Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Council Tax and IVAs: some more thoughts

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The IPA has published an interesting article in its July 2014 magazine (accessible from http://www.ipa.uk.com Press & Publications>Insolvency Practitioner magazine) explaining how its Personal Insolvency Committee believes the judgment in Kaye v South Oxfordshire District Council impacts on past and future IVAs. I have some more thoughts…

The article points out that the judgment has no practical effect where the household income is shared between solvent and insolvent adult occupiers, because whatever “tax holiday” might be enjoyed by an insolvent occupier will be off-set by the fact that the council likely will re-bill the solvent occupier, with the effect that the household income and expenditure account is unchanged. The rest of this post assumes that the debtor is the sole adult occupier (although perhaps some points also might apply where all the adult occupiers are – or are intending to be shortly – in an insolvency process; I’ve not worked out whether a council’s “re-bill” of another occupier would be a pre- or post-insolvency liability…).

For new IVA Proposals, on the basis that the first (part) year’s council tax will be caught as an unsecured claim, the article states that “it may be advisable to consider… whether the proposal might make specific provision for an increased contribution during this period”. Fair enough. I hear that many IPs are doing this already.

For existing IVAs, however, the tone of the article makes it clear that there is no expectation for Supervisors to examine potentially overpaid council tax with a view to recovering any overpayment. The article goes so far as stating: “It is also believed that Counsel has expressed a view that this judgement would not be of retrospective effect”, which I find quite extraordinary. However, there is no doubting the commercial arguments against the Supervisor going to the effort of seeking to extract small refunds from a number of councils.

Of course, the IPA article is aimed at helping its members, so it is not surprising that it has not viewed the position from the debtor’s perspective. For example, could the debtor pursue a refund? I don’t see why not (although I’m not sure I rate their chances of easy success). Would it be a “windfall” caught by the IVA? I don’t see how, as it simply refunds the debtor for payments made post-IVA; it isn’t an asset that has been acquired after the IVA started.

Would the council be entitled to set off any refund due to the debtor (for council tax paid post-IVA) against the council’s unsecured claim? I don’t think so; set-off principles in insolvency apply only where the overpayment and the claim both occurred pre-insolvency, although I appreciate that this is not what the pre-January 2014 Protocol STC stated. Clause 17(6) used to say: “Where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance”. However, the January 2014 Protocol STC now state: “Where Section 323 of the Act applies and a creditor is obliged, for whatever reason, to make a payment to you during the continuance of the arrangement, then that payment shall be used first in reduction of that creditor’s claim”. S323 begins: “This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt”… so as long as the debtor doesn’t become bankrupt, I don’t think S323 will ever apply in an IVA!

What about debtors who are in the first year of their IVAs (provided the IVA commenced after 1 April 2014)? Can they avoid paying the remaining council tax for the rest of the year on the basis that it now falls as an unsecured claim? Excepting the IPA’s comment that the Kaye judgment does not have retrospective effect, it seems that they can. Some words of caution, however: I can envisage that some councils may be a bit behind the times, so debtors may need to have a strong stomach to resist council pressure to pay up, remembering that a case precedent only exists to the point that another court sees things in a different light. The effect of pushing the year’s tax into the IVA might also be material: for example, the Protocol STC state that breach occurs when the debtor’s liabilities are more than 15% of that originally estimated and some IVAs may require a minimum dividend to be paid. If an increased council IVA claim could threaten the successful completion of an IVA containing terms such as these, one might like to think again…

Could a Supervisor demand increased contributions from a debtor who is not paying his council tax for the rest of the first year? Of course, it will depend on the IVA terms, but it seems to me that the Protocol STC don’t help a Supervisor seeking to do this. Clause 8(3) states that the debtor must tell his Supervisor asarp about any increase in income… but this is not an increase in income, it is a decrease in expenditure. Clause 10(11) states that, as a consequence of the Supervisor’s annual review of a debtor’s income and expenditure, the debtor will need to contribute 50% of any net surplus one month following the review. By the time the first annual review comes around, the “tax holiday” will have ended and the debtor again will be required to pay council tax, so the I&E will show no consequent surplus. Therefore, as far as I can see the Protocol STC do not provide for the Supervisor to recover any surplus arising from a decrease in expenditure in the first year of the IVA. Of course, this does not take into consideration the terms of the Proposal itself (or any variations in the standard, or any modified, terms) and the debtor can always offer the unexpected surplus to the Supervisor, which one would hope would go down well with the IVA creditors.

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For background on the judgment itself, you might like to take a look at my earlier post – http://wp.me/p2FU2Z-5U – or R3’s Technical Bulletin 107.1.

(UPDATE 25/08/14: for another perspective, I recommend Debt Camel’s blog: http://debtcamel.co.uk/council-tax-insolvency/.  Sara highlights the difference in DROs (I think the reason this decision has no effect on DROs is because the remainder of the year’s council tax is a contingent liability and as such is not a qualifying debt for DRO purposes) and the possibility of debtors putting in formal complaints if the council does not acknowledge the effect of this decision.)

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