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Tax Mitigation Scheme Failure Proves Disastrous

Collecting debts is often a long and arduous process, but the use of bankruptcy proceedings can be an effective means of bringing matters to a head. That was certainly so in one case in which a businessman tried, but failed, to avoid bankruptcy in respect of a judgment debt totalling more than £16 million.

The businessman, who ran a professional firm, had been sued by a client in respect of advice given in relation to a tax mitigation scheme. After the effectiveness of the scheme was challenged, the client incurred very substantial losses on entering into a settlement with HM Revenue and Customs (HMRC).

Following lengthy litigation, the Court of Appeal found that the businessman and his firm had been negligent in failing to give the client a specific warning that the scheme might well be successfully challenged. Judgment was entered against the businessman for a total of £16,067,313. The businessman was also said to owe £565,000 to HMRC in respect of unpaid Stamp Duty Land Tax.

Statutory demands had been raised against the businessman in respect of both those sums and had not been set aside. However, after the client applied for a bankruptcy order against him, the businessman argued that he had a genuine and substantial cross-claim against the client. He also pointed out that he still had hopes of reversing the Court of Appeal's decision and that his application for permission to appeal was pending before the Supreme Court.

In making the bankruptcy order sought, however, the High Court found that the cross-claim was an abuse of process. The judgment debt had not been suspended pending the Supreme Court's decision on the businessman's application to appeal, and the Court of Appeal's order was therefore currently binding. No adjournment of the bankruptcy proceedings had been sought and the businessman had admitted that there was no realistic prospect of him paying the judgment debt within a reasonable time.

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