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Bankruptcy order based on council tax arrears set aside as debtor had no assets

Out-Law Legal Update | 17 Sep 2018 | 11:29 am | 1 min. read

LEGAL UPDATE:  The High Court has set aside a bankruptcy order obtained by a local authority over unpaid council tax because it would serve no useful purpose - the debtor had no assets and there was nothing to suggest that any investigation into the debtor's affairs would reveal anything .

Aylesbury Vale District Council presented a bankruptcy petition against Harriet Lock over £8,067 of allegedly unpaid council tax. Lock was living in social housing and depended on financial support from her daughter. The court ordered her to make a skeleton  argument setting out why a bankruptcy order should not be made and send it to the court at least seven days before the hearing.

Lock prepared the argument, which made the point that a bankruptcy order would serve no purpose or be of no benefit to the Council, but did not file or serve it until the morning of the hearing of her bankruptcy petition. 

The district judge made the bankruptcy order, saying that Lock had been given the opportunity to argue that it should not be granted, but that she had failed to do so in line with the court's requirements. It was inappropriate for her to now raise points that could and should have been raised earlier, the judge said.

Lock appealed to the High Court, saying that the district judge had failed to consider her argument that the bankruptcy order would serve no purpose, and applied to set aside the bankruptcy order under section 266(3) of the Insolvency Act 1986 which grants the court the general power to dismiss a bankruptcy petition "if it appears to it appropriate to do so on the grounds that there has been a contravention of the rules or for any other reason".

The High Court set aside the bankruptcy order on the grounds that it was unjust as the district judge had not considered whether any useful purpose would be served by making it. There was no proper evidence that Lock had any assets, whether present or prospective, which could be realised in bankruptcy, and nothing to indicate that any investigation into her affairs would reveal anything.

It was acknowledged that a debtor bears a heavy burden in demonstrating that there are no assets that would be available for distribution in bankruptcy for the benefit of creditors, and also in demonstrating that no useful investigation into their affairs could be undertaken in bankruptcy. However, it was held that there was a burden on a public authority petitioning for a debtor's bankruptcy on the grounds of unpaid council tax to show at least a basic case that a bankruptcy order would achieve some useful purpose.

Samantha Latham is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com