, Making someone bankrupt part 4
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Making someone bankrupt part 4

We have seen that a petition has to be based upon a debt and in general a debt which is disputed on bona fides and substantial grounds will not be a debt for this purpose.

One issue which can arise in a bankruptcy context is where either the Inland Revenue or HM Customs make an assessment for tax payable which could be income tax or VAT or some other form of tax. What happens if the taxpayer is disputing the assessment and saying that the amount of tax said to be payable is not due? Is that a dispute for these purposes?

Generally it is not. If an assessment has been made then the way to challenge that is through the tax appeal system and unless and until there is a successful challenge the assessment stands. Therefore a tax assessment is a debt for the purpose of bankruptcy proceedings. That is not to say that the court will ignore the underlying realities, but they relate to the question of the court's discretion in relation to a bankruptcy petition rather than whether there is a debt or not. If there is an appeal, then if the court took the view that there was a reasonable prospect for success in that appeal then (as regards the amount relevant to the appeal) the court might be minded not to make the taxpayer bankrupt. Obviously if there was an amount which on any version of events would be due in any event and the debtor had no prospect of paying it, then that would be a different matter in any event. Ultimately court has a discretion and if it feels that an injustice would be perpetrated if it allowed a bankruptcy order to be made then the court can exercise its discretion against making an order.

The debt does not have to be one solely of the debtor, but can be a debt which is jointly owed by the debtor and another. Thus for example if one person is a business partner of another person and there is a debt which they both owe, a bankruptcy petition can be issued against one partner founded upon that debt.

Debts which are not recoverable at law are not debts which can be the subject of a bankruptcy petition. Thus if it is not a debt that you could sue to recover successfully by action, you cannot use it to make someone bankrupt. An example is a gambling debt. In English law you cannot sue to enforce a gambling debt (although if the debt relates to a foreign jurisdiction where the debt is enforceable that is a different matter: Internet gamblers should note that even when sitting at their computer screen they may often find that the terms under which the gambling site operates means that the debt is placed effectively offshore where the law of a different jurisdiction applies.). Another illustration of a debt which is not recoverable the law is a debt which is statute barred. The laws of limitation mean that after various periods of time a debt can no longer be enforced. Limitation is an extensive topic in itself which will be addressed at another time. If however the debt is statute barred that is means it cannot be used for a bankruptcy petition

Costs orders can be used to make someone bankrupt but the amount has to be certain. Thus if at the end of the trial one party gets a costs order against the other, even though it is clear that costs order is going to be substantial (perhaps a six-figure sum) it cannot be used to make someone bankrupt unless and until there is a fixed amount payable. However frequently when making a costs order, the court will order a payment on account to be made. Thus for example if it looks as though the payable costs might well exceed £100,000, the court might order a payment on account of costs of £50,000 in the interim: that £50,000 can be used to found a bankruptcy petition.

Michael J. Booth QC