High Court can't postpone bankruptcy because of request to appeal

Out-Law Legal Update | 31 Jul 2018 | 3:38 pm | 3 min. read

LEGAL UPDATE: A rule which gives UK courts the power to postpone bankruptcy while a court ruling that led to the bankruptcy is appealed only applies when that appeal is in motion and not just because a party has asked for permission to appeal, the High Court has ruled.

Rule 10.24(2) of the Insolvency (England and Wales) Rules 2016 (IR16) says that a court can stay or dismiss a bankruptcy petition where the debt upon which the petition was based was created by a court ruling  and an appeal is "pending". This dispute was about whether that applied to a solicitor who had sought leave to appeal a ruling, but where permission to appeal had not yet been granted.

The court ruled that there was no "pending appeal" where permission for an appeal had not yet been granted.

Paul Baxendale-Walker was the principal partner of Baxendale Walker Solicitors which specialised in tax advice. Iain Barker asked the firm for tax advice on capital gains from the sale of his business. Baxendale-Walker advised Barker to enter into a tax avoidance scheme based on the establishment of an employee benefit trust (EBT).

UK tax authority HMRC subsequently challenged the EBT scheme and Barker agreed a settlement, resulting in the payment of a substantial amount of tax and interest. Barker made a claim against Baxendale-Walker for the costs and professional fees incurred and the tax paid to HMRC on the basis that, had he not entered into the EBT, he would have entered into a different tax avoidance scheme.

Barker claimed that Baxendale-Walker and his firm of solicitors should have explained that there was a risk that HMRC could challenge the solicitor's interpretation of the law and they had failed in their duty of care to act with competence.

The High Court ruled in the solicitor's favour and Barker appealed. The Court of Appeal unanimously reversed the first judgment and ordered Baxendale-Walker to pay Barker £16 million.

Barker presented a bankruptcy petition against Baxendale-Walker based on the £16m award, the judgment debt, and a third party costs order.

Baxendale-Walker sought permission to appeal the judgment debt and at the time of the bankruptcy petition hearing an application for permission to appeal had been made to the Supreme Court. The parties were unable to confirm whether any progress had been made with the application.

In considering whether to make the bankruptcy order, the judge considered the grounds on which the petition was opposed, one of which was the fact that the judgment debt was subject to an outstanding application for permission to appeal.

Baxendale-Walker argued that it would be unfair if he was made bankrupt on a debt which may be overturned on appeal and that Rule 10.24(2) was designed to act as a safety net to prevent such unfairness.

The judge said that the language of the rule means that an appeal is in existence and is "awaited". It did not mean awaiting permission to appeal. The Rules Committee had not altered, varied or added to the wording of this rule since 1986 and on that basis, the rule was deliberately limited.

The judge ruled that the court had no jurisdiction to stay the proceedings or dismiss them under Rule 10.24(2), as there was no pending appeal where permission had been given and it was not a case where, for example, an automatic right to appeal existed.

In exercising his discretion under Rule 10.24(1) and making a bankruptcy order, the judge took into account the following: (a) the petition was founded on the judgment debt and it was not suggested that the court look behind the judgment debt (b) Baxendale-Walker had no funds to pay the judgment debt (c) a cross-claim was not genuine and was an abuse of process (e) Baxendale-Walker had not obtained a stay of execution from the Court of Appeal or the Supreme Court and (f) the Court of Appeal unanimously refused permission to appeal and there was no appeal pending.

The other main ground of opposition to the petition was a cross claim made by Baxendale-Walker for an amount equal to the judgment debt. At the time of the petition hearing the claim had not been served nor had it been raised as a defence or counter-claim to the main proceedings

The judge referred to the rule in the Henderson v Henderson case which requires that parties to litigation put forward their whole case and that a failure to do so is an abuse of process. Judge Briggs confirmed that this rule applied to both claimants and defendants alike.

The cross-claim related to the same factual matrix. Even if there was a good reason for bringing a separate claim, it should still have been raised at the case management stage to be tried with the original claim, in accordance with the rule established in a case between Aldi Stores and WSP London.

The judge did consider the merits of the cross claim but held that it was not genuine or serious and had no real prospect of success. Accordingly, this ground of opposition to the petition also failed and the bankruptcy order was granted.

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