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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Revenue & Customs v Maxwell & Anor (As Joint Administrators of Mercury Tax Group Ltd) [2010] EWCA Civ 1379 (07 December 2010) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2010/1379.html Cite as: [2010] EWCA Civ 1379, [2011] 2 BCLC 301, [2010] STI 3242, [2011] BPIR 480, [2012] BCC 30, [2011] Bus LR 707

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IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
His Honour Judge Peter Langan QC
No 2469 of 2009

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/12/2010

Master of the Rolls:

Introductory

1. This is an appeal brought by Her Majesty's Revenue and Customs ("HMRC") against a decision of His Honour Judge Peter Langan QC, sitting as a High Court Judge in the Leeds District Registry. The appeal raises issues as to the approach to be adopted by the chairman of a meeting when deciding on the votes to be accorded to a creditor of a company under Rules 2.38 and 2.39 of the Insolvency Rules 1986 ("the 1986 Rules), and the approach to be adopted by the court on an appeal against his decision under Rule 2.39(2). All references in this judgment to any "Rule" is to a rule in the 1986 Rules, and I shall refer to those rules in the terms in which they were as at the date of the hearing before Judge Langan. The 1986 Rules have been subject to fairly frequent changes, but the parties are agreed that any changes made subsequent to the hearing below were immaterial to the issues on this appeal.
2. In summary form, the facts are as follows. Mercury Tax Group Limited ("the Company") was in the business of devising and implementing tax planning strategies. On 9 September 2009, two licensed insolvency practitioners and partners in Begbies Traynor (Central) LLP ("Begbies"), Robert Maxwell and Edward Klempka ('the Administrators'), were appointed administrators of the Company. The appointment was made out of court by the directors of the Company ("the Directors"). On the same day, the business and certain assets of the Company were transferred pursuant to a so-called 'pre-pack' sale agreement to Dramatic Sight Limited ("DSL"), which is controlled by the Directors. On 19 October 2009, the Administrators sent their report to creditors of the Company ("the Creditors") with their proposals ("the Proposals") for achieving the purpose of the administration. The initial meeting of creditors was held on 16 November 2009, and was adjourned to 30 November 2009.
3. Mr Klempka was chairman of the meeting on that date ("the Meeting"). HMRC are creditors of the Company, and voted against the Proposals, and Mr Klempka admitted their vote, but only to the extent of £1,500,000. The Proposals were carried. If HMRC's vote had been admitted in the full amount claimed at the time, which was £9,336,814, or in the slightly lower amount which they now claim (and claimed before the Judge), namely £8,779,234, the Proposals would have been defeated. HMRC issued an application to the court, seeking to reverse or vary Mr Klempka's decision. In a full and careful judgment, Judge Langan rejected the appeal, and upheld Mr Klempka's decision. HMRC now appeal to this court.
4. Before identifying and discussing the issues, it is convenient to begin by considering the relevant law on taxation of companies, which founds the basis of HMRC's claim, and the directly relevant provisions of the 1986 Rules, and then to set out the facts in rather more detail. In that connection, I have been very much assisted by the judgment below from which almost all of the contents of the ensuing thirty paragraphs are taken.

Taxation of companies

5. A company must normally file a return in respect of its liability for corporation tax within 12 months from the end of the accounting period to which the return relates.^[1] The return must include a self-assessment of the tax payable by the company.^[2] If, in response to a notice requiring the same, no return is delivered, an officer of HMRC may determine to the best of his information and belief the tax payable by the company.^[3] However, if, after a determination has been served in respect of an accounting period, a company delivers a return for that period, then the self-assessment in that return supersedes the determination.^[4]
6. Just as a determination may be displaced by a self-assessment, a self-assessment may in certain circumstances be displaced by an amendment. Part IV of Schedule 18 to the Finance Act 1998 makes provision for enquiries into company tax returns. An enquiry is started by notice given by an officer of HMRC.^[5] After notice of enquiry has been given and before the enquiry has been completed, such an officer may form

"the opinion – (a) that the amount stated in the company's self-assessment as the amount of tax payable is insufficient, and (b) that unless the assessment is immediately amended there is likely to be a loss of tax to the Crown."

In such circumstances, the officer may give notice amending the self-assessment to make good the deficiency.^[6]

7. A company may appeal against an amendment of a self-assessment by giving notice in writing specifying the grounds of appeal to the officer by whom the notice of amendment was given, within thirty days of notification. The appeal is not to be heard until after the completion of the enquiry.^[7]
8. Corporation tax is due and payable nine months after the end of the relevant accounting period.^[8] Generally speaking, where notice of amendment is given during an enquiry and notice of appeal is given, the tax is due and payable as if there had been no appeal.^[9] If, however, the appellant has grounds for believing that he is overcharged by the amendment, he may within thirty days after the issue of the notice of amendment, apply to the Commissioners for a determination of the amount of tax whose payment should be postponed pending the determination of the appeal. The notice "shall state the amount in which the appellant believes that he is overcharged to tax and his grounds for that belief."^[10] The Commissioners must then postpone payment of "the amount (if any) in which… there are reasonable grounds for believing that the appellant is overcharged to tax."^[11]

Voting at creditors' meetings

9. Rule 2.34(1) provides that a meeting of creditors of a company in administration should be called "[a]s soon as reasonably practicable" to consider the administrators' proposals, and paragraphs 51, 52, 54, 56 and 62 of schedule B1 to the Insolvency Act 1986 also provide for meetings of creditors of a company in administration. Rules 2.35 to 2.48A apply to such meetings.
10. Entitlement to vote at a meeting of creditors in administration proceedings is dealt with by Rule 2.38, paragraph (1) of which provides as follows:

"[A] person is entitled to vote only if –

(a) he has given to the administrator, not later than 12.00 hours on the business day before the day fixed for the meeting, details in writing of the debt which –

(i) he claims to be due to him from the company…

[and]

(b) the claim has been duly admitted under the following provisions of this Rule…"

Rule 38(2) empowers the chairman to allow a creditor to vote, notwithstanding that he has failed to comply with Rule 2.38(1)(a), if satisfied that failure was due to "circumstances beyond the creditor's control."

11. Rule 2.38(4) is concerned with "[c]alculation of votes" and it states that:

"Votes are calculated according to the amount of a creditor's claim as at the date on which the company entered administration, less any payments that have been made to him after that date in respect of his claim and any adjustment by way of set-off in accordance with Rule 2.85 as if that Rule were applied on the date that the votes are counted."

12. Rule 2.85 is concerned with mutual credits and set-off as between a company in administration and a creditor. Rule 2.85(3) requires an account to be taken for set-off purposes "as at the date of the notice" given by the administrator that he intends to make a distribution. By Rule 2.85(4), in the case of a set-off between mutual credits, debts and other dealings, a sum is to be regarded as being due to or from the company "whether – (a) it is payable at present or in the future; (b) the obligation by virtue of which it is payable is certain or contingent; or (c) its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion."
13. Rule 2.38(5) is concerned with "[u]nliquidated debts", and it provides:

"A creditor shall not vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained, except where the chairman agrees to put upon the debt an estimated minimum value for the purpose of entitlement to vote and admits the claim for that purpose."

14. Rule 13.12 is concerned with the meaning of "debt" in the 1986 Rules, and paragraph (1) states that 'debt' means

"(a) any debt or liability to which the company is subject at the date when it goes into ... liquidation; [and]

(b) any debt or liability to which the company may become subject after that date by ... reason of any obligation incurred before that date…"

Rule 13.12(3) provides that

"For the purposes of any provision of the Act or the Rules about winding-up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion…"

Rule 13.12(5) provides that Rule 13.12 applies where a company is in administration, as if references to winding-up were a reference to administration.

15. Rule 2.39 deals with the admission and rejection of claims. Paragraph (1) provides that

"At any creditors' meeting the chairman has power to admit or reject a creditor's claim for the purpose of his entitlement to vote; and the power is exercisable with respect to the whole or any part of the claim."

16. By Rule 2.39(3), if the chairman is in doubt whether a claim should be admitted or rejected, he should "mark it as objected to and allow the creditor to vote, subject to his vote being subsequently declared invalid if the objection to the claim is sustained."
17. Somewhat oddly, bearing in mind its apparently general application to all aspects of the two Rules, the court's jurisdiction in relation to Rules 2.38 and 2.39 is in Rule 2.39(2), which is in these terms: "The chairman's decision under this Rule, or in respect of any matter arising under Rule 2.38, is subject to appeal to the court by any creditor." Rule 2.39(4) states that "if on an appeal the chairman's decision is reversed or varied, or a creditor's vote is declared invalid, the court may order that another meeting be summoned, or make such other order as it thinks fit".

The history: events leading up to the meeting

18. The Company was incorporated on 1 August 2003. On 13 November 2007 HMRC carried out a search and seizure operation against the company and one of its shareholders. A year later, Underhill J held that the search and seizure was unlawful. HMRC is thus liable to the Company for damages for trespass, but the amount of the damages has yet to be assessed.
19. In August 2009 the Directors contacted Begbies regarding the worsening financial position of the Company. After carrying out a review of the situation, Begbies concluded that the Company could not continue to trade. Mr Maxwell and Mr Klempka were appointed administrators on 9 September 2009 and on the same day the business, fixtures and fittings (including the right to continue the trespass action against HMRC) were sold to DSL for £14,858. The contingent and non-contingent debts owing to the company were to be collected by DSL in return for a commission of 20 per cent of the realisations up to £7,000,000 and the whole of any realisations in excess of that sum. Further, DSL was to contribute to the company £50,000 a month on account of contingent realisations for a period of 24 months, which was to commence on 9 March 2010.
20. A sum equal to the cap on what was payable by DSL would, in the view of the Administrators at the date of the administration, have been sufficient to enable them to discharge all the Company's debts in full. However, significant previously undisclosed liabilities (which had not been mentioned in the directors' statement of affairs) thereafter came to light, so that the capped payment by DSL was unlikely to meet the Company's liabilities to its unpaid creditors in full. If there is added to these liabilities a substantial claim by HMRC, the reduction in the amount of the percentage will be dramatic.
21. The Proposals were signed on 15 October and sent to creditors four days later. The Proposals anticipated "a significant distribution to unsecured creditors" and exit from the administration by way of a company voluntary arrangement ('CVA') in order to make the distribution. If a CVA were approved, it was proposed that the Administrators would become supervisors of the CVA. The anticipated exit through a CVA was at the heart of the Proposals, although provision was made for the Administrators to select some other route if that turned out to be more appropriate. Apart from the exit route, the Proposals were for the most part of an administrative nature.

The history: HMRC's claims

22. With the exception of sums in respect of VAT and the like (which are not in dispute, and which I shall ignore for the purpose of this judgment), HMRC's claims are for corporation tax in respect of accounting periods ending on: (1) 31 July 2004; (2) 31 December 2004; (3) 31 December 2005; (4) 31 December 2006; (5) 31 December 2007; and (6) 30 April 2008. Periods (1), (2) and (3) have been called "submitted periods" in the sense that the Company had filed self-assessment returns for those periods before it went into administration. Periods (5) and (6) have been characterised as "unsubmitted periods", as no self-assessment returns were filed prior to administration. Period (4) is more controversial as the Directors said that a return had not been filed, while HMRC said that it had received one.
23. During 2006 and 2007, enquiries were opened into the returns for the three submitted periods. These enquiries were still open on 9 September 2009, the date on which the Company went into administration. HMRC had two major concerns about the returns for the submitted periods. First, in arriving at its profit, the Company had made deductions in respect of payments into so-called "EBTs", or employee benefit trusts, and HMRC regarded these deductions as impermissible. Second, there were substantial loans to a director, which HMRC regarded as carrying a 25 per cent charge to corporation tax.^[12] At the date of administration, HMRC had written letters asking detailed questions about the submitted periods, which letters were unanswered by the Company.
24. On 17 September 2009, HMRC wrote to the Company indicating its intention to amend the self-assessments for the submitted periods. On 21 September notices of amendment were issued, showing the net tax payable in respect of the three periods as: (1) 31 July 2004, £257,120.51; (2) 31 December 2004, £322,828, 16; and (3) 31 December 2005, £1,304,470.80. These notices were received by the Administrators on 30 September 2009. On 2 October 2009 HMRC wrote to the administrators, notifying them of HMRC's "initial claim" in an aggregate sum of £3,108,554.59.
25. On 16 October 2009, DSL, which had been authorised by the Administrators to appeal against the notices of amendment, sent HMRC three letters (one in respect of each notice) stating that it wished to appeal and requesting postponement of the full amount considered payable. No grounds of appeal or reason for seeking postponement were given.
26. On 28 October 2009 HMRC opened an enquiry into period (4), ending 31 December 2006, for which it said that a self-assessment return had been filed in July 2009. On 29 October 2009, HMRC issued a notice of amendment for this period, showing the net tax payable as £998,964.51. This notice was received by the Administrators on 4 November 2009 and seems not to have been the subject of any formal appeal notice: but HMRC is treating a letter written some weeks later by the Administrators as an appeal.
27. As to the unsubmitted periods, the position was as follows. In respect of period (5), ending on 31 December 2007, HMRC issued a notice of determination in the sum of £5,814,202.64 on 29 October 2009, which was received by the Administrators on 13 November 2009. As to period (6), ending on 30 April 2008, it was the subject of a notice of determination in the sum of £15,509.94, issued on 2 November 2009 and received by the Administrators on 10 November 2009.
28. In October or early November 2009, HMRC engaged KPMG LLP ('KPMG'), who sought and obtained a meeting with Begbies on 12 November 2009, at which Mr Maxwell was present. A note of the meeting records a representative of KPMG as stating that HMRC had serious concerns about the conduct of Directors, that it wanted an investigation to be carried out, and that it would like a representative from KPMG to act as joint liquidator of the Company.
29. On 13 November 2009 HMRC delivered by hand to Begbies a breakdown of their claims, which they quantified as totalling £9,336,814.05, and a proxy for the meeting of 16 November. On the same day, HMRC wrote formally to Mr Maxwell, requesting that two named accountants and insolvency practitioners at KPMG be "appointed as independent joint liquidators." The letter did not propose any modification of the Proposals.

The history: the creditors' meeting and events leading up to it

30. The initial meeting of creditors was fixed for 16 November 2009, but, because of the position adopted by HMRC, the meeting was adjourned to 30 November 2009. Meanwhile, following the discussion of 12 November, the Administrators investigated the claim by HMRC. The investigation involved consulting with tax specialists within Begbies and the Directors (who, as the Judge pointed out, are themselves tax specialists), considering an opinion which had been provided to the Company by Queen's Counsel, and obtaining legal advice from the Administrators' own solicitors.
31. On 27 November 2009 the Administrators delivered to HMRC self-assessment returns for the two unsubmitted periods in respect of which notices of determination had been issued. The self-assessments were: for period (5), to 31 December 2007, nil; for period (6), to 30 April 2008, £6,079.25. On the same day, a letter was written giving notice of appeal against the notices of determination for (4), the period to 31 December 2006, and (5) and (6) the two unsubmitted periods.
32. The adjourned meeting of creditors took place on 30 November 2009. By the time the meeting began, HMRC had reduced its claim to £8,797,156. During a break in the Meeting before the crucial vote, HMRC handed to the Administrators notices opening enquiries into the unsubmitted periods, and notices of amendment for the unsubmitted periods in the following amounts, (5) 31 December 2007, £5,320,328.00, and (6) 30 April 2008, £809,196.25. Shortly after the Meeting, on 2 December, the Administrators gave notice of appeal and requested postponement (without adducing reasons).
33. Turning to the Meeting itself, Mr Klempka was in the chair. After some discussion, Mr Klempka stated that he valued HMRC's claim at £609,247, but that as a gesture of goodwill he would admit HMRC to vote for £1,500,000. Leaving aside HMRC's vote, Mr Klempka calculated the votes as being £4,831,591.23 (or £2,634,987.25, excluding connected parties) for the Proposals, and £581,061.92 against the Proposals. After adding HMRC's vote against at £1,500,000, the Proposals were carried. It is clear from this that, if HMRC had been admitted to vote for the whole of the amount of their claim, the Proposals would have been rejected.
34. (For completeness, it should be added that, by the time the matter came before the Judge, events had moved on and had led the Administrators to decide that they will not now pursue an exit by way of a CVA but will move the Company to creditors' voluntary liquidation or, should there be no funds to distribute to unsecured creditors, to compulsory liquidation.)

HMRC's appeal to the High Court

35. Pursuant to Rule 2.39(2), HMRC appealed against Mr Klempka's decision to accord it only £1,500,000 in votes at the Meeting. As I have mentioned, that appeal came on before Judge Langan QC.
36. The evidence adduced to the Judge on behalf of HMRC comprised the following documents:

HMRC's notices of amendment, the notices of determination, the notices of enquiry, as well as the Company's self-assessment returns, and the Administrators' notices of appeal and postponement referred to above;

A letter from HMRC to the Company dated 7 July 2009 setting out HMRC's case in some detail in relation to the tax said to be due for periods (2) and (3);

A letter from HMRC to the Company dated 17 September 2009, and setting out the reasons for the figures in the notices of amendment in respect of periods (1), (2), and (3);

A letter from HMRC to the Administrators dated 28 October 2009, in respect of periods (4), (5) and (6), which set out, in an appendix, HMRC's calculations justifying the figures in its notices of amendment and notices of determination in respect of those periods;

A witness statement of John McDermott dated 27 January 2010 explaining the grounds upon which HMRC considered that the corporation tax they claimed was owing, together with a schedule, which set out HMRC's calculations fully and clearly.

37. Apart from a terminal loss calculation, which totalled £239,713.78, the only evidence put before the Judge to dispute these corporation tax claims was referred to in an earlier witness statement of Mr Maxwell, and it consisted of a statement by the Administrators. That statement was to the effect that they had carried out investigations and received advice (for which privilege was not waived), and as a result they believed that, as to part of HMRC's claim, "the parties differ on their construction of the relevant law and until this impasse is resolved by the Courts, [the] claim will remain unsubstantiated" and, as to the remainder of the claim, "the basis of the claim is simply not understood".
38. No attempt was made by the Administrators to explain, even in general terms, the nature or detail of any argument upon which the Company was relying to have the corporation tax determinations or assessments set aside. Further, although appeals had been made by the Company to the Tax Tribunal after 9 September 2009, no grounds have ever been given, either for the appeals or for any request for postponement of payment. In this connection, it is worth noting that appeals and postponement applications must be accompanied by reasons^[13].
39. The arguments developed before the Judge focussed on the nature of the debts due to HMRC (and in particular whether they were liquidated or unliquidated), the correct date or dates as at which those debts should have been so characterised and quantified, and how Mr Klempka, as the chairman of the Meeting, should have approached and determined the value of those debts for voting purposes.
40. The Judge held that the characterisation and quantification of the debts should be effected as at the date that the Company went into administration, that the only liquidated debts in respect of corporation tax were the figures included in the Company's self-assessment returns, that the balance was unascertained and uncertain as "in the context of insolvency, a revenue debt based on assessments is not automatically treated as wholly undisputed and undisputable^[14]", and that Mr Klempka was entitled to act as he did.
41. In paragraph 42 of his judgment, after remarking that Mr Klempka might have erred on the side of generosity in allowing HMRC to vote in respect of a debt of as much as £1,500,000, the Judge said this:

"[I]t has not been suggested that he acted hastily or otherwise than on the basis of advice received. He would, of course, have been wrong if he had rejected the claim of HMRC in toto. He would equally, in my judgment, have been wrong had he accepted the claim in toto, because he would have been going contrary to the advice which he had obtained – and for which, incidentally, the creditors are ultimately paying. I do not see how he could properly have acted otherwise than he did. Either Mr Klempka's decision was, as in my judgment it was, right; or HMRC, as the appellant, has not discharged the burden of showing that the decision was wrong."

The Judge's function

42. The first question it is convenient to address is the function of the Judge in this case, as a judge hearing an appeal under Rule 2.39(2). As to that there is no dispute between Mr George Bompas QC (who appears with Ms Ruth Jordan for HMRC) and Mr Richard Sheldon QC (who appears with Ms Blair Leahy for the Administrators). They agree that the judge should not merely review the decision of the chairman which is sought to be impugned: the judge should form his or her own view, based on the evidence and arguments advanced in court.
43. In my opinion, that agreement correctly reflects the law. Rule 2.39(2) refers to an "appeal" as opposed to a "review", which suggests that a fresh decision is envisaged. Further, as the facts of this case show, it would be unsatisfactory and unfair in some circumstances if the judge was confined to reviewing the chairman's decision. The chairman will often be someone who can properly be privy to information and advice provided to the administrators or the company which is information and advice which could, equally properly, be denied to the court. If the court was confined to a reviewing function, it is hard to see how it could be fairly or satisfactorily performed in such circumstances.
44. There is first instance authority which supports this view. In In re a Company (No 004539 of 1993)^[15], Blackburn J said this:

"In my view, the task of the court, on an appeal under Rule 4.70(4) [the equivalent to Rule 2.39(4)]…, is simply to examine the evidence placed before it on the matter and come to a conclusion whether, on balance, the claim against the company is established and, if so, in what amount. I would only add that, in considering the matter, the court is not confined to the evidence that was before the chairman at the time that he made his decision but is entitled to consider whatever admissible evidence on the issue the parties to the appeal choose to place before the court."

That analysis has been applied in a number of subsequent cases concerned with similar provisions of the 1986 Rules.^[16]

45. At first sight, it is not clear whether the Judge adopted the correct approach in this case. Towards the end of the passage I have quoted from paragraph 42 of his judgment, he determined that Mr Klempka was right, and proceeded on the basis that the onus was on HMRC (for what that was worth). That tends to suggest that he approached the issue correctly. However, in the earlier parts of that passage, he seems pretty plainly to have based his view that Mr Klempka had received information and advice which persuaded him that HMRC's corporation tax claims were reasonably open to attack in their entirety (save to the extent of the Company's self-assessments). Yet none of that evidence was before the Judge. Indeed, there is reason to believe that the Judge overestimated the effect of that advice, as he said at paragraph 30 that the legal advice seen by the Administrators was "to the effect that the vast majority of HMRC's claim should be rejected under rule 2.38(5)". At best, that must be based on an inference from Mr Klempka's rejection of HMRC's claims, as the evidence gives no direct information or even indication of the nature or gist of that advice.
46. In my view, the Judge did go wrong in his approach, in that he ultimately decided that Mr Klempka's decision was justified on the basis of advice and information which he had seen, but that the Judge had not. Even if a judge's function on a Rule 2.39(2) appeal was to review the chairman's decision, it is hard to see how one could sensibly review a decision without knowing at least the general thrust of the advice and factual material on which it was based. However, whether or not a review could sensibly be carried out in such circumstances, the fundamental objection to the Judge's conclusion in this case is that it was not for him to review Mr Klempka's decision on the basis of material the Judge had not seen: it was for him to decide, to make his own decision, on the evidence and arguments put before him, as to what sum to allocate to HMRC's corporation tax claims against the Company.
47. In those circumstances, we must consider the issue afresh for ourselves, and in that connection it is appropriate first to consider a number of issues arising under the 1986 Rules.

Issues relating to the interpretation of the 1986 Rules

48. The first issue is whether "the amount of a creditor's claim" is to be assessed under Rule 2.38(4) as at the date of the administration, as the Administrators contend, or the date of the meeting, as HMRC argue. In my view, the plainly natural meaning of Rule 2.38(4) is that the amount is to be assessed as at the date of the administration, although I accept that, linguistically, it is just about possible to read the words "as at the date the company entered administration" as solely governing the immediately preceding word "claim".
49. The plainly natural meaning is strongly supported by the reference in Rule 2.38(4) itself to deducting payments made after the company went into administration: such a provision would be unnecessary on HMRC's case. It is fair to say that the reference at the end of the Rule to set-off being "applied at the date that the votes are counted" points the other way, at least at first sight. However, on closer analysis, (a) this is not inconsistent with the Administrators' case as a matter of logic, (b) it is consistent with the principle that valuation can take into account events subsequent to the administration in accordance with In re Law Car & General Insurance Corporation^[17] (discussed below), and (c) in any event, the Rules seem to envisage that set-off is generally effected as late as possible – see Rule 2.85(3).
50. The Administrators' case is also supported by the way in which other Rules are drafted. Thus Rule 2.42(1), which is concerned with debts under hire-purchase agreements and the like, refers to a creditor under such an agreement being entitled to vote "in respect of the amount of the debt due and payable to him by the company on the date that the company went into administration". That is unambiguous, and it would be surprising if the principles were different in administrations on this point for ordinary debts and hire-purchase debts. Rule 2.86(1) which provides that foreign currency debts are to be "converted into sterling at the exchange rate prevailing on the date when the company entered administration", tends to support this view also. Rule 2.105(3) which is concerned with the valuation of debts arising in the future is also in point, as it links the valuation to "the date when the company entered administration". Further, on a liquidation, debts are valued as at the date of liquidation, and, while it is not necessary to go into details, the Rules relating to administrations appear to be closely based on the much longer established Rules relating to liquidations (see especially Rules 4.67 and 4.68).
51. The next issue is whether the characterisation of a debt, namely whether or not it is "unliquidated" or "unascertained" for the purposes of Rule 2.38(5) is to be assessed at the date of administration or the date of the meeting. In my view, reading Rules 2.38(4) and (5) together, the debt should be characterised at the date of administration. That is not merely based on logical consistency, but also on the language of the two paragraphs. The "estimated minimum value" of a debt in an unliquidated or unascertained amount under the latter paragraph becomes the "amount" of the debt under the former paragraph, and, that debt is to be assessed as at the date of the administration.
52. Accordingly, I am of the view that both the quantification and characterisation of any debt for the purposes of Rules 2.38(4) and (5) and 2.39(1) and (3) are to be effected as at the date the company concerned went into administration rather than the date of the meeting. However, in many cases these conclusions are unlikely to matter even where the apparent value of the debt changes in the intervening period. Although it is clear from Rule 2.38(4) that, in order to qualify a creditor to vote, his debt must have existed at the date the company went into administration, it is well established that, when valuing the debt, one can take into account subsequent events when valuing the debt for the purpose of voting – see re Law Car^[18], a case concerned with the liquidation of an insurance company.
53. In that case^[19], Cozens-Hardy MR, having stated that "a policy-holder would [be] entitled to prove … for the loss … by reason of the repudiation of the contract at the date of the winding-up order", pointed out that "[t]his must often be a matter of speculation." However, he continued:

"But if during the currency of the policy an accident occurred which, if the indemnity had not been repudiated, would have entitled the holder to £x, the Court treat[s] that fact as evidence pro tanto of the value of the indemnity, and the holder could … prove… for £x less a discount for the period between the date of the winding –up order and the date of the accident. … This was the principle of Sir George Jessel's decision in Macfarlane's Claim^[20]. The claim could be made at any time during the continuance of the winding-up, but not so as to disturb prior dividends."

54. Accordingly, the chairman's powers of quantification under Rules 2.39(1) and (3) and under Rule 2.38(5) should be exercised taking into account events which have occurred since the date of the administration. Thus, if the debt is a claim for damages which had yet to be determined at the date of the administration, and, before the meeting, damages had been assessed by the court or agreed, the debt would still be treated at the meeting as unliquidated and unascertainable, but, at any rate absent very unusual circumstances, it should be accorded a value equal to the assessed or agreed figure, arguably subject to a discount to allow for the fact that the valuation is to be as at the date of administration.
55. It nonetheless matters whether a claim is unliquidated or unascertained, as, if it is, the chairman has to accord it "an estimated minimum value" for voting purposes, whereas if it is liquidated and ascertained, and he is in some doubt about even the whole of it, he has to allow the creditor to vote in respect of the whole of it, albeit subject to marking it as objected. This arguable (and, to me at any rate, slightly puzzling) imbalance between liquidated and ascertained debts puts a premium on debtors having their debts characterised as such.
56. The difficult question here is whether the Revenue's claims for corporation tax amounted to liquidated and ascertained debts. Given that they had to be characterised as at the date the Company went into administration, HMRC cannot take advantage of any event which took place after 9 September 2009 (the date the Company went into administration) to assist them in their contention that the claims for corporation tax were not unliquidated or unascertained. In my view, in the absence of any notices of assessment, notices of amendment or notices of determination, any sums in excess of those which the Company had recorded as owing in its self-assessments were unliquidated or unascertained.
57. Just how clearly quantified a debt has to be before it is liquidated and ascertained is not a question which it is easy to answer. It is clear from Rule 2.39(3) that it does not have to be undisputable. Some guidance may be found in Ex parte Ruffle, Re Dummelow^[21] (a case concerning section 16(3) of the Bankruptcy Act 1869), where Mellish LJ said that:

"'an unliquidated debt' includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount. In that case there must be some further enquiry before he can vote."

However, there is little subsequent authority which takes matters much further. A claim for damages and a contingent claim have (unsurprisingly) been held to be unliquidated or unascertained claims – see Re Cranley Mansions Ltd, Saigol v Goldstein^[22], Doorbar v Alltime Securities Ltd^[23] and Re Newlands (Seaford) Educational Trust^[24].

58. In this case, HMRC rely on the point that, as at the date that the Company went into administration, the facts relating to the income and expenditure of the Company were known for all the six relevant periods. Accordingly, runs their argument, it would have been possible, effectively as a matter of arithmetic, to calculate how much was owing by way of corporation tax in respect of those periods, and the total tax owing was therefore a liquidated and ascertained sum, subject always to the right of the Company to challenge it. I see the force of that argument, but it seems to me that, as a matter of ordinary language, as at 9 September 2009, the amounts owing by way of corporation tax were not ascertained and liquidated (at least over and above the amounts specified in the Company's self-assessments). In order to calculate what was owing, one would have had to trawl through figures in the Company's accounts, investigate the law relating to EBTs and payments to directors, and carry out calculations which were not straightforward. In many damages claims, one could work out the amount likely to be assessed by the court, but that does mean that an unresolved damages claim is a liquidated or ascertained debt.
59. Thus, in my opinion, in respect of all six periods, any corporation tax claimed to be due, over and above the self-assessments, was not a liquidated ascertained sum, until HMRC had issued notices of amendment. However, once such notices were issued, I consider that the sums therein were liquidated and ascertained sums, in the amounts specified in the amendments (albeit subject to the possibility of challenge by appeal for tax purposes and assessment for voting purposes at meetings)^[25]. The fact that the sums so specified were subject to appeal and stay applications would not, in my view, undermine that conclusion: to hold otherwise would involve confusing ascertainment with unchallengeability.
60. Thus, as at the date the Company went into administration, I consider that the sums claimed to be due as corporation tax in respect of the six periods in issue were not liquidated ascertained debts, but they had become so by the date of the Meeting. As they must be characterised for the purposes of Rules 2.38 and 2.39 as at the date of the administration, they fell within Rule 2.38(5). Thus, so far as the issues involving interpretation of the 1986 Rules are concerned, I agree with the conclusions reached by the Judge.

The correct conclusion in this case

61. For these reasons, I accept that the Administrators are correct in submitting that, with the exception of the self-assessment figures, HMRC's claims amounted to unliquidated or unascertained debts, and were to be assessed as at the date on which the Company went into administration. However, as already mentioned, and as Mr Sheldon realistically concedes, that does not mean that the Judge (or the chairman) was restricted to evidence which was available as at that date, namely 9 September 2009.
62. The Judge was rightly in no doubt that, as at the date on which the Company went into administration it owed HMRC substantial sums by way of corporation tax. Accordingly, the question is what was the "estimated minimum value" which the Judge should have ascribed to that debt under Rule 2.38(5).
63. In that connection, although the Rule could be said to be worded in such a way as to bestow some sort of general discretion on the chairman, and hence on a judge on an appeal under Rule 2.39(2), it seems to me clear that it imposes a duty on them to do their best to assess the minimum value. Where the decision is that of the chairman of a meeting, this may often, even normally, be something of a rough and ready, or quick and dirty, exercise. However, where the matter is referred to the court, the exercise must inevitably involve greater examination of the factual and legal basis for the claim.
64. As Harman J said in Re a Debtor (No 222 of 1990) ex p the Bank of Ireland ^[26] in relation to a rule equivalent to Rule 2.39(1) and (3):

"[T]he meeting is not the place to go into lengthy debates as to the exact status of a debt, nor is it the time to consider such matters as this court, sitting as the Companies Court, frequently has to consider as such whether a debt is bona fide disputed upon substantial grounds, an issue which leads to a great deal of litigation and frequently takes a day or so to decide. None of that could possibly be a suitable process to be embarked upon at a creditors' meeting."

65. Whatever may have been the position at the Meeting, I consider that the evidence and argument before the Judge justified only one conclusion, namely that HMRC had made out a clear prima facie case to support their contention that the corporation tax they claimed was owing was indeed due, subject to the Company's right to set off its terminal loss claim of £239,713.78. HMRC's arguments on the law and the detailed facts and calculations justifying their ultimate figures were clearly and fully set out in documents they put before the court, and to which I have referred. On the other hand, the Administrators simply denied liability for all but a small proportion of the claimed tax in the most general terms and failed to put forward any specific evidence or legal arguments as to why the whole or part of the sums claimed were not due, and they had failed to put forward any grounds in the notices of appeal and applications for stay in respect of payment of the tax, in circumstances where the statute required such grounds.
66. The Administrators could have come up with different facts and different calculations, just as they could have made legal submissions, with a view to persuading the Judge that HMRC were at least arguably wrong in their contentions. If that had happened, the Judge could have decided the issue before him in the light of the Administrators' arguments, and that could have led to various possible outcomes. (i) He might have rejected the Administrators' points, in which case he would have allowed HMRC's appeal. (ii) He might have accepted those points, in which case he would have dismissed HMRC's appeal. (iii) He might have accepted those points as to part of the tax claimed but not as to the balance, in which case he may have had to decide whether the votes he would have accorded to HMRC would or could have made a difference to the result of the Meeting. (iv) He might have decided that it was not possible to resolve the issue, in which case the "minimum" provision in Rule 2.38(5) would presumably have required him to dismiss the appeal.
67. However, because the Administrators adduced no factual evidence, no calculations (other than the terminal loss claim), and no legal arguments before the Judge, it seems to me that options (ii), (iii), and (iv) were simply shut off as possible courses for him to adopt. Assuming in the Administrators' favour, which may well be correct, that they had had to establish no more than an arguable case (in the same way as a party resisting summary judgment under CPR 24), a mere general denial of liability, coupled with speculation as to the information and advice the chairman saw, was insufficient to justify the Judge being satisfied that he should reduce the amount claimed by HMRC (save by deducting the terminal loss claim) for the purposes of Rule 2.38(5).

Conclusion

68. I have not so far dealt with the Company's claim for damages, and consequential set-off, based on the trespass for which HMRC are liable as a result of their unlawful search and seize operation referred to above. There is no evidence to suggest that this has any significant value, despite the Administrators' previous assertion to the contrary. It is true that it was valued at £500,000 in the Statement of Affairs prepared for the Administration, but it was sold as part of the "pre-pack" referred to in para 19 above, and, most importantly, it was bought back by the Company in November 2009 for £1. The Judge rightly dismissed this damages claim in the present context as irrelevant, and Mr Sheldon sensibly did not rely on it in his oral argument.
69. In these circumstances, it follows that the Judge ought to have accorded to HMRC a level of votes which would have defeated the Proposals as put to the Meeting. The question which needs to be decided therefore is what order should be made bearing in mind the wide powers conferred by Rule 2.39(4). Happily, the parties are agreed on this. Not least because there is now evidence that another creditor, who is said to have a similar level of debt and who did not vote at the Meeting, now wishes to support the proposals, it is agreed that we ought to "order that another meeting be summoned". That seems to me to be the appropriate order in the circumstances.
70. Accordingly, I would allow HMRC's appeal, and order that another meeting of Creditors pursuant to Rule 2.34 be summoned by the Administrators.

Carnwath LJ:

71. I agree.

Sullivan LJ:

72. I also agree.

Note 1   Finance Act 1998, Schedule 18, paragraph 14.    [Back]

Note 2   Finance Act 1998, Schedule 18, paragraphs 7 and 8.    [Back]

Note 3   Finance Act 1998, Schedule 18, paragraph 36.    [Back]

Note 4   Finance Act 1998, Schedule 18, paragraph 40.    [Back]

Note 5   Finance Act 1998, Schedule 18, paragraph 24.    [Back]

Note 6   Finance Act 1998, Schedule 18, paragraph 30(1).    [Back]

Note 7   Finance Act 1998, Schedule 18, paragraphs 30(3)-(5), 92(1),(2).    [Back]

Note 8   Taxes Management Act 1970, section 59D(1).    [Back]

Note 9   Taxes Management Act 1970, section 55(1)(a), (2)(a).    [Back]

Note 10   Taxes Management Act 1970, section 55(3).    [Back]

Note 11   Taxes Management Act 1970, section 55(6).    [Back]

Note 12   Income and Corporation Taxes Act 1988, section 419.    [Back]

Note 13   Finance Act 1998, Schedule 18 paragraph 92 and Taxes Management Act, section 55(3)    [Back]

Note 14   See HM Commissioners of Customs and Excise v Anglo Overseas Ltd [2005] BPIR 137, paragraph 81(iii).    [Back]

Note 15   [1995] 1 BCLC 459, 466    [Back]

Note 16   Re a Debtor (No.574 of 1995) [1998] 2 BCLC 124 at 128a-b, Power v Petrus [2008] EWHC 2607 (Ch), [2009] BPIR 141 at para 16, Tradition (UK) Ltd v Ahmed [2008] EWHC 2946 at paras 90- 91. The contrary view apparently adopted in Re Shruth Ltd [2006] 1 BCLC 294 at 302 is wrong on this point as Lewison J said in Power [2009] BPIR 141     [Back]

Note 17   [1913] 2 Ch 103    [Back]

Note 18   [1913] 2 Ch 103, 116-117, 122-123    [Back]

Note 19   [1913] 2 Ch 103, 116-117    [Back]

Note 20   17 Ch D 337    [Back]

Note 21   (1873) 8 LR Ch App 997, 1001    [Back]

Note 22   [1994] 1 WLR 1610    [Back]

Note 23   [1995] BCC 1149    [Back]

Note 24   [2006] BPIR 1231    [Back]

Note 25   Taxes Management Act 1970, sections 59D(1) and 55(1)(a), (2)(a).    [Back]

Note 26   [1992] BCLC 137, 144    [Back]