statutory provisions governing the liability for council tax and the making of liability orders. Regulation 34 of the Council Tax (Administration and Enforcement) Regulations 1992 provides that if an amount which has fallen due by way of council tax is wholly or partly unpaid, the billing authority may apply to a magistrates court for an order against the person by whom it is payable. By regulation 34(6), the court shall make the order if it is satisfied that the sum has become payable by the defendant and has not been paid.

21. By regulation 57(1) any matter which can be the subject of an appeal under Section 16 of the primary legislation (the Local Government Finance Act 1992) may not be raised in proceedings in the magistrates court for a liability order. Section 16 of the 1992 Act provides that a person may appeal to a valuation tribunal if he is aggrieved by (a) any decision of a billing authority that a dwelling is a chargeable dwelling or that he is liable to pay council tax in respect of such a dwelling; or (b) any calculation made by such an authority of an amount which he is liable to pay to the authority in respect of council tax. I therefore accept Mr Clark's submission that on an application for a liability order by the billing authority, the magistrates cannot look into the questions (1) whether the property is chargeable; or (2) whether the respondent to the summons is liable to pay the council tax; or (3) whether the calculation of the alleged liability is correct. But I would not accept Mr Clark's further submission that that means that a liability order is the equivalent of a default judgment. The primary and secondary legislation governing the liability for, and assessment to, council tax provides for challenges to a decision of a billing authority to be made through the valuation tribunal appeal mechanism. The making of a liability order by the magistrate's court has the effect of converting that liability into a judgment; but it does not mean that it is the equivalent of a default judgment. By regulation 49(1) it is expressly provided that where a liability order has been made, and the debtor against whom it is made is an individual, the amount due shall be deemed to be a debt for the purposes of Section 267 of the Insolvency Act, grounding a creditor's petition.

22 It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(l)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order "ought not to have been made". It seems to me that in the Royal Bank of Scotland v Farley case, Lord Justice Hoffmann expressly addressed what should be done at page 641. There he acknowledged that the bankruptcy procedure had ample safeguards built into it for enabling the bankrupt to challenge the existence of the debt. He might do so on an application to set aside the statutory demand (although I note that the scope for that is considerably restricted by the terms of paragraph 13.4.3 of the current (2012) Insolvency Practice Direction [now paragraph 13 3.3 of the current Practice Direction], which provides that where the debt claimed in the statutory demand is based on a liability order (amongst other things), a court will not at that stage inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the order).

23. However, Lord Justice Hoffmann went on to say that if a debtor had a bona fide appeal, or an application to set aside the judgment, in existence at the time when the petition came on to be heard, it was the invariable practice to adjourn the hearing of the petition until that application or appeal had been decided. In my judgment, that is the appropriate way of dealing with a challenge to a liability order in respect of unpaid council tax on the hearing of the petition. If there is pending an appeal to the valuation tribunal, then the debtor can ask for the hearing of the petition to be adjourned pending the final determination of that appeal. It seems to me that if there is a liability order in existence at the time of the bankruptcy petition and upon which that petition is founded, if the liability order is subsequently set aside then the appropriate course is to apply to rescind the bankruptcy order under Section 375(1) rather than to apply to annul it under Section 282(1) (a) of the Act. That seems to me the appropriate course to take. " [my emphasis]

22. I entirely agree with the above summary, and it is in my view entirely consistent with the subsequent Piggin case. In my judgment, the issue before the Judge at the hearing on 9 June 2015 was whether the Applicant's intended appeal to the valuation tribunal was bona fide and substantial and whether in the exercise of her discretion she ought to adjourn the bankruptcy petition in order to await the outcome of that appeal.
23. I am satisfied that the Judge did not approach the matter on that basis. She did not realise that she should have been focussing on the appeal to the Valuation Tribunal rather than the application to set aside to the magistrates court and she never asked herself the question whether the intended appeal to the Valuation Tribunal was bona fide and why it had not been lodged yet.
24. In those circumstances I am satisfied that I must exercise the discretion of the court afresh in the light of all the circumstances now.
25. In my judgment, the right course is as follows. Provided the Applicant undertakes to the court (1) to prosecute with all reasonable expedition and diligence that appeal, together with any application it needs to make to the Valuation Agency in respect of the registration of 18A Hillbrow Road as a rateable property, and (2) not, without the prior written consent of the Respondent or the leave of the court, to sell or otherwise dispose of any interest in any of the properties (otherwise than by way of arm's length short term lettings which do not confer security of tenure), I propose to allow the appeal, set aside the orders dated 2^nd and 9 June 2015, and adjourn the bankruptcy petition. I will hear argument as to when the petition should be relisted. I considered taking the alternative course of leaving both the bankruptcy order and the stay in place pending the appeal, but that course has no significant advantage over the course I propose to take and it has the significant disadvantage of uncertainty.
26. In taking the above course, I have balanced the following considerations:

(i) I am far from satisfied that the Applicant has been open with the Respondent and the Court about her place of residence. For reasons that in my view were never properly justified by Miss Bailey to me, the Applicant will not tell this court where she lives now or where she has lived since 2012. There are ways and means of ensuring that such information remains private and confidential if the Applicant is concerned about its publication, but still the Applicant will not provide this information to the Court. This has important ramifications in this case as to the bona fides of the Applicant's appeal to the Valuation Tribunal. The Respondent has drawn attention to communications with the Applicant as to her residence in 2012 and 2014: see paragraph 10 of the Respondent's Skeleton Argument dated 9 February 2016. If the Applicant did reside where she then said she resided and cannot explain her subsequent living arrangements, then that would significantly undermine her case that she is not liable for council tax on the property in question, and it would destroy her case that she had no knowledge of the making of any of the Liability Orders until she received the statutory demand.

(ii) On the other hand, I am satisfied that the Applicant is not substantially to blame for the delay in the making of the necessary appeal to the Valuation Tribunal. She was for extended periods a litigant in person. She was represented at hearings on an ad hoc basis by relatively junior albeit able Counsel on a direct access basis, but that is not a complete substitute for being represented by experienced solicitors in a matter such as this. She should have been advised that such an appeal was a prerequisite of any challenge by her to her underlying substantive liability for the council tax in question, and both the Croydon County Court and the magistrates court had ample opportunity to advise her of this. I do not consider that the Respondent can be criticised for not advising her of this in the circumstances of this case, which may well be relevant to the question of costs in this case. But I note that, so far as I can see from the material put before me, they did not advise her of that remedy, at least after bankruptcy proceedings were initiated. I am prepared to accept for present purposes that, once the bankruptcy proceedings had been initiated, the Applicant did not realise the need to appeal to the Valuation Tribunal until the shock of the hearing on 29 May 2015 and that she thereafter sought to bring such an appeal with reasonable expedition.

(iii) I am satisfied that the proposed appeal to the Valuation Tribunal is bona fide and substantial, albeit very late. I appreciate that the Respondent only has to show that there is at least £750, the statutory minimum for this petition, undoubtedly due and owing. But the Court still retains a discretion whether or not to make an immediate bankruptcy order even if that amount were shown as undoubtedly due and owing, for example in the light of the factor I mention under sub-paragraph (v) below. "Nevertheless, I do not consider it an injustice to the Respondent in the circumstances of this case if I do not go into the arcane provisions of the council tax legislation, such as those governing liability for properties in multiple occupancy, having regard to the fact that I am sitting in an appellate capacity, and given the jurisdiction of the Valuation Tribunal, and the unsatisfactory nature of the hearing below. I do not consider that any of the grounds advanced by the Respondent in argument, as to the unsustainability of the Applicant's appeal, afforded an easy knock-out blow to any part of the amount due under the Liability Orders. And, in the light of that pending appeal, the less I say about the merits, the better. I will, however, hear any further oral submissions as to whether the matter should be remitted to the County Court for it to determine such issues before the hearing of any appeal to the Valuation Tribunal.

(iv) I take into account the fact that the Valuation Tribunal has indicated in correspondence since the making of the bankruptcy order that the Applicant's challenge with regard to 18A Hillbrow Road has to be addressed to the Valuation Agency and that the Respondent advised the Applicant that she should contact that agency in an email dated 11 August 2014. In all the circumstances, that is not enough in my view to tip the balance in favour of leaving the bankruptcy order in place, partly because it is not clear to me that this is correct.

(v) The bankruptcy debt is not large and would be at risk of being eclipsed by the costs and expenses of a continuing bankruptcy. Furthermore, there is said to be sufficient equity in the properties to discharge it.

27. Accordingly, if the above undertakings are proffered by the Applicant, I will grant permission to appeal, permit the Applicant to amend the grounds of appeal as asked, allow the appeal, set aside the orders dated 2^nd and 9 June 2015, and adjourn the Petition to a date to be fixed. I will of course remit the matter to the Croydon County Court. If the undertakings are not proffered, I would be minded to grant permission to appeal but dismiss the appeal. I will hear further argument on the adjournment of the petition, and I would be grateful for information as to the progress of the appeal before the Valuation Tribunal and any application to the Valuation Agency. I will also hear argument on costs and the form of the order I made on 10 February 2016.
28. By way of postscript, I would add that this case has demonstrated to my mind the substantial degree of uncertainty that exists so far as concerns how the courts, both magistrates and the bankruptcy county court, should deal with the enforcement of domestic council tax liability orders in the context of the availability of the remedy by way of appeal to the Valuation Tribunal. This is after all a very important field for councils and council tax payers alike where certainty is desirable. The cases of Wiltshire Council v. Piggin [2014] EWHC 4386 (Admin) and Yang v. The Official Receiver. Manchester City Council [2013] EWHC 3577 (Ch) deserve to be more widely known than they appear to be, although they are only first instance decisions and the field would obviously benefit from attention if the opportunity arises by the Court of Appeal. In particular, the Administration Centre for Bexley/Bromley/Greenwich Magistrates Court should consider whether its advice to applicants who seek to set aside liability orders should be modified to include reference to the Piggin case and the need to pursue remedies to the Valuation Tribunal and Valuation Agency. I would, however, question whether the court should not also be pointing litigants in person to bodies which offer free legal advice, so that the court is not seen to be giving legal advice.