Holmes & Ross v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 12 January 2010 |
| Neutral Citation | [2010] EWHC 13 (Ch) |
| Docket Number | Case No: CH/2009/PTA/0427 AND 0428 |
| Court | Chancery Division |
| Date | 12 January 2010 |
[2010] EWHC 13 (Ch)
Before: Mr Justice Henderson
Case No: CH/2009/PTA/0427 AND 0428
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Ross and Mr Holmes appeared in person
Mr Jonathan Lopian (instructed by the Solicitor for HMRC) for the Respondents
Hearing date: 3 December 2009
Mr Justice Henderson:
Introduction and background
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
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).
In the light of these considerations, a two-pronged policy was adopted...
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